an economic prognostication for 2008 massachusetts mortgage bankers association west newton, ma may...
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An Economic Prognostication for 2008
Massachusetts Mortgage Bankers AssociationWest Newton, MAMay 16, 2008
Frank E. Nothaft
Chief Economist
2
Office of the Chief Economist
Recession Risk, Housing Contraction Worsen
1-in-2 chance of recession in 2008 Maybe in recession already; fiscal stimulus propels growth in second
half: Economic growth 1.5% in 2008 Job gain falls short of labor force growth; Unemployment rate up,
averages 5.2% in 2008 Core inflation at upper end of range preferred by policy makers Less housing starts, sales in 2008; house values down
Credit quality has deteriorated 2006 and 2007 subprime vintages have high early-payment defaults More than half of foreclosure starts since 2006 were subprime loans Banks have tightened underwriting on both prime and subprime
Risks to the outlook How much will liquidity constraints affect broader economy?
Current liquidity problems affecting jumbo, Alt-A markets as well as subprime Energy: high oil and natural gas prices act like a tax on the economy
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Office of the Chief Economist
Prime Conforming Mortgage Rates Remain Low By Historical Standards
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4
5
6
7
8
9
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20083
4
5
6
7
8
9
Source: Freddie Mac’s Primary Mortgage Market Survey®
1-Year, ARM Rate
30-Year,Fixed Rate
Weekly Mortgage Interest Rate (Percent)
Forecast
4
Office of the Chief EconomistSource: Inside MBS & ABS
Private-Label Mortgage-Backed Security Issuance Has Fallen Sharply
$92$99$99$94$85
$1
$14$20$19 $4
$0
$8$37
$34$1
$1$6
$16
$30$52
$0
$50
$100
$150
$200
March-2007 June-2007 September-2007 December-2007 March-2008
Dollar Amount of Issuance (Billions)
$191 Billion $137 Billion$181 Billion $95 Billion
Subprime & OtherAlt-APrime JumboFreddie Mac & Fannie Mae
Prime Jumbo
Alt-A
Freddie Mac & Fannie Mae
Subprime & Other
$109 Billion
5
Office of the Chief Economist
Highest Percentage of Banks Tightening Home Mortgage Standards Since 1990
-20
0
20
40
60
80
1991 1994 1997 2000 2003 2006
-20
0
20
40
60
80
Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: May 5, 2008)
Net Percentage of Banks Tightening Mortgage Standards During Three Previous Months
Subprime
Prime
6
Office of the Chief Economist
Single-family Building Hit a Record in 2005, but Fell About 60% Since Then
400
700
1,000
1,300
1,600
1,900
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
1- to 4-Family Housing Starts (thousands of units, SAAR)
Sources: Bureau of Census, Freddie Mac
– Recession
Third Quarter 2005 record: 1.8 million units
Forecast
First Quarter 2008: 0.7 million units
7
Office of the Chief Economist
Existing Home Sales Are Down 35% in Massachusetts from Their 2005 Peak
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
40
60
80
100
120
140
160
Source: National Association of Realtors (Existing Single-Family Houses, Apartment Condos & Co-ops); New England composite is the sum of their six states’ existing home sales: CT, MA, ME, NH, RI, VT
U.S. Existing Home Sales (Left Scale, 000s) Massachusetts Existing Home Sales (Right Scale, 000s)
Home Sales Change (2005:Q3 – 2008:Q1)
United States -31%Massachusetts -35%
Peak
Lowest MA Sales in 12 Years
8
Office of the Chief Economist
Existing Home Sales Are Down Everywhere (except Alaska)
Existing Home Sales Nationwide Down 31%(2005Q3 to 2008Q1)Down more than 40%
Down less than 20%
Down 20-40%
Percent change in existing home sales Fourth quarter 2005 through Fourth quarter 2007
Source: National Association of Realtors
-52%
-42%
-48%
-45%
-65%
-57%
-47%
Up3%
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Office of the Chief Economist
Time-On-Market Up in Most Markets
0 30 60 90 120 150 180
1
2
3
4
5
6 Dec-07
Dec-06
Dec-05
Miami, FL
Metropolitan Statistical Areas
Pheonix,AZ
Tampa, FL
Chicago, IL
Detroit, MI
Washington /Baltimore
Up 71 days
Up 68 days
Up 57 days
Up 47 days
Up 40 days
Down 5 days
Days
0 30 60 90 120 150 180
1
2
California
State
Massachusetts Up 32 days
Up 23 days
Source: National Association of Realtors
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Office of the Chief EconomistSource: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annual Growth Rates for 4Q2007)
Home Sales Prices Fell in Eighteen States Over 2007
United States –1.1%
> 5% Annual Change
< 0% Annual Change
0 – 5% Annual Change
DC
Pacific -4.6%
Mountain-0.9%
West South Central3.2%
East South Central
2.1% South Atlantic -0.9%
Middle Atlantic1.7%
New England-1.5%
East North Central-2.9%
West North Central0.2%
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Office of the Chief EconomistSource: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 4Q2007)
Forty-eight States Had Falling Prices in the Fourth Quarter 2007
Pacific –18.8%
Mountain-13.5%
West South Central-3.7%
East South Central-4.0%
South Atlantic -7.7%
Middle Atlantic-2.5%
New England-8.2%
East North Central-12.4%
West North Central-7.5%
United States: -10.0%(4th Quarter Annualized Growth)
< 0% Quarterly Change
0 – 5% Quarterly Change
DC
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Office of the Chief Economist
Job Loss Is the Main Hardship Reason Among Delinquent Prime Borrowers
Hardship ReasonUnemployment or curtailment of income 43.0%
Illness or Death in the Family 25.5%
Excessive obligation 16.2%
Marital difficulties 6.6%
Property problem or casualty loss 2.0%
Extreme hardship 0.4%
Inability to sell or rent property 1.7%
Employment transfer or military service 0.9%
All other reasons 3.7%
2007
Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects. Data cover only prime conventional conforming loans.
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Office of the Chief Economist
U.S. Unemployment Rate Averages 5.2% in 2008
2
3
4
5
6
7
8
9
10
19
90
19
91
19
92
19
93
19
94
19
95
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96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Unemployment Rate (Percent)
Forecast
Sources: U.S. Department of Labor, Freddie Mac
– National Recession
United States
Massachusetts
MarchUS 5.1%
MA 4.4%
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Office of the Chief Economist
Employment Growth Weakest In Markets With Flat or Falling House Values
U.S. employment up 0.4%Massachusetts: up 0.7%
0.0% to 0.5%
0.6% to 1.0%
Above 2.0%1.1% to 1.9%
Percent change in the non-farm payroll employmentMarch 2006 through March 2007
Source: U.S. Bureau of Labor Statistics
Below 0.0%
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Office of the Chief Economist
Default and Home Value Growth Are Inversely Related
Source: Mortgage Bankers Association, Freddie Mac
-10
-5
0
5
10
15
20
25
30
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
0
0.5
1
1.5
2
2.5
3
3.5
Percent of Massachusetts prime conventional loans delinquent 90+ days or in foreclosure (Right
Scale)Annual Massachusetts House Price Growth (Left Scale)
House Price Growth
Delinquency Percent
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Office of the Chief Economist
Prime Delinquencies Are Lowest in the Northwest
Massachusetts = 1.35%U.S. = 1.67% Seriously Delinquent
(90+ days delinquent or in foreclosure, prime conventional)Data as of December 2007
0.59-1.00%
1.01-1.40%
2.01-2.71%
1.41-1.60%
1.61-2.00%
Source: Mortgage Bankers Association
17
Office of the Chief Economist
Delinquency Rates Have Jumped In Markets With Flat or Falling House Values
0.30%
0.31 to 0.40%
4Q ’06 to 4Q ’07 Change in Level of Serious Delinquency Rate(90+ days or in foreclosure, Prime Conventional Loans)
U.S. Change = 0.81%Massachusetts Change = 0.66%
0.41 to 0.60%
0.61 to 0.80%
Source: Mortgage Bankers Association
0.81 to 1.21%
Percentage Point Difference
1.45 to 2.05%
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Office of the Chief Economist
Subprime Credit Performance
Weak underwriting characterized subprime originations in recent years
Early payment defaults and serious delinquencies are worse for recent vintages of subprime loans
Subprime loans accounted for over half of foreclosures in 2006 and 2007
About 1.5 million loans began foreclosure in 2007 Credit problems are concentrated in economically
depressed regions
19
Office of the Chief Economist
2006$3.0 trillion
20.1%
13.4%
16.1%
2.7% 14.4%
33.2%
2001$2.2 trillion
20.1%
7.2%
5.2%
57.1%
7.9%2.5%
Subprime and Alt-A Volume Quintupled Between 2001 and 2006, then Fell in 2007
Source: Inside Mortgage Finance (by dollar amount)
Alt-A Home EquityLoans
Conventional, Conforming Prime
Jumbo Prime Subprime FHA & VA
2007 Q4$1.8 trillion (annualized)
3.0%
6.0%
9.8%
6.9%
13.3%
61.0%
20
Office of the Chief Economist
Subprime
Other ARM4.0%
3-year Hybrid6.2%
2-year Hybrid56.2%
30-Yr ARM
Balloon w/ 40-50 Yr Amtz28.1%
Fixed5.6%
In Massachusetts, ARMs Dominate Subprime Home-Purchase Loans in 2006
Prime Conventional
Other ARM6.5%
Fixed73.8%
ARM Hybrids19.7%
Source: LoanPerformance, a subsidiary of First American Real Estate Solutions, FHFB MIRS First liens only; by dollar amount
21
Office of the Chief Economist
0
2
4
6
8
10
12
14
16
18
20
22
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Subprime ARM Defaults Are 12 Times Those on Prime
Loans 90 days or more delinquent or in foreclosure (percent of number)
Source: Mortgage Bankers Association(Quarterly data not seasonally adjusted;1998Q1-2007Q4)
Prime Conventional (includes Alt-A)
FHA & VA
SubprimeFRM
– Recession
SubprimeARM 20.43%
8.18%
5.18%
1.67%
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Office of the Chief Economist
843
553
691
616
0
1,000
2,000
3,000
Subprime
Regular Adjustment in 2008, in Default as of December 2007
First Adjustment in 2008, Current as of December 2007
Regular Adjustment in 2008, Current as of December 2007
About 1.4 Million Subprime Loans Will Have First Reset in 2008
Amount of ARMs Scheduled to Have a Reset (Number of Loans in Thousands as of December 2007)
Source: LoanPerformance ABS Securities, Freddie Mac. “Default” includes loans delinquent 30 or more days or that are in foreclosure.
First Adjustment in 2008, in Default as of December 2007
23
Office of the Chief Economist
0
8
16
24
32
2004H1 2004H2 2005H1 2005H2 2006H1 2006H2 2007H1 2007H2
Prime FHA&VA Subprime
Number of Foreclosures Started in Massachusetts (Annualized Rate in Thousands)
Source: Mortgage Bankers Association’s National Delinquency Survey (Data as of December 2007; number expanded to reflect 85% coverage)
43% 50% 60%58%
63%
63%
40% 36% 33% 35% 32%33%17% 14% 7% 7% 5%
4%2.5K
3.6K
12.8K
18.8K
61%
35%
4%
Subprime: 11% of Loans Serviced (December 2007)
In Massachusetts, Subprime Accounted for About 60% of Foreclosures Since 2005
37%
59%
4%
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Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose.
Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2008 by Freddie Mac.