Housing and Mortgage Market Update CML Webinar: Economic Forecast for 2010 January 26, 2010 Amy...

Housing and Mortgage Market Update

CML Webinar: Economic Forecast for 2010January 26, 2010

Amy Crews Cutts, PhD Deputy Chief Economist

Office of the Chief Economist2

Signs of Recovery?

Economy Still In Recession… Real GDP fell only 0.7% in 2Q 2009, and turned positive in 3Q at 2.8%. Unemployment rate is high – at 10% currently, could go higher Current inflation risk is low - could be more problematic in the future Exact date of the recession end will come from the National Bureau of

Economic Research – some think it ended sometime in 3Q, some in 4Q, some think it will be 1Q 2010

But Positive Signs Are Appearing Financial market indicators show some improvement – but not yet normal Home sales are at or near bottom; about a third are foreclosure sales Single-family construction is lowest since 1945, small positive signs Rate of decline in home prices appears to be slowing (?)

Risks to the outlook Are the signs of improvement real or just a temporary thing? Commercial real estate credit market remains a concern


Mortgage Market: Refis Up, Defaults Up

Low mortgage rates promote demand More purchase-money mortgages because of higher home sales in

’10 and stabilizing prices Refinance volumes will fall

Expected higher mortgage interest rates in 2010 than in 2009 Even if rates remain very low, most people who were in the money to refi

have already done so (burn-out effect) FHA volume up sharply and expected to avg $110 B/qtr in 2010

Housing Market to be hit by recession problems in addition to mortgage market crisis problems leading to a rise in defaults

Unemployment main trigger event for delinquency among prime conventional borrowers

Cumulative house price declines add to foreclosure risk Serious delinquency rates likely to rise further in 2010 Prime loans are now being affected in addition to subprime and Alt-A


-8

-6

-4

-2

0

2

4

6

8

10

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Sources: Department of Commerce, Freddie Mac (January 2010 Outlook)

Real Gross Domestic Product (Annual Percentage Change)

This Is the Most Severe Recession Since Early 1980s – Look for Positive Growth in 3Q’09

Forecast

– Recession


-2400

-2000

-1600

-1200

-800

-400

0

400

800

1200

1600

'79

'80

'81

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'86

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'88

'89

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'92

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'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

2

3

4

5

6

7

8

9

10

11

12

Change in Employment Unemployment Rate

7.2 million U.S. Non-Farm Payroll Jobs Were Lost 12/07-12/09 – Most in Post-WWII Period

Sources: U.S. Bureau of Labor Statistics, Freddie Mac

– National Recession

Change in Non-Farm Payroll Employment (in thousands) Unemployment Rate (Percent)

Forecast


Mortgage Rates Are Near 50-Year Lows – Currently at 4.99% (week ended Jan. 21, 2010)

0

2

4

6

8

10

12

14

16

18

19

53

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67

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69

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71

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01

20

03

20

05

20

07

0

2

4

6

8

10

12

14

16

1830-Year SF Fixed Conforming

Mortgage Rate

Annual Average Interest Rate (Percent)

10-Year Treasury

December 2008

2.42%April 1954

2.29%

July 1965

5.80%

0.5 points

Source: Freddie Mac’s Primary Mortgage Market Survey®, Federal Reserve

Record Low: December 3, 2009

4.71%0.7 points


Conforming Rates Have Risen Recently; Jumbo Rates, Less So

Source: HSH Associates (last data: week ending January 15, 2010)Note: Effective rate adds fees and points to the interest rate.

5.0

5.4

5.8

6.2

6.6

7.0

7.4

7.8

8.2

Jan-07

Feb

-07M

ar-07A

pr-07M

ay-07Jun-0

7Jul-0

7A

ug-07

Sep-0

7O

ct-07N

ov-0

7D

ec-0

7Jan-0

8F

eb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-0

8S

ep-08

Oct-08

No

v-08

De

c-08

Jan-09

Feb

-09M

ar-09A

pr-09M

ay-09Jun-0

9Jul-0

9A

ug-09

Sep-0

9O

ct-09N

ov-0

9D

ec-0

9Jan-1

0

Jumbo Conforming Super Conforming

6.08%

5.24%

Effective Interest Rate for 30-Year Fixed-Rate Mortgages Assuming LTV of 80% & Prime Credit (Percentage Points)

5.39%

Jumbo-Conforming Spread currently = .82 ppts


0

50

100

150

200

250

300

350

400

450

500

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

3-Month LIBOR Spread to Treasuries Has Returned to Normal

Source : Bloomberg© (last data: January 15, 2010)

Basis Points

Record: 463 bps10/10/08

Current: 19 bps1/15/10


Primary and Secondary Mortgage Market Rate Spread for 30-Year Fixed-Rate Mortgages Remains Wide

0

10

20

30

40

50

60

70

80

90

100

Jan

-07

Fe

b-0

7M

ar-0

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pr-0

7M

ay-0

7Ju

n-0

7Ju

l-07

Au

g-0

7S

ep

-07

Oct-0

7N

ov-0

7D

ec-0

7Ja

n-0

8F

eb

-08

Ma

r-08

Ap

r-08

Ma

y-08

Jun

-08

Jul-0

8A

ug

-08

Se

p-0

8O

ct-08

No

v-08

De

c-08

Jan

-09

Fe

b-0

9M

ar-0

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pr-0

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ay-0

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n-0

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l-09

Au

g-0

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ep

-09

Oct-0

9N

ov-0

9D

ec-0

9Ja

n-1

0

PMMS Less 30-day RNY for 30-year FRM

Source: Freddie Mac (last update: January 19, 2010). Primary Mortgage Market Survey (PMMS) effective yield is based on average contract rate and number of points; RNY is Required Net Yield averaged Monday through Wednesday for each week.

Basis Points


0%

10%

20%

30%

40%

50%

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

1Q2005

1Q2006

1Q2007

1Q2008

1Q2009

FHA-Insured

VA-Insured

Annual Quarterly

Share of Single-Family Originations

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

1942:FHA=29% 2009Q3:

FHA=20%

FHA Lending Has Ramped Up – Dollar Volumes Are Averaging About $110 Billion Per Quarter


$0$250$500$750

$1,000$1,250$1,500$1,750$2,000$2,250$2,500$2,750$3,000$3,250$3,500$3,750$4,000

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Total FHA & VA

Conventional Refi

Coventional Purchase

More Home Sales But Fewer Refis Result In Slight Decrease in Expected 2010 Originations

Sources: Freddie Mac (January 2010 Outlook)

Total Single-Family Mortgage Originations (Billions of Dollars)

ForecastEst.


300

500

700

900

1,100

1,300

1,500

1,700

1,900

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2005

2006

2007

2008

2009

Single-family Building Has Fallen to Lowest Level Since Before 1946; Has It Hit Bottom?

One-Family Housing Starts (thousands of units, SAAR)

Sources: Bureau of Census, Freddie Mac; Annual data 1946-2003; quarterly thereafter

– Recession

Annual Data

3rd Quarter 2005 record: 1.75 million units

1st Quarter 2009: 0.36 million units

3Q 2009: 0.50 million

units


Existing Home Sales Fell 36% From Peak in 2Q05 to 1Q09 But Have Since Risen 16%

1-Year (3Q/3Q) Percent Change in Existing Home Sales Nationally: +5.9%

Source: National Association of Realtors

37%

-14%DC: 28%

31%

Up more than 30%

Up 5-10%Up 10-15%

Up 0-5%

Down more than 10%

Down 0-5%Down 5-10%

37% -11%

Up 15-30%


Home Sales in AZ, CA and NV Are Now Rising Fast

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220Maryland Virginia MassachusettsCalifornia Florida NevadaUnited States

Existing Home Sales Including Condos and Co-ops (100 = 2002Q1)

Source: National Association of Realtors, Moody’s Economy.com. Based on Seasonally adjusted annualized rates.


Large Inventory Surplus Remains in Market

-100

0

100

200

300

400

500

600

700

800

900

1000

1996 2000 2004

Source: Bureau of Census (1996-2004:Annual Data, 2005Q1–2009Q3:Quarterly Data) Note: The excess unsold homes were estimated based on the average vacancy rate from 1996Q1 to 2005Q4 (1.7%).

Excess Unsold Homes for Sale (Numbers in Thousands)

Annual Data Quarterly Data

2005 2006 2007

Q1 Q4 Q1 Q4 Q1 Q4 Q1

2008

Q4 Q1

2009


Excess Homeowner Vacancy Rate by State as of 3Q 2009

<= 0.0%

0.1 to 0.75%

>2.0%

0.76 to 1.5%

1.6 to 2.0%

Estimated overhang of vacant-for-sale homes as a percent of state homeowner dwellings

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).


Since the 4th Quarter of 2006, Some Metro Areas Have Seen Price Declines of Up to 61%

Source: FHFA 09Q3 HPI, Freddie Mac


Home Values Appear to Be Leveling Off, or Slowing Their Descent in Most Indices

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160

20

05

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09

70

80

90

100

110

120

130

140

150

160US Maryland Michigan Nevada Arizona

Virginia California Florida

Conventional Mortgage Home Price Index (2005Q1=100, Classic Series)

Source: Freddie Mac


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Ca

lifo

rnia

Flo

rid

a

Te

xa

s

Illin

ois

Oh

io

Ne

w J

ers

ey

Ne

w Y

ork

Pe

nn

sy

lva

nia

Ge

org

ia

Ma

ss

ac

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tts

No

rth

Ca

rolin

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sh

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ton

Mic

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an

Ari

zon

a

Ma

ryla

nd

Ne

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da

(2

2)

California Has the Largest Number of Properties with Negative Equity, Nevada the Largest Share

Sources: First American CoreLogic; Data as of Sept 30, 2009. Near Negative Equity properties have TLTV between 95 and 100%; Percent values above bars represent share of loans with negative equity.

Number of Mortgaged Properties

Positive Equity

Near Negative Equity

Negative Equity

20%

35%

45%

11%

8%37%14% 48%

18%

24% 16% 9%6%

22%

65%

15%

Nationally: 10.7 million mortgaged properties with negative equity, 23%

Negative Equity Share


Prime & Alt-A Delinquencies Are Highest in Areas With Largest Negative Equity Shares

National = 6.26% Seriously Delinquent (90+ days delinquent or in foreclosure, Prime & Alt-A Conventional)

Data as of September 30, 2009

Below 3.0%

3.14-3.99%

Above 9.0%

4.02-4.95%

5.02-6.88%

Source: Mortgage Bankers Association

14.33%

14.35%

9.38%

9.55%


Relative to Serviced Loans, Subprime Accounts for a Very Large Share of Foreclosures

0

500

1000

1500

2000

2500

3000

3500

2003 2004 2005 2006 2007 2008 2009H1 2009Q3

Prime (includes Alt-A) FHA & VA Subprime

Number of Foreclosures Started (Annual Rate in Thousands)

Source: Mortgage Bankers Association National Delinquency Survey (2003 is only for second half). Numbers adjusted for 85% coverage. Shares may not sum to 100% due to rounding

33% 31%33%

45%28%

39%

8%

15%21%

47%

53%46%

33%28%

39%

35%

10%

55%

Subprime Share of Loans Serviced in US Peak (2007): 14% 3Q2009-2009: 11%

37%

9%

54%

28%

12%

61%


Subprime, Alt-A ARMs, and Option ARMs Drive Foreclosures in the U.S

30%

63%

24%

13%

9%

12% 37%

12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Distribution of Loans Outstanding in theU.S by Product, Year-end 2008

Distribution of Foreclosures Started inthe U.S by Product During 2009:Q1-Q3

Source: Mortgage Banker’s Association National Delinquency Survey. Numbers adjusted for 85% coverage.

Percent

53 million Loans 1.9 million Foreclosure Starts

SUBPRIME

FHA & VA

PRIME & Alt-A ARM

PRIME & Alt-A FIXED RATE


Recent Default Experience Is Unlike Any Previous Business Cycle Since the 1930s

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0.5

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20

08

Prime conventional loans 90 days or more delinquent or in foreclosure (percent)

– Recession Year

Source: National Bureau of Economic Research, Mortgage Bankers Association(Prime Conventional includes Alt-A; prior to 1998 includes all loans). Data through Sept 30, 2009.


Subprime Loans Are Performing About 5 Times Worse Than Prime & Alt-A – Scale Matters Too

8.9

6.3

28.7

8.7

0

3

6

9

12

15

18

21

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27

30

19

98

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09

Recession All Loans Prime & Alt-A

Subprime FHA

Loans 90 Days or More Delinquent or in Foreclosure (percent of number)

Source: Mortgage Bankers Association; “Prime Loans” includes Alt-A (Quarterly data not seasonally adjusted;1998Q1-2009Q3).


23.5%

30.2%

16.4%

10.8%

3.5%

5.5%6.7%

0%

5%

10%

15%

20%

25%

30%

35%Fe

b-05

Apr-0

5Ju

n-05

Aug-

05O

ct-0

5De

c-05

Feb-

06Ap

r-06

Jun-

06Au

g-06

Oct

-06

Dec-

06Fe

b-07

Apr-0

7Ju

n-07

Aug-

07O

ct-0

7De

c-07

Feb-

08Ap

r-08

Jun-

08Au

g-08

Oct

-08

Dec-

08Fe

b-09

Apr-0

9Ju

n-09

Del

inqu

ency

%

Option ARM SubprimeAlt-A OtherFRE & FNM Jumbo PrimeTotal

Bad Economy Is Exacerbating Problem: Serious Delinquencies Are Rising For All Loan Types

Source: LPS Applied Analytics (Formerly McDash Analytics); Data as of June 2009

Loans 90 days or more delinquent or in foreclosure (percent of number)


Private Label

Securities12%

Banks & Thrifts

16%

Ginnie Mae and FHA

13%Fannie Mae

35%

Freddie Mac23%

Other1%

0.43

0.86

0.53

0.74

1.55

0.0 0.5 1.0 1.5 2.0

Freddie Mac

Fannie Mae

Ginnie Mae andFHA

Banks & Thrifts

Private LabelSecurities

Freddie Mac Holds or Guarantees 24% of All Loans, But Has Only 9% of Problem Loans

Sources: FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, First American CoreLogic (LoanPerformance). Note: data as of September 30, 2009. Seriously Delinquent loans are at least 90 days delinquent or in foreclosure. Components may not sum to 100% because of rounding. Freddie Mac and Fannie Mae figures include only whole loans held in portfolio and in outstanding guaranteed securities.

Number of First Mortgages Outstanding(in millions)

Seriously Delinquent Mortgages(in millions)

Total: 54 Million Total: 4.7 Million


Challenge: High Vacancy Rates Impact Our Ability to Reach Borrowers

Source: Freddie Mac. Vacancy Rate based on vacant/unknown properties, excludes any REO acquisitions.

Vacancy Rate for Key States (Overall Rate for 90+Foreclosure Loans for 10/31/2009 )

State Percent Vacant

Arizona 37

California 30

Florida 44

Georgia 41

Illinois 30

Michigan 25

Nevada 41

New York 29

Ohio 29

Pennsylvania 32

Texas 36

34%

Where to Get More InformationLook 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. © 2010 by Freddie Mac.

Housing and Mortgage Market Update CML Webinar: Economic Forecast for 2010 January 26, 2010 Amy...

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