Housing and Mortgage Market Update

Philadelphia Council for Business Economics

Philadelphia, PA
May 6, 2009

Frank E. Nothaft
Chief Economist
 Housing Contraction Ongoing,
Mortgage Defaults Rising

ƒ Housing activity low

ƒ Single-family construction is lowest since 1945
ƒ Sales are near bottom; about a third are foreclosure sales
ƒ U.S. house price measures will likely decline through 2010
ƒ Low mortgage rates promote loan demand
ƒ Less purchase-money because of lower house prices, fewer sales
ƒ Refis account for 75% of applications over past three months
ƒ FHA volume up sharply
ƒ Refi volume pushes 2009 originations above last year

ƒ Mortgage defaults rise

ƒ Unemployment main trigger event for delinquency
ƒ House price declines add to foreclosure risk
ƒ Serious delinquency rates likely to rise further in 2009
ƒ Coastal areas, Great Lakes region will be hit hardest

Office of the Chief Economist

1

Low Interest Rates and Falling Home Prices

Have Increased Housing Affordability
Index Percent
170 18.0
NAR Affordability
30-year Fixed
Index
(left scale) Mortgage Rate
(right scale)
140 14.5

110 11.0

80 7.5
Index = 100 means
median income buys
median priced home
50 4.0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009

Source: National Association of Realtors Composite Housing Affordability Index – (% of median

priced home affordable on median income with conventional mortgage and 20% down); Freddie Office of the Chief Economist
Mac Primary Mortgage Market Survey ® 2
 Conventional and FHA Mortgage Rates Have
Dropped 2% Since October
Effective Interest Rates on 30-Year Fixed-Rate Mortgages (Percent)
7.4
FHA
Conventional
7.0

6.6

6.2

5.8

5.4

5.0

4.6
Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09
Source: Mortgage Bankers Association (last data: week ending April 24, 2009)
Office of the Chief Economist
3

Difference Between 30-Year Fixed Jumbo and

Conforming Rates Is at Record Levels
Effective Interest Rate on 30-Year Fixed-Rate Conventional Mortgages (Percentage Points)

8.2

7.8 30-Year Jumbo FRM

7.4 7.07 %

7.0 7/20/07
26 bps

6.6
6.45%
6.81%
6.2
5/1/09
5.8 143 bps

5.4 30-Year Conforming FRM

5.03%
5.0
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09

Source: HSH Associates (last data: week ending April 17, 2009) Office of the Chief Economist
Note: Effective rate adds fees and points to the interest rate.
4
 Banks Are Tightening Lending Standards
Across All Lines of Business
Net Percentage of Banks Tightening Credit Standards During Three Previous Months
100

80 Prime Residential Loans

Commercial Real Estate
60

40

20

-20

-40
1990
1991
1992
1993

1994
1995
1996

1997
1998

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

2009
Source: Federal Reserve Board's Senior Loan Officer Survey (all residential loans through
2007Q1, prime residential starting 2007Q2); last update: May 4, 2009 Office of the Chief Economist
5

Consumer Confidence Fell in February to An

All-Time Low
Consumer Confidence
150
Peak Jan 2000
– Recession
130

110

90

70

50

30
Low Feb 2009

10
1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Note: Data are bimonthly through May 1972; missing months’ data between February
1969 and May 1972 interpolated by Freddie Mac. Office of the Chief Economist
Sources: The Conference Board, Freddie Mac 6
 Single-family Building Hit a Record in 2005, but
Has Fallen to Lowest Level Since 1945
One-Family Housing Starts (thousands of units, SAAR) Forecast
1,800
Third Quarter 2005
record: 1.75 million units
– Recession
1,500

1,200

900

600
First Quarter 2009:
0.36 million units
300
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Sources: Bureau of Census (SAAR), Freddie Mac Office of the Chief Economist
7

Building Permits Have Dropped in U.S. Over

Last 3½ Years
Housing Permits U.S. (Thousands) Housing Permits Philadelphia (Thousands)
2500 77%
50
Drop
– Recession

2000 40
United States

1500 30

1000 20

500 Philadelphia-Camden- 75% 10

Wilmington, Drop
PA-NJ-DE-MD MSA
0 0
1980Q1

1982Q1

1984Q1

1986Q1

1988Q1

1990Q1

1992Q1

1994Q1

1996Q1

1998Q1

2000Q1

2002Q1

2004Q1

2006Q1

2008Q1

Source: National Association of Realtors, Bureau of Census Office of the Chief Economist
8
 Existing Home Sales Down a Third in U.S. and
Pennsylvania during the Last Three Years
U.S. Existing Home Sales (Thousands) Pennsylvania Existing Home Sales (Thousands)
7,500 280
Home Sales Growth
United States
7,000 2005Q4 – 2008Q4
260
United States -32%
6,500 Pennsylvania -34% 240
6,000
220
5,500
200
5,000
180
4,500
Pennsylvania
160
4,000

3,500 140

3,000 120

2,500 100
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: National Association of Realtors

Office of the Chief Economist
(Existing Single-Family Houses, Apartment Condos & Co-ops)
9

Large Inventory Surplus Remains in Market

Excess Unsold Homes for Sale (Numbers in Thousands)

1000
Annual Data Quarterly Data
900
800
700
600
500
400
300
200
100
0
Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1
-100
1996 2000 2004 2005 2006 2007 2008 2009

Source: Bureau of Census (1996-2004:Annual Data, 2005Q1–2009Q1:Quarterly Data)

Note: The excess unsold homes were estimated based on the average vacancy rate from Office of the Chief Economist
1996Q1 to 2005Q4 (1.7%).
10
 Excess Homeowner Vacancy Rate by State

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

<= 0.0%
0.1 to 0.75%

0.76 to 1.5%
1.6 to 2.0%

>2.0%

Source: U.S. Census Bureau and Freddie Mac calculations (difference between 2008
Office of the Chief Economist
homeowner vacancy rate and 1996-2005 average homeowner vacancy rate for each state).
11

National House Prices Have Experienced a

Cumulative Decline of 17% Since 2006Q3
Quarterly Growth Rates (Numbers in Percentages)
5
3.9
4 3.4
3 2.5
1.7 1.7
2 1.3
0.4 0.7
1
0
-1 -0.3
-1.2 -0.9
-2 -1.4
-3 -2.4
-4
-3.8 -3.8
-5
-5.0
-6
2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3

Source: Freddie Mac Office of the Chief Economist

12
 House Price Declines Were Broad Based from
2007Q4 to 2008Q4
United States –12.1%
-8.5 -3.4
-1.8 1.7 -4.1
-9.9
-10.9
-8.4 -7.2 -2.9 -7.2
-9.5 -2.1
-15.0
-1.1
-4.2 -6.9
-0.8
-1.8 -6.0 RI –13.0
-29.5 -5.2 -13.0 -8.1
-8.8 CT –7.2
-8.7 -4.0
-3.2 -11.7 DC –6.2
-1.4 -6.0
-25.7 -0.3
-3.0
-4.2
-25.9 -0.9 -2.0 -4.5
-5.3
-10.4 >= 0%
-4.9
-3.4
-0.2 -5.0
-5 to 0%
-3.3
-10 to -5%
-25.2
-7.1 -20 to -10%
< -20%

Source: Freddie Mac Office of the Chief Economist

13

Expected Peak-to-2010Q4 Decline in US House Prices Is

25% Nominal, 30% Real

U.S. House Price Index Forecast

350

300
25%

250
Nominal
200

150
30%
100
Real
50

0
1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Sources: Nominal House Prices - Census Bureau’s Constant Quality New-House Purchase Index
(1963-1969), Freddie Mac’s Conventional Home Price Purchase-Only Index (1970-1974), portfolio-
weighted WRSI index and forecast (1975-2010); Consumer Price Index - U.S. Bureau of Labor Office of the Chief Economist
Statistic’s Consumer Price Index (1963-2008) and February 2009 Blue Chip Forecasts (2009-2010).
14
 Past Financial Crises Have Had Substantial
Value and Output Declines

Peak-to-Trough Length of Time

Change (%) (Average)
Real House Price -35% 5 years
Stock Market Values -56% 3-4 years
Unemployment Rate 7% 5 years

As of fourth quarter of 2008, U.S. Real House Prices are

down about 21% from peak of two-and-a-half years earlier

Source: C. Reinhart and K. Rogoff, “The Aftermath of Financial Crisis,” December 2008, Office of the Chief Economist
and Freddie Mac house price index. 15

Low Rates, GSE Streamline Refis Result in

Origination Rebound in 2009

Total Single-Family Mortgage Originations (Billions of Dollars)

4,000
3,750 Refinance Originations
3,500 Home Purchase Originations
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Sources: Freddie Mac Office of the Chief Economist

16
 FHA Lending Is Up Sharply:
Largest Share Since 1942
Share of Single-Family Originations
50%
Annual Quarterly

1942:
40% FHA=29% 2008Q4:
FHA=29%

30%

VA-Insured
20%

10%

FHA-Insured
0%
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
1Q2005
1Q2006
1Q2007
1Q2008
Sources: HUD (1935-1997), Freddie Mac & Inside Mortgage Finance (1998 – Present) Office of the Chief Economist
17

Subprime and Alt-A Volume Quintupled 2001 to

2006, then Fell from 2006 to 2008

5.2%
14.4% 7.7%
7.9% 2.7%
2.5%
1.5%
33.2% 20.0%
7.2%
57.1% 13.4%

20.1% 2.8% 62.0%

6.5%
20.1% 16.1%

Single-family 2001 2006 2008

Originations $2.2 trillion $3.0 trillion $1.5 trillion
Subprime
and Alt-A $0.2 trillion $1.0 trillion $0.1 trillion

Conventional, Jumbo Prime Subprime Alt-A FHA Home Equity

Conforming Prime & VA Loans

Source: Inside Mortgage Finance (by dollar amount) Office of the Chief Economist
18
 GSE & GNMA Market Share Fell When Subprime Boomed;
Today GSEs & GNMA Are Main Source of Mortgage Funds

MBS Share Issuance (Percent of MBS Issuance)

Annual (1985 – 2007) Quarterly (2008 - 2009)
90% Subprime,
1st quarter 2009:
Non-Traditional
80% Conventional, Prime, Fixed-Rate
Lending Boom
Lending Is Mainstay of Market (1985-2003)
(2004-2007H1)
70% FRE & FNM
74%
60% Subprime Crisis,
Private-label MBS
50%
Collapse
40% (2007H2-2009)
Ginnie Mae
30% 26%
20%

10%
Private-Label
0% 0%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
Ginnie Mae Private-Label Freddie Mac and Fannie Mae
Source: Inside MBS & ABS (The 2008 Mortgage Market Statistical Annual - Volume II),
Inside MBS & ABS (April 25, 2005, July 11, 2008 issues, January 9, 2009, and Office of the Chief Economist
April 3, 2009). 19

Job Loss Is the Main Hardship Reason Among

Delinquent Prime Borrowers

Hardship Reason 2007

Unemployment or curtailment of income 43.0%
Illness or Death in the Family 25.5%
Excessive obligation 16.2%
Marital difficulties 6.6%
Property problem or casualty loss 2.0%
Extreme hardship 0.4%
Inability to sell or rent property 1.7%
Employment transfer or military service 0.9%
All other reasons 3.7%

Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to
hurricane effects. Data cover only prime conventional conforming loans.
Office of the Chief Economist
20
 U.S. Unemployment Rate Rose to 8.5% in March,
the Highest in More Than 25 Years
Unemployment Rate (Percent)
13
– National Recession Forecast
Pennsylvania
Feb-Mar 1983: 2009Q4:
11 12.9% 9.5%

United States
9 Nov-Dec 1982:
10.8%
PA
Mar-09
7 7.8%

3
1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008
Sources: U.S. Department of Labor, Freddie Mac Office of the Chief Economist
21

States With High Job Losses Are Strongly

Correlated with High Delinquency Rates

Percent change in the non-farm payroll employment

December 2007 through December 2008
1.5% to 2.2% –2.0% to –1.1% National employment
0.1% to 1.0% –3.0% to –2.1% down 3.0 million (-2.2%)
-1.0% to -0.1% –4.5% to –3.1%
Office of the Chief Economist
Source: U.S. Bureau of Labor Statistics
22
 Prime & Alt-A Delinquencies Are Highest in Areas
With Falling Home Values and Job Loss

7.55%
0.90-1.75%
5.56%
5.04% 1.76-2.25%

2.26-2.75%
2.76-3.25%
8.90%
3.26-9.00%

National = 3.74% Seriously Delinquent

(90+ days delinquent or in foreclosure, Prime & Alt-A Conventional)
Data as of December 2008
Source: Mortgage Bankers Association Office of the Chief Economist
23

Loan Modifications in Private-Label Securities

Are Key to Foreclosure Reduction
Number of Mortgages Outstanding Seriously Delinquent Mortgages
(in millions) (in thousands)
3% Other 8% 13%
Portfolio
2
15%
11% Other
Bank and Fannie Mae
Portfolio
Thrift 33%
Bank and
275 444 7%
Thrift
Portfolios Portfolios Freddie Mac
8 397 232
Fannie Mae
18
Private Label Ginnie Mae
Securities & FHA 11%
15% 378
8
Private Label
Ginnie Mae Securities
& FHA Freddie Mac 1,734
6 13

11%
23% 50%
Total: 55.0 Million Total: 3.46 Million
Sources: Federal Reserve Board, FDIC, HUD, Freddie Mac, Fannie Mae, Mortgage Bankers Association, First
American CoreLogic (LoanPerformance); data as of December 31, 2008. Seriously Delinquent loans are at least 90
days delinquent or in foreclosure. Components may not sum to total because of rounding. Office of the Chief Economist
24
 Increasing Delinquencies, Especially Subprime

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

25
23.1
All Loans Prime Loans Subprime Loans
20

15

10

6.3
5
3.7

0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Source: Mortgage Bankers Association; “Prime Loans” includes Alt-A (Quarterly
data not seasonally adjusted;1998Q1-2008Q4).
Office of the Chief Economist
25

Subprime Accounted for Almost Half of PA

Loans Entering Foreclosure Since 2006
Number of Foreclosures Started (Annual Rate in Thousands)
45
Subprime: 13% of Loans Serviced in PA
40

35

30 45%
49%
25
47% 39% 46% 51%
20 12%
11%
15
23% 18% 14%
10 23%
43%
40%
5 38% 36% 36%
30%
0
2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4
Prime FHA&VA Subprime
Source: Mortgage Banker’s Association National Delinquency Survey. Office of the Chief Economist
26
 Homeowner Affordability and Stability Plan

Larger Additional
Backstop $200 billion for GSEs

Easier Lower rates for

Refinancing 4-5 million mortgages

Subsidized $75 billion for

Modifications 3-4 million mortgages

Increased Up to
Portfolio Size $900 billion
Office of the Chief Economist
27

Freddie Mac Relief Refinance Mortgages

• Freddie Mac must own or guarantee

• Borrowers must be current over past 12 months
• LTVs up to 105% of current value
• Lenders generally will not have to re-underwrite
• Mortgage Insurance (MI): If loan has MI, same coverage
must be maintained; if loan does not have MI then not
required on greater than 80 percent LTV
• Conventional loans
• Must be originated by June 10, 2010

Office of the Chief Economist

28
 Modification Program for At-risk Borrowers

• $75 billion to subsidize loan modifications

• Modifications will follow uniform guidelines
• Reduces monthly payments to a 31 percent debt-to-
income ratio
• Provides financial incentives for servicers and borrowers to
initiate and sustain modifications
• Each GSE responsible for modifying their own loans
• Fannie Mae is Program Administrator for Non-GSE
modifications
• Freddie Mac is Compliance Agent for Non-GSE
modifications

Office of the Chief Economist

29

Where to Get More Information

Look for regular updates to our economic forecast,
commentary and data at
www.freddiemac.com/news/finance

Contact us at chief_economist@freddiemac.com

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.
© 2009 by Freddie Mac.