Fre Nothaft_05-06-09[1]

Housing and Mortgage Market Update Philadelphia Council for Business Economics Philadelphia, PA May 6, 2009

Frank E. Nothaft Chief Economist

Housing Contraction Ongoing, Mortgage Defaults Rising

ƒ Housing activity low ƒ Single-family construction is lowest since 1945 ƒ Sales are near bottom; about a third are foreclosure sales ƒ U.S. house price measures will likely decline through 2010

ƒ Low mortgage rates promote loan demand ƒ ƒ ƒ ƒ

Less purchase-money because of lower house prices, fewer sales Refis account for 75% of applications over past three months FHA volume up sharply Refi volume pushes 2009 originations above last year

ƒ Mortgage defaults rise ƒ ƒ ƒ ƒ

Unemployment main trigger event for delinquency House price declines add to foreclosure risk Serious delinquency rates likely to rise further in 2009 Coastal areas, Great Lakes region will be hit hardest

Office of the Chief Economist 1

Low Interest Rates and Falling Home Prices Have Increased Housing Affordability 170

Index

Percent

NAR Affordability Index

18.0

30-year Fixed Mortgage Rate

(left scale)

(right scale)

140

14.5

110

11.0

80

7.5 Index = 100 means median income buys median priced home

50

Source: National Association of Realtors Composite Housing Affordability Index – (% of median priced home affordable on median income with conventional mortgage and 20% down); Freddie Mac Primary Mortgage Market Survey ®

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

4.0

Office of the Chief Economist 2

Conventional and FHA Mortgage Rates Have Dropped 2% Since October Effective Interest Rates on 30-Year Fixed-Rate Mortgages (Percent) 7.4

FHA Conventional

7.0 6.6 6.2 5.8 5.4 5.0 4.6 Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

Jul-07

May-07

Mar-07

Jan-07

Office of the Chief Economist

Source: Mortgage Bankers Association (last data: week ending April 24, 2009)

3

Difference Between 30-Year Fixed Jumbo and Conforming Rates Is at Record Levels Effective Interest Rate on 30-Year Fixed-Rate Conventional Mortgages (Percentage Points)

8.2

30-Year Jumbo FRM

7.8 7.07 %

7.4 7.0

7/20/07 26 bps

6.6 6.45% 6.81%

6.2

5/1/09 143 bps

5.8 5.4

30-Year Conforming FRM 5.03%

5.0 May-09

Apr-09

Mar-09 Feb-09

Jan-09

Dec-08

Nov-08

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

May-08 Apr-08

Mar-08

Feb-08

Jan-08

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

May-07

Apr-07

Mar-07 Feb-07

Jan-07

Source: HSH Associates (last data: week ending April 17, 2009) Note: Effective rate adds fees and points to the interest rate.

Office of the Chief Economist 4

Banks Are Tightening Lending Standards Across All Lines of Business Net Percentage of Banks Tightening Credit Standards During Three Previous Months

100 80

Prime Residential Loans Commercial Real Estate

60 40 20 0 -20

Source: Federal Reserve Board's Senior Loan Officer Survey (all residential loans through 2007Q1, prime residential starting 2007Q2); last update: May 4, 2009

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

-40

Office of the Chief Economist 5

Consumer Confidence Fell in February to An All-Time Low Consumer Confidence 150

Peak Jan 2000

– Recession 130 110

90

70

50 30

Low Feb 2009

Note: Data are bimonthly through May 1972; missing months’ data between February 1969 and May 1972 interpolated by Freddie Mac. Sources: The Conference Board, Freddie Mac

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

10

Office of the Chief Economist 6

Single-family Building Hit a Record in 2005, but Has Fallen to Lowest Level Since 1945 One-Family Housing Starts (thousands of units, SAAR)

Forecast

1,800

Third Quarter 2005 record: 1.75 million units

– Recession

1,500

1,200

900

600 First Quarter 2009: 0.36 million units

300 2009

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

1964

1961

1958

1955

1952

1949

1946

Office of the Chief Economist

Sources: Bureau of Census (SAAR), Freddie Mac

7

Building Permits Have Dropped in U.S. Over Last 3½ Years Housing Permits Philadelphia

Housing Permits U.S. (Thousands)

2500

(Thousands)

50

77% Drop

– Recession

2000

40 United States

1500

30

1000

20

500

Philadelphia-CamdenWilmington, PA-NJ-DE-MD MSA

10

75% Drop

Source: National Association of Realtors, Bureau of Census

2008Q1

2006Q1

2004Q1

2002Q1

2000Q1

1998Q1

1996Q1

1994Q1

1992Q1

1990Q1

1988Q1

1986Q1

1984Q1

1982Q1

0 1980Q1

0

Office of the Chief Economist 8

Existing Home Sales Down a Third in U.S. and Pennsylvania during the Last Three Years U.S. Existing Home Sales (Thousands) 7,500

Pennsylvania Existing Home Sales (Thousands) 280

Home Sales Growth 2005Q4 – 2008Q4

7,000

United States Pennsylvania

6,500

United States

260 -32% -34%

240

6,000

220

5,500 200 5,000 180 4,500 Pennsylvania

4,000

160

3,500

140

3,000

120

2,500 1990

100 1992

1994

1996

1998

2000

2002

2004

Source: National Association of Realtors (Existing Single-Family Houses, Apartment Condos & Co-ops)

2006

2008

Office of the Chief Economist 9

Large Inventory Surplus Remains in Market Excess Unsold Homes for Sale (Numbers in Thousands)

1000 Annual Data

900

Quarterly Data

800 700 600 500 400 300 200 100 0 Q1

-100 1996

2000

2004

Q4 Q1

2005

Q4 Q1

2006

Source: Bureau of Census (1996-2004:Annual Data, 2005Q1–2009Q1:Quarterly Data) Note: The excess unsold homes were estimated based on the average vacancy rate from 1996Q1 to 2005Q4 (1.7%).

Q4 Q1

Q4 Q1

2007

2008

2009

Office of the Chief Economist 10

Excess Homeowner Vacancy Rate by State Estimated overhang of vacant-for-sale homes as a percent of state homeowner dwellings

<= 0.0% 0.1 to 0.75% 0.76 to 1.5% 1.6 to 2.0% >2.0%

Source: U.S. Census Bureau and Freddie Mac calculations (difference between 2008 homeowner vacancy rate and 1996-2005 average homeowner vacancy rate for each state).

Office of the Chief Economist 11

National House Prices Have Experienced a Cumulative Decline of 17% Since 2006Q3 Quarterly Growth Rates (Numbers in Percentages)

5

3.9

4 3

3.4

2.5 1.7

2

1.3

1.7 0.7

0.4

1 0

-0.3

-1 -1.2

-2

-0.9

-1.4 -2.4

-3 -4

-3.8 -3.8

-5 -5.0

-6 2005Q1 Source: Freddie Mac

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

Office of the Chief Economist 12

House Price Declines Were Broad Based from 2007Q4 to 2008Q4 United States –12.1% -8.5

-3.4 1.7

-1.8 -8.4

-9.9 -7.2

-2.1

-9.5

-4.1 -10.9 -2.9 -7.2 -15.0

-1.1

-6.0

-29.5 -3.2

-4.0

-6.0

-1.4

-25.7

-0.9

-5.3 -0.2

-11.7

DC –6.2

-3.0

-2.0

-4.5 -4.9

-3.3

CT –7.2

-0.3 -4.2

-25.9

RI –13.0 -13.0 -8.1

-5.2

-8.8

-8.7

-6.9

-4.2

-0.8

-1.8

>= 0% -5 to 0% -10 to -5% -20 to -10% < -20%

-10.4 -3.4

-5.0 -25.2

-7.1

Office of the Chief Economist

Source: Freddie Mac

13

Expected Peak-to-2010Q4 Decline in US House Prices Is 25% Nominal, 30% Real U.S. House Price Index

Forecast

350

300

25%

250 Nominal 200

150

30% 100 Real 50

0 2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

Sources: Nominal House Prices - Census Bureau’s Constant Quality New-House Purchase Index (1963-1969), Freddie Mac’s Conventional Home Price Purchase-Only Index (1970-1974), portfolioweighted WRSI index and forecast (1975-2010); Consumer Price Index - U.S. Bureau of Labor Statistic’s Consumer Price Index (1963-2008) and February 2009 Blue Chip Forecasts (2009-2010).

Office of the Chief Economist 14

Past Financial Crises Have Had Substantial Value and Output Declines

Peak-to-Trough Length of Time Change (%)

(Average)

Real House Price

-35%

5 years

Stock Market Values

-56%

3-4 years

Unemployment Rate

7%

5 years

As of fourth quarter of 2008, U.S. Real House Prices are down about 21% from peak of two-and-a-half years earlier

Source: C. Reinhart and K. Rogoff, “The Aftermath of Financial Crisis,” December 2008, and Freddie Mac house price index.

Office of the Chief Economist 15

Low Rates, GSE Streamline Refis Result in Origination Rebound in 2009 4,000 3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0

Total Single-Family Mortgage Originations (Billions of Dollars) Refinance Originations Home Purchase Originations

'98 Sources: Freddie Mac

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

Office of the Chief Economist 16

FHA Lending Is Up Sharply: Largest Share Since 1942 Share of Single-Family Originations

50% Annual

Quarterly

1942: FHA=29%

40%

2008Q4: FHA=29%

30% VA-Insured

20%

10% FHA-Insured

0% 1Q2008

1Q2007

1Q2006

1Q2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

1945

1941

1937

Office of the Chief Economist

Sources: HUD (1935-1997), Freddie Mac & Inside Mortgage Finance (1998 – Present)

17

Subprime and Alt-A Volume Quintupled 2001 to 2006, then Fell from 2006 to 2008

5.2% 7.7%

14.4%

2.7%

7.9%

2.5%

33.2%

7.2% 57.1%

20.0%

13.4%

20.1%

2.8% 20.1%

2001 Single-family Originations $2.2 trillion Subprime and Alt-A

1.5%

$0.2 trillion

Conventional, Conforming Prime

Jumbo Prime

Source: Inside Mortgage Finance (by dollar amount)

62.0%

6.5%

16.1%

2006 $3.0 trillion

2008 $1.5 trillion

$1.0 trillion

$0.1 trillion

Subprime

Alt-A

FHA & VA

Home Equity Loans

Office of the Chief Economist 18

GSE & GNMA Market Share Fell When Subprime Boomed; Today GSEs & GNMA Are Main Source of Mortgage Funds MBS Share Issuance (Percent of MBS Issuance) Annual (1985 – 2007)

Quarterly (2008 - 2009)

90% Conventional, Prime, Fixed-Rate Lending Is Mainstay of Market (1985-2003)

80% 70%

Subprime, Non-Traditional Lending Boom (2004-2007H1)

60%

1st quarter 2009: FRE & FNM 74% Subprime Crisis, Private-label MBS Collapse (2007H2-2009)

50% 40%

Ginnie Mae 26%

30% 20% 10%

Private-Label

2006 2007 2008 Q1 2008 Q2

2004 2005

2001 2002 2003

1997 1998 1999 2000

1993 1994 1995 1996

1992

1991

1988 1989 1990

1985 1986 1987

Ginnie Mae

2008 Q3 2008 Q4 2009 Q1

Private-Label 0%

0%

Freddie Mac and Fannie Mae

Source: Inside MBS & ABS (The 2008 Mortgage Market Statistical Annual - Volume II), Inside MBS & ABS (April 25, 2005, July 11, 2008 issues, January 9, 2009, and April 3, 2009).

Office of the Chief Economist 19

Job Loss Is the Main Hardship Reason Among Delinquent Prime Borrowers

Hardship Reason

2007

Unemployment or curtailment of income

43.0%

Illness or Death in the Family

25.5%

Excessive obligation

16.2%

Marital difficulties

6.6%

Property problem or casualty loss

2.0%

Extreme hardship

0.4%

Inability to sell or rent property

1.7%

Employment transfer or military service All other reasons

0.9% 3.7%

Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects. Data cover only prime conventional conforming loans.

Office of the Chief Economist 20

U.S. Unemployment Rate Rose to 8.5% in March, the Highest in More Than 25 Years Unemployment Rate (Percent) 13 – National Recession

Forecast

Pennsylvania

2009Q4: 9.5%

Feb-Mar 1983: 12.9%

11

United States Nov-Dec 1982: 10.8%

9

PA Mar-09 7.8%

7

5

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

3

Office of the Chief Economist

Sources: U.S. Department of Labor, Freddie Mac

21

States With High Job Losses Are Strongly Correlated with High Delinquency Rates

Percent change in the non-farm payroll employment December 2007 through December 2008

1.5% to 2.2% 0.1% to 1.0% -1.0% to -0.1% Source: U.S. Bureau of Labor Statistics

–2.0% to –1.1% –3.0% to –2.1% –4.5% to –3.1%

National employment down 3.0 million (-2.2%) Office of the Chief Economist 22

Prime & Alt-A Delinquencies Are Highest in Areas With Falling Home Values and Job Loss

7.55%

0.90-1.75%

5.56%

1.76-2.25%

5.04%

2.26-2.75% 2.76-3.25% 8.90%

3.26-9.00%

National = 3.74% Seriously Delinquent (90+ days delinquent or in foreclosure, Prime & Alt-A Conventional) Data as of December 2008 Office of the Chief Economist

Source: Mortgage Bankers Association

23

Loan Modifications in Private-Label Securities Are Key to Foreclosure Reduction Number of Mortgages Outstanding (in millions) 3%

15% Bank and Thrift Portfolios 8

15%

Seriously Delinquent Mortgages (in thousands)

8%

Other Portfolio 2

11% 33% Fannie Mae 18

Bank and Thrift Portfolios 397

13%

Other Portfolio 275

7%

Freddie Mac 232

Ginnie Mae & FHA 378

Private Label Securities 8 Ginnie Mae & FHA 6

Fannie Mae 444

Freddie Mac 13

11%

Private Label Securities 1,734

11% 23%

Total: 55.0 Million

50%

Total: 3.46 Million

Sources: Federal Reserve Board, FDIC, HUD, Freddie Mac, Fannie Mae, Mortgage Bankers Association, First American CoreLogic (LoanPerformance); data as of December 31, 2008. Seriously Delinquent loans are at least 90 days delinquent or in foreclosure. Components may not sum to total because of rounding.

Office of the Chief Economist 24

Increasing Delinquencies, Especially Subprime Loans 90 Days or More Delinquent or in Foreclosure (percent of number) 25

All Loans

Prime Loans

23.1

Subprime Loans

20

15

10

6.3

5

3.7

Source: Mortgage Bankers Association; “Prime Loans” includes Alt-A (Quarterly data not seasonally adjusted;1998Q1-2008Q4).

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

0

Office of the Chief Economist 25

Subprime Accounted for Almost Half of PA Loans Entering Foreclosure Since 2006 Number of Foreclosures Started (Annual Rate in Thousands)

45

Subprime: 13% of Loans Serviced in PA 40 35 30

45% 49%

25 47%

39%

46%

51%

20

12% 11%

15 23%

10 5

23%

18%

14% 43% 40%

38%

36%

36%

2004Q4

2005Q4

2006Q4

30%

0 2003Q4

Prime

FHA&VA

Source: Mortgage Banker’s Association National Delinquency Survey.

2007Q4

2008Q4

Subprime Office of the Chief Economist 26

Homeowner Affordability and Stability Plan

Larger Backstop

Additional $200 billion for GSEs

Easier Refinancing

Lower rates for 4-5 million mortgages

Subsidized Modifications

$75 billion for 3-4 million mortgages

Increased Portfolio Size

Up to $900 billion Office of the Chief Economist 27

Freddie Mac Relief Refinance Mortgages

• • • • •

Freddie Mac must own or guarantee Borrowers must be current over past 12 months LTVs up to 105% of current value Lenders generally will not have to re-underwrite Mortgage Insurance (MI): If loan has MI, same coverage must be maintained; if loan does not have MI then not required on greater than 80 percent LTV • Conventional loans • Must be originated by June 10, 2010

Office of the Chief Economist 28

Modification Program for At-risk Borrowers • $75 billion to subsidize loan modifications • Modifications will follow uniform guidelines • Reduces monthly payments to a 31 percent debt-toincome ratio • Provides financial incentives for servicers and borrowers to initiate and sustain modifications • Each GSE responsible for modifying their own loans • Fannie Mae is Program Administrator for Non-GSE modifications • Freddie Mac is Compliance Agent for Non-GSE modifications Office of the Chief Economist 29

Where to Get More Information Look for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance Contact us at [email protected]

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2009 by Freddie Mac.