Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC

1. Analysis of the Mortgage Crisis and International Impact Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC 2008 Real Estate Update: Affordable Housing in Today’s Market December 10–12  San Juan, Puerto Rico Sponsored by Reznick Group, Nixon Peabody LLP and IPED, Inc.

2. What Caused the Crisis? • Competing Theories of Blame: • Homeowners, Investment Banks, Government, Fannie Mae, Freddie Mac, Lenders • Conservative commentators argue that it was because people received mortgage loans that were not qualified. • Blames Clinton era policies for increasing homeownership • Reality is far more complicated and indicative of a system wide failure.

3. Overview • Myth of the Cause of the Crisis • The Key Causal Factors in a Fragmented System • How it has Affected Mortgage Markets Internationally • Practical Solutions to Ensure Accountability, Fairness and Coordination

4. 90’s Policies to Increase Homeownership Amongst Non-Traditional Groups • African-American, Latino, Immigrant significantly lagged Caucasian rates • 1995: 43% African Americans; 44% Latinos; 71% Caucasians • Governmental Policy Objectives to Increase • Fannie/Freddie saw traditional market flat and non-traditional as growth sector

5. Homeownership Rate Growth • Overall Rate: 64% in 1995; 69% in 2005 • Caucasian Growth: 71% 1995; 75% 2005 • Minority Growth: 44% 1995; 51% 2005

6. Minority Groups Disproportionately Affected • Historically, Affordable Mortgages Better Payment Histories than Low-Documentation Mortgages • NYT: Neighborhoods with Large Poor and Minority Populations Experienced Sharp Rise in Defaults • Chicago: Areas where non-White over 80% Accounts for 65% of Foreclosure Cases • Same Trends Documented in Atlanta, Cleveland, Philadelphia and other Cities

7. European Mortgage Markets • 2007 Growth: 7.4%; 2006: 11.2% Lower In 2008 • Only 7 Countries In Europe Experienced Growth; 4 In Eastern Europe • Housing Supply Fell Significantly In Several EU Countries, Except Eastern Europe

8. European Housing Starts • 2003: 600,000 • 2004: 650,000 • 2005: 1,100,000 • 2006: 1,200,000 • 2007: 550,000

9. United Kingdom: Significant Decline • Average House Price Is £158,872, 14.6% Decrease In One Year From £186,044. • April To July 2008, Transaction Volumes Averaged 57,887 Transactions Per Month. 48% Decrease In One Year When Sales Volumes Averaged 110,828 • Gross Lending Year To Date: £211bn Compared To £276bn In The Same Period Last Year, A 24% Fall • 34,000 House Purchase Approvals In September Down From 97,000 In One Year; A 65% Fall

10. Netherlands: Challenged but More Stable • Rising interest rates from fall 2005 • Consumer confidence has fallen from summer 2007 • Decline in housing transactions from summer 2006 • Growing supply of houses • Housing prices relative stable2008: +1½% and 2009: +1% (regional differences)

11. Eastern Europe: Costs Increasing and Lending Tightening • Increase In Interest Rates For Mortgages Due To Scarcity Of Money (Between 12%-24% For Local Currencies). • Serbia, Moldova, Romania: Large Inflow Of Remittances Helped The Mortgage Markets. Likely To Decrease • Tightening Of The Prudential Requirements By The Central Banks In Eastern Europe Regarding Mortgage Lending • New Legislative Initiative To Regulate The Primary Mortgage Markets • New Attitude Of The Markets Regarding Securitizations. No Immediate Prospects For Such Transactions

12. Causes of the Crisis • Fragmented Regulatory System • Development of New Financial Products • Growth of the Non-Regulated Sector • Desperation, Fear and Opportunism • Treatment of Minority Borrowers • Desire of GSEs not to Lose Market Share • Lack of Accountability • No Early Warming System

13. Federal Housing Administration (FHA): Mortgage Insurance FHA Mission Oversight of Fannie/Freddie Office of Federal Housing Enterprise Oversight Mortgagee Review Board Federal Deposit Insurance Corporation Federal Reserve Federal Housing Finance Board State and Local Regulators Causes of the Crisis: Fragmented Regulatory System

14. Causes of the Crisis: New Financial Products • Products • 80/20 First and Second Mortgage • High LTV, Sometimes over 100% • Interest Only • Low and No Documentation Mortgages (Self-certified) • Implications • Interest rate shock from adjustment • High debt to income ratios • Vulnerability to financial or economic downturn • No “skin in the game”

15. Causes of the Crisis: Desperation, Fear and Opportunism • Housing prices in Major Cities Doubling and more from 1998 to 2005 • Fear of Being Closed Out of the Market • Desperation to Use New Mortgage Products to Afford a Mortgage • Investor Opportunism to Take Advantage of Rising Prices

16. Growth of the Non-Regulated Sector • FHA Market Share Drops from 14% in 1999 to 4% in 2007 • Regulation Cause Move to Non-Regulated Sector • Example: Appraisal Reform • 40% of No/Low Documentation Say They Did Not Believe They Could Qualify for a Mortgage • Fannie/Freddie Buying Mortgage and Bonds Not to Lose Market Share

17. FHA Market Share

18. Causes of the Crisis: Minorities and Sub-Prime Mortgages • 1999 To 2006: Sub-prime Loans By Minorities Grew From 15% To 27% • Non-Traditional Market Sector Twice As Likely To Have Taken Out Sub-prime • Disparity Exists Even with Similar Incomes • $51K to $75K 23% Minority 10% Caucasian • Interest Rates 3% Higher Than Prime, More Likely To Be Adjustable And Have High Fees And Prepayment Penalties

19. Causes of the Crisis: System Wide Accountability • Realtors • Mortgage Brokers • Appraisers • Lenders • Servicers • Rating Agencies • Investment Banks • Second Mortgage Originators and Lenders • Mortgage Purchasers and Packagers

20. Causes of the Crisis: No Early Warning System • Foreclosure Crisis Known in Key Areas Two Years Ago • No System-wide Mechanism for Emerging Patterns • Few Ways of Identifying and Disciplining Cause of Problems • No System for Planning for Impact on Communities

21. Solutions • Responsible Mortgage Lending • Coordinated Regulatory System • Consumer Education • Unified, Accurate Appraisal System • Accountability from Responsible Parties • Careful Analysis • Early Warning System • Planning for Financial Crises

22. Solutions: Responsible Mortgage Lending • Clear Underwriting Standards • Income Verification and Documentation • Reasonable Debt to Income Ratios • Sensitivity Analysis Performed on Adjustable Mortgages

23. Solutions: Coordinated Regulatory System • Mission and Financial Oversight Should be Coordinated • Safety and Soundness Should be Stress Tested • Consumer Education and Protection Critical • Mortgages Outside of Regulated System Should be Monitored

24. Solutions: Appraisal System • Appraisers Should be Trained and Certified • Analysis Should be Performed on the Basis of Closed Loans, not Open or Listed Sales • Appraisals Should be Subject to Monitoring

25. Solutions: Accountability • Investors Should “Trust but Verify” • Mortgage Analysis and Investment Paper Analysis Should be Clear and Transparent • Legal Violations Investigated Quickly and Effectively • Ensure a Share of the Risk of the Key Players

26. Solutions: Early Warning System • Database to Report and Analyze Patterns of Delinquency, Default and Foreclosure • Servicers and Lenders Should Establish Strong Foreclosure Prevention Systems • Communities Should Plan for Large Influx of Real Estate Owned Properties

27. Conclusion • “Sub-Prime” a Misleading Definition of the Crisis • Causal Factors Complex, but Low-Documentation Mortgages, Fragmented Oversight, and a Lack of Accountability Strong Factors • Solutions Include Strong Underwriting Standards, Coordinated Regulation, and a “Trust but Verify” Ethic

28. Thank You For More Information: IraPeppercorn@IraPeppercorn.Com IraPeppercornInternational@Yahoo.com