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Boardroom view.


You have to wonder when economists really are not quite sure whether to declare the nation in a recovery or not. At a recent press gathering, Freddie Mac's Chief Economist Robert Van Order distributed an outlook paper that states: "While there probably is a recovery going on, it is clearly a slow one...." If the experts don't know, what should the rest of us think?

The muddled economic picture has led the economics profession to trot out a neat buzz word - the "double dip" recession. Van Order says that, "Analysts of the current economic situation are giving increasing currency to the possibility of a double dip: recovery from recession only to be followed quickly by a subsequent recession." The Freddie Mac economist says the recession of 1980 provided an earlier example of such a phenomenon. That recession was followed by a brief recovery and then a deep recession in 1982.

So what are the signs that are leading economists to see such a fuzziness in the economic order of things?

Van Order says that inflation remains in check and Freddie Mac expects growth in the consumer price index to rise at a modest 3.2 percent rate in 1992. However, Freddie Mac's economists only see a very modest improvement in the unemployment picture this year. The Freddie Mac forecast is for the nation's unemployment rate to drop only slightly to 6.6 percent in 1992.

Despite the talk in Washington about a quick-fix, tax break to jump start the stalled economy, Van Order says that "there is little role for fiscal policy as a tool for recovery; it will take too long to work." That's not likely to deter the lawmakers though. But the Fed on the other hand, "still has some juice left (though the credit crunch limits its effect)," Van Order says. Freddie's top economist said in December that "prospects for lower interest rates, especially short rates, are not bad in the near future." But he added that by mid-1992, "the best bet is that short rates will begin to rise as the recovery gets going and long rates will lag behind and rise slowly." That should help mortgage bankers keep their hold on a sizeable share of the origination market in 1992.

Van Order's outlook paper states that Freddie Mac's economics department has seen some evidence that mortgage delinquencies have started leveling off, but it expects foreclosures to increase further and to reach a peak sometime in 1992.

But Freddie Mac does expect a pickup in housing starts and total home sales in 1992. Van Order said his forecast is for housing starts to total 1.3 million this year, while total home sales are expected to reach 4.15 million. Those figures beat last year's totals of 1.05 million starts and 3.8 million total sales.

Freddie Mac's economics department expects total single-family originations to hit $500 billion in 1992, compared with $488 billion last year.

Interestingly, while other housing trade groups have forecast a pickup of the ARM origination share, Freddie Mac sees the ARM share declining further to only 25 percent of originations in 1992. That is down from 26 percent in 1991.

Van Order says last year lenders learned that borrowers are "pretty ruthless" about exercising their options to refinance. He also said that the old adage about borrowers waiting for a 200 basis point difference in their current mortgage rate versus market rates before they refinance, basically was tossed out the window this time around. Van Order said that the annual runoff rate had risen to more than 16 percent by spring of 1991. He noted that prevailing market rates then were at roughly 9.25 percent and there were very few mortgages outstanding at that time of 11.25 percent of more. The norm for refinancing this time around was closer to 100 basis points - in the spring of last year borrowers were trading in mortgages of 10-10.5 percent for 9.25 percent loans.

ARMs in Freddie Mac's portfolio were paying off in droves. Van Order said that the annual runoff rate for ARMs in Freddie's portfolio went from a little more than 10 percent in 1990 to roughly 30 percent in the spring of 1991. He added that Freddie Mac expects fixed-rate mortgage prepayment rates to be in excess of 20 percent for the first few months of 1992. Van Order noted in his remarks that during the 1986-87 refinance surge, fixed-rate mortgages prepaid at a rate of 20-25 percent.

Fifteen-year mortgages have quietly caught fire with refinancing borrowers. Based on the preferences shown by 15,000 original Freddie Mac loans that refinanced into new Freddie Mac loans in 1991, 28 percent of homeowners who originally held fixed-rate loans refinanced into 15-year loans. Sixty percent of original holders of 15-year loans stayed with them upon refinancing. Nineteen percent of borrowers who originally held ARMs chose 15-year loans when refinancing. The other hot products for refinancing ARM borrowers were fixed-rate loans - grabbing a 59 percent share - and 5-year balloons - taking a 15 percent share. Ten percent of borrowers who originally held 30-year fixed-rate loans took out 5-year balloons when they refinanced.

Van Order pointed out that with the exception of the current prepayment surge, prepayments should be generally lower going forward, as baby boomers age and are less inclined to move, and as housing appreciation levels off. But the Freddie Mac economist also predicted prepayments are likely to be more volatile than they used to be - which should keep the people who run the models pretty busy.

In terms of the outlook for housing price appreciation, Van Order said the national average price pickup at the end of last year was running at about a 2 percent annual rate. He said the housing appreciation rate should rise to 3.5 percent by year-end 1992 and then move back up to close to 5 percent by the end of 1993, but that is contingent on the economy regaining health. He noted some markets currently showing depreciation in home prices, including Long Island where prices have fallen by about 7 percent and Los Angeles where prices dropped by about 2 percent in 1991.

Van Order predicted that both delinquency rates and defaults should peak in 1992.

At the same press gathering, Freddie Mac's Chairman and CEO Leland Brendsel noted that it "was really the new home market where you've seen the weakness." He observed that while in 1992 the outlook was for general weakness in the economy, there would be strength in the mortgage origination market. Brendsel said that Freddie Mac purchased close to $100 billion in mortgages in 1991, and he expected the total to come close to that in 1992 as well.
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Title Annotation:Federal Home Loan Mortgage Corp.'s Chief Economist Robert Van Order's forecast for mortgage market
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:Industry Overview
Date:Jan 1, 1992
Previous Article:Developing Incentive Compensation Programs for Mortgage Lenders.
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