Foreclosures for Sale May Still Affect Home-Loan Bonds

by on Foreclosure Crisis

Investors should not rush into investing in U.S. home-loan bonds because the recent increases in home prices do not fully reflect the true level of foreclosures for sale inventories in the country, according to New York-based Barclays Capital analysts Glenn Boyd and Ajay Rajadhyaksha.

The analysts said that the housing market has not been improving as fast as suggested by news of home price increases. Although the Standard & Poor’s/Case-Shiller home price index in May indicated the first monthly price increase in 3 years and an only 2-percent adjusted year-over-year decline, the more accurate reading would be an adjusted decline of 10 to 15 percent.

According to the Barclays analysts, without a sustained increase in home prices, there would be no change in the level of residential loan delinquencies and losses.

The analysts also argued that home price data presented to the public during the first months of the year, particularly the spring months, is an inflated version of typical home price patterns. During the spring, more homeowners sell homes, reducing the share of low-priced foreclosed properties in total home sales and reducing the extent of their influence on home prices.

The analysts predicted that a new wave of foreclosures will hit the country as bank foreclosure moratoriums expire, weakening further home-loan investments. Home-loan securities investors will also be hurt by increased federal efforts to work out loan modifications for distressed homeowners.

Prices for prime jumbo fixed-rate securities climbed 10 cents on the U.S. dollar last month to around 85 cents, according to the Barclays analysts.

Securities backed by Alt-A home loans with fixed-rate years rose 7 cents to 54 cents.

The analysts have observed that confidence is surging in the fixed-income markets, with prices of non-agency home loan bonds rising to higher levels.

Expected demand due to the launching of the U.S. Public-Private Investment Program has pushed the spike in the fixed-income markets. The PPIP program was launched on July 8 to buy home loan bonds rated AAA with up to $30 billion in funding.

While both the home price indexes released in July by the S&P/Case-Shiller index and the Federal Housing Finance Agency price index indicated monthly home price increases, the analysts said the indexes suffer from seasonal biases.

According to the Barclays analysts, home prices across the U.S. will fall further by an average of 11 percent and then bottom out in 2010, bringing the total home price drop to 40 percent from their peak levels during the housing boom.