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Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

Hearing on Mortgage Foreclosure Issues: Texas Relative to Other States The Committee on Financial Institutions The Texas House of Representatives. Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University Austin, Texas June 11, 2008.

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Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

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  1. Hearing on Mortgage Foreclosure Issues: Texas Relative to Other StatesThe Committee on Financial InstitutionsThe Texas House of Representatives Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University Austin, Texas June 11, 2008

  2. Current Mortgage/Capital Market • Downturn in capital and mortgage markets is more severe than the market anticipated • Loss of confidence in ratings and ratings services • Pricing of mortgage-backed assets by institutions • Potential legal/regulatory changes • Likely mergers, acquisitions or failures among financial institutions • Law suits • Foreclosures will remain high through 2009 maybe early 2010 • Subprime ARM resets significant through 2009 • Return to traditional mortgage loan underwriting • Mortgage delinquency/default problems are spilling over into consumer debt delinquencies and business loans • Plenty of liquidity in market, nobody knows how to lend

  3. Housing Market Bust 2007 - … • 2007 first decline in national median home price since 60’s • 1Q2008 annual house prices in US MSAs fell 5.2% on average • 33 states are experiencing year-over-year house price declines as of 1Q2008 (FACL); 15 states according to OFHEO • House price declines appear to be concentrated in larger MSAs • Small and mid-sized MSAs tend not be experiencing declines nearly as severe, if at all • MBA 1Q2008 mortgage delinquency and foreclosure data are highest on record – trend continues upward • The “Un-magnificant Seven” California, Florida, Nevada, Arizona, Michigan and Ohio • Falling home prices in key areas eliminates refinancing, renegotiating or selling when borrower gets behind Sources: NAR, First American CoreLogic, Mortgage Bankers Association

  4. US Median Home Prices in 2008 2001 Trend At 2001 Trend, 2008 median prices should be between $185,000 and $190,000. 2007 = $217,900, if 2008 = $187,500 along trend line, down 14%; if 2008 = $200,000, down 8.5%. Source: NAR, Real Estate Center at Texas A&M University

  5. U.S. Median Home Price Percent Change Source: NAR

  6. US and Texas Appreciation Purchase Only Index Change Year over Year US 1Q2008 = -3.1% Texas 1Q2008 = 2.5% US Texas Source: OFHEO

  7. US, Texas, California and Florida Appreciation Purchase Only Index Change Year over Year US 1Q2008 = -3.1%; Texas 1Q2008 = 2.5% Florida = -14.5%; California = -19.1% Florida US Texas California Arizona = -7%; Nevada = -11% Source: OFHEO

  8. Price Change by State 1Q2007 – 1Q2008 Source: OFHEO, HPI Y/Y % Change

  9. Percent of Foreclosures Started by Type of Loan 1Q2008 Source: Mortgage Bankers Association, National Delinquency Survey, March 31,2008, Estimates by Real Estate Center

  10. Factors Leading to Higher Foreclosures • Traditional life events: loss of job, divorce, illness • Falling home prices • Significant number of non-owner-occupant, investor buyers • ARM resets, prime and subprime • Spikes in other housing costs, especially property taxes and utilities • Local employment losses – Ohio, Michigan, Indiana and other rust-belt states • Fraud and predatory lending practices

  11. Prime and Subprime ARM Resets Source: First American LoanPerformance, The Market Pulse, September 2007

  12. Percent of Loans in Foreclosure: U.S. and Texas Texas U.S. Source: Mortgage Bankers Association, National Delinquency Survey

  13. US Mortgage Delinquency Rates Subprime Mortgages All Mortgages (average = 4.7%) Prime Mortgages (average = 2.5%) Source: Mortgage Bankers Association, National Delinquency Survey, March 31, 2008

  14. US Mortgages in Foreclosure at the End of the Quarter Subprime Loans All Loans (average 1.24%) Prime Loans (average 0.5%) Source: Mortgage Bankers Association, National Delinquency Survey , March 31, 2008

  15. Texas Mortgages in Foreclosure at the End of the Quarter Subprime Loans All Loans (average 1.1%) Prime Loans (average 0.5%) Source: Mortgage Bankers Association, National Delinquency Survey, March 31, 2008

  16. Total Delinquency & Foreclosure Filings 2007 • US 2,203,295, up 75% • Texas 149,703, down 4.6% (1 of only 6 down) • California 481,392, up 238% • Florida 279,325, up 124% • Ohio 153,196, up 88% • Michigan 136,205, up 68% • Arizona 69,970, up 151% • Nevada 66,316, up 215% • Virginia 24,199, up 456% • Maryland 25,109, up 455% • Connecticut 23,470, up 100% • Massachusetts 41,487, up 161% 16 states doubled or more; D.C. was up 608% Source: RealtyTrac, Inc. Data include all default, delinquency and foreclosure filings reported. The same property often has more than one filing.

  17. Monthly Foreclosure Filings Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale as of April 2008

  18. Households per Delinquency or Foreclosure FilingUS = 519; Texas = 809 • 10 – 205 • 251 – 1,500 • 1,501 – 9,999 • 10,000 - + Source: RealtyTrac, Inc. , April 2008

  19. Core Mortgage Risk Index by MSA – 2Q2008 • High • Moderately High • Moderate • Low Source: First American CoreLogic

  20. Seriously Delinquent by State 1Q2008 6.0% 3.5% 6.4% 4.3% 4.2% 6.0% 5.6% 4.9% 4.1% Seriously Delinquent Rate Greater than 6.64% 5.35% - 6.64% 4.04% - 5.34% 0 - 4.03% National Rate = 4.03% 5.0% 4.1% 3.1% 6.7% Source: Mortgage Bankers Association, National Delinquency Survey, (90-days delinquent + FC Inventory)

  21. Foreclosure Starts by State 1Q2008 1.26% 0.84% 1.93% 1.14% 1.16% 1.14% 1.59% 1.33% • Foreclosure Start Rate • Greater than 1.34% • 1.0% - 1.34% • 0-0% - .99% • National (SA) = 0.99% 0.98% 0.67% 1.86% Source: Mortgage Bankers Association, National Delinquency Survey, Real Estate Center at Texas A&M University

  22. Monthly Texas Foreclosure Filings Average Since May 2005 = 9,564 There are approximately 8.1 million occupied homes in Texas Monthly average filings = 0.12% of total occupied homes Source: RealtyTrac, Inc., American Community Survey, US Census Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

  23. Major Financial Risks • Falling home prices from peak of bubble • Prime residential mortgage delinquency up • Can’t value CDO’s and other mortgage-backed paper • Commercial mortgage delinquency rising – could become significant problem later • ADC loans to homebuilders and developers much tighter • Spillover onto credit card and auto loans • Credit Default Swaps (CDS) next major impact

  24. Hearing on Mortgage Foreclosure Issues: Texas Relative to Other StatesThe Committee on Financial InstitutionsThe Texas House of Representatives Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University Austin, Texas June 11, 2008

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