“Wipeout”: Maneuvering Through the U.S. Housing & Mortgage Markets

PRESENTERS:Maureen Campbell – President, Pearce Plus Relocation & Senior Services

Ryan Huskey – VP, Corporate Lending Group

Melissa Graber – Director, Client Services, MSI (Moderator)

RECAP OF 2010

In 2010 and the first half of 2011, the economy, unemployment, and real estate markets continued to create some of the biggest challenges since the Great

Depression.

HR/Mobility professionals have been challenged more than ever to adjust relocation programs in an effort to continue to move employees in a business environment focused on reducing costs wherever

possible.

Recap of Housing 2010

> An uptick in sales peaked in the first half of the year giving false hope of a robust recovery.

> Expiration of home buyers tax credit caused a housing slump in the second half of the year. In July, closed sales dropped 25% year over year.

> Accelerated foreclosure actions weakened prices.

> S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline.

> Interest rates were near historical lows and affordability improved, but fewer potential buyers qualified for new loans due to the heightened credit standards.

> High unemployment, weak consumer confidence, and uncertainty about the future of home prices still prevented some potential buyers from entering the market.

Current Market Statistics

Where Are We Now?

Unemployment Rate

> The July 2011 Jobs Report indicated that the unemployment rate still hovers around 9.1%.

2011 Mortgage Rates

Despite the lowest mortgage rates in 50 years, strict qualifying procedures continue to stall the housing recovery.

House Prices - June 2006 to march 2011 have varied from -59% to +11%

Four-Quarter Price Change by StateQ1 2010 – Q1 2011

> Only 3 States Saw Price Appreciationo North Dakota at 1.1%o Alaska at 2.7%o West Virginia at 2.2%

> The Biggest Declines:o Idaho at -15.7%o Arizona at -12.2%o Oregon at -10.3%

SO WHAT DO THE “EXPERTS” SAY?

Lawrence Yun, Chief Economist for the National Association of Realtors

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Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr

“The dip in contracts may be due to temporary factors. The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months. The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.” 05.27.2011

PENDING HOME SALES 2011

Future Home Sales Will Rise

Fannie Mae, Freddie Mac, Moody’s and NAR 5/2011

John Paulson Multibillionaire hedge fund operator,

September 2010

“If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

"Pricing is down so much in some markets that when you analyze renting versus owning, it makes much more sense to own“

Michael Larson Real-Estate Analyst,

Weiss Research, February 2011

There is Optimism AMONG “Pundits”…

Fortune Magazine

Real estate: It's time to buy again

“Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing.”

Home Price Expectation Survey

Macro Market Home Price Expectations Survey 03/2011

Economic Signs the Bottom is Close

> Housing is the most affordable it has been in decades

> Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, THE LOWEST LEVEL IN 35 YEARS.

> The average price has fallen to just over 2 years' income now - well below its pre-bubble average of 2.6 years.

> Ultimately, affordability will drive people to buy homes.

o Attractive mortgage rates

o Greatly reduced housing prices

Moody’s Analytics & Wall Street Journal, February 27, 2011

Source: Westcourt Funds

Optimism

Excitement

Euphoria

Denial

Fear

Panic

Despondency Depression

Hope

Optimism

Point of maximum risk in investment

Point of maximum opportunity

Consumer Confidence

THE “EYE OF THE STORM”FORCLOSURES & SHORT SALES

“We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.”

Freddie Mac

Fannie Mae

Fannie Mae 5/6/2011

“Our foreclosure rates remain high. However, foreclosure levels were lower than what they otherwise would have been in the first quarter of 2011 due to the delays caused by servicer foreclosure process deficiencies and the resulting foreclosure pause.”

“Shadow” Inventory

> The number of months between the date of the borrower's last payment and the date of liquidation is now at more than 18 months on average. The highest figure on record.

>Discoveries of defects in the residential mortgage foreclosure process further extended liquidation timelines - slowing the resolution of shadow inventory and preventing home prices from finding a floor.

> Prior to the foreclosure moratoriums -The total number of troubled loans peaked in early 2010 and began to show improvement.

Source: Fitch Ratings, NYC

Clearing of “Shadow” Inventory

>Florida has the largest shadow inventory:o Stemming from inflated foreclosure inventory which takes a very long time to clear

o New York & Florida:> Highest number of days loans are delinquent (644 & 638)

> Taking longer for properties to come on the market

>Arizona & Nevada are faring better with shadow inventory: o Moving faster through the pipeline and comprising a larger share of existing saleso Arizona – 55% of existing sales are foreclosureo Nevada – 70% of existing sales are foreclosure

>The months’supply depends on saturation of distressed sales:o New Jersey reported about 20% of existing sales to be distressed sales, therefore it will take longer to

clearo Nevada’s 70 % share will clear more quickly

Selma Hepp, Research Economist, March 21, 2011

Mortgage Default Warnings Surged in August

> The number of U.S. homes that received an initial default notice jumped 33% in August from July

> Biggest monthly gain in 4 years> Banks are now taking swifter action nearly a year after processing

issues led to a sharp slowdown> This means a potentially faster turnaround time for the housing

marketo A revival is unlikely as long as a glut of potential foreclosures hovers over

the market

> There are 3.7 million more homes in some stage of foreclosure now than there would be in a normal housing market

Foreclosures in Process

OCC and OTS Mortgage Metrics Report 3/2011

Share Of Distressed Sales

Shows the % of sales that are distressed in each state.

Months Supply of “Shadow” Inventory

NAR May 2011

*Months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales.

IS HOMEOWNERSHIP STILL THE AMERICAN DREAM?

National housing survey

Americans believe that homeownership has more potential as an investment than any other traditional investment vehicle including stocks, bonds and mutual funds.

Fannie Mae 4/2011

Pew Research Center

Disagree19%

Agree81%

Percentage who agree that buying a home is the best long-term investment a person can make.

Pew Research Center 4/12/2011

Homeownership Rates

> Until 1995, home ownership rates historically hovered around 64%

> Between 1995 and 2004 homeownership rates increased when Congress urged Fannie Mae and Freddie Mac to invest in mortgages targeted to lower-income buyers, encouraging subprime lending and a deregulated mortgage industry

> In 2004 over 69 % of households owned homes

> In 2010, that number has decreased to 66.9 % . America's rate of home ownership may be permanently declining from its 2004 peak

> The last time a lower percentage of Americans owned their own homes was in 1999, when the rate was 66.7 percent

> In today’s current housing market, the number of renters is on the rise

Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 2011

Desire for Homeownership Remains Strong Though!

> Affordability has increased due to lower home prices and interest rates

> Homeownership rates increase with age, and the U.S. population is experiencing an aging trend fueled by the Baby Boomers.

> There are 6 million more “Millennials” in the prime future homeowners group than there were Baby Boomers in 1977.

> The biggest first time homeowner opportunity in the history of the country is ahead of us!

> People buy homes as their family and lifestyle situations change

Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 27, 2011

Housing Affordability & Demographics

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Homeownership Rates by Age of Household

Fourth Quarter 2009 Fourth Quarter 2010

Source: US Census Bureau

WHEN IT COMES RIGHT DOWN TO IT, REAL ESTATE IS LOCAL

ARIZONA FLORIDACALIFORNIAMedian Price

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$129,577

$252,727

$147,669

$237,466

$512,842

$330,037

$111,097

$246,497

$144,501

Median Sales Prices 2000-2010

Med

ian

Sale

s Pr

ice

> Post-Bubble price declines have been dramatic in some marketso AZ dropped 42%o CA dropped 36%o FL dropped 42%

2000 2006 2010 2000 2006 2010 2000 2006 2010

Source: Federal Housing Financing Agency One unit, non-condominium properties

Market Conditions Are Local

IDAHOMedian Price

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$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$235,474

$537,740

$506,654

$74,899

$113,144 $133,473

$151,845

$281,796

$245,858

Median Prices 2000-2010

Med

ian

Pric

e

NEW YORKWASHINGTON, DC

2000 2006 2010 2000 2006 2010 2000 2006 2010

NORTH DAKOTA

> In other markets, post-bubble price declines have been more moderate o DC dropped 6%o ND increased 15%o NY dropped 13%

Source: Federal Housing Financing Agency One unit, non-condominium properties

Market Conditions are Local

To Evaluate Real Estate Market Conditions

> It’s essential to understand that markets and economies vary from state to state, town to town, and neighborhood to neighborhood.

> Broad-based data is important for understanding overall economic conditions, but to get a true reading, statistics must be gathered on a local level with the assistance of a local expert.

> That’s why the ERC Broker Market Analyses addresses both the macro and micro markets.

> Every property needs to be examined individually.

> Local data is critical to accurate pricing and marketing success!

Regional & Local Market Data

> To get the most accurate information on real estate markets and trends, it’s important to look at regional and local data.

> RDC Members post quarterly market stats on:o Median/Average Sales Priceso Days on Marketo Absorption Rateo # of Active Listingso # of Closed Sales (past 6 months)o Increase/decrease in valueo List Price to Sales Price Ratio

www.relocationdirectorscouncil.org

HOW DOES THIS REAL ESTATE DATA IMPACTHR & MOBILITY PROFESSIONALS?

Relocation Challenges

> Smaller Buyer Pool

> Unknown Impact of “Shadow” Inventory on Market Competition

> Property Management Needs

> Loss-on-Sale

> Negative Equity

> Extended Days on Market

> Extended Duplicate Housing Costs

The Need For Creative Approaches to Recruiting & Relocation

> Pre-decision BMAs/Appraisals

> Extensive counseling on pricing strategies

> Customizationo As consumers, people want customization and flexibility. o This is true of employers and employees as well

> Even homeowners have become renters – How does this impact their benefits package?o Extended temporary housing/duplicate housing costso Property Management

> Loss-on-sale assistance – Negative Equity - Short sale assistance

> Mortgage Interest Differential Adjustment (MIDA)

Positioning Properties for a Quick Sale

> Pricing! Pricing! Pricing!

> Staging: o In this market, it’s importanto Lack of staging goes to conditiono Home repairs & improvements

> No matter what you do, if a property is not priced accurately to begin with, it will not only sit on the market, but, in a declining market, will sell for a lot less.

> Homes will sell in any market if all of the critical factors are in place. A recent study showed that sellers who priced correctly from the start got 12% more for their properties in half the time.

Industry Players

>To understand today’s lending environment, you need to understand who the industry players are

>We have all heard the names Fannie Mae, Freddie Mac, GNMA, FHA, and VA. But who are they and what do they do?

Fannie Mae (FNMA)

> FNMA was established in 1938 after the Great Depression as part of FDR’s New Deal

> Their purpose was to create a liquid secondary market by buying FHA insured mortgages from banks

> In 1958, Congress passed legislation giving private investor’s access to common stock while the federal government held preferred stock

> In 1968, FNMA converted to a publicly held corporation so that the federal government could remove it from the budget

Fannie Mae (FNMA)

>When Fannie Mae went public, they split into two entities

o Fannie Mae retained responsibility for purchasing non-government guaranteed loans

o Ginnie Mae was created and assumed Fannie’s original charter of purchasing government guaranteed loans

GSEs and Ginnie Mae

> In 1970, Freddie Mac (FHLMC) was created to expand the secondary mortgage market for mortgages in the U.S.

> FNMA and FHLMC are Government Sponsored Enterprises (GSE)

> GNMA is a Government Owned Enterprise (GOE)

> What is the difference?o The GSEs are publicly owned but have an ‘implicit guarantee’ that the US

Government will back their securitieso Ginnie Mae is owned by the government and has an ‘explicit guarantee’ that

their securities are backed by the full faith and credit of the US Government

The Meltdown of the GSEs

> In 2008, FNMA and FHLMC were placed into conservatorship under the Federal Housing Finance Agency

> In 2010, FNMA and FHLMC were delisted from the NYSE

> Although not official, the GSEs appear to have the same guarantee as GNMA

>What does this mean? Essentially, the US Government is controlling all of the shots in today’s lending environment

GSEs and Ginnie Mae

>So what do the agencies do?o They do not originate or service loanso They purchase or guarantee mortgage backed securities that are

traded on the secondary marketo The GSEs set the lending guidelines for conforming loans that

they purchase or guaranteeo Ginnie Mae guarantees loans from the following government

agencies:> Department of Housing and Urban Development (HUD)- FHA loans> Department of Veteran Affairs- VA loans> Department of Agriculture (USDA)- Rural Development Loans

GSE and Ginnie Market Share

>Between 2004 and 2007, the total market share of the agencies was 51.5%

>Between 2008 and the present, the total market share of the agencies is 97%

>What does this mean?o The federal agencies have a monopoly on the mortgage marketo Until private money comes back, the agencies set the lending

rules

MBS Market Share

NOW THAT WE HAVE DISCUSSED THE IMPORTANCE AND POWER OF THE AGENCIES, WHAT ARE THEY DOING TO SHAPE TODAY’S MORTGAGE MARKET?

Loan Quality Initiative (LQI)

> In addition to stricter lending guidelines, the agencies are implementing the Loan Quality Initiative

> LQI was implemented to promote complete and accurate loan data> LQI is focused on four basic objectives:

WHAT AFFECT WILL LQI HAVE ON THE CONSUMER?

Fraud Awareness

>Measures will be taken to eliminate all possibilities of fraud

>There will be an increased awareness on owner occupancy

>Fraud Guard Report – Detects undisclosed bankruptcies, foreclosures, appraisal comps, parties to the transaction

>Social Security Verification Checks – Will confirm the social security number directly with the social security administration

Documentation Standards

>Documentation requirements have become very tedious for the consumer and employers, but it may get worse

>How will this affect the three primary qualifying standards?o Incomeo Assetso Credit

Documentation Standards – Income

> There will be more requests for employers to confirm salaries, transfer dates, bonus history, bonus continuance, payroll discrepancies, etc

> Tax returns are now needed more often, even for W2 wage earners

> Tax Transcripts for every borrowero Unreimbursed business expenseso Real estate ownedo Business ownedo Verification of W2’s

Documentation Standards – Assets

> Underwriters are looking for more than just sufficient assets, they are looking for the source of the assets as well

> Any deposit greater than $1K must be sourced in writing

> Assets necessary for the transaction must be liquid. Non-cash assets must be liquidated to cash and verified by underwriting prior to final approval

> Documenting assets are more difficult with relocating borrowers due to expense reimbursements and regional banks

Appraisal Standards

> The Loan Quality Initiative is having a drastic change on the way appraisal reports are completed

> To improve the quality and consistency of appraisal data, the GSEs have developed the Uniform Appraisal Dataset (UAD), which defines all fields required for an appraisal submission for specific appraisal forms and standardizes definitions for key fields

> The Uniform Appraisal Dataset requirements are affective for all appraisals originated on or after September 1, 2011

> Sale type: REO, short sale, estate sale, relocation sale, non-arms length, and arms length

Appraisal Standards

> Property Style: Must include appropriate architectural design type such as “Ranch”, “Colonial”, “Rambler”, “Farmhouse”, etc. Descriptions such as 1 story, 1 ½ story and 2 stories are no longer acceptable

> Property View Rating: Each property must be assigned a rating of neutral, beneficial or adverse

> Property view factors: There are 12 established view factors: water view, golf course view, industrial view, power lines, etc.

> How will be the affect?o Appraisals will take much longer. The local MLS may or may not have the data

required under the UADo Realtors should expect increased calls from appraiserso Increase of additional appraisal reviews i.e. desk review, field review or second

appraisal

Loan Limits

> A Jumbo loan is a loan in which the loan amount exceeds the limit set by the agencies

> The standard conforming loan limit is $417,000 for a Single Family Residence

> Economic Stimulus Act (Expires 9/30/2011) – the higher of $417,000 or 125 percent of the area median home price- not to exceed 175% of $417,000 or $729,750

> Housing and Economic Recovery Act – the higher of $417,000 or 115 percent of the area median home price- not to exceed 150 percent of $417,000 or $625,500

> With median home prices dropping, the affect can be bigger than the equation alone

> FHA has a standard loan limit of $271,050 but has the same high cost loan limits as conforming loans

HIGHLIGHTS

PMI is Coming Back

> It is easier to qualify

>The premiums are cheaper

>Special relocation rates

>Eliminates the need for piggy back loans i.e. 80-10-10

>Up front single premiumso Lender paido Borrower paido Seller paid

Low Down Payments

>Conforming loans require 3% down and the private mortgage insurance companies are now providing this

>FHA loans require 3.5% down

>VA requires no money down

>USDA requires no money down

Jumbo Loans

> Jumbo loans still have very strict guidelines, but more banks are offering them

>With the increase of banks offering jumbo loans, the rates are starting to come down

> Turn times continue to be longer for jumbo loans and consumers should plan a minimum of 45 days to get a jumbo loan approved

Summary

> Fannie Mae, Freddie Mac, FHA and VA are setting the rules

> Common sense is pretty much useless in the approval process. It is all guideline and rule driven

> Documentation requirements are all ready tedious; however, expect it to get worse

> Increased verification measures will slow down the process and potentially blow up deals in the end

> Although credit standards are more strict, we are seeing some positive signs with an increase of financing options i.e. PMI, down payment, and Jumbo

THANK YOU!