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Housing Market Update A Collaborative Meeting Between Servicers and Counselors February 8, 2008

Housing Market Update A Collaborative Meeting Between Servicers and Counselors February 8, 2008. Christopher Henderson. Outline. The House-Price Run-up and Correction Mortgage Credit Quality and Regional Statistics Assessment of the Current Crisis Examining Remedies Conclusions.

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Housing Market Update A Collaborative Meeting Between Servicers and Counselors February 8, 2008

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  1. Housing Market Update A Collaborative Meeting Between Servicers and CounselorsFebruary 8, 2008 Christopher Henderson

  2. Outline • The House-Price Run-up and Correction • Mortgage Credit Quality and Regional Statistics • Assessment of the Current Crisis • Examining Remedies • Conclusions

  3. The House Price Run-up and Correction

  4. Greatest Increase In Real Home Prices In US History (Real Y/Y House Prices 1890-2006)

  5. Innovations in the Mortgage Market The Evolution of Lending Today Over 100% LTV Unlimited geography Up to 40 yr term Negative amortization Piggyback lending Interest only No documentation 1995 Automated Underwriting FICO Scores 1989 100% LTV 1970 90% LTV 1964 80% LTV 1935 60% LTV 1913 50% LTV Limited geography Limited term Balloons

  6. House Prices Are Falling (quarterly; Y/Y percent change; relative to CPI) Existing homes, price index (OFHEO) Existing homes, median price (NAR) Case-Shiller composite-10 price index Futures Index

  7. House Price Depreciation Is Now Widespread 2006Q3-2007Q3 U.S. Appreciation: -4.5% HPA less than -4.5% (9) -4.5% ≤ HPA < 0% (22) 0 ≤ HPA ≤ 2% (9) HPA greater than 2% (11) Sources: Case-Shiller-Weiss, UBS Note: Alaska and Hawaii were both -1.7%

  8. Mortgage Credit Quality and Regional Statistics

  9. Foreclosure Starts are Highest in ARMs, Especially Subprime ARMs Source: MBA National Delinquency Survey

  10. ARM 2006/07 Delinquencies Are Double That Of Fixed Rate Sources: UBS, CPR CDR

  11. Alt A 2006/07 ARM Delinquencies Are Double That Of Fixed Rate Sources: UBS, CPR CDR

  12. Jumbo Prime 2006/07 ARM Delinquencies Are Double That Of Fixed Rate Sources: UBS, CPR CDR

  13. Subprime Delinquencies Are Better Regionally Than Nationally Source: UBS and Moody’s

  14. Noncurrent Mortgage Loans Are Rising At Commercial Banks Percent Notes: Nation financial data through 9/30/07, District through 12/31/07. Figures through 2005 are annual, quarterly after 2005. District excludes credit card banks and HSBC

  15. Noncurrent Home Equity Loans Are Also Rising at Commercial Banks Percent Notes: Nation financial data through 9/30/07, District through 12/31/07. Figures through 2005 are annual, quarterly after 2005. District excludes credit card banks and HSBC. Data include both HELOCs and installment lending.

  16. Lending Standards Have Tightened Source: Federal Reserve Board Senior Loan Officer Opinion Survey, 2/4/08

  17. MBS Issuance Has Shut Down Across Nonagency Channels

  18. GSEs, MIs Are Capital Constrained and Tightening Underwriting • With losses rising and mark-to-market write downs on their subprime securities, GSEs now have capital pressures. • Less well understood is that mortgage insurers, which insure GSEs’ high LTV product, are also severely capital constrained. • MIs are not federally regulated, and rely on rating agency ratings to measure solvency. • Moody’s recently warned of downgrades on the three largest MIs (MGIC, PMI, Radian) and one other (Triad) • MIs have also substantially tightened underwriting standards. • Bottom line: High LTV lending will be severely constrained in the conforming market.

  19. Homeownership Rate Is Declining Percent, both scales Source: Haver Analytics, Mortgage Bankers Assn. and Census Bureau Note: Foreclosure data is quarterly rate annualized

  20. Assessment of the Current Crisis

  21. About Half of Delinquencies Are In Subprime, Prime/Alt-A and Concentrated in ARMs Source: MBA Mortgage Delinquency Survey • According to the MBA, this survey is 85% of the market. This translates to 2.1 million 60+/FCs, with 1 million subprime delinquencies, 700K in Subprime ARMs.

  22. Subprime Assets Are Concentrated In 15-20 Servicers

  23. Over 80% of 2008 Resets Are Subprime Nonagency ARM Resets by Channel/Product

  24. Examining Remedies

  25. Loan is originated between 1/1/2005 and 6/31/2007 Loan is included in a securitized pool Loan has an initial reset date between 1/1/2008 and 6/31/2010 Borrower is current or at the worst 30-days delinquent and have no more than one 60-day delinquency in the past 12 months Not eligible for an “FHA Secure” Loan Have an original or updated LTV greater than 97% Not eligible for an FHA Secure Loan because of delinquency history, DTI, or is above the FHA loan limit Owner occupied property (i.e., not investor or 2nd Home) Current FICO is less than 660 and not 10% greater than original FICO Borrowers that meets all of these criteria are eligible for a “fast track” loan modification where loan will be kept at the existing rate for a five-year period. Treasury “Fast Track” Plan

  26. Fast Track Eligibility Will Help • Based on UBS estimates before recent Fed interest rate declines, about 400K borrowers will qualify for “Fast Track.” • If we assume 15% will become delinquent before reset, number declines to 342K. Almost 90% will occur in 2008. Recent Fed rate cuts will likely substantially cut the number of borrowers in need of a rate freeze. • This leaves some 444K borrowers ineligible for FHA Secure or Fast Track.

  27. Loan Modification Activity Is Picking Up, But Has A Long Way to Go • In the nonagency securitized market, loan modifications increased to about 16K in the 2007Q4, a large increase, but still well short of what is needed to make a significant difference.

  28. Challenges with Foreclosure Alternatives • Agencies have the most developed workout programs. • GSEs have had organized programs since the mid-1990s. • Freddie reports workouts of around 1,000 per week. • FHA can assess “treble damages” against Servicers not offering FAs. • Security trusts programs are not as well developed. • Investors are widely dispersed. • Trust agreements are generally not specific around requiring workouts. • Servicers generally are servicing for others without direct links to investors. • Subprime securities face higher hurdles to get workout volumes increased. • In response, the Fed issued SR 07-16 to encourage servicers of securitized products to pursue loss mitigation strategies.

  29. Housing Counseling • Housing Counseling is already playing an important role for households. • For FY 2006, 371,768 clients received pre-purchase homebuyer counseling from HUD-approved agencies; 171,090 received assistance in resolving or preventing mortgage delinquency (HUD report). • Funding has been expanded for housing counseling. • HUD appropriations for counseling grew from $42 million (FY2007) to $50 million (FY2008). • Congress has provided a special appropriation of $180 million to NeighborWorks America for the National Foreclosure Mitigation Counseling Program (NFMCP). NeighborWorks America will begin the process of allocating funds in the near future. • Learning more about Counseling • Federal Reserve Bank of Philadelphia is conducting a study on the effectiveness of pre-purchase homeownership counseling where participants will be tracked for four years after receiving homeownership assistance. • NeighborWorks America is conducting an evaluation of its “Hope Hotline” as a foreclosure prevention tool and will be undertaking an extensive evaluation of the effectiveness of counseling as part of an evaluation of NFMCP.

  30. HOEPA provisions • The proposal includes four key protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling. • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan. • Creditors would be required to verify the income and assets they rely upon in making a loan. • Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase. • Creditors would have to establish escrow accounts for taxes and insurance. • The rule would define “higher-priced mortgage loan” to capture loans in the subprime market but generally exclude loans in the prime market.

  31. Conclusions • House price corrections will continue, increasing defaults across the market, but especially so in Subprime. • The near-term economic outlook is for weak but positive growth for 2008, with risks greatest on the downside. • About half of all delinquencies are in Subprime; Prime and Alt A delinquencies are concentrated in ARMs. • Around 80-95% of Subprime assets are serviced by 15-20 Servicers. Remedies will need to come through these Servicers. • Subprime ARM resets are over 80% of ARM resets in 2008. • The Treasury Plan for subprime loans will freeze rates on roughly a quarter of ARMs resetting in the next 18 months; numbers will decline with recent Fed rate cuts. • Workout and counseling activities are growing, but are not yet at levels that can make a significant difference.

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