Most of the gain was probably related to the recently sustained bounce-back in new home sales, which has come despite the rise in mortgage rates that threw the homebuilding index off its highs amid tapering fears last spring. As The Wall Street Journal's Justin Lahart just noted, "Mortgage rates have been the crucial variable for home builders this year. Next year it may be jobs instead."
Beyond hopes that Fed easing may have finally boosted the economy to a higher growth rate, however -- perhaps creating enough new jobs to allow more twenty-somethings to move from their parents' basements, raising household formation in the bargain -- there is another reason to be bullish about the "housers in the new year. [Along for the ride could be home improvement retailers -- Home Depot (HD), Lowes (LOW), private mortgage insurers Genworth (GNW), Radian (RDN), MGIC Investment (MTG), Essent (ESNT), and non-bank servicers Ocwen (OCN), Nationstgar (NSM), as well.]
Specifically, Rep. Mel Watt (D-N.C.), to be sworn in Jan. 6 as the new Federal Housing Finance Agency Director overseeing Fannie Mae and Freddie Mac, has just signaled that he will put on hold the higher mortgage guarantee fees recently set in motion for Fannie-and Freddie-backed conforming loans by outgoing FHFA head Ed DeMarco. This could amount to a break for two-thirds-plus of new loans originated early next year. And it should help ensure that the near-term momentum in U.S. housing will continue, albeit at the cost of delayed progress toward the administration's goals of reducing the GSEs' market dominance and "crowding back in" private capital.
I predict Watt could make several other changes having positive impact.
Perhaps most subtly, FHFA could revise future "rep and warrant" agreements between the GSEs and lenders, allowing for shorter "sunset" periods, or repayment windows after which lenders can be free of the risk of loan buy-back demands from Fannie and Freddie, as recently advocated by the Urban Institute's Laurie Goodman. Such "putback risk" has forced lenders to add credit overlays on loans, thus raising mortgage costs and putting home purchases out of reach for many would-be buyers.
There could be other signals of a reweighting of regulatory priorities to juice the mortgage and housing markets, as well, including a hold on a scheduled GSE pullback from support of multi-family housing and fresh looks at allowing Fannie-Freddie principal forgiveness and a modest expansion of the HARP refinancing program.
I wrote skeptically for a year or more about what the bond markets have dubbed the related "DeMarco trade," or prospect for accelerated loan prepayments affecting certain classes of mortgage debt. But I began to see the writing on the wall for the cautious (conservatives would say "heroic") acting director right around Halloween (Oct. 31).
DeMarco's critics finally gained a foothold to replace him in November, when Senate Majority Leader Harry Reid (D-Nev.) triggered the "nuclear option," changing Senate rules to preclude filibusters on non-cabinet-level appointees, with just a simple majority vote. This cleared the way for Watt's confirmation by a 57-41 margin on Dec. 10.
Meanwhile, the impact of debt forgiveness, and even more so, a modest "HARP 2.1", might now be more limited, given that the improvement in home values has lifted many borrowers out of "underwater" status and refis might seem less attractive (for HARP-eligible borrowers who have so far passed up the chance).
The new reality: prevailing rates today might not produce as big a savings as might have been the case a year ago; moreover, progressives' dream of allowing the millions of borrowers whose loans are not backed by Fannie and Freddie to refi in the future via the two companies simply cannot be fulfilled by Watt without (unlikely) legislation.
For these reasons, debt market worries over a wave of unwanted prepayments might still be over-done -- although help to the housing story could still be achieved at the margin.
One other area where Watt should be housing-friendly involves DeMarco's parting proposal to reduce conforming loan caps 4% by as early as next October (from a baseline $417,000 to $400,000 and in high-cost areas from $625,000 to $600,000).
Even though the Obama administration has embraced the notions of lowering the GSEs' loan caps (while raising G-fees) as a way of reducing the Fannie-Freddie footprints -- and has tacitly endorsed evolving Senate legislation to do so as a means of phasing out the two companies over a five-year period -- a delayed first step on the caps, past 2014, seems all but assured.
Particularly, that is, since it can be rationalized as in deference to Congress, as lawmakers, themselves, consider housing finance reform. And even less subtly as a means of avoiding turbulence before next November's all important mid-term elections, wherein the Democratic Senate could yet prove in play.