FTA Revenue Estimating and Tax Research Conference

Transcription

1 FTA Revenue Estimating and Tax Research Conference Economic Update By Doug Duncan Vice President and Chief Economist Fannie Mae October 17, Fannie Mae 1

2 Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economics & Mortgage Market Analysis (EMMA) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the EMMA group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the EMMA group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management 2

3 Speaker Biography Douglas G. Duncan is Fannie Mae s Vice President and Chief Economist. He is responsible for managing Fannie Mae s Strategy Division and Economics & Mortgage Market Analysis Groups. In this leadership role, Duncan provides all economic, housing, and mortgage market forecasts and analyses, and serves as the company s thought leader and spokesperson on economic and mortgage market issues. Prior to joining Fannie Mae, Doug was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives, and work on the Financial Institutions Project at the U.S. Department of Agriculture. He has been elected to the Board of Directors for the National Association of Business Economists, is a member of the American Economics Association and the American Real Estate and Urban Economics Association, and is past president of the Housing Statistics Users Group. Named one of the country s top four most accurate economists in 2010 by the Wall Street Journal and named one of Bloomberg / BusinessWeek s 50 Most Powerful People in Real Estate, Doug is a frequent speaker on national and state economic, housing, and mortgage market conditions. Duncan received his Ph. D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University. 3

4 Agenda The Macro Economy Consumer Attitudes Household Financial Condition The State of Housing Commercial Real Estate The Banking Sector and Real Estate Finance Some Historical Perspective Policy 4

5 The Macro Economy: Slowing Growth and Employment Struggles 5

6 Employment activity is not matching economic activity. SAAR, $ trillions SA, millions $ $ $ $ $ $ $ $ $10.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 ' Real GDP (LHS) Total Nonfarm Private Payrolls (RHS) Sources: Bureau of Economic Analysis, Bureau of Labor Statistics 6

7 Metropolitan job losses were widespread during the recent recession. 100% Share of MSAs with Net Private Payroll Gains (SA, %, 3-Month Moving Average in Bold) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Source: Bureau of Labor Statistics, Current Employment Statistics, via Moody s Analytics 7

8 Employment recovery varies by region. Year-over-Year Employment Growth (Total Nonfarm Employment, % Change) North Dakota Utah Wyoming Oklahoma Texas Michigan Vermont Arizona Louisiana Minnesota Nebraska New Hamp. Ohio Alaska Massachusetts Oregon Washington Hawaii Iowa California Idaho Kentucky New York Pennsylvania New Mexico Wisconsin Colorado Illinois Maine South Carolina Montana South Dakota Tennessee Arkansas Florida North Carolina West Virginia New Jersey Connecticut Mississippi Nevada Maryland Rhode Island Virginia Alabama Kansas Missouri Georgia Indiana Delaware Source: Bureau of Labor Statistics, Current Employment Statistics, via Moody s Analytics 8

9 Small firms remain reluctant to hire. Percent Planning to Increase Employment, Net (SA, %) 25% 20% 15% 10% 5% 0% -5% -10% -15% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 NFIB: Percent Planning to Increase Employment, Net (SA, %) 4-Month Moving Average Source: National Federation of Independent Businesses 9

10 Importance of residential investment to the economy declines to record lows. Residential Fixed Investment as a Share of GDP 4.0% Residential Fixed Investment Contribution to GDP Percent Change 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Bureau of Economic Analysis 10

11 Consumer income trend lags previous economic recoveries. Real disposable personal income; levels are rebased and set equal to 100 at the end of the recession Current Months from recession end Source: Bureau of Economic Analysis 11

12 Consumer Attitudes: Why Do You Think This is a Good Time To Borrow $200K to Buy a House? 12

13 Consumers are growing more pessimistic about the economy. 90% 80% In general, do you think our economy is on the right track or is it off on the wrong track? ( % of total survey respondents) Right track Wrong track 78% 77% 70% 60% 61% 60% 64% 65% 56% 63% 66% 70% 50% 40% 30% 31% 30% 31% 28% 35% 29% 26% 23% 20% 16% 16% 10% 0% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Source: Fannie Mae National Housing Survey, September,

14 Source: Fannie Mae National Housing Survey - September,

15 Decline in perception of safety of homeownership may be ending. 83% Home IRA/401(k) plan Savings/Money Market Account 79% 74% 76% 75% 77% 76% 75% 69% 70% 63% 67% 66% 62% 65% 65% 64% 67% 68% 66% 65% 2003 Jan '10 June '10 Q Q Q Q Do you think this investment is Showing % Safe Q Q Q Q June '10 Jan Putting money into a savings or money market account Putting money into an IRA or 401(k) plan Buying a home Buying an insurance annuity Investing in a mutual fund Buying government or corporate bonds Buying stocks GP % Source: Fannie Mae National Housing Survey - Second Quarter,

16 Borrowers still value choice and personal responsibility. Which is closer to your view regarding different types of home mortgage choices? Having lots of choices means people can find just the one that suits their needs More choices just raises the likelihood that people will be too overwhelmed to find a plan that meets their needs Wave (% Can find the right one/ too overwhelming) GP % Mortgage % Underwater % Owner % Renter % Q /33 63/34 64/34 59/33 64/31 Q /34 62/35 65/32 59/33 63/33 Q /33 64/32 63/34 55/34 62/34 Q /31 63/32 62/35 61/31 66/29 June '10 61/33 59/36 63/35 59/32 63/30 January 10 64/29 65/30 64/31 62/25 64/29 When people get home loans that are more than they can afford, whose fault do you think it is: The person taking out the mortgage, because it's their own responsibility to know if they can pay their bills or not The mortgage company, because they know better what people can afford and should help guide people Wave (% the person/ the mortgage company) GP % Mortgage % Underwater % Owner % Renter % Q /35 54/37 50/43 54/36 59/33 Q /35 54/37 50/43 54/36 59/33 Q /38 56/35 58/35 50/43 56/39 Q /36 56/34 56/35 53/36 54/38 June '10 56/35 57/33 60/31 54/37 56/36 January 10 53/39 54/37 51/39 50/42 55/39 Source: Fannie Mae National Housing Survey - Second Quarter,

17 House Prices: Consumers more cautious now than 6 months ago. During the next 12 months, do you think home prices in general will go up, go down, or stay the same as where they are now? Showing % General Population Go up Go down 25% 18% Jun '10 Jul '10 Aug '10 Sept '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug'11 Sept'11 Respondents who said house prices would go up or go down were asked to estimate by what percent. -1.1% Jun '10 Jul '10 Aug '10 Sept '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug'11 Sept'11 Source: Fannie Mae National Housing Survey September, 2011, Monthly Survey 17

18 Expectations: Pessimism Persists Source: Fannie Mae National Housing Survey - September,

19 Though 3 in 4 Single-family home renters say owning makes more sense than renting, most say they would rent their next home Which is closer to your view? Owning makes more sense because you re protected against rent increases and owning is a good investment over the long term Renting makes more sense because it protects you against house price declines and is actually a better deal than owning If you were going to move, would you be more likely to: Single-family Renters (N=566) Rent, 54% Buy, 43% Rent, 67% Buy, 30% Multifamily Renters (N=265) Please note that Single-family Renters are defined as those renters who live in a building with 1-4 units and Multifamily Renters are defined as those renters who live in a building with 5 and more units. Source: Fannie Mae National Housing Survey - Second Quarter,

20 and as a result, we are seeing more single-family homes moving back into rental stock. Renter-occupied Housing Units 25,000 (000 s) 20,000 15,000 10,000 5, Single-family Note: Single-family includes properties consisting of up-to 4 units Multifamily Source: Census 20

21 Household Financial Condition: Done Reducing Leverage? 21

22 Household debt is declining and still has a way to go. Consumer Credit / Disposable Personal Income (%) Household Financial Obligation Ratio (Financial Obligations / Disposable Personal Income, %) 25% 25% 24% 24% 23% 22% 21% 20% 19% 18% 17% 16% 23% 22% 21% 20% 19% 18% 17% 15% '80 '85 '90 '95 '00 '05 '10 16% 15% '80 '85 '90 '95 '00 '05 '10 Covers most short- and intermediate-term credit extended to individuals, excluding loans secured *Financial Obligations include monthly mortgage payments, consumer debt payments, automobile by real estate. lease payments, rental payments on tenant-occupied property, homeowners insurance, and property tax payments. Sources: Federal Reserve Board, Bureau of Economic Analysis 22

23 Over-leveraged households at lower income levels indicate stronger rental demand relative to ownership. Mean Debt to Before-Tax Income Ratio 600% 545% 500% 400% 300% 200% 100% 256% 241% 215% 219% 182% 180% 172% 154% 135% 109% 85% 88% 96% 105% 85% 177% 157% 81% 84% 60% 87% 49% 73% 0% Less than Income Percentile 1989 Any Debt/Before Tax Income 2007 Any Debt/Before Tax Income 1989 Primary Residential Debt/Before Tax Income 2007 Primary Residence/Before Tax Income Source: Federal Reserve 23

24 Recession impaired consumers ability to qualify for credit. 45% Distribution of Credit Scores Across the Population (%) 40% 35% 40% 37% 30% 25% 25% 20% 15% 10% 15% 12% 10% 15% 12% 18% 16% 5% 0% Less than Pre-Crisis Apr-10 Sources: Deutsche Bank, FICO 24

25 The State(s) of Housing: Weakest In Decades 25

26 Current housing recovery underperforms previous recoveries. Real Residential Fixed Investment (Index, recession trough = 100) Quarters after trough Source: Bureau of Economic Analysis 26

27 Shadow supply of housing has remained elevated. Vacant homes held of the market for other reasons* (Millions) Millions Pending Serious Delinquency Inventory Pending FC Inventory Pending REO Inventory '65 '70 '75 '80 '85 '90 '95 '00 '05 ' J- 06 M- 06 S- 06 J- 07 M- 07 S- 07 J- 08 M- 08 S- 08 J- 09 M- 09 S- 09 J- 10 M- 10 S- 10 J- 11 *Held off the market for reasons other than occasional use or temporarily occupied by persons with usual residence elsewhere. Sources: Census Bureau, CoreLogic 27

28 10.0% Improvement in SDQs to persist? 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Mortgage Payments Past Due Days: United States (SA, %) Seriously Delinquent Mortgages: U.S. (NSA, %) MBA defines seriously delinquent mortgages as mortgages with payments 90 days and over past due in addition to mortgages in the foreclosure process. Source: Mortgage Bankers Association 28

29 Leading indicators point to stalled market ahead '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 70 Mortgage Loan Applications for Purchase Index (SA, Left Axis) Pending Home Sales Index (SA, Right Axis) Sources: Mortgage Bankers Association, National Association of REALTORS 29

30 New homes for sale at all-time low, new completed homes for sale the lowest since '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 New 1-Family Houses For Sale: United States (SA, Thous) New 1-Family Houses For Sale: Completed Units (NSA, Thous) Source: Census 30

31 More rental households live in properties with 1-4 units than 5+ units. 1-4 unit properties are the predominant source of rental housing 100.0% 80.0% Division of Rental Households Between 1-4 Unit Properties and 5+ Unit Properties 1-4 Units 5+ Units 60.0% 40.0% 20.0% 53.8% 54.0% 54.7% 54.9% 54.8% 46.2% 46.0% 45.3% 45.1% 45.2% 18.7 Million 16.0 Million 18.9 Million 16.1 Million 19.6 Million 16.3 Million 20.3 Million 16.7 Million 20.7 Million 17.1 Million 0.0% Note: A condominium is classified according to number of units in the entire structure, even if eligible for mortgage financing as single-family property Source: U.S. Census Bureau American Community Survey (Mobile Homes omitted) 31

32 Ratios of national HPI to income* and rents approach historical norms (Indexed, 1988 Q1 = 100) '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 HPI over Median Income HPI over Median Asking Rents *Median household income estimated by Fannie Mae from 2009 on. Source: S&P Case-Shiller, Census 32

33 Commercial Real Estate: Signs of Recovery? 33

34 Apartment prices leading commercial real estate recovery. Moody's/REAL Commercial Property Price Index (2000Q4=100, NSA) Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 Apartments Industrial Office Retail Source: Moody s/real 34

35 Multifamily housing starts remain near record lows... Multifamily Housing Starts (Thousands of Units, SAAR) '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Census 35

36 while rental occupancy demand has picked up. Multifamily Housing Market Index: Rental Occupancy: Class B Apartments Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 Current Demand Demand Projected 6 Months Forward Source: National Association of Home Builders 36

37 Commercial real estate loan performance improving at banks. Commercial Real Estate Loans Non-current Rate 8.0% 7.0% 6.0% 5.0% 4.0% Source: FDIC 3.0% 2.0% 1.0% 0.0% 1991:Q1 1991:Q4 1992:Q3 1993:Q2 1994:Q1 1994:Q4 1995:Q3 1996:Q2 1997:Q1 1997:Q4 1998:Q3 1999:Q2 Multifamily 2000:Q1 2000:Q4 2001:Q3 Other Commercial Real Estate 2002:Q2 2003:Q1 2003:Q4 2004:Q3 2005:Q2 2006:Q1 2006:Q4 2007:Q3 2008:Q2 2009:Q1 2009:Q4 2010:Q3 2011:Q2 37

38 The Banking Sector and Real Estate Finance: Bank Consolidation 38

39 Consolidation of the banking industry that started in the nineties remains in place. Share of Industry Assets 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 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-09 Jan-10 Jan-11 Assets > $10 Billion Assets $1 Billion - $10 Billion Assets $100 Million - $1 Billion Assets < $100 Million Source: FDIC 39

40 Non-loan asset growth positive, but very slow. Year-over-Year Growth in Nonloan Assets 25% 20% 15% 10% 5% 0% -5% Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Source: FDIC 40

41 Banks bulk up on liquid assets after the crisis. Q Q All Other $559,456,596 13% Cash and Cash Due $400,646,806 9% All Other $831,399,725 14% Cash and Cash Due $1,066,341,065 18% Goodwill and Intangibles $367,731,512 9% Goodwill and Intangibles $373,900,175 6% REO $6,087,984 0% Trading Account Assets $679,456,166 16% Federal Funds Sold & Reverse Repurchase Agreements $572,918,471 14% Securities $1,646,111,302 39% REO $46,568,920 1% Trading Account Assets $732,447,311 12% Federal Funds Sold & Reverse Repurchase Agreements $421,528,673 7% Securities $2,406,060,859 42% Source: FDIC 41

42 Bank loans still in decline. Year-over-Year Growth in Loan Assets 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 3/31/2008 6/30/2008 9/30/ /31/2008 3/31/2009 6/30/2009 9/30/ /31/2009 3/31/2010 6/30/2010 9/30/ /31/2010 3/31/2011 6/31/2011 Source: FDIC 42

43 Real estate loan share is flat since the beginning of the crisis. Q Q Other 490,216,088 8% Other 546,195,562 8% Loans to Individuals 842,908,642 14% SF Residential 1,869,190,871 32% Loans to Individuals 1,187,506,640 18% SF Residential 2,047,775,775 33% C&I Loans 1,740,360,699 29% Farm loans 52,696,348 1% Multifamily 107,474,944 2% Commercial Real Estate* 810,628,901 14% C&I Loans 1,479,937,362 23% Farm loans 54,780,824 1% Multifamily 156,289,409 2% Commercial Real Estate* 954,695,021 15% Source: FDIC 43

44 Market concentration in the banking industry has increased. Total Deposits, Market Share Bank of America 9.1% Bank of America 13.3% Citigroup 8.5% All Others 51.6% Citigroup 11.3% JPMorgan Chase 7.9% All Others 55.6% Wells Fargo 4.5% JPMorgan Chase 13.0% Wells Fargo 10.9% Source: SNL Financial 44

45 Increased liquidity needs and reduced risk appetite lowers bank loan to deposit ratios. 100% Loan to Deposit Ratio by Bank Size % 60% 40% 20% 0% 76.3% 62.9% 99.1% 79.2% 102.7% 86.8% 90.7% 78.2% 81.3% 73.4% $1T + $50B - $1T $5B - $50B $500M - $5B < $ Asset Size Source: FDIC 45

46 Mortgage production has consolidated through the crisis. Originator Market Share Rank Lender Share% Rank Lender Share (%) 1 Countrywide 15.5% 1 Wells Fargo 23.4% 2 Wells Fargo 13.3% 2 Bank of America 18.3% 3 WaMu 6.6% 3 Chase 9.7% 4 CiF 6.2% 4 Ally/ResCap (GMAC) 4.1% 5 Chase 5.8% 5 CiFMortgage, Inc. 4.0% 6 GMAC/ResCap 5.8% 6 U.S. Bank Home Mortgage 3.3% 7 Bank of America 5.6% 7 PHH Mortgage 2.9% 8 Wachovia (& Golden West) 3.5% 8 SunTrust Mortgage, Inc. 1.7% 9 IndyMac 3.0% 9 Quicken Loans, Inc. 1.7% 10 EMC Mortgage 2.4% 10 Provident Funding Assoc 1.6% Top % Top % Top % Top % Source: National Mortgage News 46

47 Mortgage servicing is highly concentrated Rank Bank FV of MSR ($000) Market Share 1 Wells Fargo & Company $ 12,511, % 2 JPMorgan Chase & Co. $ 6,452, % 3 Citigroup Inc. $ 4,339, % 4 Citicorp $ 4,338, % 5 Bank of America Corporation $ 2,806, % 6 First Horizon National Corporation $ 1,314, % 7 U.S. Bancorp $ 1,118, % 8 SunTrust Bank Holding Company $ 657, % 9 BB&T Corporation $ 451, % 10 Fifth Third Bancorp $ 438, % Top 5 Top 10 $ 30,446, % $ 34,426, % 2011 Rank Bank FV of MSR ($000) Market Share 1 Wells Fargo & Company $ 17,071, % 2 Bank of America Corporation $ 15,560, % 3 JPMorgan Chase & Co. $ 13,093, % 4 Citigroup Inc. $ 4,690, % 5 Ally Financial Inc. $ 3,774, % 6 U.S. Bancorp $ 2,073, % 7 PNC Financial Services Group, Inc. $ 1,755, % 8 SunTrust Banks, Inc. $ 1,537, % 9 BB&T Corporation $ 1,043, % 10 MetLife, Inc. $ 1,028, % Source: SNL Financial Top 5 Top 10 $ 54,188, % $ 61,626, % 47

48 Consolidation has increased among Ginnie Mae issuers post-crisis. Top Ginnie Mae Issuers Rank Issuer Share% Rank Issuer Share (%) 1 Wells Fargo Home Mortgage 30.4% 1 Bank of America, NA 33.6% 2 Countrywide 15.3% 2 Wells Fargo Home Mortgage 31.2% 3 CiFMortgage 9.4% 3 JP Morgan Chase 8.5% 4 JP Morgan Chase 6.0% 4 GMAC Mortgage 4.4% 5 GMAC Mortgage Corp. 4.6% 5 U.S. Bank 3.6% 6 U.S. Bank/Firstar Bank 3.9% 6 PHH Mortgage 2.8% 7 NaFonal City Mortgage Co. 3.5% 7 MetLife Bank 1.7% 8 WaMu 3.3% 8 Flagstar Bank 1.7% 9 Taylor, Bean & Whitaker 2.4% 9 CiFMortgage 1.5% 10 SunTrust Mortgage 2.2% 10 SunTrust Mortgage 1.3% Top % Top % Top % Top % Top 5 GNMA issuers more concentrated than top 5 originators even though all are eligible GNMA issuers Source: National Mortgage News 48

49 Banks are gradually reducing home equity lines from their balance sheets. $ Millions $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1987Q4 1988Q3 1989Q2 1990Q1 1990Q4 1991Q3 1992Q2 1993Q1 1993Q4 1994Q3 1995Q2 1996Q1 1996Q4 1997Q3 1998Q2 1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4 2006Q3 2007Q2 2008Q1 2008Q4 2009Q3 2010Q2 2011Q1 Home Equity Lines of Credit on Bank Balance Sheets Source: FDIC 49

50 Distressed and cash sales combined with lower risk appetite reduces purchase mortgage volumes. $ billion 4,000 3,500 Refinance Purchase 3,000 2,500 2,000 1,500 1, History in blue, forecast in red Sources: HUD and Fannie Mae 50

51 Market composition returning to the Old Normal? Average percent shares of dollars of originations % 6% 18% 3% 13% 15% 1% 22% 33% 19% 36% 27% 39% 24% 30% Bank Portfolio Private Label Securities Ginnie Mae Freddie Mac Fannie Mae Sources: S&P, Fiserv, Census Bureau, Bureau of Labor Statistics, FHFA 51

52 Some Historical Perspective Each Cycle is a Little Different but Human Nature is the Same 52

53 Credit cycles Fear, greed, and reaching for yield. 4 Baa - Aaa Spread H 3 H H Percent 2 H H H 1 L L L L L 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Source: Moody s 53

54 Market shares of residential mortgages : role of government as credit risk holder is increasing again. Sources: Federal Reserve and Fannie Mae analysis 54

55 Amortization grew after the depression. Life Insurance Companies Period Non- Amortized Partially Amortized Fully Amortized % 58.8% 21.3% % 61.5% 14.3% % 52.8% 26.4% % 21.0% 76.7% % 3.5% 95.4% Commercial Banks Period Non- Amortized Partially Amortized Fully Amortized % 44.1% 14.9% % 38.7% 10.3% % 35.7% 13.6% % 20.7% 69.0% % 27.3% 69.0% Much of this change came during the late thirges when the adopgon of fully amorgzed loans in HOLC and FHA operagons increased the popularity of this type of mortgage and when both lenders and borrowers, in the wake of depression experience with straight loans, began to recognize the importance of regular amorgzagon. Savings and Loan Associations Period Non- Amortized Amortized % 94.9% % 93.3% % 99.7% % 99.8% % 99.2% Source: Capital Formation in Residential Real Estate, Leo Grebler, David Blank, and Louis Winnick, NBER

56 Regional importance on average interest rates for residential mortgages outstanding diminished between 1890 and Region New England 5.5% 5.8% 5.93% 5.38% Middle Atlantic 5.5% 5.7% 5.65% 5.47% East North Central 6.8% 6.1% 6.18% 5.45% West North Central 7.8% 6.5% 6.09% 5.48% South Atlantic 6.3% 6.3% 6.25% 5.63% East South Central 7.0% 6.4% 6.59% 5.64% West South Central 9.0% 7.9% 6.99% 5.97% Mountain 9.3% 7.5% 7.02% 5.79% Pacific 8.6% 6.8% 6.34% 5.73% United States 6.2% 6.1% 6.18% 5.55% Difference: Maximum Less Minimum 380bp 220bp 137bp 59bp Perhaps the most important long- term change in the structure of residengal mortgage interest rates has been the decline in regional differengals. It has resulted both from the improvement of lending faciliges and the decrease in risks of mortgage lending in what were young regions in 1890 and from greater mobility of mortgage funds, through which local markets became less isolated. Source: Capital Formation in Residential Real Estate, Leo Grebler, David Blank, and Louis Winnick, NBER

57 Today - return of private capital depends on private sector expectation for house prices Price (CoreLogic National HPI SA, excluding distressed sales) to Median Family Income (Base Year = 2000) Median Asking Rent (SA)/Median Family Income, Base Year = 2000 Sources: Census Bureau, CoreLogic, Moody s Analytics, DLX Haver 57

58 and clarity regarding capital and risk. The boundaries of the government's implicit and explicit assumption of mortgage credit risk Favored consumer products, allowable products, and demand for hard money / private lenders Capital requirements by Timing Product type Function Type of entity 58

59 Policy: All You Ever Asked For And More 59

60 Monetary policy is easy. 350 % Short rates remain low and yield curve is steep /1/07 4/1/07 7/1/07 10/1/07 1/1/08 4/1/08 7/1/08 10/1/08 1/1/09 4/1/09 7/1/09 10/1/09 1/1/10 4/1/10 7/1/10 10/1/10 1/1/11 4/1/11 7/1/11 10/1/11 Sources: Federal Reserve Board, Bloomberg 60

61 Fiscal policy unpalatable choices from here on. Federal Government Receipts and Outlays as a Percent of GDP Receipts Outlays Deficit Historical 1946 to Standard deviation Forecast 2011 to Policy Choices Higher Taxes Less Spending Growth Inflation Source: Historical and Forecast from OMB FY 2012 Budget 61

62 U.S. fiscal policy threatens our economic status. Underlying fiscal balance Losing ground relative to other developed economies OECD projections of fiscal balances and debt assuming modest cuts As percentage of nominal GDP (unless otherwise specified) Financial balances Net financial liabilities Gross financial liabilities Long term interest rate (%) Greece Iceland Ireland Italy Japan Portugal Spain United Kingdom United States Euro Area OECD Source: OECD Economic Outlook, Volume 2011 Issue 1 - No. 89, Table

63 Net benefit to tax payers by income quartile shows strong progressivity in current tax system. $100,000 Government Spending Received Minus Taxes Paid Per Household, 2004 $80,000 $60,000 $40,000 $20,000 $0 -$20,000 -$40,000 -$60,000 Bottom 20 Percent Second 20 Percent Third 20 Percent Fourth 20 Percent Top 20 Percent Income Quintile Bottom 20% Second 20 % Middle 20% Fourth 20% Top 20% 2004 Upper Income Bound $23,700 $42,305 $65,001 $99,502 No Upper Bound Source: Tax Foundation Working Paper No. 1, March

64 State and local fiscal challenges also are significant. Cyclical Challenges Recession led to a decline in Income taxes Sales taxes RE taxes and fees Increased demand for Healthcare Education Social services Close the gap with One-time cuts and funds Federal stimulus Tax and fee increase Structural Problems Pension Liability Union contracts with defined benefit plans Decline in share of plans that are fully funded Aggressive return assumptions Healthcare costs are ballooning Flexibility under Medicaid rules State and local employees Impact on future tax rates and services affects current ability to attract jobs 64

65 James Madison writing in Federalist 62 (1788): In another point of view, great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking, the success and profit of which may depend on a continuance of existing arrangements. What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government? In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy. 65

66 Contact Information fanniemae.com/portal/research-and-analysis/ Doug Duncan, VP & Chief Economist Fannie Mae 3900 Wisconsin Avenue, NW Mail Stop 1H-2N/01 Washington, DC (o) (c) (fax)