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

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, 2008 4:00 PM 5:15 PM

Looking for a bottom Economists say the economy isn t at its low point yet, and house prices likely won t get there until 2009. Does this feel like the bottom of a downturn? Yes: 27% 1 st half 2010 2 nd half 2009 When will home prices hit bottom? 6% 29% No: 73% 1 st half 2009 2 nd half 2008 17% 38% 1 st half 2008 4% Source: The Wall Street Journal, April 11, 2008.

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 1,250 2006 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 Q1 2007 Q2 2007 Q3 2007 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

Homeownership rate reaches historical high in 2004 Percent 70 69.2% in September 2004 68 66 64 62 67.8% in December 2007 60 58 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: U.S. Census Bureau.

Homes for sale: existing and new single-family homes 1989 2007 4.8 4.2 3.6 3.0 2.4 1.8 1.2 0.6 0.0 Source: U.S. Census Bureau. 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Millions Millions 0.8 0.7 Existing homes (Left axis) 0.6 0.5 0.4 0.3 New homes (Right axis) 0.2 0.1 0.0

Home prices peak in 2006 Index, January 1987 = 100 600 500 California median home price 400 300 200 100 0 1987 S&P/Case-Shiller home price index 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 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 2003 2004 2005 2006 2007 2008

Home mortgage share of household liabilities reaches a new high in 2007 Percent 75 70 65 60 55 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Source: Federal Reserve.

U.S. households leverage has increased rapidly since 1980 Percent 150 125 Household debts as % of disposable personal income 100 75 50 1958 1964 1970 1976 1982 1988 1994 2000 2006 Sources: Federal Reserve and U.S. Census Bureau.

Mortgage originations by product 4.6% Subprime and Alt-A shares quadruple between 2001 and 2006, then fall in 2007. 2.6% 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. 2006 $3.0 trillion 2007 $1.8 trillion Conventional, conforming prime Jumbo prime Subprime Alt-A FHA & VA Home equity loans

2/28 ARMs dominate subprime home-purchase loan originations in 2006 Fixed 9% 30Yr ARM Balloon W/ 40-50-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.

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% 900 600 300 0 37% 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

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%

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

Private-label mortgage-backed security issuance has fallen sharply US$ billions 200 Subprime and other Alt-A 150 100 52 30 34 19 37 16 8 20 14 Prime jumbo Freddie Mac and Fannie Mae 1 7 4 50 85 94 99 97 0 March 2007 $191 billion June 2007 $181 billion Sept. 2007 $137 billion Dec. 2007 $109 billion Source: Inside Mortgage Finance.

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.

Surge in amount and diversity of U.S. asset-backed securities outstanding US$ trillions 14 12 10 8 6 4 2 Mortgage ABSs (GSE-guaranteed) Asset-backed commercial paper Credit card and consumer loan ABSs Mortgage ABSs (private label) Corporate and foreign ABSs 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: Federal Reserve. 2007Q3

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.

Mortgage rates Percent 9.0 8.0 7.0 30-yr fixed 6.0 5.0 4.0 3.0 2.0 1-yr ARM 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: Mortgage Banker s Association and Moody s Economy.com.

Treasury and CMBS yields have recently moved in opposite direction 200-day rolling correlation coefficient 1.0 0.6 U.S. CMBS AAA yield and 1-3-month Treasury yield 0.2-0.2-0.6 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.

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.

Growing share of subprime loans in foreclosure Millions of loans 7 Percent 3.5 6 5 4 Percent in foreclosure (R) Loans serviced (L) 3.0 2.5 3 2.0 2 1 1.5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1.0 Source: Mortgage Bankers Association.

Despite Federal funds rate cuts, mortgage rates remain relatively flat 4.0 3.5 3.0 2.5 2.0 1.5 Freddie Mac 30-year fixed mortgage rate Federal funds rate 8.0 7.0 6.0 5.0 4.0 3.0 1.0 0.5 Spread 2.0 1.0 0.0 January 2007 June 2007 November 2007 April 2008 0.0 Sources: Federal Reserve and Freddie Mac.

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

Prime and subprime mortgage originations by FICO score Percent of total originations 16% Subprime 14% 12% Prime 10% 8% 6% 4% 2% 0% 0-459 480-499 520-539 560-579 600-619 640-659 FICO score 680-699 720-739 760-779 800-900 Source: LoanPerformance.

Estimates of losses from subprime crisis Date 7/19/2007 10/17/2007 11/8/2007 11/15/2007 11/16/2007 12/19/2007 1/31/2008 2/11/2008 3/3/2008 3/3/2008 3/10/2008 3/13/2008 Source: Various. Estimate $50-100 billion $100-200 billion $150 billion $400 billion $400 billion $200-300 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

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, 2008. 8.3 7.5 7.3 6.6 63 14.9 12.6 12.4 9.7 9.1 31.7 38.0 40.9 The collapse of credit markets in the United States, driven by the subprime loan crisis, has led to major losses for banks worldwide.

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

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.

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

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: 87 0 20 40 60 80 100 Percent Source: Los Angeles Times, June 14, 2007.

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

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

CMBS slides relative to Libor LOAS 1,200 1,000 800 600 400 200 0 Note: Monthly Data from July 2002 to March 2008. 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 44 76 98 170 Standard deviation 47 89 119 155 Current (3/31/2008) 251 609 819 769 CMBS-AAA CMBS-AA CMBS-A CMBS-BBB

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 16 12 8 4 0 Source: Bloomberg. Mar-07 Subprime Total Prime

18 16 14 12 10 8 6 4 2 0 Alt-A fixed rate mortgage 60-day delinquencies 60D+ delinquencies 20 0 6 12 18 24 30 36 Weighted average loan age Source: UBS. 2000 2001 2002 2003 2004 2005 2006 2007

Alt-A adjustable rate mortgage 60-day delinquencies 60D+ delinquencies 20 18 2000 2001 16 2002 14 2003 12 2004 2005 10 2006 8 2007 6 4 2 0 Source: UBS. 0 6 12 18 24 30 36 Weighted average loan age

Treasury holdings as a percentage of reserve bank credit 0.95 0.9 0.85 0.8 0.75 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-08 0.79

S&P/Case-Shiller home price Index for three California cities Change measured from peak to January 2008 300 Los Angeles San Diego 250 San Francisco 20-City 200 150-18% -21% -16% -13% 100 50 0 Jan -00 Jan -01 Jan -02 Jan -03 Jan -04 Jan-05 Jan -06 Jan-07 Jan -08 Source: S&P/Case-Shiller.

Rate of delinquencies and foreclosures on single-family mortgage loans Delinquent or foreclosed, % 8 7.5 7 6.5 6 5.5 5 4.5 4 3.5 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

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 150 140 130 Composite Average Average 120 110 100 Composite 90 Source: National Association of Realtors. Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

NAR Western Region Housing Affordability Index 125 115 105 95 85 75 65 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 150 140 130 120 110 100 90 80 NAR South Region Housing Affordability Index 160 150 Index Average 140 130 120 110 100 90 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 200 190 Index Average 180 170 160 150 140 130 120 Jan-05 Jan-05 Jan-06 Jan-06 Jan-07 Jan-07 Jan-08 Jan-08

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

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

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

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

Average cap rate by property type 11% 10% 9% 8% 7% 6% 5% Source: Real Capital Analytics. 1Q 2001 2Q 2001 3Q 2001 4Q 2001 1Q 2002 2Q 2002 3Q 2002 4Q 2002 1Q 2003 2Q 2003 3Q 2003 4Q 2003 1Q 2004 2Q 2004 3Q 2004 4Q 2004 1Q 2005 2Q 2005 3Q 2005 4Q 2005 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007 Multi-Family Industrial Office Retail

CMBX historical spreads Source: Markit.

CMBX historical spreads (continued) Source: Markit.

ABX historical spreads Source: Markit.

ABX historical spreads (continued) Source: Markit.