The Future of the Mortgage Market: Where Do We Go From Here?

Transcription

1 The Future of the Mortgage Market: Where Do We Go From Here? Stuart Gabriel, Director of the Ziman Center for Real Estate, Arden Realty Chair and Professor of Finance, Anderson School of Management, University of California, Los Angeles Scott Minerd, CEO and Chief Investment Officer, Guggenheim Partners Asset Management Inc. Ethan Penner, Executive Managing Director, CB Richard Ellis Investors LLC Lewis Ranieri, Prime Originator and Founder, Hyperion Private Equity Funds; Chairman, CEO and President, Ranieri & Co. Inc. Tad Rivelle, Founding Partner, Chief Investment Officer and Generalist Portfolio Manager, Metropolitan West Asset Management Ellen Seidman, Director, Financial Services and Education Project, Asset Building Program, New America Foundation; Executive Vice President, National Policy and Partnership Development, ShoreBank Corp. Moderator: James R. Barth, Lowder Eminent Scholar in Finance, Auburn University; Senior Finance Fellow, Milken Institute Monday, April 28, :00 PM 5:15 PM

2 Looking for a bottom Economists say the economy isn t at its low point yet, and house prices likely won t get there until Does this feel like the bottom of a downturn? Yes: 27% 1 st half nd half 2009 When will home prices hit bottom? 6% 29% No: 73% 1 st half nd half % 38% 1 st half % Source: The Wall Street Journal, April 11, 2008.

3 Subprime crisis overview December 2006 March 2008 S&P 500 Index 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1, Q4 Dec. 06: Ownit Mortgage, a subprime lender, files for bankruptcy Feb. 07: HSBC says it set aside $10.6 billion for bad loans, incl. subprime Apr. 07: New Century, a mortgage broker, files for bankruptcy Jul. 07: Two Bear Stearns hedge funds file for bankruptcy Aug. 07: Fed cuts discount rate to 5.75% Sources: BusinessWeek (March 31, 2008), Standard & Poor s and Global Insight. Jan. 11, 08: BofA agrees to buy Countrywide Oct. 07: Merrill announces $7.9b in subprime writedowns, surpassing Citi s $6.5 billion Jan. 30, 08: Fed cuts discount rate to 3.5% 2007 Q Q Q Q4 Mar. 11, 08: Fed offers troubled banks as much as $200 billion Mar. 16, 08: JP Morgan offers to buy Bear Stearns Mar. 18, 08: Fed cuts discount rate to 2.4%; Fed funds rate to 2.25% 2008 Q1

4 Homeownership rate reaches historical high in 2004 Percent % in September % in December Source: U.S. Census Bureau.

5 Homes for sale: existing and new single-family homes Source: U.S. Census Bureau Millions Millions Existing homes (Left axis) New homes (Right axis)

6 Home prices peak in 2006 Index, January 1987 = California median home price S&P/Case-Shiller home price index Sources: U.S. Office of Federal Housing Enterprise Oversight (OFEHO), Standard & Poor's, California Association of Realtors and Moody's Economy.com. OFHEO conventional and conforming home price index

7 Home mortgage share of household liabilities reaches a new high in 2007 Percent Source: Federal Reserve.

8 U.S. households leverage has increased rapidly since 1980 Percent Household debts as % of disposable personal income Sources: Federal Reserve and U.S. Census Bureau.

9 Mortgage originations by product 4.6% Subprime and Alt-A shares quadruple between 2001 and 2006, then fall in % 8.0% 8.4% 19.4% 56.9% 14.4% 2.7% 13.4% 20.1% 33.2% 16.1% 13.3% 6.9% 6.0% 3.0% 9.8% 61.0% 2001 $2.2 trillion Source: Inside Mortgage Finance $3.0 trillion 2007 $1.8 trillion Conventional, conforming prime Jumbo prime Subprime Alt-A FHA & VA Home equity loans

10 2/28 ARMs dominate subprime home-purchase loan originations in 2006 Fixed 9% 30Yr ARM Balloon W/ Yr Amtz 26% Other ARM 4% 2-year & 3-year hybrids 61% Other ARM 23% Fixed 31% ARM hybrids 46% ARM Hybrids 23% Other ARM 7% Fixed 70% Subprime Alt-A Prime conventional Source: Freddie Mac.

11 Subprime loans accounted for over half of foreclosures since 2006 Number of foreclosures started (Annualized rate in thousands) 1,800 Subprime: 13% of 1,500 Subprime loans serviced FHA and VA (December) 1,200 Prime (includes Alt-A) 54% % 29% 34% 2003 H2 36% 29% 35% 2004 H1 37% 29% 34% 2004 H2 44% 22% 34% 2005 H1 47% 20% 33% 2005 H2 Source: Mortgage Bankers Association National Delinquency Survey (data as of December 2007, number expanded to reflect 85% coverage). 52% 17% 31% 2006 H1 55% 13% 32% 2006 H2 56% 11% 33% 2007 H1 9% 37% 2007 H2

12 Existing home sales are down everywhere over past two years Percent change in existing home sales fourth quarter 2005 through fourth quarter 2007 Source: Freddie Mac. Existing home sales nationwide down 29%

13 Forty-six states had falling prices in the fourth quarter 2007 United States: - 9.3% (Fourth quarter annualized growth) Source: Freddie Mac.

14 Private-label mortgage-backed security issuance has fallen sharply US$ billions 200 Subprime and other Alt-A Prime jumbo Freddie Mac and Fannie Mae March 2007 $191 billion June 2007 $181 billion Sept $137 billion Dec $109 billion Source: Inside Mortgage Finance.

15 U.S. asset-backed securities outstanding 1980, Total = $114 billion Mortgage ABSs (GSEguaranteed) 100% Assetbacked commercial paper 6% 2007 Q3, total = $12.2 trillion Corporate and foreign ABSs 29% Mortgage ABSs (GSEguaranteed) 35% Credit card and consumer loan ABSs 6% Mortgage ABSs (private label) 24% Source: Federal Reserve.

16 Surge in amount and diversity of U.S. asset-backed securities outstanding US$ trillions Mortgage ABSs (GSE-guaranteed) Asset-backed commercial paper Credit card and consumer loan ABSs Mortgage ABSs (private label) Corporate and foreign ABSs Source: Federal Reserve. 2007Q3

17 Origination shares of mortgage brokers account for majority of residential mortgage originations 1987 Number of mortgage brokers: 7,000 Brokers 20% 2006 Number of mortgage brokers: 53,000 Others 42% Brokers 58% Others 80% Source: Wholesale Access.

18 Mortgage rates Percent yr fixed yr ARM Sources: Mortgage Banker s Association and Moody s Economy.com.

19 Treasury and CMBS yields have recently moved in opposite direction 200-day rolling correlation coefficient U.S. CMBS AAA yield and 1-3-month Treasury yield U.S. CMBS BBB yield and 1-3-month Treasury yield -1.0 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Sources: DataStream and Milken Institute staff calculation.

20 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Sixty-day-plus day home mortgage delinquency rates on the rise 25% 20% Subprime 15% 10% Alt-A Alt A 5% Jumbo prime 0% Sources: First American Corelogic and LoanPerformance databases.

21 Growing share of subprime loans in foreclosure Millions of loans 7 Percent Percent in foreclosure (R) Loans serviced (L) Source: Mortgage Bankers Association.

22 Despite Federal funds rate cuts, mortgage rates remain relatively flat Freddie Mac 30-year fixed mortgage rate Federal funds rate Spread January 2007 June 2007 November 2007 April Sources: Federal Reserve and Freddie Mac.

23 Origin of securitization But I don t know any other word to describe what we are doing. You will have to use it (securitization). Lewis Ranieri The Origins of Securitization, Sources of Its Growth, and Its Future Potential, A Primer on Securitization

24 Prime and subprime mortgage originations by FICO score Percent of total originations 16% Subprime 14% 12% Prime 10% 8% 6% 4% 2% 0% FICO score Source: LoanPerformance.

25 Estimates of losses from subprime crisis Date 7/19/ /17/ /8/ /15/ /16/ /19/2007 1/31/2008 2/11/2008 3/3/2008 3/3/2008 3/10/2008 3/13/2008 Source: Various. Estimate $ billion $ billion $150 billion $400 billion $400 billion $ billion $120 billion $400 billion $170 billion $600 billion $215 billion $285 billion Source Bernanke testimony before congress William C. Dudley, NY Fed Bernanke testimony before Congress Deutsche Bank Goldman Sachs The Economist Wall Street Journal German finance minister at G7 meeting Wikipedia Geraud Charpin, head of European credit strategy at UBS in London Head of Japan's financial regulator Standard and Poor s

26 Supbrime s biggest losers Losses/write-downs since beginning of 2007, US$ billions Citigroup UBS Merrill Lynch Bank of America Morgan Stanley HSBC JPMorgan Chase IKB Deutsche Washington Mutual Deutsche Bank Wachovia Credit Agricole Credit Suisse Source: The New York Times, April 22, The collapse of credit markets in the United States, driven by the subprime loan crisis, has led to major losses for banks worldwide.

27 Financial stocks take big hits in subprime crisis Percentage change in price, December 2006 March 2008 Source: Bloomberg.

28 Rep. Barney Frank s housing rescue plan Calls for the Federal Housing Administration to insure some $300 billion in new mortgages for distressed borrowers, even if they are badly behind on their payments and have poor credit - including those who owe more than their homes are worth. Would substantially relax the standards of the Depressionera FHA in an effort to reach the hardest-hit homeowners, leaving the government responsible for paying off their loans if they cannot. Lenders first would have to agree to wipe out a portion of the outstanding debt, and borrowers would have to show they could afford to make payments on the new mortgage.

29 Mortgage loan fraud on the rise Source: Financial Crimes Enforcement Network.

30 Is adequate information disclosed to consumers? Percentage of people in a study who could not correctly identify various loan terms using current mortgage disclosure forms Annual percentage rate: 20 Monthly payment: 21 Loan amount: 51 Existence of prepayment penalty: 68 Total upfront Cost: Percent Source: Los Angeles Times, June 14, 2007.

31 Structured credit finance products ABS Credit derivatives RMBS MBS CDS CMBS CDOs MBS: Mortgage-backed securities RMBS: Residential MBS CMBS: Commercial MBS Source: International Monetary Fund. ABS: Asset-backed securities CDS: Credit default swap CDOs: Collateralized debt obligations

32 The Future of the Mortgage Market: Where Do We Go From Here? Scott Minerd s Slides

33 CMBS slides relative to Libor LOAS 1,200 1, Note: Monthly Data from July 2002 to March Source: Lehman Brothers, Guggenheim estimates. Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Basis points CMBS-AAA CMBS-AA CMBS-A CMBS-BBB Mean Standard deviation Current (3/31/2008) CMBS-AAA CMBS-AA CMBS-A CMBS-BBB

34 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Delinquencies as a percentage of total loans, by quarter 20 Percent Source: Bloomberg. Mar-07 Subprime Total Prime

35 Alt-A fixed rate mortgage 60-day delinquencies 60D+ delinquencies Weighted average loan age Source: UBS

36 Alt-A adjustable rate mortgage 60-day delinquencies 60D+ delinquencies Source: UBS Weighted average loan age

37 Treasury holdings as a percentage of reserve bank credit Source: Federal Reserve. Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan

38 S&P/Case-Shiller home price Index for three California cities Change measured from peak to January Los Angeles San Diego 250 San Francisco 20-City % -21% -16% -13% Jan -00 Jan -01 Jan -02 Jan -03 Jan -04 Jan-05 Jan -06 Jan-07 Jan -08 Source: S&P/Case-Shiller.

39 Rate of delinquencies and foreclosures on single-family mortgage loans Delinquent or foreclosed, % Source: Mortgage Bankers Association. Mar-79 Mar-81 Mar-83 Mar-85 Mar-87 Mar-89 Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Foreclosures Delinquencies Mar-05 Mar-07

40 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Housing affordability index National NAR national housing affordability index Composite Average Average Composite 90 Source: National Association of Realtors. Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

41 NAR Western Region Housing Affordability Index Source: National Association of Realtors. Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 NAR Northeast Region Housing Affordability Index Index Average NAR South Region Housing Affordability Index Index Average Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Housing affordability index By region Index Average NAR Midwest Region Housing Affordability Index Index Average Jan-05 Jan-05 Jan-06 Jan-06 Jan-07 Jan-07 Jan-08 Jan-08

42 The Future of the Mortgage Market: Where Do We Go From Here? Stuart Gabriel s Slides

43 Treasury yields Source: Federal Reserve, data as of 3/24/08.

44 Fixed rates on 30-Year mortgages vs. Fed Funds target Source: Freddiemac, Federal Reserve, Bankrate.com. Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 8% 7% 6% 5% 4% 3% 2% 30-year fixed jumbo 30-year fixed Fed Funds target Dec-07 Jan-08 Feb-08 Mar-08

45 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Short term rates 1 yr ARM vs. 1-year treasury spread as of Mar 08: 3.58% 8% 7% 6% 5% Fed Funds 1-year treasury 1-year ARM Spread 4% 3% 2% 1% 0% Source: Federal Reserve, Freddie Mac, Bankrate.com. Jan-08

46 Average cap rate by property type 11% 10% 9% 8% 7% 6% 5% Source: Real Capital Analytics. 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2007 Multi-Family Industrial Office Retail

47 CMBX historical spreads Source: Markit.

48 CMBX historical spreads (continued) Source: Markit.

49 ABX historical spreads Source: Markit.

50 ABX historical spreads (continued) Source: Markit.