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Housing and Mortgage Market Update

Philadelphia Council for Business EconomicsPhiladelphia, PAMay 6, 2009

Frank E. Nothaft

Chief Economist

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Office of the Chief Economist

1

Housing Contraction Ongoing,Mortgage Defaults Rising

Housing activity low Single-family construction is lowest since 1945 Sales are near bottom; about a third are foreclosure sales U.S. house price measures will likely decline through 2010

Low mortgage rates promote loan demand Less purchase-money because of lower house prices, fewer sales Refis account for 75% of applications over past three months FHA volume up sharply Refi volume pushes 2009 originations above last year

Mortgage defaults rise Unemployment main trigger event for delinquency House price declines add to foreclosure risk Serious delinquency rates likely to rise further in 2009 Coastal areas, Great Lakes region will be hit hardest


2

Low Interest Rates and Falling Home PricesHave Increased Housing Affordability

Source: National Association of Realtors Composite Housing Affordability Index (% of medianpriced home affordable on median income with conventional mortgage and 20% down); Freddie

Mac Primary Mortgage Market Survey

50

80

110

140

170

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

4.0

7.5

11.0

14.5

18.0Index Percent

NAR AffordabilityIndex

(left scale)

30-year FixedMortgage Rate

(right scale)

Index = 100 meansmedian income buysmedian priced home

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3

Conventional and FHA Mortgage Rates HaveDropped 2% Since October

4.6

5.0

5.4

5.8

6.2

6.6

7.0

7.4

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

Source: Mortgage Bankers Association (last data: week ending April 24, 2009)

Effective Interest Rates on 30-Year Fixed-Rate Mortgages (Percent)

FHA

Conventional


4

Source: HSH Associates (last data: week ending April 17, 2009)

Note: Effective rate adds fees and points to the interest rate.

Difference Between 30-Year Fixed Jumbo andConforming Rates Is at Record Levels

5.0

5.4

5.8

6.2

6.6

7.0

7.4

7.8

8.2

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

7.07 %

Effective Interest Rate on 30-Year Fixed-Rate Conventional Mortgages (Percentage Points)

6.81%

7/20/0726 bps

6.45%

5.03%

5/1/09143 bps

30-Year Conforming FRM

30-Year Jumbo FRM

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5

Banks Are Tightening Lending StandardsAcross All Lines of Business

-40

-20

0

20

40

60

80

100

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Prime Residential Loans

Commercial Real Estate

Source: Federal Reserve Board's Senior Loan Officer Survey (all residential loans through2007Q1, prime residential starting 2007Q2); last update: May 4, 2009

Net Percentage of Banks Tightening Credit Standards During Three Previous Months


6

Consumer Confidence Fell in February to AnAll-Time Low

10

30

50

70

90

110

130

150

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Note: Data are bimonthly through May 1972; missing months data between February1969 and May 1972 interpolated by Freddie Mac.

Sources: The Conference Board, Freddie Mac

Consumer Confidence

RecessionPeak Jan 2000

Low Feb 2009

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7

Single-family Building Hit a Record in 2005, butHas Fallen to Lowest Level Since 1945

300

600

900

1,200

1,500

1,800

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

One-Family Housing Starts (thousands of units, SAAR)

Sources: Bureau of Census (SAAR), Freddie Mac

Recession

Third Quarter 2005record: 1.75 million units

Forecast

First Quarter 2009:

0.36 million units


8

Building Permits Have Dropped in U.S. OverLast 3 Years

0

500

1000

1500

2000

2500

1980Q1

1982Q1

1984Q1

1986Q1

1988Q1

1990Q1

1992Q1

1994Q1

1996Q1

1998Q1

2000Q1

2002Q1

2004Q1

2006Q1

2008Q1

0

10

20

30

40

50

Housing Permits U.S. (Thousands)

Source: National Association of Realtors, Bureau of Census

United States

Philadelphia-Camden-Wilmington,

PA-NJ-DE-MD MSA

Recession

Housing Permits Philadelphia (Thousands)

77%Drop

75%Drop

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9

Existing Home Sales Down a Third in U.S. andPennsylvania during the Last Three Years

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

100

120

140

160

180

200

220

240

260

280

Source: National Association of Realtors(Existing Single-Family Houses, Apartment Condos & Co-ops)

U.S. Existing Home Sales (Thousands) Pennsylvania Existing Home Sales (Thousands)

Home Sales Growth2005Q4 2008Q4

United States -32%Pennsylvania -34%

United States

Pennsylvania


10

Large Inventory Surplus Remains in Market

-100

0

100

200

300400

500

600

700

800

900

1000

1996 2000 2004

Source: Bureau of Census (1996-2004:Annual Data, 2005Q12009Q1:Quarterly Data)Note: The excess unsold homes were estimated based on the average vacancy rate from

1996Q1 to 2005Q4 (1.7%).

Excess Unsold Homes for Sale (Numbers in Thousands)

Annual Data Quarterly Data

2005 2006 2007

Q1 Q4 Q1 Q4 Q1 Q4 Q1

2008

Q4 Q1

2009

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11

Excess Homeowner Vacancy Rate by State

2.0%

0.76 to 1.5%

1.6 to 2.0%

Estimated overhang of vacant-for-sale homes as a percent of state homeowner dwellings

Source: U.S. Census Bureau and Freddie Mac calculations (difference between 2008homeowner vacancy rate and 1996-2005 average homeowner vacancy rate for each state).


12

National House Prices Have Experienced aCumulative Decline of 17% Since 2006Q3

2.5

3.93.4

1.71.3

1.7

0.4

-1.2-0.3

0.7

-0.9

-3.8 -3.8

-1.4

-2.4

-5.0-6

-5

-4

-3

-2-1

0

1

2

3

4

5

2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3

Quarterly Growth Rates (Numbers in Percentages)

Source: Freddie Mac

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13

House Price Declines Were Broad Based from2007Q4 to 2008Q4

Source: Freddie Mac

-3.3

-3.4

-2.0-25.9

-25.7

-3.2

RI 13.0

CT 7.2

DC 6.2

-8.1

-25.2

-10.4

-7.1

-0.8

-9.5

-8.8 -5.2

-1.4-0.3

-5.0

-7.2

-13.0

-3.4

-15.0

-9.9

-6.0

-4.9

-1.8

-3.0

1.7

-1.8

-10.9

-6.9

-5.3

-29.5

-2.9

-6.0

-0.9

-8.4

-4.2

-4.5

-2.1

-4.2

-0.2

-8.7-11.7

-4.1

-8.5

-7.2

-4.0

-1.1

>= 0%

-5 to 0%

< -20%

-10 to -5%-20 to -10%

United States 12.1%


14

0

50

100

150

200

250

300

350

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Nominal

Real

Expected Peak-to-2010Q4 Decline in US House Prices Is25% Nominal, 30% Real

Sources: Nominal House Prices - Census Bureaus Constant Quality New-House Purchase Index(1963-1969), Freddie Macs Conventional Home Price Purchase-Only Index (1970-1974), portfolio-weighted WRSI index and forecast (1975-2010); Consumer Price Index - U.S. Bureau of Labor

Statistics Consumer Price Index (1963-2008) and February 2009 Blue Chip Forecasts (2009-2010).

U.S. House Price Index Forecast

25%

30%

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15

Past Financial Crises Have Had SubstantialValue and Output Declines

Peak-to-Trough

Change (%)

Length of Time

(Average)Real House Price -35% 5 years

Stock Market Values -56% 3-4 years

Unemployment Rate 7% 5 years

Source: C. Reinhart and K. Rogoff, The Aftermath of Financial Crisis,December 2008,and Freddie Mac house price index.

As of fourth quarter of 2008, U.S. Real House Prices aredown about 21% from peak of two-and-a-half years earlier


16

Low Rates, GSE Streamline Refis Result inOrigination Rebound in 2009

0

250

500

750

1,000

1,250

1,5001,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

4,000

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Sources: Freddie Mac

Total Single-Family Mortgage Originations (Billions of Dollars)

Refinance Originations

Home Purchase Originations

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17

0%

10%

20%

30%

40%

50%

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

1Q2005

1Q2006

1Q2007

1Q2008

FHA-Insured

VA-Insured

Annual Quarterly

Share of Single-Family Originations

Sources: HUD (1935-1997), Freddie Mac & Inside Mortgage Finance (1998 Present)

FHA Lending Is Up Sharply:Largest Share Since 1942

1942:FHA=29% 2008Q4:

FHA=29%


18

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 2001 to2006, then Fell from 2006 to 2008

Source: Inside Mortgage Finance (by dollar amount)

Alt-A Home EquityLoans

Conventional,Conforming Prime

Jumbo Prime Subprime FHA& VA

2008

$1.5 trillion

2.8%

6.5%

20.0%

7.7%

62.0%

1.5%

Single-familyOriginations

Subprimeand Alt-A $0.2 trillion $1.0 trillion $0.1 trillion

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19

GSE & GNMA Market Share Fell When Subprime Boomed;Today GSEs & GNMA Are Main Source of Mortgage Funds

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

Ginnie Mae Private-Label Freddie Mac and Fannie Mae

Source: Inside MBS & ABS (The 2008 Mortgage Market Statistical Annual - Volume II),Inside MBS & ABS (April 25, 2005, July 11, 2008 issues, January 9, 2009, andApril 3, 2009).

Annual (1985 2007) Quarterly (2008 - 2009)

MBS Share Issuance (Percent of MBS Issuance)

Subprime,Non-TraditionalLending Boom

(2004-2007H1)

Subprime Crisis,Private-label MBS

Collapse(2007H2-2009)

Conventional, Prime, Fixed-RateLending Is Mainstay of Market (1985-2003)

Private-Label0%

Ginnie Mae26%

FRE & FNM74%

1st quarter 2009:


20

Job Loss Is the Main Hardship Reason AmongDelinquent Prime Borrowers

Hardship Reason

Unemployment 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 tohurricane effects. Data cover only prime conventional conforming loans.

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21

U.S. Unemployment Rate Rose to 8.5% in March,the Highest in More Than 25 Years

3

5

7

9

11

13

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Unemployment Rate (Percent)

Forecast

Sources: U.S. Department of Labor, Freddie Mac

National Recession

United StatesNov-Dec 1982:

10.8%

2009Q4:9.5%

PennsylvaniaFeb-Mar 1983:

12.9%

PAMar-097.8%


22

States With High Job Losses Are StronglyCorrelated with High Delinquency Rates

National employmentdown 3.0 million (-2.2%)

2.0% to 1.1%

-1.0% to -0.1%

1.5% to 2.2%

0.1% to 1.0%

Percent change in the non-farm payroll employmentDecember 2007 through December 2008

Source: U.S. Bureau of Labor Statistics

4.5% to 3.1%

3.0% to 2.1%

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23

Prime & Alt-A Delinquencies Are Highest in AreasWith Falling Home Values and Job Loss

National = 3.74% Seriously Delinquent(90+ days delinquent or in foreclosure, Prime & Alt-A Conventional)

Data as of December 2008

0.90-1.75%

1.76-2.25%

3.26-9.00%

2.26-2.75%

2.76-3.25%

Source: Mortgage Bankers Association

7.55%

8.90%

5.56%

5.04%


24

Loan Modifications in Private-Label SecuritiesAre Key to Foreclosure Reduction

11%

15%

15%

3%

33%

23%

Freddie Mac

13

Fannie Mae

18

Ginnie Mae

& FHA

6

Private Label

Securities8

Bank and

Thrift

Portfolios

8

13%

7%11%

8%

11%

50%

Freddie Mac

232

Fannie Mae

444

Ginnie Mae

& FHA378

Private Label

Securities

1,734

Bank and

Thrift

Portfolios

397

Number of Mortgages Outstanding(in millions)

Seriously Delinquent Mortgages(in thousands)

Sources: Federal Reserve Board, FDIC, HUD, Freddie Mac, Fannie Mae, Mortgage Bankers Association, FirstAmerican CoreLogic (LoanPerformance); data as of December 31, 2008. Seriously Delinquent loans are at least 90days delinquent or in foreclosure. Components may not sum to total because of rounding.

OtherPortfolio

275

OtherPortfolio

2

Total: 55.0 Million Total: 3.46 Million

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25

Increasing Delinquencies, Especially Subprime

6.3

3.7

23.1

0

5

10

15

20

25

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

All Loans Prime Loans Subprime Loans

Loans 90 Days or More Delinquent or in Foreclosure (percent of number)

Source: Mortgage Bankers Association; Prime Loans includes Alt-A (Quarterlydata not seasonally adjusted;1998Q1-2008Q4).


26

Subprime Accounted for Almost Half of PALoans Entering Foreclosure Since 2006

0

5

10

15

20

25

30

35

40

45

2003Q4 2004Q4 2005Q4 2006Q4 2007Q4 2008Q4Prime FHA&VA Subprime

Number of Foreclosures Started (Annual Rate in Thousands)

Source: Mortgage Bankers Association National Delinquency Survey.

30%36%36%38%

40%

23%

47%

11%

14%18%23%

49%

51%46%39%

43%

12%

45%

Subprime: 13% of Loans Serviced in PA

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27

Additional$200 billion for GSEs

$75 billion for3-4 million mortgages

Lower rates for4-5 million mortgages

Up to$900 billion

LargerBackstop

SubsidizedModifications

EasierRefinancing

IncreasedPortfolio Size

Homeowner Affordability and Stability Plan


28

Freddie Mac Relief Refinance Mortgages

Freddie Mac must own or guarantee

Borrowers must be current over past 12 months

LTVs up to 105% of current value

Lenders generally will not have to re-underwrite

Mortgage Insurance (MI): If loan has MI, same coverage

must be maintained; if loan does not have MI then notrequired on greater than 80 percent LTV

Conventional loans

Must be originated by June 10, 2010

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29

Modification Program for At-risk Borrowers

$75 billion to subsidize loan modifications

Modifications will follow uniform guidelines

Reduces monthly payments to a 31 percent debt-to-

income ratio Provides financial incentives for servicers and borrowers to

initiate and sustain modifications

Each GSE responsible for modifying their own loans

Fannie Mae is Program Administrator for Non-GSEmodifications

Freddie Mac is Compliance Agent for Non-GSE

modifications

Where to Get More InformationLook for regular updates to our economic forecast,commentary and data at

www.freddiemac.com/news/finance

Contact us at [email protected]

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office ofthe Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not beconstrued as indicating Freddie Mac's business prospects or expected results, and are subject to change withoutnotice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does notguarantee 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. 2009 by Freddie Mac

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FRE NOTHAFT_05-06-09[1]