Housing and Mortgage Market Update

Guaranteed Rate-Chicago Association of Realtors
Chicago, IL June 16, 2010

Frank E. Nothaft Chief Economist

Mortgage Rates Low, But Defaults Rising; Loan Modifications Will Help Reduce Overall Impact 

Mortgage rates low, underwriting more careful 

30-year fixed mortgage rates likely stay in 4.75% to 5.25% range in 2010  Originations 25% less in 2010, driven by less refinance  FHA & VA about one-fourth of all lending in 2010 Unemployment main trigger event for delinquency House-price declines add to foreclosure risk Serious delinquency rates likely to rise further in 2010 Subprime, Alt-A and Option ARMs drive foreclosures 

Mortgage defaults rise 
   

Making Home Affordable lessens impact 

Keeping families in homes is the long-term priority  Streamline refinance will help families lower monthly payment  Loan modification is important tool in 2010

Office of the Chief Economist
1

Low Interest Rates & Falling Home Prices Have Increased Housing Affordability
Index

80

NAR Affordability Index
(left scale)

Percent 8.0

30-year Fixed Mortgage Rate
(right scale)

50

4.5

20

.0

90
Index = 00 means median income buys median priced home

7.5

60

4.0

9 9 9 9 9 9 98 98 98 98 989

Source: National Association of Realtors Composite Housing Affordability Index ± (% of median priced home affordable on median income with conventional mortgage and 20% down), seasonally adjusted; Freddie Mac Primary Mortgage Market Survey ®

99 99 99 99 999 200 200 200 200 2009
Office of the Chief Economist
2

Jumbo Rates Remain Well Above Rates on Loans Eligible for Sale to Freddie Mac
Effective Interest Rate on 3 -Year Fixed-Rate Conventional Mortgages (Percentage Points)

.1 . . . .
. 1%
/2 / .2 %

3 -Year Jumbo FRM
. %

.1 . . 4.

12/1 / 1. %

.

%

3 -Year Conforming FRM

/ /1 . %

.

%

Source: HSH Associates (last data: week ending June 4, 2010) Note: Effective rate adds fees and points to the interest rate.

Jun-10 Ma -10 Apr-10 Mar-10 Fe -10 Jan-10 Dec-0 Nov-0 ct-0 Sep-0 Aug-0 Jul-0 Jun-0 Ma -0 Apr-0 Mar-0 Fe -0 Jan-0 Dec-0 Nov-0 ct-0 Sep-0 Aug-0 Jul-0 Jun-0 Ma -0 Apr-0 Mar-0 Fe -0 Jan-0 Dec-0 Nov-0 ct-0 Sep-0 Aug-0 Jul-0 Jun-0 Ma -0 Apr-0 Mar-0 Fe -0 Jan-0

Office of the Chief Economist
3

Building Permits Fell in U.S. Over Past
Housing Permits U.S. (Thousands)
± Recession

Years

Housing Permits Chicago (Thousands)

Chicago IL

% Drop

United States

% Drop

Sources: Bureau of Census (³Chicago-Joliet-Naperville IL MSA´) and National Bureau of Economic Research

Office of the Chief Economist

Existing ome a es Fe By More han a hird in the , Over a a f in inois
Existing ome a es ( housands)
7,500

inois Existing ome a es ( housands)
350

6,500

300

3
5,500 250

4,500

200

3,500

2

150

2,500 1 0 1 2000 2001 2002 200 2010 2003 2004 2005 2006 2007 200 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1

100

Source: National Association of Realtors®

Office of the Chief Economist

More S es b t Less efin nce Decre se in Origin tions
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Tot Sing emi y Mortg ge Origin tions (Billions of Dollars)

es t in

%

V Convention Covention

Forecast

efi rch se

'

'

'

'

'

'

'

'

'

'

'

'

'

'

Sources: Freddie Mac, HUD, VA

Office of the Chief Economist

Large Inventory Surplus Remains in Market
Excess Unsold Homes for Sale (Numbers in Thousands)

000 900 800 00 600 500 400 00 00 00 0 - 00
996 000
Q Q4 Q Q4 Q Q4 Q Q4 Q Q4 Q
Annual Data Quarterly Data

004

005

006

00

008

009

0 0

Source: Bureau of Census (1 6-2004:Annual Data, 2005Q1±2010Q1:Quarterly Data) Note: The excess unsold homes were estimated based on the average vacancy rate from 1 6Q1 to 2005Q4 (1.7%).

Office of the Chief Economist

U.S. House Prices Have Experienced a Cumulative Decline of 2 % Since June 2
uarterly Growth Rates (Numbers in Percentages)
5.1 4.4

2.7 2.1 2.3 1.6

2.4 1.9 1.2 1.2 0.6 0.8 0.0

2.5

2

0.0

-0.7

-0.9 -1.3 -2.1 -2.8 -4.0 -2.7 -2.0 -2.4

2

-6.5
2 2 2 2 2 2 2 2 2 2 2 2 2

Note: National home prices use the internal Freddie Mac Index, which is a value-weighted based on Freddie Mac¶s single-family portfolio. The US index is a monthly series; quarterly growth rates are calculated as a 3-month change based on the final month of each quarter. Office Source: Freddie Mac

of the Chief Economist

House Price Declines Largely Occur in States with Excess acant-for-Sale Homes
Cumulative Change, 2 Q1 to 2 1 Q1

-2 %

- 2% %

-3 %

-3 %

> 2% -2 to 2% -1 to -2% -2 to -1 % < -2 %

Source: FHFA Purchase-Only House Price Index (NSA) by State, 2006Q1 and 2010Q1.

Office of the Chief Economist

California Has the Largest mber of roperties ith egative Eq ity, evada the Largest Share
mber of Mortgaged roperties in 1
%

s Positive Equity Near Negative Equity Negative Equity

% 1 % 1% % 1 % % ationally: 11. million mortgaged properties ith negative eq ity, % egative Eq ity Share %

% 1 %

1 %

1 %

%

1%

% %

1
Washin ton Ohio enns vania Massach setts o th Caro ina Michi an rizona inois ia s

C ifo ni

e se

Marylan

oi

e

o

Geo

Source: First American CoreLogic; Data as of December 31, 200 . Near Negative Equity properties have Total LTV between 5 and 100%; Percent values above bars represent share of loans with negative equity. Top 15 states by number of mortgaged properties plus Nevada are shown.

Office of the Chief Economist
1

evada

e

e

Job Loss Is the Main Hardship Reason Among Delinquent Prime Borrowers

Hardship Reason
Unemployment or curtailment of income Excessive obligation Illness or Death in the Family Marital difficulties Inability to sell or rent property Property problem or casualty loss Employment transfer or military service Extreme hardship All other reasons

2 .3% 1 .3% 11.2% . % 2. % 1. % . % .1% 3. %

Source: Freddie Mac; data represent prime borrowers who were delinquent on conventional conforming loans owned by Freddie Mac and had successful contact with their servicer during 200 . All Other Reasons includes: Abandonment of Property; Energy/Environment Cost; Incarceration; Payment adjustment; Payment Dispute; Servicing problem; Unable to contact borrower and other ± nondescript.

Office of the Chief Economist
11

Unemployment Rate (U.S. . % in May) Expected to Decline Gradually
Unemployment Rate (Percent)
1
± National Recession Forecast

11

Illinois Chicago-Joliet-Naperville IL 2 11:Q . % Nov-Dec µ 2: 1 . %

United States

2

2

2

1

1

Sources: Bureau of Labor Statistics (³Chicago-Joliet-Naperville, IL MSA´), National Bureau of Economic Research and Freddie Mac.

Office of the Chief Economist
12

2

2 1

1

1

1

1

1

1

1

1

1

1

2

2

2

2

Recent Default Experience Is Unlike Any Previous Business Cycle Since the 1 3 s
Prime conventional loans days or more delinquent or in foreclosure (percent)
± Recession Year

1%

3 2 1

2

2

2

2

2

Source: National Bureau of Economic Research, Mortgage Bankers Association (Prime Conventional includes Alt-A).

Office of the Chief Economist
13

2 1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

2

2

2

2

2

Increasing Delinquencies, Especially Subprime
oans Days or More Delinquent or in Foreclosure (percent of number)
All oans rime & Alt-A Subprime

1 1

1

1

1

Source: Mortgage Bankers Association; ³Prime Loans´ includes Alt-A (Quarterly data not seasonally adjusted;1 Q1-2010Q1).

1

Office of the Chief Economist
1

1

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

1 . % 1 .2% 1 . %

Below 3. % 3. -3. % . - . % . - . %
1 . %

National = 7.1% Seriously Delinquent Illinois = 8.0% (90+ days delinquent or in foreclosure, Prime & Alt-A Conventional) Data as of March 31, 2010
Source: Mortgage Bankers Association

. - . % Above 1 %

Office of the Chief Economist
1

Subprime, Alt-A ARMs, and Option ARMs Drive Foreclosures in Illinois
Distribution of oans Outstandin in I b roduct: anuar 1, 1 Distribution of Foreclosures Started in I b roduct: an-Dec

11
. Million

SUB RIME

1 1
RIME & Alt-A ARM

Thousand
FHA & A

1
RIME & Alt-A FIXED RATE

1
Million oans 11 Thousand Foreclosures Office of the Chief Economist
1

Source: Mortgage Banker¶s Association National Delinquency Survey. Numbers adjusted for 5% coverage.

Subprime and A t-A o ume Quintup ed , then Fe from to

1 to

% % % 1% 1% 1% 1 1% 1 % % 1% % % % 1 % % % % %

Sing e-fami y Originations Subprime and A t-A

1 tri ion
tri ion
Jumbo Prime

tri ion
1 tri ion
A t-A FHA & A

1

tri ion
1 tri ion

Conventiona , Conforming Prime

Subprime

Home Equity Loans

Source: Inside Mortgage Finance (by dollar amount)

Office of the Chief Economist
1

GSE & GNMA Share Fell When Subprime Boomed; Today GSEs & GNMA Are Main Source of Funds
MBS Share Issuance ( ercent of MBS Issuance)
Annual (1 ±2 ) Subprime, Non-Traditional Lending Boom (2004-2007H1) uarterly (2 2 1 )

1st quarter 2010: FRE & FNM
Subprime Crisis, Private-label MBS Collapse (2007H2-200 )

Conventional, Prime, Fixed-Rate Lending Is Mainstay of Market (1 5-2003)

3 2 1 1 2 3 1 2 3 1 2 3 1

Ginnie Mae 2 ri ate abel
1 2 3

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2

Ginnie Mae

ri ate abel

Freddie Mac and Fannie Mae
Office of the Chief Economist
1

Source: Inside MBS & ABS (The 200 Mortgage Market Statistical Annual - Volume II), Inside MBS & ABS (January , 2010), Inside MBS & ABS (April 16, 2010).

2 2 2 2 2 2 2 2 2 1

Private Label Securities Comprise 1 % of Loans Outstanding but Almost 3 % of Problem Loans
Number of First Mortgages Outstanding
(in millions)
Other % ank and hrift Portfolios 1 % Private Label Securities 1 % A VA 13%

Seriously Delinquent 1st Mortgages
(in millions)
Private Label Securities annie Mae
Other Portfolio

1

annie Mae 33%

Other anks hrifts A VA

1

reddie Mac 23%

reddie Mac

2
otal:
 

1
otal:

12 1

1

Million
 

3 Million
1

Sources: FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, HUD, First American CoreLogic (LoanPerformance). Note: Data as of December 31, 200 . Seriously Delinquent loans were at least 0 days delinquent or in foreclosure. Components may not sum to 100% because of rounding. Freddie Mac and Fannie Mae figures include whole loans held in portfolio and in guaranteed securities outstanding.

Office of the Chief Economist

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. © 2010 by Freddie Mac.

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