Quantitative Easing & the Housing Market

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CARRINGTON INVESTMENT SERVICES

599 PUTNAM AVENUE

GREENWICH, CT 06830

American Enterprise Institute

April 9, 2013

Quantitative Easing & the Housing Market

Carrington Investment Services is a SEC registered broker-dealer, member of FINRA and S IPC



1

Quantitative Easing & Housing

QE is a radical Fed policy intended to reflate asset, job markets

Fed funds target has been set at 0.25% since 2008

FOMC is purchasing $40 billion per month of agency securities and $45b/m of Treasury paper, reinvesting principal payments into RMBS

FOMC (3/13): “… these actions should maintain downward pressure onlonger-term interest rates, support mortgage markets, and help to make

broader financial conditions more accommodative”

FOMC believes that QE will help to revive job market and boost activityin housing, consumer sectors, indirectly create jobs

QE is effectively a massive tax; a wealth transfer from individual andcorporate savers to debtors, constraining spending by former

QE also represents significant reduction/manipulation of the duration offinancial assets, creating future credit, liquidity risk to banks, individualinvestors when QE policy ends

April 9, 2013



2

Net Interest Margin – All US Banks ($M)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000Total interest income

Total interest expense

Net interest income

Source: FDIC Quarterly Banking Profile (12/31/2012)

QE has lowered bank funding cost by $80 billion per quarter

April 9, 2013



3

2013 Housing Market Outlook

Key housing metrics are pointing in the right direction…

Home prices are appreciating steadily

• January 2013 up 8.1% YOY, best in six years

• Consensus forecast is for 3-4% increase in 2013

• For first time since 2006, no quarterly winter price decline

Existing home sales are up• Anticipated sales of 4.9-5.0mm units

New home sales are up dramatically

• Anticipated sales of 400-450,000

Housing starts are at multi-year highs

• Home builders are running 2-3x 2011 run rates

Delinquency and foreclosure rates are down

• Bank charge-offs at 1% of total loans down from over 2.5% in 2009

April 9, 2013



4

Case-Shiller 10/20 City Index

0.00

50.00

100.00

150.00

200.00

250.00

J a n u a r y 1 9 8 7

O c t o b e r 1 9 8 7

J u l y 1 9 8 8

A p r i l 1 9 8 9

J a n u a r y 1 9 9 0

O c t o b e r 1 9 9 0

J u l y 1 9 9 1

A p r i l 1 9 9 2

J a n u a r y 1 9 9 3

O c t o b e r 1 9 9 3

J u l y 1 9 9 4

A p r i l 1 9 9 5

J a n u a r y 1 9 9 6

O c t o b e r 1 9 9 6

J u l y 1 9 9 7

A p r i l 1 9 9 8

J a n u a r y 1 9 9 9

O c t o b e r 1 9 9 9

J u l y 2 0 0 0

A p r i l 2 0 0 1

J a n u a r y 2 0 0 2

O c t o b e r 2 0 0 2

J u l y 2 0 0 3

A p r i l 2 0 0 4

J a n u a r y 2 0 0 5

O c t o b e r 2 0 0 5

J u l y 2 0 0 6

A p r i l 2 0 0 7

J a n u a r y 2 0 0 8

O c t o b e r 2 0 0 8

J u l y 2 0 0 9

A p r i l 2 0 1 0

J a n u a r y 2 0 1 1

O c t o b e r 2 0 1 1

J u l y 2 0 1 2

Composite-10 CSXR-SA

Composite-20 SPCS20R-SA

Source: Standard & Poor's (3/31/2013) April 9, 2013



5

2013 Housing Market Outlook

But it’s a slow, atypical recovery in housing prices

Economic growth is weak

• Unemployment rates are stubbornly high, creating 150-200k jobs monthly

Existing home sales will be 2mm off peak levels in 2013

• Household formation will grow, but homeownership rates will decline

Home prices have recovered - but only to 2003 levels

• Low inventory levels and investor interest price drivers

• Mix of properties sold (fewer REOs) contributing to price hikes

Mortgage origination is expected to decline this year & next

• Credit remains tight – and QM rules will likely make it tighter

•

Total 1-4 lending down $200-300 billion in 2013 to $1.4 trillion• Very little non-agency mortgage lending

• Bank refinance “boom” probably peaked end of 2012

April 9, 2013



6

Banks Not Supporting Housing Sector

No net bank credit growth under home price recovery

Fed QE policy dramatically reduced cost of funds forbanking sector, but this is not translating into growth inbank credit for 1-4 family home purchases

Tougher credit criteria, increased regulatory hurdleslargely offsetting cheaper bank funding costs. Banksfocused on writing prime loans for FHA, agency market

Flat to down lending by banks, plus reduced servicing,agency balances, adding to tight credit markets for manyborrowers. Agency loan guarantee fees have doubled andwill go higher over next several years

April 9, 2013



7

Loans for Real Estate, All Banks ($M)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Loans secured by real estate

1-4 Family residential mortgages

Nonfarm nonresidential

Construction and development

Home equity lines

Multifamily residential real estate


Bank portfolio of residential real estate loans flat to down…

April 9, 2013



8

Unused Credit Lines, All Banks ($M)


Exposure at default for residential, commercial real estate flat…

April 9, 2013



9

Exposure at Default: Top 50 Banks (%)

Source: FDIC RIS/The IRA Bank Monitor (12/31/2012)

50

100

150

200

250

300

Citi

Peer Avg

JPM

April 9, 2013



10

Gross Defaults: Top 50 Banks (bp)

Source: FDIC RIS/The IRA Bank Monitor (12/31/2012)

0

100

200

300

400

500

600

M a r - 0 0

S e p - 0 0

M a r - 0 1

S e p - 0 1

M a r - 0 2

S e p - 0 2

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

C

Peer Avg

JPM

April 9, 2013



11

Non-Performing Loans, All Banks: ($M)

Source: FDIC Quarterly Banking Profile (12/31/2012) April 9, 2013

0

20,000

40,000

60,000

80,000

100,000

120,000

2 0 1 2 : Q 4

2 0 1 2 : Q 1

2 0 1 1 : Q 2

2 0 1 0 : Q 3

2 0 0 9 : Q 4

2 0 0 9 : Q 1

2 0 0 8 : Q 2

2 0 0 7 : Q 3

2 0 0 6 : Q 4

2 0 0 6 : Q 1

2 0 0 5 : Q 2

2 0 0 4 : Q 3

2 0 0 3 : Q 4

2 0 0 3 : Q 1

2 0 0 2 : Q 2

2 0 0 1 : Q 3

2 0 0 0 : Q 4

2 0 0 0 : Q 1

1 9 9 9 : Q 2

1 9 9 8 : Q 3

1 9 9 7 : Q 4

1 9 9 7 : Q 1

1 9 9 6 : Q 2

1 9 9 5 : Q 3

1 9 9 4 : Q 4

1 9 9 4 : Q 1

1 9 9 3 : Q 2

1 9 9 2 : Q 3

1 9 9 1 : Q 4

1 9 9 1 : Q 1

1 9 9 0 : Q 2

1 9 8 9 : Q 3

1 9 8 8 : Q 4

1 9 8 8 : Q 1

1 9 8 7 : Q 2

1 9 8 6 : Q 3

30-89 days past due

90 days or more pastdue

In nonaccrual status



12

Estimated Originations: 1990-2014 ($B)

April 9, 2013

0

100

200

300

400

500

600

700

800

900

2 0 0 0 - Q 1

2 0 0 0 - Q 3

2 0 0 1 - Q 1

2 0 0 1 - Q 3

2 0 0 2 - Q 1

2 0 0 2 - Q 3

2 0 0 3 - Q 1

2 0 0 3 - Q 3

2 0 0 4 - Q 1

2 0 0 4 - Q 3

2 0 0 5 - Q 1

2 0 0 5 - Q 3

2 0 0 6 - Q 1

2 0 0 6 - Q 3

2 0 0 7 - Q 1

2 0 0 7 - Q 3

2 0 0 8 - Q 1

2 0 0 8 - Q 3

2 0 0 9 - Q 1

2 0 0 9 - Q 3

2 0 1 0 - Q 1

2 0 1 0 - Q 3

2 0 1 1 - Q 1

2 0 1 1 - Q 3

2 0 1 2 - Q 1

2 0 1 2 - Q 3

2 0 1 3 - Q 1

2 0 1 3 - Q 3

2 0 1 4 - Q 1

2 0 1 4 - Q 3

Mortgage Originations: 1-4 Family:

Purchase (Bil.$)

Mortgage Originations: 1-4 Family:

Refinance (Bil.$)

Source: Mortgage Bankers Association (3/31/2013)

Mortgage originations for refinance and purchase are falling



13

Bank Loan Servicing & Sales ($M)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Q4 2012Q3 2012Q2 2012Q1 2012Q4 2011

Total Loans Serviced

1-4 Family Loans Sold


April 9, 2013



14

Non-Bank Securitization ($B)

Source: Deutsche Bank, Thomson Reuters, Bloomberg (12/31/2013)

0

50

100

150

200

250

300

350

400

450

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

RMBS/Other

Equipment

Credit Card

Student Loan

Auto

April 9, 2013



15

Households and Homeownership Rate

April 9, 2013



16

Basel III, Dodd-Frank & Housing

New bank capital regulations are offsetting benefit of QE

Basel III and other regulations literally forcing commercialbanks out of real estate sector, creating huge opportunityfor non-banks

The total amount of credit provided to the US housing

sector directly by banks and indirectly via private labelsecuritizations has not recovered

Non-banks have an enormous opportunity to take share,customers from commercial banks in new loan originationand loan servicing sectors

Hundreds of billions of dollars worth of loans, MSRs andother assets likely to be sold by banks next three years,remaking the residential mortgage market

April 9, 2013



17

Basel III and Housing

LTV Ratio Category 1 RiskWeight

Category 2 RiskWeight

0-59% 35% 75%

60-79% 50% 100%

80-89% 75% 150%

90-100% 100% 200%

Source: BIS, Board of Governors (12/31/2012)

Basel III risk weights negative for credit availability to housing

April 9, 2013



18

Basel III, Risk & Housing

Basel III, Dodd-Frank Offset Fed Efforts via QE

Credit: Basel III places big premium on “AAA” rated,

Low-LTV, prime assets across the board. Residentialmortgages have 10x risk weight vs. Basel 2.5

Liquidity: Market risk is big factor under Basel III, forcing

banks into shorter duration prime assets (floaters, ARMs,short CMOs) and commercial assets such as auto loans andcredit cards

Capital: AOCI filter under Basel III also pushes banks intoshorter duration assets (autos, credit cards, prime loans)

CFPB: New rules for “qualified mortgage” push lendersinto prime loans, discourage non-QM lending by banks

April 9, 2013



19

Conclusion

Q: Is QE Behind the Recovery in Housing? A: Yes

QE has changed investor risk preferences

• Large investor participation in market for residential homes

• Mom & Pop, institutional investors involved broadly in price rally

Recovery is not supported by traditional fundamentals

• Declining bank lending, agency volumes

• Weak employment, GDP, home ownership

End of bank refinancing boom not a function of QE

• Policy drivers behind refinancing boom have run course

• Streamlined refinancing rules likely to have modest impact in 2013

Falling yields may cool investor passion• Gross yields on public rental strategies imply net 4-5% net returns

• HPA seen in 2012-2013 may not be easy to capture

April 9, 2013



20

Contact Information

Christopher WhalenManaging Director & Executive Vice President

Carrington Investment Services LLC599 West Putnam Avenue

Greenwich, CT 06830Office: 203-661-6186

[email protected]

April 9, 2013

Documents

Quantitative Easing & the Housing Market