High Loan to Value Mortgages and the Economy

1. High Loan to Value Mortgages and the Economy Michelle Madden June 15, 2004

2. Historical Information • The National Housing Act of 1934 established the Federal Housing Administration. • The GI Bill of Rights in 1944 established the Veterans’ Administration. • In 1992, the Federal National Mortgage Association, Fannie Mae, began conducting the National Housing Survey. • In 2001, approximately 68% of U.S. households owned their homes.

3. Housing and the Economy • Internationally, high homeownership levels do not equate to economic prosperity. Some rural, non-industrialized nations have higher ownership rates than the U.S. • The housing share of GDP is comprised of housing investment, consumption, and spending. The total housing share of GDP was 21.4% in 2000. • Foreclosures and delinquencies are analyzed to see how they impact other housing statistics.

4. HLTV Mortgages • HLTV mortgages require less than a 20% down payment. Often the down payment is 10% or less. • FHA, Fannie Mae, VA, and subprime lenders offer HLTV mortgages. • HLTV mortgages are increasing in both number and availability. From 1993-2003, they increased by 300%.

5. HLTV Mortgages May Result in… • Higher housing prices. • HLTV homeowners as non-movers during recessions. • Less of an incentive to stay out of foreclosure. • Economic growth or regional recessions?

6. Loss Mitigation as an Alternative to Foreclosure • Special Forbearance • Mortgage Modification • Partial Claim • Pre-foreclosure Sale • Deed-in-lieu of Foreclosure • ***HUD is reviving an effort to financially penalize servicers of government mortgages who do not try to go through loss mitigation prior to foreclosure.

7. Analysis • Does an increase in the rate of growth of GDP lead to a decrease in FHA Foreclosure Rates? • Does a change in the rate of FHA Foreclosure Rates lead to a change in the rate of GDP’s growth?

8. 3 2.5 2 Rate of Foreclosures Started Extended MBA FHA Rate 1.5 Extended MBA Conventional Rate 1 0.5 0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year Conventional and FHA Foreclosure Rates 1950-1997

9. 18.0 16.0 14.0 12.0 10.0 % Change in GDP Percent Extended MBA FHA Rate 8.0 6.0 4.0 2.0 0.0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year Percentage Change in GDP and FHA Foreclosure Rates 1950-1997

10. Regression Results • The regression to see if the rate of change in FHA Foreclosures is dependent upon changes in GDP had an Adjusted R Square of -0.0114. • The regression to see if changes in GDP are dependent upon the rate of change in FHA foreclosures had an Adjusted R Square of -0.0114. • Neither regression found a strong relationship between the factors.

11. Conclusion • Both HLTV mortgages and foreclosures on FHA loans are increasing. • It could not be proven that FHA foreclosure rates strongly impacted GDP or were strongly impacted by GDP from 1950-1997. • The government is encouraging more HLTV mortgages and wider use of loss mitigation.