Back to the Future? Housing and Mortgage Finance in a Government World

Transcription

1 Back to the Future? Housing and Mortgage Finance in a Government World NCTR Annual Convention Jennifer Bridwell October 13, 2009 Pacific Investment Management Company LLC,840 Newport Center Drive, Newport Beach, CA 92660,

2 1. Back to the Future: U.S. Mortgage Market Retrospective 2. Housing Decline: When Will It End? 3. Managing MBS in the New Mortgage Market 4. Outlook for 2010 and Beyond

3 Back to the Future: U.S. Mortgage Market Retrospective 3

4 The Result of Irresponsible Lending ABX Historical Prices Price AAA 20 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 As of June 30, 2009 SOURCE: JP Morgan Refer to Appendix for additional index information. 4

5 Remember 2006? Holy cow! They have no equity! They have 600 FICOs! What is the world coming to? Exotic mortgage lending accounted for ~70% of new issuance in 2005/2006 Subprime floaters had new issue spreads of LIBOR + 10bps!! The most exotic loan ever? - 100% Loan to Value - First time homeowner - Stated income FICO and below - Non-owner occupied In Feb 2007 Fremont announced they would no longer originate this type of loan to below 580-FICO borrower. Wow, just in time! 5

6 2006: Cash-Out Refis 2009: Modify or Walk Away 6

7 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% The Future of Mortgage Finance: We ve Seen This Before Securitized Mortgage Issuance SOURCE: UBS Jan-09 Feb-09 Mar-09 98% Non-Agency MBS Agency MBS 44% 7 99%

8 Banks Used to Dominate Mortgage Lending. And Will Again Lending used to be about knowing your customer Depositor relationships matter Payment histories matter (non-manufactured FICO) Documentation/underwriting are important Minimize fraud 10

9 Housing Decline: When Will it End? 11

10 Not Likely A Bottom Yet S&P/Case-Shiller 20 MSA Composite: Year over Year Change 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Foreclosure moratorium lasted from 9/30/08 3/31/09 Loan modifications picked up in Q2 Late stage delinquencies building and will need to be liquidated As of June 30, 2009 SOURCE: Case-Shiller Refer to Appendix for additional index information. 12

11 Regional Housing Differences Are Large Peak to Trough Changes in the Case-Shiller House Price Index Seattle -20.9% AK National Change: -30.7% -1.4% WA Minneapolis -17.3% -32.0% VT ME MT ND -1.1% MN -6.1% -3.6% -1.8% Chicago -31.3% OR -25.1% Detroit N.H % -15.7% ID WI SD -41.3% NY -7.6% -3.9% MA -16.5% WY -1.9% MI -4.1% R.I % -0.3% -36.7% IA PA CT -11.6% San Francisco NE -2.2% -4.8% NV -4.8% OH New York City -44.9% -50.7% IL UT IN -13.1% NJ -17.5% -23.2% -5.6% -17.8% CA -8.6% CO WV KS MO -1.6% VA DE -52.2% -9.8% HI KY -41.6% -2.1% -11.6% -6.6% -2.3% MD -14.7% -22.0% AZ NC -5.1% TN -10.4% -49.7% NM OK AR SC Los Angeles -2.2% -3.5% -4.7% -3.6% -40.4% MS GA San Diego AL -5.3% -18.7% -3.1% -41.4% TX <-20% Phoenix LA -50.8% -0.6% -2.8% FL Miami Dallas -44.5% -45.1% -11.1% -10% to -20% -5% to -10% -1% to -5% 0 to -1% SOURCE: S&P as of April 30,

12 The New Landscape of the Mortgage Market 14!mk_Structured_Credit_LF_Tab2

13 New Landscape of Mortgage Portfolio Management Today s Mortgage Market Agency MBS Rates Volatility Prepayments Rates/Curve Agency eligibility in Conservatorship Credit availability Foreclosure costs and timelines Policy Servicing practice Home price forecasts Regulation Borrower equity Underwriting Non-Agency MBS HPD Loan performance Underwriting Servicing Separating Agency and Non-Agency MBS markets is no longer adequate 15

14 Necessary Skills for the New Landscape Detailed loan-level modeling capabilities utilizing LoanPerformance database State-of-the-art mortgage surveillance system Detailed, experienced servicer surveillance Public policy expertise in housing and mortgage markets Senior portfolio managers who have managed mortgage portfolios through multiple market cycles Consulting relationships with originators, servicers, appraisers, brokers Comprehensive US Housing Research Effort Significant resources in credit research for analysis of homebuilders, financial firms, and workouts 16

15 Our Mortgage Philosophy We have a risk control culture / We demand compensation for risk We have a strong value orientation and tend to be contrarians We value liquidity We value a Government guarantee We are model skeptics, although we maintain best-in-class mortgage loan-level models We conduct our own credit analysis, independent of rating agencies We have seasoned, veteran, industry-leader mortgage Portfolio Managers We have a strong macroeconomic foundation which informs our relative value views 17

16 Agency MBS: We Think Differently Agency coupon relative value discipline is largely extinct. It remains our #1 alpha source. Higher Risk-adjusted return When Agency coupon relative value is done well, portfolios are not forced to make significant out-of-index bets (increase in credit, liquidity risks) No subprime blowups, no exotic MBS derivatives blowups in past cycles We are contrarians and liquidity providers Capitalize on accounting and regulatory-driven trading which is substantial in MBS Refer to Appendix for additional risk information 18

17 2010 and Beyond 19

18 A Portrait of Massive Liquidity Injection Program $ Allocated Specific Program Goal Fannie / Freddie Conservatorship $200 Billion Prevent collapse of GSEs and ensure mortgage capital flow TARP I & TARP II $700 Billion Stabilize financial markets Federal Reserve Bank & U.S. Treasury - MBS Purchase Programs TALF Financial Stability Plan (Obama Plan) $ 1.25 Trillion $200 Billion $350 Billion Stimulate home purchasing through lowering conforming mortgage rates Increase availability of consumer credit by providing Fedbacked term financing for consumer ABS Continue to recapitalize the banking system, directly address foreclosure prevention, with a probable extension to troubled asset purchases Pub lic-private Investment Fund Up to $30 Billion Cleanse financial institution balance sheets of legacy assets TALF Expansion $200 Billion + Expand TALF support to Legacy CMBS and potentially RMBS Homeowner Affordability and Stability Plan (HASP): Home Affordable Modification Program (HAMP) Total Home Affordable Refinance Plan (HARP) Hope for Homeowners / Helping Families Save Their Homes Act Bankruptcy Reform (Failed) Fannie / Freddie Support $75 Billion n/a Up to $75 Billion n/a $200 Billion $2.7 Trillion Keeping homes off the market by preventing avoidable foreclosures through implementing systematic loan modification protocol Keeping homes off the market by providing homeowners with loans owned or guaranteed by Fannie Mae/Freddie Mac the opportunity to refinance into more affordable monthly payments Keeping homes off the market by providing expanded refinancing options and restoring equity Bankruptcy Reform provision of Helping Families Save Their Homes Act failed in the Senate Stabilize the balance sheets of Fannie and Freddie and support/expand the guarantee of Agency MBS SOURCE: PIMCO, Federal Reserve, US Treasury * As of June 30, 2009

19 Now What? The Future of Fannie, Freddie and Ginnie Washington is faced with the restructuring of these giant institutions. How do they exit Conservatorship, or do they? Consensus debate is focused on 3 areas: 1. Full government ownership of Fannie/Freddie, possibly under FHA 2. Privatize Fannie & Freddie completely 3. Keep Ginnie largely as is, under FHA. Combine Fannie/Freddie, keep them as GSEs, and strictly limit their activities (i.e. run off the retained portfolios, increase capital requirements, etc) Is there political will to make big changes?

20 Mortgage Market Outlook Government support for the Agency MBS market expected to continue to improve liquidity and keep mortgage rates low Opportunities for MBS alpha will continue to be high as capital devoted to the sector is relatively low Despite the significant fall in mortgage rates over 2009, we expect prepayment speeds to remain low relative to rates, especially compared to 2003 levels Agency MBS will continue to be the primary arena for housing finance as nonagency origination channels have been shut by the credit and housing crises Refer to Appendix for additional risk information. 20

21 Summary We re going back to a 1980s mortgage market Agency MBS and real bank lending Housing will likely be weaker near-term expecting a bottom in Jumbos are most vulnerable Uncertainties abound in Non-Agency land, but the worst is likely over In this volatile market, you need good drivers Refer to Appendix for additional outlook information. 22

22 Relax, PIMCO is Driving.Back to the Future! 23

23 Supplemental Information 24!mk_Structured_Credit_LF_Tab2

24 MBS / ABS Portfolio Management & Research Team Scott Simon Managing Director (26 (26 Years of of Experience) Head of of Mortgage Credit and and Asset-Backed Portfolio Management Dan Ivascyn Managing Director (18 (18 Years of of Experience) Head of of Mortgage Credit, Portfolio Manager Joshua Anderson Executive Vice President (14 (14 Years of of Experience) Head of of Structured Credit Research Jennifer Bridwell Executive Vice President (21 (21 Years of of Experience) Dan Hyman Senior Vice President (7 (7 Years of of Experience) Alfred Murata Senior Vice President (10 (10 Years of of Experience) Kent Smith Senior Vice President (23 (23 Years of of Experience) Giang Bui Senior Vice President (9 (9 Years of of Experience) MBS // ABS Product Manager Agency MBS, Specified Pools Non-Agency MBS, Alt Alt A Distressed Loans, Servicer Surveillance CDOs // Manufactured Housing Ji Ji Li Li Senior Vice President (10 (10 Years of of Experience) Ying Qiu Vice President (13 (13 Years of of Experience) Sharad Bansal Vice President (10 (10 Years of of Experience) Marco van Akkeren Senior Vice President (9 (9 Years of of Experience) Rama Nambimadom Senior Vice President (11 (11 Years of of Experience) Mortgage Credit Analytics Consumer ABS HEL Specialist Mortgage Credit Analytics Credit Derivatives Jing Yang Vice President (3 (3 Years of of Experience) Haidi Gu Vice President (4 (4 Years of of Experience) Lalantika Padmanabhan Structured Credit Associate (4 (4 Years of of Experience) Stefanie Evans Vice President (16 (16 Years of of Experience) John Murray Senior Vice President (6 (6 Years of of Experience) HEL Specialist LoanPerformance Specialist Servicer Surveillance CMBS // Multifamily Commercial Real Estate // CMBS Ashish Sinha MBS/ABS Analyst (3 (3 Years of of Experience) Deepa Salastekar Vice President (12 (12 Years of of Experience) Ryan Murphy Product Associate (3 (3 Years of of Experience) Joyce Chang Product Associate (3 (3 Years of of Experience) Jason Steiner Mortgage Credit Analyst (9 (9 Years of of Experience) Mortgage Credit Analytics MBS // ABS Product Manager MBS // ABS Associate MBS // ABS Associate Non-Agency MBS As of July 31, Mortgages_orga_02

25 Appendix Past performance is not a guarantee or a reliable indicator of future results. Index description The ABX AAA Index is an index comprised of 20 credit default swaps on the AAA tranches of Home Equity Asset Backed Securities. It is not possible to invest directly in an unmanaged index. The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan region across the United States. In addition, the S&P/Case-Shiller U.S. National Home Price Index is a broader composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly. Outlook Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Risk Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, , PIMCO. 27 mortgage_appendix_01