The Long and Short of Housing

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The Long and Short of Housing

• The Home Ownership Boom and the Subprime
  Foreclosure Bust
• John C. Weicher

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Overview

• What stemmed the subprime debacle?
• What does the past tell us?
• Mitigating the impact of subprime foreclosure
• Future of subprime
• National Trends
• Subprime debacle in perspective

3
Growth Change

• Subprime barely existed 20 years ago
• Recent years 15 -20 of home mortgages
• Growth stemmed from 3 public policy changes
• Tax Reform Act
• FIRREA
• Federal encouragement of conventional MBS
  market

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1986 Tax Reform Act

• Consumer Interest tax deductions ended except
  home mortgages
• Adversely effected consumer loan market
• Spurred market for Home Equity Lending

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Federal Institutions Reform, Recovery and
Enforcement Act of 1989

• Established new regulatory framework for savings
  institutions
• Mortgage lenders became mortgage brokers
• Had to meet less flexible GSE standards to
  securitize

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Federal Encouragement of Conventional MBS Market

• Previously, financial markets only willing to
  accept MBS with Federal guarantee
• MBS by fully privatized institutions was
  successful by the late 80s
• Subprime MBS beginning to earn acceptance by
  early 90s

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As the market grew, subprime changed

• 1990s Refinance or debt consolidations
• and low LTVs
• 2002 Home purchases 1/3 of subprime
• and LTVs 90
• 2006 Home purchase 44 and high LTVs

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How Big is the Problem?

• Problems are concentrated in loans made between
  2004 2006
• Estimate that 10.8 of subprime ARMs are in
  default half enter foreclosure 200,000
• If include subprime fixed rate 300,000

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No Housing Bubble

• Housing starts have fallen drastically
• Rate of price increases have decelerated sharply
• Bubble Defined Rapid increase in house price
  followed by a sharp fall
• FDIC definition
• 30 increase over 3 years with a 15 decrease
  over 5 years
• Adjusted for inflation increase of 40-45 and
  15 decrease

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Forbearance

• Practice of forbearance is growing
• FHA started program in 99 10,000 in
  forbearance, now 70,000
• Conventional lenders are participating
• Wall Sts option ticking time bomb

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Regulation

• End of 2006 lenders were tightening standards
• 10 / 06 - Financial regulators issued guidance on
  non-traditional mortgage products
• Guidance on Subprime lending 6 / 07

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Education

• Immigrants
• Financial literacy programs
• Counseling
• HUD 2006 funded 1.5 million families
• Congress 20MM 2001 to 45 MM in 2005 through
  2007

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Information Revolution

• Lenders are better able to measure risk
• 15- 20 years ago LTV was the best indicator
• Now have credit histories
• Automated underwriting systems
• Total Scorecards
• Subprime has overshot ability to measure risk

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Conclusion

• Subprime foreclosures will be large
• Short term problem 2004 2006 subprime
  originations
• No indication that it will spread to prime market
• Short term subprime debacle will not be limited
  by the long term fundamentals in the housing
  mortgage markets

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What has happened since?
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4Q 08 7.88
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4Q 08 3.3
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Actual Outcome

• Housing Bubble
• Delinquencies foreclosures spread to prime
  market
• Long term housing fundamentals have helped to
  scale down problems
• Long term problem
• My prediction See shift in delinquencies

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Bureau of Labor StatisticsUnemployment Rate