Freddie Mac 2010 Annual Report Download - page 71

rents, the principal source of income for property owners, stabilized and began to increase on a national basis. Vacancy rates
and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows
generated by the underlying property. These improving fundamentals helped to stabilize property values in a number of
markets. However, the multifamily market continues to be negatively impacted by high unemployment and ongoing
weakness in the economy. Since 2008, most of our competitors, other than Fannie Mae and FHA, ceased their activities in
the multifamily mortgage business or severely curtailed these activities relative to their previous levels. However, some
market participants began to re-enter the market on a limited basis in 2010.
Outlook
Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control.
These statements are not historical facts, but rather represent our expectations based on current information, plans,
judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied
by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause
the actual performance of the housing and mortgage markets and the U.S. economy during 2011 to be significantly worse
than we expect, including adverse changes in consumer confidence, national or international economic conditions and
changes in the federal government’s fiscal policies. See “BUSINESS — Forward-Looking Statements” for additional
information.
Overview
As in the past, we expect key macroeconomic drivers of the economy — such as income growth, unemployment rate,
and inflation — will affect the performance of the housing and mortgage markets in 2011. With the federal government’s
fiscal policy supporting aggregate demand for goods and services and a monetary policy that provides low interest rates and
ample liquidity to capital markets, we believe the economic recovery will continue and gradually accelerate during 2011,
with the second half of 2011 exhibiting stronger fundamentals than the early part of the year.
Single-Family Market
Below are four features that we believe will influence the 2011 housing and mortgage markets. The likelihood that any
or all of these features will occur depends on a variety of factors, including the pace of the economic recovery.
•Mortgage rates — By November 2010, fixed-rate mortgage rates had declined to their lowest level since the early
1950s. This allowed for the continuation of the refinance boom that began in 2009. If the federal funds rate remains
under 0.5% for most of 2011, relatively low mortgage rates should be a feature of the 2011 mortgage market.
•Home prices — We believe those local markets that have relatively large inventories of for-sale homes and REO
dispositions will continue to see home price declines in 2011. We also believe that while certain markets may
experience modest home price increases in 2011, home prices for the U.S. as a whole are likely to be lower than in
2010.
•Homebuyer affordability — The three primary factors that affect buyer affordability are: (a) mortgage rates; (b) home
prices; and (c) income. We believe buyer affordability is higher than the past several years. We believe that many
first-time buyers will be attracted to the housing market in 2011, which should translate into more home sales in 2011
than in 2010 and a slight increase in mortgage debt outstanding.
•Lower mortgage origination volume — More home sales in 2011 would generally result in increased purchase-money
originations, and that is expected to be a feature of 2011’s mortgage market. However, refinance activity is expected
to decline during 2011 as a result of at least three factors: (a) many borrowers have refinanced over the past year or
are currently in the midst of refinancing, and hence will have little need to do so again in 2011; (b) MHA’s Home
Affordable Refinance Program is scheduled to expire on June 30, 2011, which is expected to further dampen refinance
volume during the second half of 2011; and (c) we expect interest rates will move up during 2011, reducing the
financial incentive to refinance for those borrowers who have not done so already. As a result, we believe the
anticipated decline in refinance originations should offset the potential increase in purchase-money originations, which
should lead to lower total mortgage lending volume in 2011.
Multifamily Market
While major multifamily market fundamentals improved on a national basis during 2010, certain local markets continue
to exhibit weak fundamentals. We expect that our multifamily non-performing assets may increase due to the continuation of
challenging economic conditions, particularly in certain geographical areas. Improvements in loan performance have
historically lagged improvements in broader economic and market trends during market recoveries. As a result, we may
continue to experience elevated credit losses in the first half of 2011, even if market conditions continue to improve.
68 Freddie Mac