With the fiscal cliff negotiation out of the way--at least, the first phase of it--analysts at ""Barclays"":http://group.barclays.com/home assert in a ""new release"":https://live.barcap.com/PRC/servlets/dv.search?contentPubID=FC1891134&bcllink=decode that ""housing policy is transitioning from being a source of negative headline risk to a potential positive factor for the housing stocks.""[IMAGE]
As the haze surrounding the state of the mortgage interest tax deduction (MID) lifts and the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration (FHA) prepares to make reforms to its business model, analysts Stephen Kim and John Coyle note that ""anticipated policy changes have been less severe than feared.""
While part of the fiscal cliff tax bill limits itemized deductions in some cases (due to a provision known as the Pease Restriction), Barclays does not believe the scaling back will affect higher-end home purchasing behavior, thus leaving homebuilders relatively unscathed.
""To begin with, the limitation also applies to deductions like charitable donations, so it is unclear how much any impact from the deduction limitation will affect home buying activity versus giving to charities,"" the analysts write. ""Moreover, mortgage rates are exceptionally low now, approximately 48 percent below their 20-year average of 6.46 percent. This means that the MID is theoretically less important now than in prior periods, since the benefit from locking in a lower mortgage rate will help offset the loss of the mortgage interest deduction.""
The bigger threat to homebuilders--FHA's commitment to reform its lending standards, fees, and scope in an effort to repair its financial situation--also appears to be less of a worry than first thought.[COLUMN_BREAK]
So far, newly confirmed commissioner Carol Galante has committed to several major steps to be taken by the end of January: the cessation of reverse mortgage origination, an increase for down payments on loans above $625,000, and the tightening of standards for borrowers with FICO scores below 620.
Those reforms are merely ""cosmetic"" and shouldn't affect purchases very greatly, Barclays asserts.
""For instance, reverse mortgages do not relate to home purchases; borrowers of loans over $625,500 should easily manage a 5% down payment; and only 3.4% of FHA's recent loan volume went to borrowers with FICO scores below 620. Overall, we expect these changes to be incremental rather than transformative, and thus to have only a modest dampening effect on housing demand,"" Kim and Coyle write.
However, should the agency take further steps to tighten standards--such as increasing down payments on entry-level buyers--builders will likely start feeling the effects.
Another concern for housing and mortgage industry professionals is the nebulous ""qualified mortgage"" (QM) rule, which establishes the type of loan for which a lender is legally protected from future lawsuits. The ambiguity of the term has remained a point of debate for analysts, industry experts, and politicians, but Barclays believes a clarification is on the way very soon.
While the firm originally expected the Consumer Financial Protection Bureau to issue a final standard as soon as January 21, Kim and Coyle now believe the QM definition standards may be released as early as January 9. This is critical, they say, as the current environment has many banks (particularly smaller institutions) erring on the side of caution, creating a restrictive credit market.
With the road seemingly clear, Barclays maintained its ""Positive"" outlook for homebuilding and building products.
""To be sure, the mortgage policy decisions facing regulators are far from being resolved, but we now believe that investors have essentially come up the learning curve on these issues,"" the analysts write. ""Going forward, we think mortgage policy issues will pose a more modest threat, and that clarification on these issues during the year could provide incremental upside to the stocks.""