Niederjohn Round Table 3-16-09

Key Events Leading up to the Crisis
• Housing price increase during 2000-2005, followed by a levelling off and price
decline
• Increase in the default and foreclosure rates beginning in the second half of
2006
• Collapse of major investment banks in 2008
• 2008 collapse of stock prices
rev200902 The Economic Crisis of 2008: Past, Present, and Future Slide 1 of 45
Exhibit 1: House Price Change
• Housing prices were relatively stable during the 1990s, but they began to rise toward the
end of the decade.
• Between January 2002 and mid-year 2006, housing prices increased by a whopping 87
percent.
• The boom had turned to a bust, and the housing price declines continued throughout
2007 and 2008.
• By the third quarter of 2008, housing prices were approximately 25 percent below their
2006 peak.
Annual Existing House Price Change
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
19
19
19
19
19
19
19
20
19
19
19
19
19
19
20
20
20
20
20
20
20
20
Source: www.standardpoors.com, S and P Case-Schiller Housing Price Index.
Exhibit 2a: The Default Rate
• The default rate fluctuated, within a narrow range, around 2 percent prior to 2006.
• It increased only slightly during the recessions of 1982, 1990, and 2001.
• The rate began increasing sharply during the second half of 2006
• It reached 5.2 percent during the third quarter of 2008.
Default Rate
6%
5%
4%
3%
2%
1%
0%
79
80
81
82
84
85
86
87
89
90
91
92
94
95
96
97
99
00
01
02
04
05
06
07
19
19
19
19
19
19
19
19
19
20
19
19
19
19
19
19
19
19
20
20
20
20
20
20
Source: mbaa.org, National Delinquency Survey.
Exhibit 2b: Foreclosure Rate
Foreclosure Rate
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
79
80
81
82
84
85
86
87
89
90
91
92
94
95
96
97
99
00
01
02
04
05
06
07
19
19
19
19
19
19
19
20
20
20
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Source: www.mbaa.org, National Delinquency Survey.
Exhibit 3: Stock Market Returns
• As of mid-December of 2008, stock returns were down by 37 percent since the
beginning of the year.
• This is nearly twice the magnitude of any year since 1950.
• This collapse eroded the wealth and endangered the retirement savings of many
Americans.
S and P 500 Total Return

60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
07
19
19
19
19
19
19
20
20
19
19
19
19
19
19
19
19
19
19
19
20
Source: www.standardpoors.com
Exhibit 4.1: Subprime Mortgages
• Subprime mortgages as a share of total mortgages originated during the year,
increased from 5% in 1994 to 13% in 2000 and on to 20% in 2004-2006.
Subprime Mortgage Originations as a Share of Total

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Subprime (FRB) Subprime (JCHS)
Source: Data from 1994-2003 is from the Federal Reserve Board while 2001-2007 is from the Joint Center for Housing Studies at Harvard University
Exhibit 7a: Foreclosure Rates on Subprime
• Compared to their prime borrower counterparts, the foreclosure rate for subprime
borrowers is approximately 10 times higher for fixed rate mortgages and 7 times higher
for adjustable rate mortgages.
• There was no trend in the foreclosure rate prior to 2006 for adjustable rate or fixed rate
mortgages.
• Starting in 2006, there was a sharp increase in the adjustable rate mortgage
foreclosure rate.
Foreclosure Rates on Subprime Mortgages

6%
5%
4%
3%
2%
1%
0%
98
98
99
99
00
00
01
01
02
02
03
03
04
04
05
05
06
06
07
07
19
19
20
20
20
20
19
19
20
20
20
20
20
20
20
20
20
20
20
20
Fixed Adjustable
Source: Liebowitz, Stan J., “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown,” Ch. 13 in Randall G. Holcombe and Benjamin Powell, eds, Housing America: Building
Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.
Exhibit 7b: Foreclosure Rates on Prime
• While the foreclosure rate on fixed rate mortgages was relatively constant, the
foreclosures on adjustable rate mortgages began to soar in the second half of 2006.
• This was true for both prime and subprime loans.
Foreclosure Rates on Prime Mortgages

1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07
19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Fixed Adjustable
Source: Liebowitz, Stan J., “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown,” Ch. 13 in Randall G. Holcombe and Benjamin Powell, eds, Housing America: Building
Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.
Exhibit B15: U.S. Excess Reserves
Excess Reserves in Billions of Dollars, 2000-present

$800
$700
$600
$500
$400
$300
$200
$100
$0
0 0 00 001 001 002 002 003 003 004 004 005 005 006 006 007 007 008 008 009
20 20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Source: The Federal Reserve Bank of St. Louis, www.stlouisfed.org

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Key Events Leading up to the Crisis

S and P 500 Total Return

Subprime Mortgage Originations as a Share of Total

Subprime (FRB) Subprime (JCHS)

Foreclosure Rates on Subprime Mortgages

Foreclosure Rates on Prime Mortgages

Excess Reserves in Billions of Dollars, 2000-present

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