The Administration’s Housing Strategy and Economic Update

Neel Kashkari Phillip SwagelSenior Advisor to the Secretary Assistant Secretary for Economic Policy

Department of the TreasuryMay 2, 2008

2

Agenda

Macro overviewHousing market run-upThe foreclosure problemThe Administration’s plan to deal with itMeasuring resultsLooking forwardDiscussion

3

Slowdown and Recovery

0.60.1

2.1 1.92.3

2.9

0.6 0.6

4.93.8

-2

-1

0

1

2

3

4

5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 H1 H2

Blue Chip Scenario for GDP GrowthPercent change at an annual rate

20082007 2009

Blue Chip Optimists

Blue Chip Pessimists

Blue Chip Consensus(Bars)

Source: Blue Chip Economic Indicators

4

Home Inventories Are Elevated

2

4

6

8

10

12

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Low

Months' Supply of New Single-Family Houses

High

Median Forecast

Source: Census Bureau

5

Labor Market Slowdown

-300

-200

-100

0

100

200

300

400

2002 2003 2004 2005 2006 2007 20083.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Unemployment Rate and Nonfarm Payrolls

Unemployment rate (right axis)

Payroll job change(left axis)

Blue Chipforecast

Thousands Percent

Sources: Bureau of Labor Statistics

6

Home Price Declines

0.0

0.5

1.0

1.5

2.0

87 89 91 93 95 97 99 01 03 05 07 09 11

Historical Range

HOUSING PRICE/RENT RATIO(Case-Shiller 10-City Price/Price Index for Rent)

Futures Market

Predictions

Sources: Bureau of Labor Statistics, S&P and MacroMarkets LLC

7

Financial Market Stresses

0.0

0.5

1.0

1.5

2.0

2.5

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

2006 2007 2008

3-Month LIBOR Rate less 3-Month Treasury Bill RatePercent

0.0

0.2

0.4

0.6

0.8

1.0

1.2

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

2006 2007 2008

3-Month LIBOR-OIS SpreadPercent

-0.5

0.0

0.5

1.0

1.5

2.0

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

Spread Between Jumbo and 30-Year Mortgage Rates

2006 2007 20080

30

60

90

120

150

180

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

Dow Jones CDX Investment Grade Index S d

Old series

2006 2007 2008

New series

Sources: Reuters, British Bankers Association, Federal Reserve, CMAN-CMA New York, BanxQuote

8

What Caused the Excesses?Upside: more Americans became homeowners

Poor origination practicesLow-doc / no-docNo money down

New mortgage productsSubprime hybrid ARMsPay option ARMs

Originate-to-distribute model

Structured product complexity

Cheap credit60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

1980 1986 1992 1998 2005

Hom

eow

ners

hip

Rat

e

Chart Source: The Census Bureau

9

Nationwide Foreclosure StartsForeclosures have climbed to new levels

0%

1%

2%

3%

1987 1991 1995 1999 2003 2007

Fore

clos

ure

Star

ts R

ate

Source: Mortgage Bankers Association, 2008

10

Foreclosures Are Costly for Everyone

Homeowners and families

Neighborhoods and communitiesEach foreclosure lowers the value of other homes in the neighborhood and reduces the local tax base

Lenders and investorsForeclosures can cost 25-50% of a home’s value

The economy as a wholeForeclosures add additional inventory to the housing market, putting pressure on prices, new construction and the wealth effect

11

The Problem in Perspective

80mm houses

4mm are behind (8% of 55mm with 2% in foreclosure)

55mm have mortgages

25mm are paid off

51mm are paying on-time

This compares to 50% seriously delinquent in the 1930s

12

Regional View of ForeclosuresStrong appreciation or weak economies are drivers

Housing Bubbles vs. Rust Belt Recessions5-year price gains vs. Foreclosures per 1,000 Homes

0

5

10

15

20

25

-20 0 20 40 60 80 100 120 140

5-year Price Gain

Detroit

Miami

Bakersfield

Riverside, CA

Fresno

Ft Laud

Orlando

Phoenix

Las Vegas

Palm Beach

Tampa

Stockton

San Diego

Oakland

Sacramento

Atlanta

MemphisColumbus

Indianapolis

ToledoDaytonDenver

Cleveland

Akron

Warren

Weak Economies Housing Bubbles

Fore

clos

ures

per

1,0

00 H

omes

The top-25 “foreclosure hotspots” include areas where the housing downturn reflects the weak economy (IN, MI, OH), and areas where foreclosures reflect the end of a housing bubble that left the “last ones in”underwater (AZ, CA, FL, NV).

National Average

Source: RealtyTrac / OFHEO, 2008

13

Our Housing Market Objectives

Avoid preventable foreclosures

Ensure the flow of capital into the housing market

Enable the necessary housing correction to move forward as quickly as possible

Minimize the spillover from housing to the real economy

14

Foreclosures by ProductForeclosures are highly concentrated in subprime

Source: Mortgage Bankers Association, 2008

63%

17%

15%

19%

6%

12%

10% 10%

6%

43%

Loans Outstanding Loans in Foreclosure

Pr. FRM

Pr. ARMSub. FRMSub. ARM

FHA / VA

subprime loansmake up 55%of foreclosures

15

Subprime ARM DelinquencyRecent vintages show very poor underwriting

Source: Federal Reserve staff calculations from First American LoanPerformance data

0%

5%

10%

15%

20%

25%

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60

Loan Age (months)

Cum

ulat

ive

Per

cent

age

in D

efau

lt

2007

2006

2005

2004

2003

First Reset

16

Avoiding Preventable Foreclosures

There were over 650,000 foreclosure starts a year from 2001 to 2005

Unfortunate life events happen: job loss, divorce, illness

Some people bought more home than they could ever hope to afford

Many will become renters again

Some people speculated on endless appreciation in either their primary residence or an investment property

Some may choose to walk away

We are focused on people who both 1) want to keep their home and 2) have the financial wherewithal to do so

17

Today’s Mortgage MarketSecuritization has introduced new challenges

Historically, a borrower in trouble would renegotiate with his local banker

Today investors are scattered around the world - with servicers acting as intermediaries

Many homeowners are scared or embarrassed and don’t know that help is available

In as many as 50% of foreclosures, the homeowner never spoke with their lender

Many market participants have been working hard individually with limited results

A coordinated effort was needed

18

Our Housing Strategy Tools

The HOPE NOW Alliance

FHASecure

Government-Sponsored Enterprises

19

The HOPE NOW AllianceReaching homeowners is the biggest challenge

More than 25 mortgage servicersGreater than 94% of the subprime marketGreater than 70% of the overall market

Non-profit housing counselorsLeaders such as NeighborWorks America and the HomeOwnershipPreservation Foundation

InvestorsFannie & Freddie

Trade organizationsAmerican Securitization Forum / SIFMAMortgage Bankers AssociationFinancial Services Roundtable

20

The HOPE NOW AllianceMultiple tools to reach and help homeowners

Nationwide counseling hotline: 888-995-HOPE

Best practices for servicers and counselors

Notification to subprime borrowers 120-days pre-reset

HOPE NOW letters to 60-day delinquent borrowers

Servicers / investors funding counseling complementing government support

ASF fast-track plan for subprime ARMsRefinance or rate freeze for those who can pay the starter rate

Project Lifeline for all highly delinquent borrowersPossible foreclosure pause for borrowers who ask for help

21

Counselor FundingInvestors funding counseling for the first time

Historically, counseling was supported by foundations and the government

Congress and the President allocated $350mm for counseling

Investors benefit from reduced foreclosures and lower losses

American Securitization Forum provided guidelines for servicers to seek reimbursement for counseling expenses from investors

HOPE NOW and ASF are establishing a long-term, sustainable funding model that is in the best interest of both homeowners and investors

22

ASF Fast-Track PlanRefinance and rate freeze for subprime ARMs

1.8mm 2/28s and 3/27s resetting in 2008 and 2009

Possible market failure if servicers are unable to handle the volume of calls from troubled borrowers

Uses payment history, LTV, FICO to speed servicer decision making

Borrowers who could not pay the starter rate will need case-by-case help

Remaining borrowers who can not afford higher payment will be fast-tracked into a refinance or 5-year rate extension

Recent interest rate reductions have reduced the reset problem: protocols are now in place for when rates climb

23

Project LifelineReaching out to borrowers most in need

90-day delinquent borrowers receive Lifeline notice

Borrowers may qualify for a foreclosure “pause” of up to 30 days while a long-term solution is evaluated

Borrowers must call and express interest in keeping their homesProvide updated financials to servicerServicer evaluates potential workoutsIf a workout seems feasible, servicer will pause the foreclosure process

Unlike across-the-board foreclosure moratoriums, borrowers who are most likely able to keep their homes self-select

Allows the housing adjustment to move quickly while helping homeowners

24

FHASecureFHA providing refinancing to subprime borrowers

Provides 30 year, fixed rate mortgages to borrowers

FHASecure provides refinancing for borrowers who defaulted due to a reset

Previously borrowers had to be current to qualify

170,000 borrowers have refinanced since August 2007

FHA studying options to expand coverage administratively

President Bush has called on Congress to pass FHA Modernization

Potential help for an additional 250,000 borrowers

25

GSEsPlaying a countercyclical housing market role

Economic stimulus bill raised loan limits for GSEs and FHANew limits as much as $729,750 in high cost areas

Federal Home Loan Banks to purchase ~$100bn of GSE paper

OFHEO eliminated portfolio caps and reduced capital ratio in exchange for plan to raise substantial additional capital

Could provide up to $200 billion in additional liquidity

GSE ReformMust ensure that they have a regulatory structure that is on par with other financial institutions

26

What Should We Do About “Underwater” Borrowers?

Much has been made of estimated 9mm who owe more than their home is worth

Being “underwater” does not change one’s ability to pay one’s mortgage

For the vast majority of Americans, their home is not just a short-term investment

Homeowners who can afford their mortgage but walk because they are underwater are merely speculators

It is not the government’s job to make people whole for their investment losses

27

Are Principal Write-downs Appropriate?

Borrowers with an affordability problemAffordability problems can often be solved by reducing interest rates and extending the mortgage termServicers generally reduce principal in conjunction with other, less costly, alternatives

Borrowers with an equity problemServicers and investors are reluctant to reduce principal due to moral hazard

Losing 40% on one loan is better than 10% on five

28

How Do Servicers Evaluate Loan Modification Options?

Current CLTVTR 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

10% FC T T T T T T T T T T T20% FC T T T T T T T T T T T30% FC FC TR TR TR TR TR TR TR TR TR TR

Necessary 40% FC FC FC FC TR TR TR TR TR TR TR TRPayment 50% FC FC FC FC FC TR TR TR TR TR TR TRReduction 60% FC FC FC FC FC FC FC TR TR TR TR TR

70% FC FC FC FC FC FC FC FC TRP TRP TRP TRP80% FC FC FC FC FC FC FC FC FC FC TRP TRP90% FC FC FC FC FC FC FC FC FC FC FC FC

100% FC FC FC FC FC FC FC FC FC FC FC FC

Legend Illustrative AssumptionsFC Foreclosure 60% Current value recovery in foreclosureT Term Extension 40 Maximum loan term

TR Term Extension + Rate Reduction 2.0% Minimum interest rateTRP Term Extension + Rate Reduction + Principal Writedown 50% Minimum principal

Note: Ignores second liens and ignores short-sale as a loss mitigation option

29

Measuring Results

More people are calling for helpHotline receiving 4,500 calls per day up from 650 in August20% response rate to HOPE NOW letters – over 1mm letters sent (over 200k per month)

More people are getting workoutsAlmost 1.4mm people received a workout since JulyLoan modifications growing faster than repayment plans

More people are refinancingOver 170,000 people have refinanced into FHA since August

30

Measuring Results: All Loans(numbers in thousands)

Q1-07 Q2-07 Q3-07 Q4-07 Q1-08

Repayment plans 261 270 320 332 323

Modifications 54 65 76 141 179

Total Workouts 314 335 396 473 503

Modifications as a % of Workouts

17% 19% 19% 30% 36%

Source: The HOPE NOW Alliance, www.hopenow.com

31

Measuring Results: Sub. ARMsMinimizing foreclosures for those who could afford the starter rate

Source: The HOPE NOW Alliance, www.hopenow.com

431,171 subprime 2/28 and 3/27 scheduled to reset in Q1 2008

203,000 (47%) were paid in full through refinancing or sale

14,418 were modified Nearly 64% were modified for 5 years or more

Only 553 loans that were current at reset have entered foreclosure

32

When Will the Correction End?Some people fear a vicious cycle of lower home prices, increased foreclosures, increased inventories leading to even lower prices

Homebuilders are the key to breaking that cycleSingle-family starts are falling – as one would expect – down 63% to 680k per year in March from 1.8mm peak in early 2006Household formation is about 1.2mm per year

We are working through the excess inventoryNew home inventory is down 18% to 468,000 units in March from peak

As prices continue to fall, we expect buyers to step into the market