Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
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