While there are positives associated with the placement of the GSEs into conservatorship, UBS noted that its impact on the overall housing market is expected to be modest. Analysts' outlook for non-agency MBS is on the modest side as well.

In part, analysts noted rising unemployment that will lead to higher default rates, with unsold inventories continuing to weigh on home prices. 

At this time, the firm projects an extended period of deterioration before the housing market bottoms sometime in mid-2009.  Additionally, analysts believe the 2006/2007 vintages will continue their seasoning curve as loans roll into delinquency and foreclosure.

Analysts based their projections on data from Loan Performance, Intex and the Mortgage Bankers Association's National Delinquency Survey. They then used a default timing curve to convert the delinquency data into a monthly foreclosure and REO forecast. 

Based on their expectation of a 5% liquidation rate, analysts expect total foreclosure inventory to peak in mid-2009 at $450 billion, or 1.83 million loans.  Assuming a 1% liquidation rate, foreclosures won"t peak until 2012, while a 7% liquidation rate will put the peak in early 2009. 

Analysts said that the majority of foreclosures will be from subprime. They added their foreclosure outlook for Alt-A is less than 50% of supbrime, while foreclosures for option ARMs will occur later than the other sectors and remain strong into 2011 and 2012. 

In terms of jumbo mortgage foreclosures, although troublesome for investors, they are relatively minor compared to the other sectors. Jumbo foreclosures is projected to begin peaking in early 2009 and hold around there through 2010.

On the agency side, analysts said data is limited. They expect the foreclosure rate will be less than jumbos, a view supported by the collateral characteristics. Additionally, agencies have lower exposure to California.

The firm's analysis suggested that the peak in agency foreclosures will begin in early- to mid- 2010 and extend into 2011.

Generally, although foreclosures are an issue in all sectors, UBS said that subprime and Alt-A will continue to cause the most problems.

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