THE PAUL MILSTEIN CENTER FOR REAL ESTATE

Public Policy and the Housing Recovery

By Professor Chris Mayer

Today’s outline

•  Comments on Dynan, Gayer, & Plotkin •  What other policies did the government pursue to

stabilize housing? •  Modifications for delinquent borrowers •  Provide support for GSEs/FHA to provide mortgage credit

–  How successful was government support of mortgage credit?

–  Takeaways for the future

DGP: Very Nice Work

•  Comprehensive summary of various federal and state homebuyer assistance programs

•  Variety of different estimation strategies •  Conclusion: small positive, but limited effect on

demand and prices •  Results make intuitive sense and are consistent with

the findings on many other government programs to help housing

05

10Ra

te

1960q1 1970q1 1980q1 1990q1 2000q1 2010q1DATE

Ownership RentalCurrent as of Quarter 1, 2013Source: US CensusUS Residential Vacancy Rates

Vacancy rate for housing is falling; Many vacant units in depressed places

Mortgage-related policies had limited effectiveness

•  HAMP (Home Affordable Mortgage Program) was a victim of its own claims & bureaucracy – Targeted 3 to 4 million modifications – So far: 1.1 million permanent modifications (2.0

million temporary mods), but saved many foreclosures (Agarwal, et. al., 2013)

– Some private lenders opted out; the latest GSE programs apply to all delinquent borrowers and do not require new paperwork

– Moral hazard was much less of a problem than feared (Mayer, Morrison, & Piskorski, 2012)

Mortgage-related policies had limited effectiveness

•  Government support for mortgages helped, but only for the best borrowers – For most of the last 5 years, the government has

financed more than 9 in 10 mortgages (Fannie, Freddie, and FHA)

– HARP refinancings were almost exclusively pursued by high quality borrowers until mid-2012

– Refinancings never reached levels set in previous interest rate declines

– Purchase mortgages were only available for the very best borrowers (760 FICO, 28% downpayment)

Private debt capital has disappeared; Little issuance of private MBS

020

040

060

080

0Bi

llions

of D

olla

rs

1996 1998 2000 2002 2004 2006 2008 2010 2012Year

Gross Non−Agency MBS Issuance by Year (Includes CMBS)Current as of April 2013, annualizedSource: SIFMA

© Equifax Confidential and Proprietary

US First Mortgage

First Mortgage Portfolio contraction is driven by Foreclosures, Deleveraging (payoffs & pay downs) and lower Home Buyer Demand.

US First Mortgage Portfolio

70

#LOANS

$BALANCES

$7.0

$7.5

$8.0

$8.5

$9.0

$9.5

48

49

50

51

52

53

54

55

562

00

71

0

20

07

12

20

08

02

20

08

04

20

08

06

20

08

08

20

08

10

20

08

12

20

09

02

20

09

04

20

09

06

20

09

08

20

09

10

20

09

12

20

10

02

20

10

04

20

10

06

20

10

08

20

10

10

20

10

12

20

11

02

20

11

04

20

11

06

20

11

08

20

11

10

20

11

12

20

12

02

20

12

04

20

12

06

20

12

08

20

12

10

$Trillions#MillionsEquifax

First Mortgage Portfolio Loans & Balances

Number of first mortgages drops from 55 million to 49 million

Home purchase mortgages are at levels seen in mid 1990s

Source: Mortgage Bankers Association

Even refinancing activity is well below previous peaks

Source: Mortgage Bankers Association

Origination Credit Scores are at unprecedented highs

Source: Lender Processing Services

New lending has returned for Autos, CC’s

© Equifax Confidential and Proprietary

$75.5

$52.4

$41.2$45.2 $45.0

$46.6

$59.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxStudent Loan Origination Loan Amount Year-to-Date

$172.4

$151.7$133.3

$82.3

$109.3

$128.4$146.7

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Auto Finance Origination Loan Amount Year-To-Date

$125.1 $127.7 $121.8$106.9 $107.5

$120.0$136.3

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxAuto Bank Origination Loan Amount Year-To-Date

US Credit Orignations

6 © Equifax Confidential and Proprietary

$75.5

$52.4

$41.2$45.2 $45.0

$46.6

$59.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxStudent Loan Origination Loan Amount Year-to-Date

$172.4

$151.7$133.3

$82.3

$109.3

$128.4$146.7

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Auto Finance Origination Loan Amount Year-To-Date

$125.1 $127.7 $121.8$106.9 $107.5

$120.0$136.3

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxAuto Bank Origination Loan Amount Year-To-Date

US Credit Orignations

6

© Equifax Confidential and Proprietary

$195.9 $202.0 $196.8

$93.8$77.7

$97.2$117.9

$0

$50

$100

$150

$200

$250

$300

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxBankcard Origination Credit Limit Year-To-Date

$50.7

$61.0$56.0

$43.5$34.9 $36.6

$41.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Retail Card Origination Credit Limit Year-To-Date$83.3 $85.6

$72.8

$40.3$36.9

$38.1 $40.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Consumer Finance Origination Credit Limit Year-To-Date

$239.4

$215.5

$133.7

$59.1 $46.8 $47.1 $51.7

$0

$50

$100

$150

$200

$250

$300

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Home Equity Origination Credit Line Year-To-Date

US Credit Originations

5

© Equifax Confidential and Proprietary

$195.9 $202.0 $196.8

$93.8$77.7

$97.2$117.9

$0

$50

$100

$150

$200

$250

$300

2006 2007 2008 2009 2010 2011 2012

$Billions EquifaxBankcard Origination Credit Limit Year-To-Date

$50.7

$61.0$56.0

$43.5$34.9 $36.6

$41.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Retail Card Origination Credit Limit Year-To-Date$83.3 $85.6

$72.8

$40.3$36.9

$38.1 $40.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Consumer Finance Origination Credit Limit Year-To-Date

$239.4

$215.5

$133.7

$59.1 $46.8 $47.1 $51.7

$0

$50

$100

$150

$200

$250

$300

2006 2007 2008 2009 2010 2011 2012

$BillionsEquifax

Home Equity Origination Credit Line Year-To-Date

US Credit Originations

5

New Auto Finance

New Home Equity New Bankcard Credit

New Bank Auto Loans

Source: Equifax Credit Trends

© Equifax Confidential and Proprietary

US Bankcard

US Bankcard Originations Sub Prime Card Lenders have opened

underwriting to Sub Prime,

rebounding from the 2009-2010

pullback. Originations increases

have recently slowed as compared

to  last  year’s  originations.

Sub Prime Card is defined by

Origination Risk Scores < 660.

16

YEAR ANNUAL %YOY YEAR TO DATE %YOY CURRENT MO %YOY

2006 27.5 - - - - - 17.2 - - - - - 2.4 - - - - -

2007 29.1 5.8% 19.8 15.1% 2.5 5.1%

2008 18.4 -36.6% 13.4 -32.1% 1.5 -38.9%

2009 7.5 -59.2% 4.8 -64.0% 0.5 -64.7%

2010 8.5 12.4% 4.8 0.2% 0.8 41.9%

2011 12.0 41.4% 7.6 56.4% 1.1 46.0%

2012 - - - - - - - - - - 7.8 2.9% 1.1 -0.3%

NUMBER OF SUB PRIME BANKCARDS (MILLIONS)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

J06 J07 J08 J09 J10 J11 J12

#MillionsEquifax

Number of Bankcard Originations: Sub Prime

Subprime Bankcard (and Auto) lending has returned (FICO

Good news: Household formation is below trend…but will catch up

Thousands

Source: Census Bureau

Trendline: March 2001 to December 2007

Conclusion for housing policy

•  Policy has not stabilized US housing nearly as much as it could have

•  Future government actions should focus on re-establish reasonable lending standards and ground rules

•  Need private capital, but in a sustainable way with countercyclical credit support

•  Rental market for single-family homes is growing, but is not a long-run solution