Fading Homeownership Bodes Ill for Fannie, Freddie: BofA-Merrill Economists

A report from Bank of America Merrill Lynch showing that U.S. homeownership is at its lowest point in over a decade suggests that Fannie Mae and Freddie Mac will continue to wrestle with earnings losses as long as housing demand remains weak.

U.S. Census Bureau statistics show that the homeownership rate fell to 66.7% in third-quarter 2010, its lowest rate since 1999, well below its peak of 69.2% in Q4 in 2004—and translating to a loss of 2.7 million homeowners. The rate is based on the total occupied housing stock of owners versus renters. With many underwater mortgage owners transitioning to rental units, both Fannie Mae and Freddie Mac face a persistent string of losses in the quarters to come.

Government-controlled mortgage buyer Fannie Mae on Nov. 5 reported a third-quarter net loss of $1.3 billion and asked for $2.5 billion in additional federal aid. The nation’s other government-sponsored enterprise (GSE) for mortgage lending, Freddie Mac, on Nov. 3 reported a net loss of $4.1 billion after the dividend payment of $1.6 billion on its senior preferred stock to the U.S. Department of the Treasury.

Meanwhile, underwater borrowers, meaning mortgage holders with negative equity because their asset's value has fallen below their loan balance, are expected to be renters rather than owners in the future, according to a “Housing Watch” report written by economist Michelle Meyer of the North American economics group at Bank of America Merrill Lynch Global Research

“We expect vacancy rates to remain high given the continued flood of foreclosures and the drop in household formation (the number of new independent family units),” Meyer wrote. “The Census Bureau’s population survey shows that household formation slowed to an average of 500,000 a year