Demystifying the Mortgage Meltdown: What It Means for Main Street, - - PowerPoint PPT Presentation
Demystifying the Mortgage Meltdown: What It Means for Main Street, Wall Street and the U.S. Financial System James R. Barth James R. Barth Glenn Yago Glenn Yago Senior Fellow Director of Capital Studies Milken Institute October 2, 2008 1
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2
Treasury Secretary Henry Paulson March 16, 2008 CNN
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Treasury Secretary Henry Paulson September 19, 2008 Press release
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5
December 2006–September 2008
550 650 Dow Jones U.S. Financial Index
Ownit Mortgage,
Century, a
HSBC sets
Fed cuts discount rate to 2.4%; Fed funds rate to 2.25%.
banks as much as $200 billion in loans; Fed introduces Term Securities Lending Facility.
JP Morgan Chase offers to buy Bear Stearns; Fed introduces Primary Dealer Credit Facility.
Merrill announces $7.9 billion in subprime write- downs, surpassing Citi’s $6.5 billion.
2008: First Priority Bank closes. Feburary–March 2007: More than 25 subprime lenders declare bankruptcy.
NetBank goes bankrupt.
Countrywide gets emergency loan of $11 billion from a group of banks. July 30, 2008: President Bush signs a
Lehman files for bankruptcy.
Fed loans AIG
6
Sources: BusinessWeek, S&P, Global Insight, Milken Institute.
250 350 450
Ownit Mortgage, a subprime lender, files for bankruptcy. Century, a mortgage broker, files for bankruptcy. HSBC sets aside $10.6 billion for bad loans, including subprime. July 31, 2007: Two Bear Stearns hedge funds file for bankruptcy.
discount rate to 5.75%; Fed introduces Term Discount Window Program.
Bank of America agrees to buy Countrywide.
cuts discount rate to 3.5%. June 9, 2008: Lehman announces a $2.8 billion loss. July 11, 2008: IndyMac is seized by FDIC.
Fed introduces Term Auction Facility.
President Bush introduces tax rebate stimulus program of $168 billion.
American Home Mortgage files for bankruptcy. Bush signs a housing rescue law.
seizes Fannie Mae and Freddie Mac. Fed loans AIG $85 billion.
Washington Mutual is seized by FDIC.
Citigroup agrees to buy Wachovia bank.
7
Government- controlled 46%
Total value of housing stock = $19.3 trillion Mortgage debt $10.6 trillion Prime 91.6% Subprime 8.4% Securitized 58%
8
Note: total residential and commercial mortgages = $14.7 trillion; 5 percent = $700 billion
Private sector- controlled 54%
Equity in housing stock $8.7 trillion 91.6% Non-securitized 42%
Sources: Federal Reserve, Milken Institute.
80 million houses 27 million are paid off 53 million have mortgages 48 million are paying on time
9
48 million are paying on time 5 million are behind
This compares to 50% seriously delinquent in the 1930s.
(9.2% of 53 million with 2.8% in foreclosure)
Sources: U.S. Treasury, Milken Institute.
10 10
Federal funds rate vs. rates on FRMs and ARMs
5 6 7 8 Percent 30-year FRM rate
11 11
1 2 3 4 2001 2002 2003 2004 2005 2006 2007 2008 Record low from June 25, 2003, to June 30, 2004: 1% 1-year ARM rate Target federal funds rate
Sources: Federal Reserve, Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.
Index, January 2000 = 100 2.5 3.0 3.5 4.0 150 200 250 US$ trillions Home
US$ trillions 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Percent
12 12
0.0 0.5 1.0 1.5 2.0 2001 2003 2005 2007 50 100 Home mortgage
(left axis) S&P/Case-Shiller National Home Price Index (right axis)
Sources: Inside Mortgage Finance, Mortgage Bankers Association, Moody’s Economy.com, S&P/Case-Shiller, Milken Institute.
0.0 0.5 1.0 1.5 2.0 2.5 2001 2003 2005 2007 3.0 3.5 4.0 4.5 1-Year ARM rate (right axis) Home mortgage
(left axis)
13 13
68 69 70 Percent
Q2 2004: 69.2% Q2 2008: 68.1%
400 500 600 700 US$ thousands
California m edian hom e price U.S. m edian California average 1987-2008
Credit boom pushes homeownership rate to historic high Home price bubble peaks in 2006 California and national home prices reach record highs
280 330 380 Index, January 1987 = 100
S&P/ Case-Shiller National Hom e Price Index
14 14
64 65 66 67 1998 2000 2002 2004 2006 2008
Average, 1965–Q2 2008: 65.2%
100 200 300 400 1998 2000 2002 2004 2006 2008
U.S. m edian hom e price U.S. average, 1987-2008: $121,280 1987-2008 $229,748
80 130 180 230 1998 2000 2002 2004 2006 2008
OFHEO Hom e Price Index
Sources: U.S. Census Bureau, OFHEO, Moody’s Economy.com, S&P/Case-Shiller, California Association of Realtors, Milken Institute.
4.2 5.6 7.0 0.9 1.2 1.5 Millions Millions
Existing hom e sales (left axis)
1.5 2.0
January 2006: 1.8 m illion
Housing units, millions
2 3 4 0.4 0.6 0.8 Millions
Existing homes for sale (left axis)
Millions
15 15
0.0 1.4 2.8 1998 2000 2002 2004 2006 2008 0.0 0.3 0.6
New hom e sales (right axis)
0.0 0.5 1.0 1998 2000 2002 2004 2006 2008
July 2008: 641,000 Average starts, 1959–July 2008: 1.1 m illion
Sources: U.S. Census Bureau, OFHEO, Moody’s Economy.com, Milken Institute.
1 2 1998 2000 2002 2004 2006 2008 0.0 0.2 0.4
New homes for sale (right axis)
16 16
National FICO scores display wide distribution What goes into a FICO score?
18 27 30 40 Percentage of population Subprime = 21% Prime = 79% Payment history 35% New credit 10% Types of credit in use 10%
17 17
Sources: myFICO.com, Milken Institute.
2 5 8 12 15 18 13 10 20 up to 499 500- 549 550- 599 600- 649 650- 699 700- 749 750- 799 800+ Subprime = 21% Amounts owed 30% Length of credit history 15%
Prime Subprime 12 16 20 Percent of total originations FICO below 620 Prime: 6.6% Subprime: 45.2% FICO above 620 Prime: 93.4% Subprime: 54.8%
18 18
4 8
5 9 4 6
7 9 4 8
9 9 5
1 9 5 2
3 9 5 4
5 9 5 6
7 9 5 8
9 9 6
1 9 6 2
3 9 6 4
5 9 6 6
7 9 6 8
9 9 7
1 9 7 2
3 9 7 4
5 9 7 6
7 9 7 8
9 9 8
FICO score
Sources: LoanPerformance, Milken Institute.
5.0 6.0 7.0 8.0 Percent 30-year FRM rate
19 19
2.0 3.0 4.0 5.0 2001 2002 2003 2004 2005 2006 2007 2008 1-year ARM rate
Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.
15 20 25 Percent of all outstanding home mortgages
20 20
Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.
5 10 2001 2002 2003 2004 2005 2006 2007 2008
30 40 50 60 FHA ARM Prime ARM Subprime ARM Percent of mortgage type
21 21
10 20 30 2001 2002 2003 2004 2005 2006 2007 2008
Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.
3.0 4.0 Subprime Prime US$ trillions Subprime's share: 7.8% 7.4% 8.4% 18.2% 21.3% 20.1% 7.9%
22 22
0.0 1.0 2.0 2001 2002 2003 2004 2005 2006 2007 Q2 2008 7.8% 0.9%
Sources: Inside Mortgage Finance, Milken Institute.
540 625 600 400 500 600 700 US$ billions US$ billions 699 973 1,200 1,240 940 895 800 1,000 1,200 1,400
Average annual growth rates 1995–2006: 14% 2006–Q1 2008: -23%
Originations Outstandings
23 23
160 200 310 191 14 100 200 300 400 2001 2002 2003 2004 2005 2006 2007 Q2 2008 479 574 200 400 600 2001 2002 2003 2004 2005 2006 2007 Q1 2008
Sources: Inside Mortgage Finance, Milken Institute.
H2 2008
24 24
2001, $2.2 trillion 2% 5% 7.9% 7% 2006, $3.0 trillion 33.2% 13% 14% 2.7% 2007, $2.4 trillion 11% 14% 4.9% Q1 2008, $480 billion 4% 9% 9.6% 2% 8%
25 25
FHA & VA Conventional, conforming prime Jumbo prime Jumbo prime Subprime Alt-A Home equity loans
Sources: Inside Mortgage Finance, Milken Institute.
57.1% 20% 13% 20% 16% 47.3% 8% 14% 67.2%
Other ARM 7% Prime conventional ARM hybrids
Alt-A
Other ARM 23%
Subprime
Other ARM 4%
Fixed 9%
30-year ARM balloon
26 26
23% Fixed 70%
Fixed 31%
ARM hybrids 46%
Sources: Freddie Mac, Milken Institute.
with 40- to 50-year amortization 26% 2- and 3-year hybrids 61%
27 27
Securitized 15.6%
Held in
Residential mortgage loans 1980: Total = $958 billion Residential mortgage loans Q2 2008: Total = $11.3 trillion
28 28
Held in portfolio 84.4%
Held in portfolio 41% Securitized 59%
Sources: Federal Reserve, Milken Institute.
40 45 43 42 45 47 50 57 62 65 68 68 68 50 60 70 80 Percent of all subprime mortgages securitized since 1994
29 29
31 29 33 40 10 20 30 40 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q1 2008 Q2 2008
Sources: Inside Mortgage Finance, Milken Institute.
New securities issuance
21% 2% 42%
1985 Total = $110B
13% 20%
2001 Total = $1.3T
18% 4% 56%
2006 Total = $2.0T
15% 6%
First half 2008 Total = $734B
30 30
Ginnie Mae Freddie Mac Fannie Mae Private-label
Sources: Inside Mortgage Finance, Milken Institute.
35%
Total = $110B
29% 38%
Total = $1.3T
22%
Total = $2.0T
33% 46%
Total = $734B
Outstanding securities
13% 6% 55%
1985
14% 18%
2001
35% 7% 25%
2006
30% 7% 26%
First half 2008
31 31
Ginnie Mae Freddie Mac Fannie Mae Private-label
26%
Total = $390B
39% 29%
Total = $3.3T
33%
Total = $5.9T
37%
First half 2008 Total = $6.8T Sources: Inside Mortgage Finance, Milken Institute.
32 32
4.5 5.0 Median home price/ median household income 2005: 4.69
Ratio of home price to household income surges Home mortgage share of household debts reaches a new high in 2007 Debt-to-income ratio
increased rapidly
125 150 Home mortgage debt/disposable personal income Percent
Q4 2007: 139.5%
70 75 Percent Q2 2007: 73.7%
33 33
2.5 3.0 3.5 4.0 1998 2001 2004 2007 Average, 1967–2007: 3.38 2007: 4.29
Sources: U.S. Census Bureau, OFHEO, Federal Reserve, Moody’s Economy.com, Milken Institute. 75 100 125 1998 2001 2004 2007 Average, 1957–2007: 79.7%
60 65 70 1998 2001 2004 2007 Q2 2008: 73.4% Average, 1952–2008: 64.2%
34 34
150 200 250 World War I World War II 1970’s boom 1980’s boom Current boom Annualized growth rate of nominal home index: 3.4% Index, 2000 = 100 Great Depression
35 35
50 100 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Long-term trend line
Sources: Robert Shiller, Milken Institute.
Change in home prices in 100 plus years
5 10 15 20 25 30 World War I Great Depression World War II 1970’s Boom 1980’s Boom Current Boom Average, 1890–2007: 3.7% Percentage change in nominal home price, year ago
36 36
5 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 +/- one standard deviation
Sources: Robert Shiller, Milken Institute.
S&P/Case-Shiller 10 city OFHEO S&P/Case-Shiller national 5 10 15 20 Home price indices, percent change on a year earlier
37 37
Sources: S&P/Case-Shiller, OFHEO, Moody’s Economy.com, Milken Institute.
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
United States: - 9.3% (fourth-quarter annualized growth)
38 38
Source: Freddie Mac.
48.4 48.0 28.2 27.9 26.8 26.3 26.3 26.0 24.4 22.9
Seattle Portland Washington New York Phoenix Los Angeles Tampa Miami Las Vegas Charlotte
One year ago… Five years ago…
Charlotte Dallas Denver Boston Portland Seattle New York Cleveland Atlanta Chicago Minneapolis 39 39 20.5 18.6 14.3 9.1 6.6 6.5 6.1 5.9 4.8
Composite 10 Composite 20 Chicago San Francisco Atlanta Dallas San Diego Boston Denver Minneapolis Cleveland Detroit
% change in price, June 07-08 % change in price, June 03-08
Sources: S&P/Case-Shiller, Milken Institute.
Minneapolis Washington Composite 20 Detroit Composite 10 Tampa San Francisco San Diego Los Angeles Phoenix Miami Las Vegas
Housing starts sharply decline Homes sit longer
… as home appreciation slows
15 30 Percent change, year ago
8 10 12 Number of months that homes sit on the market Existing homes
10 20 2 4
Percentage change from year ago in m edian hom e sales price (left axis)
Percent Months
40 40
Note: Shaded area represents fluctuation within one standard deviation from mean (1.28%) Sources: Mortgage Bankers Association, OFHEO, Moody’s Economy.com, Milken Institute.
1998 2000 2002 2004 2006 2008 June 2008: -41.9% July 2008: -39.2%
2 4 6 1998 2000 2002 2004 2006 2008 New homes
1999 2001 2003 2006 2008 6 8 10 12
Num ber of m onths hom es stay on m arket (right axis)
41 41
1,150 1,400 1,650 1,900 2,150 Thousands of foreclosures per year Average 661,362 annual foreclosures from Q2 1999 to Q2 2006
42 42
400 650 900 1,150 Q 2 1 9 9 9 Q 4 1 9 9 9 Q 2 2 Q 4 2 Q 2 2 1 Q 4 2 1 Q 2 2 2 Q 4 2 2 Q 2 2 3 Q 4 2 3 Q 2 2 4 Q 4 2 4 Q 2 2 5 Q 4 2 5 Q 2 2 6 Q 4 2 6 Q 2 2 7 Q 4 2 7 Q 2 2 8 Average 661,362 annual foreclosures from Q2 1999 to Q2 2006
Sources: Mortgage Bankers Association, Milken Institute.
1,150 1,400 1,650 1,900 2,150 Thousands of foreclosures per year Average 1,316,220 annual forclosures from Q3 2006 to Q2 2008
43 43
Sources: Mortgage Bankers Association, Milken Institute.
400 650 900 1,150 Q 2 1 9 9 9 Q 4 1 9 9 9 Q 2 2 Q 4 2 Q 2 2 1 Q 4 2 1 Q 2 2 2 Q 4 2 2 Q 2 2 3 Q 4 2 3 Q 2 2 4 Q 4 2 4 Q 2 2 5 Q 4 2 5 Q 2 2 6 Q 4 2 6 Q 2 2 7 Q 4 2 7 Q 2 2 8 Average 661,362 annual foreclosures from Q2 1999 to Q2 2006
1,200 1,600 2,000 Subprime FHA and VA Prime (includes Alt-A) Subprime: 12% of mortgages serviced (March 2008) 54% Number of home mortgage foreclosures started (annualized, in thousands) 50%
44 44
400 800
June 2004
June 2005
June 2006
June 2007
March 2008 37% 29% 34% 36% 29% 35% 37% 29% 34% 44% 22% 34% 47% 20% 33% 52% 17% 31% 55% 13% 32% 56% 11% 33% 9% 37% 8% 42%
Sources: Inside Mortgage Finance, Milken Institute.
Home mortgages delinquent or in foreclosure (percent of number) 15 20 25 30 35 Q2 2008, Subprime ARM: 33.4% Subprime FRM: 11.8% Prime FRM: 3.0% FHA and VA: 5.8%
45 45
5 10 15 Q2 1998 Q1 1999 Q4 1999 Q3 2000 Q2 2001 Q1 2002 Q4 2002 Q3 2003 Q2 2004 Q1 2005 Q4 2005 Q3 2006 Q2 2007 Q1 2008
Sources: Mortgage Bankers Association, Milken Institute.
46 46
< 20% >= 20% and < 35% >= 35% and < 50% >= 50%
Sources: Zillow.com, Milken Institute.
United States = 44.8%
47 47
< 15% >= 15% and < 30% >= 30% and < 45% >= 45%
Sources: Zillow.com, Milken Institute.
United States = 32.7%
48 48
< 1% >= 1% and < 25% >= 25% and < 40% >= 40%
Sources: Zillow.com, Milken Institute.
United States = 18.6%
49 49
120 160 200 36,000 48,000 60,000 US$ billions Capital raised (left axis) Jobs cut (right axis) Number of jobs cut
50 50
Note: Q3 data are through September 25, 2008. Sources: Bloomberg, Milken Institute.
40 80 Prior quarters Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 (through 12,000 24,000 Losses/write-downs (left axis) (left axis)
Cumulative losses/write-downs, capital raised, and jobs cut by financial institutions worldwide
400 500 600 80,000 100,000 120,000 140,000 Number of jobs cut US$ billions Capital raised (left axis) Jobs cut (right axis)
51 51
Note: Q3 data are through September 25, 2008. Sources: Bloomberg, Milken Institute.
100 200 300 Prior quarters Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 (through 20,000 40,000 60,000 80,000 Losses/write-downs (left axis) Capital raised (left axis)
US$ billions, through September 25, 2008 Losses /write-downs Capital raised Citigroup, United States 55.1 49.1 Merrill Lynch, United States 52.2 29.9 UBS, Switzerland 44.2 28.2 HSBC, United Kingdom 27.4 5.1 Wachovia, United States 22.7 11.0
52 52
Wachovia, United States 22.7 11.0 Bank of America, United States 21.2 20.7 Morgan Stanley, United States 15.7 5.6 IKB Deutsche, Germany 15.0 12.3 Washington Mutual, United States 14.8 12.1 Royal Bank of Scotland, United Kingdom 14.4 23.5 World total 521.9 379.2
Sources: Bloomberg, Milken Institute.
Washington Mutual Lehman Brothers Freddie Mac Fannie Mae AIG Bear Stearns* Wachovia Percentage change in stock price, December 2006–September 2008
53 53
Note: * Bear Stearns stock price is to May 2008. ** Countrywide stock price is to June 2008. Sources: Bloomberg, Milken Institute.
5.5 Wachovia Countrywide** Merrill Lynch Morgan Stanley UBS Equity Goldman Sachs Bank of America JP Morgan & Chase Wells Fargo
AIG Wachovia Bank of America UBS Equity Morgan Stanley Fannie Mae Merrill Lynch Total loss in market value: $728 billion, December 2006–September 2008
54 54
4 17 Merrill Lynch Washington Mutual Freddie Mac Lehman Brothers Goldman Sachs Countrywide** Bear Stearns* Wells Fargo JP Morgan & Chase
Note: * Bear Stearns stock price is to May 2008. ** Countrywide stock price is to June 2008. Sources: Bloomberg, Milken Institute.
US$ billions
55 55
40 60 80 100 Net percentage of domestic respondents tightening standards for commercial real estate loans LTCM Dotcom The end of S&L crisis Subprime
56 56
Sources: Federal Reserve, Milken Institute.
20 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
1,000 1,200 1,400 1,600 1,800 Basis points, spread over 10-year Treasury bond Merrill Lynch Mortgage-Backed Securities Index Merrill Lynch High-Yield Bond Index Maximum spread: 08/29/2008: 955.8 bps
57 57
200 400 600 800 01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008 07/2008 Merrill Lynch High-Yield Bond Index
Sources: Merrill Lynch, Bloomberg, Milken Institute.
100 120 140
Septem ber 19, 2008: 127.5 bps
Basis points
Average since
Spread between 3-month LIBOR and
Spread between 3-month LIBOR and T-bill rate
250 300 350
August 20, 2007: 240 bps
Basis points
Septem ber 18, 2008: 313 bps
58 58
20 40 60 80 2006 2007 2008
Average since Decem ber 2001: 21.1 bps August 2007: 69.8 bps
Sources: Bloomberg, Milken Institute.
50 100 150 200 2006 2007 2008
Average since 1985: 76 bps Average since August 2007: 130 bps
300 400 500 Basis points Government announces support for Fannie Mae and Freddie Mac Lehman Brother files for bankruptcy and Merrill Lynch acquired AIG rescued
Average CDS spread, basis points
59 59
Note: Counterparty Risk index averages the market spreads of the credit default swaps (CDS) of fifteen major credit derivatives dealers, including ABN Amro, Bank of America, BNP Paribas, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, HSBC, Lehman Brothers, JPMorgan Chase, Merrill Lynch, Morgan Stanley, UBS, and Wachovia. Sources: Datastream, Milken Institute.
100 200 07/2007 09/2007 11/2007 01/2008 03/2008 05/2008 07/2008 09/2008 Bear Stearns acquired
50 100 150 Quarterly change in outstanding amount, US$ billions
60 60
Sources: Federal Reserve, Milken Institute.
Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Issuers of asset-backed securities Other issuers
5 6 7 8 9 10 2.5 3.0 3.5 4.0 4.5 5.0 Freddie Mac 30-year fixed mortgage rate (left axis) Percent Percent 30-year FRM rate (left axis)
61 61
1 2 3 4 5 01/2007 03/2007 06/2007 09/2007 12/2007 02/2008 05/2008 08/2008 0.0 0.5 1.0 1.5 2.0 2.5 Federal funds rate (left axis)
Spread (right axis)
Sources: Freddie Mac, Federal Reserve, Moody’s Economy.com, Milken Institute.
HOPE NOW The Economic Stimulus Act of 2008 Housing and Economic Recovery Act of 2008 Conservatorship of Fannie Mae and Freddie Mac
62 62
Temporary guaranty program for money market funds Temporary ban on short selling in selected
Bailout package?
63 63
Economists say the economy isn’t at its low point yet, and house prices likely won’t get there until 2009
Does this feel like the bottom to a downturn? Yes 27% When will home prices hit bottom? 6% 2nd half 1st half 2010
64 64
No 73% 4% 17% 38% 29% 1st half 2008 2nd half 2008 1st half 2009 2nd half 2009
Source: Wall Street Journal.
5.0 5.5 6.0 6.5 Q2 1971: 6.08% Annual rents as percent of home prices
65 65
Sources: Davisa, Lehnertb, Martin (2007), Milken Institute.
3.0 3.5 4.0 4.5 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Q4 2006: 3.48% Q1 2008: 3.93% Average, 1960–Q1 2008: 5.04% Average, 2000–Q1 2008: 4.06%
Annual home price decline
3.80% 2010 Q3 2008 Q4 2008 Q2 2008 Q2 2008 Q2 ratio
Annual home price decline required
66 66
4.00% 2013 Q1 2009 Q4 2008 Q3 2008 Q2 2008 Q2 5.00% 2024 Q1 2014 Q1 2010 Q4 2009 Q3 2009 Q1 5.04% average 2024 Q3 2014 Q2 2010 Q4 2009 Q3 2009 Q1 Rent-to-price rat 6.00% 2026 Q4 2017 Q3 2012 Q3 2010 Q4 2009 Q4
Sources: Davisa, Lehnertb, Martin (2007), Milken Institute.
2,500 3,000 3,500 4,000 US$/month
Payment with 100% LTV Payment with 90% LTV Payment with 80% LTV Mortgage payment assumptions: Every month, a home is purchased at median price, buyer takes out a 30-year conforming, fixed-rate loan with 80%
insurance.
67 67
500 1,000 1,500 2,000 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Maximum affortablility limit is 38% of median household
insurance.
Sources: Moody’s Economy.com, Milken Institute.
68 68
2,443 879 1,410 2,067 944 886 1,000 1,500 2,000 2,500 3,000 US$ billions
69 69
500 1,000 Fannie Mae: total assets Fannie Mae: total MBS
Freddie Mac: total assets Freddie Mac: total MBS
Commercial banks: total residential real estate assets Savings institutions: total residential real estate assets
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
1,301 1,778 2,443 1,410 1,500 2,000 2,500 3,000 US$ billions Total assets Total MBS outstanding
70 70
Sources: Freddie Mac, Fannie Mae, Milken Institute.
133 41 1,022 803 844 805 886 879 288 316 1,301 752 1,123 500 1,000 1,500 Fannie Mae 1990 Freddie Mac 1990 Fannie Mae 2003 Freddie Mac 2003 Fannie Mae 2006 Freddie Mac 2006 Fannie Mae 2Q 2008 Freddie Mac 2Q 2008
167x 244x 150 200 250 300 Mortgage book of business over capital measures Fannie Mae Freddie Mac
71 71
60x 56x 48x 55x 60x 58x 52x 57x 64x 81x 56x 65x 59x 50 100 150 Core capital Fair value Core capital Fair value 2005 2006 2007 2008Q2
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
Freddie Mac, 2007 Freddie Mac, 2006 Subprime Alt-A All others 57.4% 13.1% 29.5% 61.2% 25.0% 13.8% $122.2 billion $76.1 billion
72 72
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
Fannie Mae, 2007 Fannie Mae, 2006 Fannie Mae, 2005 33.8% 4.3% 32.0% 46.4% 36.1% 17.5% 32.1% 37.4% 30.5% 57.4% 13.1% 29.5% $86.9 billion $97.3 billion $94.8 billion
23.7 21.5 67.9 Federal Home Loan Banks Fannie Mae Freddie Mac Leverage ratio, total assets/common equtity
73 73
9.1 9.8 9.4 31.6 Credit unions Commercial banks Savings institutions Brokers/hedge funds
Sources: Federal Deposit Insurance Corporation, Office of Federal Housing Enterprise Oversight, National Credit Union Administration, Bloomberg, Google Finance, Milken Institute.
28 19 22 26 27 19 31 24 23 34 32 33 31 22 28 30 24 22 25 30 35 40 2000 2005 2007 June 2008 Total assets/total shareholder equity
74 74
Sources: Bloomberg, FDIC, Milken Institute.
19 18 19 n.a. 5 10 15 20 Bear Stearns Merrill Lynch Morgan Stanley Lehman Brothers Goldman Sachs
AAA AA+ AA AA- A+ A A- BBB+
1,000 2,000 3,000 4,000 5,000 Number of securities rated 4,090, or 51%, of new securities rated by S&P were rated AAA
Most new securities issued in 2007 were rated AAA by S&P
S&P Total Downgraded Downgraded / Total AAA 1,032 156 15.1% AA(+/-) 3,495 1,330 38.1% A(+/-) 2,983 1,886 63.2%
56 percent of MBS issued from 2005 to 2007 were eventually downgraded
75 75
BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC+ CCC- CC C D
S&P were rated AAA A(+/-) 2,983 1,886 63.2% BBB(+/-) 2,954 2,248 76.1% BB(+/-) 789 683 86.6% B(+/-) 8 7 87.5% Total 11,261 6,310 56.0%
Sources: Bloomberg, Inside Mortgage Finance, Milken Institute.
Note: A bond is considered investment grade if its credit rating is BBB- or higher by S&P
Origination of mortgage loans High-grade CDO Senior AAA 88% Junior AAA 5% Pool of mortgage AA 3% loans: prime or subprime A 2% BBB 1% Unrated 1%
76 76
Sources: International Monetary Fund, Milken Institute.
Mortgage bonds AAA 80% AA 11% A 4% Mezzanine CDO BBB 3% CDO-squared BB-unrated 2% Senior AAA 62% Junior AAA 14% Senior AAA 60% AA 8% Junior AAA 27% A 6% AA 4% CDO-cubed… BBB 6% A 3% Unrated 4% BBB 3% Unrated 2%
US$ millions 1,014 946 813 800 1,000 1,200
37.3 52.9 40 50 60 Number of cases reported, thousands 37.3 52.9 40 50 60 Number of cases reported, thousands
77 77
293 225 429 200 400 600 2002 2003 2004 2005 2006 2007
Sources: Financial Crimes Enforcement Network, Federal Bureau of Investigation, Milken Institute.
1. 7 2.3 2.9 3.5 4.7 5.4 9.5 18.4 26.0 10 20 30 1997 1999 2001 2003 2005 2007 1. 7 2.3 2.9 3.5 4.7 5.4 9.5 18.4 26.0 10 20 30 1997 1999 2001 2003 2005 2007
51 68 74 79 84 87 95 Loan amount Presence of prepayment penalty for refinance in two years Presence of charges for optional credit insurance Reason why the interest rate and APR sometimes differ Property tax and homeowner’s insurance cost amount Total up-front cost amount Prepayment penalty amount
Percent of respondents who could not correctly identify various loan costs using current disclosure forms
78 78
Sources: Federal Trade Commission, Milken Institute.
20 20 21 23 30 32 33 37 51 APR amount Cash due at closing amount Monthly payment (including whether it includes taxes and insurance) Settlement charges amount Balloon payment (presence and amount) Interest rate amount Whether loan amount included finances settlement charges Which loan was less expensive Loan amount
15 20 25 Detroit Bakersfield Riverside Fort Lauderdale Las Vegas Stockton Sacramento Toledo Cleveland Weak economies Housing bubbles Foreclosures per 1,000 homes
79 79
Sources: U.S. Treasury Department, RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.
5 10
20 40 60 80 100 120 140 Five-year price gain, Q3 2002–Q3 2007 (percent) Miami Bakersfield Fresno Fort Lauderdale Orlando Phoenix Palm Beach Tampa San Diego Oakland Sacramento Atlanta Memphis Columbus Indianapolis Toledo Dayton Denver Cleveland Akron Warren National average
25 30 35 40 45 Weak economies strengthen Stockton Bakersfield Riverside Las Vegas Fort Lauderdale Sacramento Oakland Denver Foreclosures per 1,000 homes National average Collaping housing bubbles
80 80
Sources: RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.
5 10 15 20 25
5 Price change, 2007–June 2008 (percent, annualized) Miami Orlando Phoenix Fresno Sacramento San Diego Detroit Warren Cleveland Dayton Columbus Indianapolis Palm Beach Tampa Toledo Akron Atlanta Memphis
81 81
National banks State commercial and savings banks Federal savings banks Insurance companies Securities brokers/dealers Other financial companies, including mortgage companies and brokers
Fed is the umbrella or consolidated regulator
Agency
Fannie Mae, Freddie Mac, and Federal Home Loan Banks Financial, bank and thrift holding companies
82 82
regulators
commerical banks
regulators plus District of Columbia and Puerto Rico
regulators
(if needed)
for some products
regulator
regulator
regulator Federal branch Foreign branch Limited foreign branch Primary/ secondary functional regulator
Notes: Justice Department: Assesses effects of mergers and acquisitions on competition Federal Courts: Ultimate decider of banking, securities, and insurance products CFTC: Commodity Futures Trading Commission FDIC: Federal Deposit Insurance Corporation Fed: Federal Reserve FINRA: Financial Industry Regulatory Authority GSEs: Government Sponsored Enterprises OCC: Comptroller of the Currency OTS: Office of Thrift Supervision SEC: Securities and Exchange Commission
Sources: Financial Services Roundtable (2007), Milken Institute.
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