S&P/Case Shiller index Home price index Index Jan. 2000=100, 3 month ending 240 220 200 180 160 10-metro composite 140 120 20-metro composite 100 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: Standard & Poor's and Fiserv, Inc., Moody s Analytics.
Median existing single-family home price United States Percent change, year ago 20 10 0-10 -20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: National Association of Realtors, Moody s Analytics.
Single-family housing starts United States Millions of units 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: U.S. Census Bureau, IHS Global Insight.
Median single-family home sales United States Percent change, year ago 60 40 20 Existing homes 0-20 -40 New homes -60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: National Association of Realtors, Moody s Analytics.
Housing inventory Existing, Single-family homes, United States Millions 4.0 3.5 Available homes for sale (L) Months 12 10 3.0 2.5 2.0 1.5 Months supply (R) 8 6 4 1.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2 Sources: NAR, Moody s Analytics.
Delinquency rate Percent of loans past due vs. those in foreclosure Percent 3.8 3.6 3.4 3.2 3.0 2.8 2.6 Percent of loans past due 30 days (L) Percent in foreclosure (R) Percent 1.6 1.4 1.2 1.0 0.8 0.6 0.4 2.4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.2 Sources: Mortgage Bankers Association, Moody s Analytics.
Eleven million homes are still under water Number of mortgages, millions 16 2010 14 12 10 Negative equity 23% 8 6 4 2 0 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Others 72% Near negative equity 5% Source: CoreLogic.
Shadow housing inventory equals nine months supply As of January 2011 Number of mortgages, millions 2.5 2.0 Pending serious delinquency inventory Pending foreclosure inventory Pending REO inventory 1.5 1.0 0.5 Source: CoreLogic. 0 2006 2007 2008 2009 2010 2011
Homes with negative equity by state Percent of homes underwater, Q4 2010 California is 5 th most underwater, 32% U.S. average is 23% Source: CoreLogic. Least underwater (10% or less) Second tier Third tier Most underwater (32% or more) Note: States with no color/shading (Louisiana, Maine, Mississippi, S. Dakota, Vermont, W. Virginia, and Wyoming) did not have data available.
Repeat home sales index 12 month change Single-family excluding distressed series
Repeat home sales index 12 month change Single-family combined
30-year fixed mortgage rate United States Percent 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: Mortgage Bankers Association, Moody s Analytics.
Housing affordability United States Index 200 180 160 140 120 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: U.S. Census, Moody s Analytics.
Mortgage principal and interest payments Monthly payment amounts US$ 1200 1100 1000 900 800 700 600 00 01 02 03 04 05 06 07 08 09 10 11 Sources: National Association of Realtors, Moody s Analytics.
Homeownership rates by age United States Percent 44 42 Less than 35 years old (L) 65 years and over (R) Percent 82 81 80 40 79 38 78 77 36 92 94 96 98 00 02 04 06 08 10 76 Sources: U.S. Census, Moody s Analytics.
Number of applications for government (FHA and VA) mortgages Composite index Index March 1990 = 100 700 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 Sources: Mortgage Bankers Association, Moody s Analytics.
Government-backed mortgage originations As percent of total single-family originations Percent 25 20 15 10 5 0 91 93 95 97 99 01 03 05 07 09 Sources: U.S. Office of Federal Housing Enterprise Oversight, Moody s Analytics.
Freddie and Fannie s share of residential mortgage debt outstanding Percent 50 45 40 35 30 25 20 91 93 95 97 99 01 03 05 07 09 Sources: FHFA Annual Report to Congress, Enterprise financial statements, Federal Reserve Board.
Changing landscape of the U.S. mortgage market Percent of home mortgage loans securitized 80 70 60 50 40 30 20 10 0 2006 2007 2008 2009 2010 Percent of home mortgage loans held or securitized by government agencies and GSEs 60 50 40 30 20 10 0 2006 2007 2008 2009 2010 Sources: Federal Reserve, Milken Institute. Note: Estimates based upon single-family home mortgages.
GSEs suffered significant losses in 2008 to 2010 Net income, US$ billions Fannie Mae 20 10.1 Freddie Mac 4.4 5.9 8.1 10 3.7 3.9 5.0 6.3 3.2 4.8 2.6 2.1 4.1 2.3 3.1 0-2.1-10 -20-14.0-14.0-21.6-30 -40-50 -50.1-60 -58.7-70 -72.0-80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: Fannie Mae, Freddie Mac, FHFA, Inside the GSEs.
Agency originations by credit score Source: Lender Processing Services.
Agency originations by loan-to-value ratio Source: Lender Processing Services.
Households shedding debt Financial obligations ratio Homeowners debt as percent of disp. income Percent 12.0 10.0 Mortgage debt 8.0 6.0 Consumer debt 4.0 90 92 94 96 98 00 02 04 06 08 10 Sources: Federal Reserve Board, Moody s Analytics.
Interest rates Fed funds rate vs. 10-year bond yield Percent 7 6 5 10-year T- note yield 4 3 2 1 Federal funds rate 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: Federal Reserve Board, IHS Global Insight.
Job market turning the corner Non-farm employment, United States Percent change, year ago 4.0 Difference from previous month 600 2.0 0.0-2.0 Absolute change, ths. (R) 400 200 0-200 -400-4.0-6.0 00 01 02 03 04 05 06 07 08 % change (L) 09 10-600 -800-1000 Sources: Bureau of Labor Statistics, IHS Global Insight.
Illusion of Wealth Effect Assets of Households & Nonprofit Organizations U.S. Asset values ran up over 50% in 4 years!
Traditional Economics Opines... In reality asset prices are powerful inputs to the goods and service economy Example: Home Builder Inputs: Land + Lumber + Copper + Labor = X Outputs: Price of Homes = X + Profit Wrong asset prices distort the economy
Unsustainable Asset Prices Meant Unsustainable Consumption 1 MEW is calculated as the sum of (1) gross cash out amounts and (2) the change in home equity loans outstanding. The data is the product of a research project undertaken by Dr. A. Greenspan and Dr. J. Kennedy at the Federal Reserve.
De-Leveraging Is Self-Reinforcing, Hence Paulson s Financial Bazooka GE Stock at $6 Shareholders to Management: Shrink the balance sheet of GECC (or we ll get a new management that will) Loan Officers Call in loans Term lines-of-credit are terminated Medium Business Emergency de-leveraging Cutting costs is a life and death matter Laid-off Employee Personal balance sheet de-levers (could be forcible - foreclosure) Reduce consumption
Policy Choices Upon Arrival of the Minskian Moment Leverage/ Debt Management Strategies Private Sector Solution Bankruptcy/foreclosure Forced liquidation of assets Debt forbearance Forgive principal/interest Reschedule payments Socialized Solution Aid provided to borrowers Micro: FHA lending Macro: Keynesian stimulus Aid provided to lenders TARP Zero rates Run the printing presses: QE2 Policy Results Asset prices collapse Regulatory capital evaporates Banks fail/lending seizes up Civil unrest Labor/capital rapidly re-shuffled DEPRESSION Asset prices are impeded from adjusting Lenders/borrowers given breathing room Government borrowing mushrooms Labor/capital remains distorted INFLATION
Treasury Yields Lower Than Where They Were at a Comparable Point in the Great Depression Treasury Rates Dynamics Source: Bloomberg, Federal Reserve
Banks Have the Capital and the Liquidity to Lend Banks should be willing lenders against good collateral
...But We re Not Seeing Non-Conforming Mortgage Origination
What Happens When Mr. Belvedere Wants to Buy His Dream House? Mr. Belvedere wants to put down $1 million on a $2 million dream house Bank should be pleased to originate: Issue 5-Year CD at 2% Offer Mr. Belvedere 6% Mortgage 50% LTV 4% Net-interest margin (NIM) Asset Liability 6% Non-conforming 2% Certificate Mortgage of Deposit Instead of saying yes, bank asks for: Proof of Income Verification of This Notarization of That Grade school report card
Mr. Belvedere Realizes the Bank Doesn t Want to Lend! In fact, no bank wants to originate the loan No money center bank No regional bank No community bank No start-up bank Theory #1: Mr. Potter theory that bankers are bad Theory #2: It is not economic for banks to lend. But why?
Mortgage Conundrum Explained Legacy loans priced at discount to new issue market Invisible hand steering mortgage capital to secondary market (and away from primary market)
Mortgage Conundrum: Fundamental Cause Surplus of Underwater Properties Excess/Overhang of Mortgage Loans Foreclosure process full of friction Banks exercise restraint in foreclosing Government empowers borrowers against lenders Court system backed up on foreclosure filings Inefficient liquidation of property has led to inefficient mortgage pricing
Providing Zero Rate Capital Further Distorts the Economy Consider a game of monopoly where two of the players get 0% loans from the banker and two of the players do not Price of Boardwalk and Park Place gets bid higher Those that receive the 0% loans have their prospects accreted while the others have their prospects diluted EM countries receiving capital inflows (Brazil) benefit at expense of those countries that do not (Egypt, Tunisia)
Ending Fiscal Stimulus: How Do You Squeeze a Tuna Fish into a Sardine Can? If the stock of Federal debt normalizes at 100% debt/gdp and Treasury rates normalize at 5%, then debt service costs will more than triple to 5% of U.S. GDP Can we get Federal spending back home to Kansas at 21% of GDP? The Federal Government ends up short 6.3% of U.S. GDP, i.e. $900 Billion per year
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 2008 Q2 2008 Q3 2008 Q4 GSE & GNMA Market Share Fell When Subprime Boomed; Today GSEs & GNMA Are Main Source of Mortgage Funds 90% 80% 70% 60% 50% 40% 30% MBS Share Issuance (Percent of MBS Issuance) Annual (1985 2007) Quarterly (2008) Conventional, Prime, Fixed-Rate Lending Is Mainstay of Market (1985-2003) Subprime, Non-Traditional Lending Boom (2004-2007H1) 4 th quarter 2008: Subprime Crisis, Private-label MBS Collapse (2007H2-2008) FRE & FNM 62% Ginnie Mae 37% 20% 10% 0% Private-Label 1% Ginnie Mae Private-Label Freddie Mac and Fannie Mae Office of the Chief Economist Source: Inside MBS & ABS (The 2008 Mortgage Market Statistical Annual - Volume II), Inside MBS & ABS (April 25, 2005, July 11, 2008 issues, and January 9, 2009).