Post on 23-Dec-2015
transcript
U.S. Subprime U.S. Subprime Mortgage Market MeltdownMortgage Market Meltdown
James R. BarthAuburn University and Milken Institute
jbarth@milkeninstitute.org
14th Dubrovnik Economic ConferenceThe Croatian National Bank
Dubrovnik, CroatiaJune 25–28, 2008
“Any real-estate investment is a good investment … ”
… NOT!… NOT!
“Any real-estate investment
is a good investment … ”
62
63
64
65
66
67
68
69
70
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Percent
Homeownership Rate Reaches Historic High in 2004
69.2% in September 2004
67.8% in March 2008
Source: U.S. Census Bureau.
2008
Home Prices Peak in 2006
Sources: U.S. Office of Federal Housing Enterprise Oversight (OFEHO), Standard & Poor's, California Association of Realtors, Moody's Economy.com.
S&P/Case-Shillerhome price index
OFHEO conventional and conforming home
price index
California median home price
0
100
200
300
400
500
600
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Index, January 1987 = 100
S&P/Case-Shillerhome price index
OFHEO conventional and conforming home
price index
California median home price
0
100
200
300
400
500
600
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Index, January 1987 = 100
S&P/Case-Shillerhome price index
OFHEO conventional and conforming home
price index
California median home price
0
100
200
300
400
500
600
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Index, January 1987 = 100
S&P/Case-Shiller 10 city
OFHEO
S&P/Case-Shiller national
-15
-10
-5
0
5
10
15
20
1988 1992 1996 2000 2004 2008
Home Price Appreciation Peaks in 2005
House-price indices, % change on a year earlier
A Longer-Term Perspective on Home Prices
Source: Robert J. Shiller, 2006.
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
1890=100
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
1890=100
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
1890=100
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
60
80
100
120
140
160
180
200
220
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
100
120
140
160
180
200
220
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
1890=100
80
60
-20%
-10%
0%
10%
20%
30%
40%
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
WorldWar I
GreatDepression
WorldWar II
1970’sBoom
1980’sBoom
CurrentBoom
History Repeats Itself: Home Prices Don’t Just Go Up
Change in Home Prices in 100 plus years Percentage change, year ago
Source: Robert J. Shiller, 2006.
Homes for Sale Take Off
Source: U.S. Census Bureau.
0.0
0.6
1.2
1.8
2.4
3.0
3.6
4.2
4.8
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Existing homes (Left axis)
New homes (Right axis)
0.0
0.6
1.2
1.8
2.4
3.0
3.6
4.2
4.8
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Existing homes (Left axis)
New homes (Right axis)
Millions Millions
20082007200620052004200320022001200019991998
6.5
6.0
5.5
5.0
4.5
4.0
1.4
1.2
1.0
0.8
0.6
0.4
Millions, SAAR Millions, SAAR
Single-family Home Sales Reach New High Before Plunging
Sources: U.S. Census, National Association of Realtors, Moody’s Economy.com.
Existing homes (Left axis)
New homes (Right axis)
Existing Home Sales Are Down Everywhere Over the Past Two Years
Source: Freddie Mac.
Percent change in existing home sales Fourth-quarter 2005 through fourth-quarter 2007
Existing home sales nationwide down 29%
Median Existing Single-family Home Price: Too Good to Last
Sources: National Association of Realtors, Moody’s Economy.com.
20082007200620052004200320022001200019991998
20
15
10
5
0
-5
-10
-15
Percent change, year ago
Forty-six States Had Falling Prices in the Fourth Quarter 2007
Source: Freddie Mac.
United States: - 9.3% (fourth-quarter annualized growth)
Single-family Housing Starts
Sources: U.S. Census Bureau, Global Insight.
20082007200620052004200320022001200019991998
40
20
0
-20
-40
-60
Percent change, year ago
Single-family Building Hit a Record in 2005 But Was 53% Lower Two Years Later
Thousands, SAAR
Housing starts: Single-family privately owned
0200400600800
1,0001,2001,4001,6001,8002,000
Source: U.S. Census Bureau.
20082007200620052004200320022001200019991998
4.0
3.5
3.0
2.5
2.0
1.5
1.0
11
10
9
8
7
6
5
4
3
Millions Months
Homes Sit Longer on the Market
Sources: National Association of Realtors, Moody’s Economy.com.
Months supply (Right axis)
Homes available for sale
(Left axis)
Home Prices and Credit Boom
Index, January 2000 = 100
S&P/Case-Shiller®
home price index (L)
Total originations
(R)
Subprime originations
(R)
0
50
100
150
200
250
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500US$ billions
20082007200620052004200320022001200019991998
7
6
5
4
3
2
1
0
Percent
Interest Rates: Too Low Too Long? Fed Funds Rate vs. Rate on Long-term Government Bonds
Sources: Federal Reserve, Global Insight.
Fed funds rate
Government bond rate
200820072006200520042003200220012000199919981997
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
Percent
Sources: Mortgage Banker’s Association, Moody’s Economy.com.
30-yr fixed
1-yr ARM
Mortgage Rates: ARMs Appear Attractive to Many
ARM Share of Mortgages
Sources: U.S. Federal Housing Finance Board, Freddie Mac, Moody’s Economy.com.
200820072006200520042003200220012000199919981997
40
35
30
25
20
15
10
5
Percent
Share of all applications
Share of all loans
ARM Share of Mortgages
Source: Mortgage Bankers Association.
11.7 12.0 11.9
14.814.4
15.8
16.9
17.9
19.0
20.220.6 20.9
21.721.3 21.4
21.1 20.920.2
20.9 20.8
9
11
13
15
17
19
21
23
Percent of all loans
ARM Mortgage Share by Loan Type
Source: Mortgage Bankers Association.
0
10
20
30
40
50
60
70
FHAPrimeSubprime
Percent of loan type
Prime and Subprime Home Mortgage Originations
YearTotal Originations
(US$ Trillions)
Share of Total (%)
Prime Originations
SubprimeOriginations
1994 0.77 95.5 4.5
1995 0.64 89.8 10.2
1996 0.79 87.7 12.3
1997 0.86 85.5 14.5
1998 1.45 89.7 10.3
1999 1.31 87.8 12.2
2000 1.05 86.8 13.2
2001 2.22 92.2 7.8
2002 2.89 92.6 7.4
2003 3.95 91.6 8.4
2004 2.92 81.8 18.2
2005 3.12 78.7 21.3
2006 2.98 79.9 20.1
2007 2.43 92.1 7.9
2008 Q1 0.48 97.9 2.1
Source: Inside Mortgage Finance.
Mortgage Originations by Product
Subprime and Alt A shares quadruple between 2001 and 2006, then fall in 2007.
Conventional, conforming prime Jumbo prime
Subprime Alt-A
FHA & VA Home equity loans
Conventional, conforming prime Jumbo prime
Subprime Alt-A
FHA & VA Home equity loansSource: Inside Mortgage Finance.
2001 $2.2 trillion
19.4%
8.4%
4.6%
2.6% 8.0%
56.9%
2006 $3.0 trillion
16.1%20.1%
14.4%
13.4%
2.7%
33.2%
2007 $2.4 trillion
14.3%
7.9%
14.4%
11.3%
4.9%
47.3%
2001 $2.2 trillion
19.4%
8.4%
4.6%
2.6% 8.0%
56.9%
2006 $3.0 trillion
16.1%20.1%
14.4%
13.4%
2.7%
33.2%
2007 $2.4 trillion
14.3%
7.9%
14.4%
11.3%
4.9%
47.3%
Subprime
Other ARM 4%Fixed
9%
30Yr ARM Balloon W/
40-50-Yr Amtz 26%
2-year & 3-year hybrids 61%
Primeconventional
Fixed 70%
ARM Hybrids23%
Other ARM7%
Alt-A
ARMhybrids46%Fixed
31%
Other ARM23%
Subprime
Other ARM 4%Fixed
9%
30Yr ARM Balloon W/
40-50-Yr Amtz 26%
2-year & 3-year hybrids 61%
Primeconventional
Fixed 70%
ARM Hybrids23%
Other ARM7%
Alt-A
ARMhybrids46%Fixed
31%
Other ARM23%
Subprime
Other ARM 4%Fixed
9%
30Yr ARM Balloon W/
40-50-Yr Amtz 26%
2-year & 3-year hybrids 61%
Primeconventional
Fixed 70%
ARM Hybrids23%
Other ARM7%
Alt-A
ARMhybrids46%Fixed
31%
Other ARM23%
Subprime
Other ARM 4%Fixed
9%
30Yr ARM Balloon W/
40-50-Yr Amtz 26%
2-year & 3-year hybrids 61%
Primeconventional
Fixed 70%
ARM Hybrids23%
Other ARM7%
Alt-A
ARMhybrids46%Fixed
31%
Other ARM23%
2/28 ARMs Dominate Subprime Home-purchase Loan Originations in 2006
Source: Freddie Mac.
Other ARM
Subprime Mortgage Loans Outstanding
Source: Inside Mortgage Finance.
US$ billions
344 382 416
574
973
699
479319
283290
1,200
940895
1,240
0
200
400
600
800
1,000
1,200
1,400
Distribution of Prime and Subprime Residential Mortgage Originations by FICO Score
(2006)
PrimeSubprime
0%
2%
4%
6%
8%
10%
12%
14%
16%
Percent of Total Originations
FICO Score
National Distribution of FICO Scores
2
5
8
12
15
18
27
13
0
5
10
15
20
25
30
up to499
500-549 550-599 600-649 650-699 700-479 750-799 800
Percentage of Population
Origin of “Securitization”
“But I don’t know any other word to describe what we are doing. You will have to use it
(securitization).”
Lewis Ranieri
“The Origins of Securitization, Sources of Its Growth, and Its Future Potential,” A Primer on Securitization
Surge in Amount and Diversity of U.S. Asset-backed Securities Outstanding
Source: Securities Industry and Financial Markets Association.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1999 2000 2001 2002 2003 2004 2005 2006 2007
US$ trillionsOther
Student Loans
Home Equity
Credit Card
Automobile
Non-agencyMBSAgency CMO
Agency MBS
U.S. Asset-backed Securities Outstanding
Source: Securities Industry and Financial Markets Association.
Agency MBS54%
Agency CMO16%
Non-agency MBS9%
Automobile3%
Credit Card6%
Home Equity3%
Student Loans1%
Other8%
Agency MBS46%
Agency CMO14%
Non-agency MBS14%
Automobile2%
Credit Card4%
Home Equity6%
Student Loans3%
Other11%
1999, Total = US$4,235 Billions 2007, Total = US$9,682 Billions
Home Mortgage Security Issuance
1985, Total = $110 Billion
Non-Agency
2%FNMA21%
FHLMC35%
GNMA42%
2006, Total = $2.1 Trillion
GNMA4% FHLMC
18%
FNMA22%
Non-Agency
56%
2007, Total = $1.9 Trillion
GNMA5%
FHLMC24%
FNMA33%
Non-Agency
38%
Outstanding Home Mortgage Securities
1986, Total = $548 Billion
Non-Agency
MBS3%Fannie
Mae MBS18%
Freddie Mac PCs
31%
Ginnie Mae MBS
48%
2006, Total = $5.7 Trillion
Ginnie Mae MBS
7%
Freddie Mac PCs
26%
Fannie Mae MBS
35%
Non-Agency
MBS32%
2007, Total = $6.6 Trillion
Ginnie Mae MBS
7%
Freddie Mac PCs
26%
Fannie Mae MBS
35%
Non-Agency
MBS32%
Private-label Mortgage-backed Security Issuance Has Fallen Sharply
Source: Inside Mortgage Finance.
Dollar amount of Issuance, US$ billions
85 94 99 97 101
1920 14
3437
8
52 30
16
7
0
50
100
150
200
Subprime & other
Alt-A
Prime Jumbo
Freddie Mac &Fannie Mae
Dollar amount of Issuance, US$ billions
85 94 99 97 101
1920 14
3437
8
52 30
16
7
0
50
100
150
200
Subprime & other
Alt-A
Prime Jumbo
Freddie Mac &Fannie Mae
March 2007$191 Billion
June 2007$181 Billion
Sep. 2007$137 Billion
Dec. 2007$109 Billion
April 2008$102 Billion
Origination Shares of Mortgage Brokers Account for Majority of Home Mortgage Originations
Source: Wholesale Access.
80%
2006 Number of mortgage brokers:
53,000
Others42% Brokers
58%
1987 Number of mortgage brokers:
7,000
Others
Brokers20%
2006 Number of mortgage brokers:
53,000
Others42% Brokers
58%
1987 Number of mortgage brokers:
7,000
Others
Brokers20%
Monoline Insurers’ Financial Guarantees of Securities Increase, But What Happens If They Cannot Be Honored?
19%
6%19%
11%
45%
Mortgage-BackedSecurities: U.S.
Other Asset-Backed Securities:U.S.Mortgage-BackedSecurities:InternationalOther Asset-Backed Securities:InternationalOther
Structured Finance,
$2.2 Trillion, 62%
Public Finance, $1.3 Trillion,
38%
Net Par Outstanding = $3.5 TrillionDecember 2006
34%15%
15%
8%28%
GeneralObligation
UtilityRevenue
Tax-BackedRevenue
TransportationRevenue
Other
Securitization: Originate to Distribute vs. Originate to Hold
0%
20%
40%
60%
80%
100%
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
OtherNon-Agency
Issuers
Government-Sponsored
Enterprises and Agencies
Saving Institutions
Commercial Banks
Subprime Crisis Overview December 2006–March 2008
Sources: BusinessWeek (March 31, 2008), Standard & Poor’s and Global Insight.
1,600
1,550
1,500
1,450
1,400
1,350
1,300
1,250
S&P 500 Index
Dec. 06: OwnitMortgage, a subprime
lender, files for bankruptcy
Apr. 07: New Century, a mortgage broker, files for bankruptcy
Feb. 07: HSBC says it set aside $10.6 billion
for bad loans, incl. subprime
Jul. 07: Two Bear Stearns hedge funds
file for bankruptcy
Aug. 07: Fed cuts discount rate to
5.75%
Jan. 11, 08: BofA agrees to buy Countrywide
Jan. 30, 08: Fed cuts discount rate to 3.5%
Mar. 18, 08: Fed cuts discount rate to 2.4%; Fed
funds rate to 2.25%
Mar. 11, 08: Fed offers troubled banks as
much as $200 billion
Mar. 16, 08: JP Morgan offers
to buy Bear Stearns
2008 Q12006 Q4
Oct. 07: Merrill announces $7.9b in subprime write-downs, surpassing Citi’s
$6.5 billion
2007 Q1 2007 Q2 2007 Q3 2007 Q4
1,600
1,550
1,500
1,450
1,400
1,350
1,300
1,250
S&P 500 Index
Dec. 06: OwnitMortgage, a subprime
lender, files for bankruptcy
Apr. 07: New Century, a mortgage broker, files for bankruptcy
Feb. 07: HSBC says it set aside $10.6 billion
for bad loans, incl. subprime
Jul. 07: Two Bear Stearns hedge funds
file for bankruptcy
Aug. 07: Fed cuts discount rate to
5.75%
Jan. 11, 08: BofA agrees to buy Countrywide
Jan. 30, 08: Fed cuts discount rate to 3.5%
Mar. 18, 08: Fed cuts discount rate to 2.4%; Fed
funds rate to 2.25%
Mar. 11, 08: Fed offers troubled banks as
much as $200 billion
Mar. 16, 08: JP Morgan offers
to buy Bear Stearns
1,600
1,550
1,500
1,450
1,400
1,350
1,300
1,250
S&P 500 Index1,600
1,550
1,500
1,450
1,400
1,350
1,300
1,250
S&P 500 Index
Dec. 06: OwnitMortgage, a subprime
lender, files for bankruptcy
Apr. 07: New Century, a mortgage broker, files for bankruptcy
Feb. 07: HSBC says it set aside $10.6 billion
for bad loans, incl. subprime
Jul. 07: Two Bear Stearns hedge funds
file for bankruptcy
Aug. 07: Fed cuts discount rate to
5.75%
Jan. 11, 08: BofA agrees to buy Countrywide
Jan. 30, 08: Fed cuts discount rate to 3.5%
Mar. 18, 08: Fed cuts discount rate to 2.4%; Fed
funds rate to 2.25%
Mar. 11, 08: Fed offers troubled banks as
much as $200 billion
Mar. 16, 08: JP Morgan offers
to buy Bear Stearns
2008 Q12006 Q4
Oct. 07: Merrill announces $7.9b in subprime write-downs, surpassing Citi’s
$6.5 billion
2007 Q1 2007 Q2 2007 Q3 2007 Q4
Ratio of Median Home Price to Median Household Income Surges
2.5
3.0
3.5
4.0
4.5
5.0
'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06
Median Home Price/Median Household Income
55
60
65
70
75
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Percent
Home Mortgage Share of Household Liabilities Reaches a New High in 2007
Source: Federal Reserve.
Leverage of U.S. Households has Increased Rapidly Since 1980
Home mortgage debts as % of disposable personal income
Sources: Federal Reserve and Moody’s.
55
60
65
70
75
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Percent
Sixty-day plus Home Mortgage Delinquency Rates Are on the Rise
Alt A
Jumbo prime
Subprime
0%
5%
10%
15%
20%
25%
Sources: First American Corelogic and LoanPerformance databases.
Alt-A
Subprime ARM Defaults Are 12 Times Those for Prime
Delinquent or In Foreclosure (Percent of Number)
Prime, 2.08
Subprime ARM, 26.09
Subprime FRM, 9.82
FHA & VA, 5.96
0
5
10
15
20
25
30
Q2 19
98
Q4 19
98
Q2 19
99
Q4 19
99
Q2 20
00
Q4 20
00
Q2 20
01
Q4 20
01
Q2 20
02
Q4 20
02
Q2 20
03
Q4 20
03
Q2 20
04
Q4 20
04
Q2 20
05
Q4 20
05
Q2 20
06
Q4 20
06
Q2 20
07
Q4 20
07
Subprime Loans Accounted for Over Half of Foreclosures Since 2006
Source: Mortgage Bankers Association National Delinquency Survey(data as of December 2007, number expanded to reflect 85% coverage).
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
33%
52%
17%
31%
55%
13%
32%
54%
9%
37%
Subprime: 13% of loans serviced (December)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
33%
52%
17%
31%
55%
13%
32%
54%
9%
37%
Subprime: 13% of loans serviced (December)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
33%
52%
17%
31%
55%
13%
32%
54%
9%
37%
Subprime: 13% of loans serviced (December)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
33%
52%
17%
31%
55%
13%
32%
54%
9%
37%
Subprime: 13% of loans serviced (December)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
Number of foreclosures started (Annualized rate in thousands)
0
300
600
900
1,200
1,500
1,800
2003H2
2004H1
2004H2
2005H1
2005H2
2006H1
2006H2
2007H1
2007H2
Subprime
FHA and VA
Prime (includes Alt-A)
37%
29%
34%
37%
29%
34%
36%
29%
35%
44%
22%
34%
47%
20%
33%
56%
11%
33%
52%
17%
31%
55%
13%
32%
54%
9%
37%
Subprime: 13% of loans serviced (December)
Less than 60% 60%-110%110%-180%More than 180%
Percent Change in Delinquency Rate of Subprime ARM Loans Between 2005Q2 and 2007Q2
Sources: Mortgage Bankers Association, Milken Institute.
National Subprime Foreclosure Ratesby Origination Year*
1999 2000 2001 2002 2003 2004 2005 2006Year to
July 2007
Originate year 1.30 1.50 1.85 1.07 0.82 0.86 0.97 2.56 3.011st year 6.33 6.86 7.17 5.51 4.14 3.93 6.38 7.692nd year 5.46 6.01 5.81 4.55 3.11 3.66 4.663rd year 4.85 3.35 4.23 2.37 2.23 1.854th year 2.29 2.49 1.88 1.56 0.835th year 2.05 1.19 1.17 0.596th year 0.79 0.71 0.487th year 0.56 0.308th year 0.24
188,026 165,801 140,195 124,781 127,100 176,729 231,360 140,278 13,272
787,420 739,749 620,945 797,625 1,143,037 1,716,141 1,925,780 1,368,706 440,934
23.88 22.41 22.58 15.64 11.12 10.30 12.01 10.25 3.01
Total Number of Foreclosures From
Origination through September 2007
Total Number of Originations
Foreclosure Rate through September 2007
*Foreclosure rates are based on the number of loans starting foreclosure.
Foreclosure Rates in Origination Year and
Subsequent Years
Origination Year
For
eclo
sure
Yea
r
California Subprime Foreclosure Ratesby Origination Year*
1999 2000 2001 2002 2003 2004 2005 2006Year to
July 2007
Originate year 0.88 0.76 1.01 0.70 0.48 0.50 0.76 5.20 4.881st year 4.03 3.72 4.29 3.18 2.08 2.04 5.97 14.102nd year 3.01 2.99 2.74 1.68 0.79 1.46 5.513rd year 2.66 1.26 1.17 0.36 0.34 0.854th year 0.93 0.49 0.22 0.16 0.125th year 0.46 0.11 0.12 0.066th year 0.12 0.07 0.047th year 0.06 0.028th year 0.03
9,160 8,389 9,528 9,137 8,944 16,161 39,198 31,295 2,973
75,224 88,915 99,412 148,796 235,065 333,327 320,200 162,134 60,871
12.18 9.43 9.58 6.14 3.80 4.85 12.24 19.30 4.88
Total Number of Foreclosures From
Origination through September 2007
Total Number of Originations
Foreclosure Rate through September 2007
*Foreclosure rates are based on the number of loans starting foreclosure.
Foreclosure Rates in Origination Year and
Subsequent Years
Origination Year
For
eclo
sure
Yea
r
Determinants of Delinquency andForeclosure Rates in CBSAs
January 1999–December 2006
VariablesC -16.868*** -8.036*** -7.780*** -3.035*** -10.365*** -6.498***ARM 21.771*** 22.567*** 11.523*** 12.191*** 10.089*** 10.202***FICO < 620 9.757*** 1.563* 3.266*** -1.068** 7.767*** 4.017***LTV > 80 53.410*** 33.103*** 27.963*** 17.067*** 24.812*** 15.692***LOWNODOC 17.031*** 20.549*** 7.628*** 10.058*** 9.867*** 11.075***Interaction of All Four Loan Characteristics
201.692*** 164.110*** 118.785*** 89.430*** 73.308*** 62.224***
Population 1.688*** 0.823** 0.949***Median Family Income Growth -2.048*** -0.768** -1.719***Home Price Growth -25.700*** -13.091*** -11.435***Unemployment 1.340*** 0.719*** 0.613***Average Loan Size -0.049*** -0.028*** -0.021***
Adjusted R-square 0.6466 0.7043 0.6200 0.6768 0.6395 0.6962Number of Observations 34224 34224 34224 34224 34224 34224Number of CBSAs 360 360 360 360 360 360
60+ Days Delinquent and In Foreclosure
90+ Days Delinquent and In Foreclosure In Foreclosure
Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes core-based statistical area. Includes CBSA fixed effects.
Determinants of Delinquency andForeclosure Rates in CBSAs
January 1999–December 2005
VariablesC -20.594*** -14.972*** -10.032*** -7.082*** -11.168*** -8.664***ARM 23.762*** 24.692*** 12.482*** 13.304*** 11.056*** 11.228***FICO < 620 10.678*** 5.818*** 4.407*** 1.788*** 6.731*** 4.553***LTV > 80 60.163*** 41.033*** 31.243*** 20.929*** 27.730*** 19.273***LOWNODOC 12.880*** 20.157*** 6.113*** 10.506*** 7.556*** 10.328***Interaction of All Four Loan Characteristics
307.380*** 187.290*** 166.440*** 92.650*** 128.897*** 84.331***
Population 2.161*** 1.351*** 0.964***Median Family Income Growth -2.213*** -1.101*** -1.320***Home Price Growth -18.750*** -9.630*** -8.970***Unemployment 1.480*** 0.796*** 0.650***Average Loan Size -0.057*** -0.033*** -0.023***
Adjusted R-square 0.6396 0.6927 0.6085 0.6626 0.6355 0.6852Number of Observations 30036 30036 30036 30036 30036 30036Number of CBSAs 360 360 360 360 360 360
60+ Days Delinquent and In Foreclosure
90+ Days Delinquent and In Foreclosure In Foreclosure
Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes core-based statistical area. Includes CBSA fixed effects.
Determinants of Delinquency andForeclosure Rates in CBSAs
January 1999–December 2004
VariablesC -16.427*** -15.111*** -7.510*** -6.824*** -9.204*** -8.671***ARM 26.290*** 27.469*** 13.680*** 14.619*** 12.423*** 12.364***FICO < 620 1.228 0.125 -0.868 -1.482** 2.051*** 1.617***LTV > 80 61.173*** 48.908*** 31.379*** 24.678*** 28.574*** 23.128***LOWNODOC 3.752*** 9.777*** 1.451* 5.173*** 2.487*** 4.438***Interaction of All Four Loan Characteristics
521.907*** 351.432*** 280.018*** 178.666*** 237.738*** 174.602***
Population 2.254** 1.346*** 0.877**Median Family Income Growth -2.403*** -1.251*** -1.402***Home Price Growth -13.716*** -6.812*** -6.535***Unemployment 1.478*** 0.799*** 0.684***Average Loan Size -0.061*** -0.035*** -0.025***
Adjusted R-square 0.6329 0.6746 0.5987 0.6417 0.6328 0.6730Number of Observations 25848 25848 25848 25848 25848 25848Number of CBSAs 360 360 360 360 360 360
60+ Days Delinquent and In Foreclosure
90+ Days Delinquent and In Foreclosure In Foreclosure
Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes core-based statistical area. Includes CBSA fixed effects.
The Mortgage Problem in Perspective
80 million houses25 million are paid off
55 million have mortgages 51 million are paying on-time
4 million are behind
This compares to 50% seriously delinquent in the 1930s
(8% of 55 million with 2% in foreclosure)
Source: U.S. Treasury Department.
“A billion here, a billion there, and A billion here, a billion there, and pretty soon you’re talking real pretty soon you’re talking real
money.”money.”
-- U.S. Senator Everett Dirksen, 1961-- U.S. Senator Everett Dirksen, 1961
““A billion^here, a billion^there, A billion^here, a billion^there, and pretty soon you’re talking real and pretty soon you’re talking real
money.”money.”
-- U.S. Senator Everett Dirksen, -- U.S. Senator Everett Dirksen, 19611961
Estimates of Losses From Subprime Crisis
Date Estimate Source7/19/2007 $50-100 billion Bernanke testimony before congress
10/17/2007 $100-200 billion William C. Dudley, NY Fed
11/8/2007 $150 billion Bernanke testimony before Congress
11/15/2007 $400 billion Deutsche Bank
11/16/2007 $400 billion Goldman Sachs
12/19/2007 $200-300 billion The Economist
1/31/2008 $120 billion Wall Street Journal
2/11/2008 $400 billion German finance minister at G7 meeting
3/3/2008 $170 billion Wikipedia
3/3/2008 $600 billionGeraud Charpin, head of European credit strategy at UBS in London
3/10/2008 $215 billion Head of Japan's financial regulator
3/13/2008 $285 billion Standard and Poor’s
Supbrime’s Biggest Losers
Source: Bloomberg.
The collapse of credit markets in the United States, driven by the subprime loan crisis, has led to major losses for banks worldwide.
38.237.0
19.516.1
15.414.8
12.69.89.7
9.18.4
7.77.0
42.9CitigroupUBS
Merrill LynchHSBC
IKB Deutsche Royal Bank of Scotland
Bank of AmericaMorgan Stanley
JPMorgan ChaseCredit Suisse
Washington MutualCredit AgricoleDeutsche Bank
Wachovia
Losses/write-downs through May 27, 2008, US$ billions
Recent Losses/Write-downs and Capital Raised by Financial Institutions
Total2Q 2008
(through May 27)
Loss /Write-down
Capital Raised
Loss /Write-down
Capital Raised
Citigroup, United States 42.9 44.1 0.0 12.9
UBS, Switzerland 38.2 28.8 0.0 16.2
Merrill Lynch, United States 37.0 17.9 0.0 4.3
HSBC, United Kingdom 19.5 2.0 0.0 2.0
IKB Deutsche, Germany 16.1 13.3 0.0 0.0
Royal Bank of Scotland, United Kingdom 15.4 23.8 0.0 23.8
Bank of America, United States 14.8 19.7 0.0 6.7
Morgan Stanley, United States 12.6 5.6 0.0 0.0
JPMorgan Stanley, United States 9.8 708.0 0.0 7.8
Credit Suisse, Switzerland 9.7 1.5 0.0 0.0
World total (US$ billions) 382.8 269.9 0.9 139.0
Source: Bloomberg.
Financial Stocks Take Big Hits in Subprime Crisis
-11%
-17%
-18%
-29%
-32%
-40%
-52%
-52%
-53%
-56%
-56%
-63%
-77%
-87%
-94%
-1 -0.8 -0.6 -0.4 -0.2 0
JP Morgan & Chase
Goldman Sachs
Wells Fargo
Bank of America
Morgan Stanley
AIG
Lehman Brothers
UBS
Wachovia
Fannie Mae
Merrill Lynch
Freddie Mac
Washington Mutual
Countrywide
Bear Stearns
Source: Bloomberg.
Percentage change in price, December 2006–March 2008
Leverage Ratios of Different Types of Financial Firms 2007
9.8
8.4
8.4
31.6
24.7
0 5 10 15 20 25 30 35
Commerical banks
Savings institutions
Credit unions
Brokers and hedge funds
Government-sponsored enterprises
Asset/CapitalSource: David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin, 2008
Too Much Dependence on Debt? Leverage Ratios At Biggest Investment Banks
Note: * the latest figure is as of December 2007Sources: Bloomberg.
15
20
25
30
35
40
BearStearns
MorganStanley
MerrillLynch
LehmanBros.*
GoldmanSachs
Total assets to total shareholder equity
March 2001
March 2008
15
20
25
30
35
40
BearStearns
MorganStanley
MerrillLynch
LehmanBros.*
GoldmanSachs
Total assets to total shareholder equity
15
20
25
30
35
40
BearStearns
MorganStanley
MerrillLynch
LehmanBros.*
GoldmanSachs
Total assets to total shareholder equity
March 2001
March 2008
5
9
13
17
21
Citigroup JP Morgan Chase Bank of America
Total assets to total shareholder equity
Banks Depend Less on Debt Leverage Ratios At Bank Holding Companies
March 2001
March 2008
Sources: Bloomberg.
December 2007
What Broke the Cycle?
Fraud: by borrowers, brokers, appraisers, lenders. Cracks in most overheated markets (LA, Las Vegas, Miami) quickly
spread everywhere. Most highly leveraged vehicles (CLOs) collapsed first
Followed by second most leveraged institutions – banks (not hedge funds).
Difference this time: Primary losers are those who own AAA debt.
Source: Moody’s Source: Moody’s
Downgrades in the Asset-Backed Securities Markets
0 1 15
0 13
12 30
123 1 0 4 140
80 171
122 539
1,635
1,215
210
415
6,566
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0 1 0 0
6 6
23
0 0 0 0 0 0
15
7 9
78
134
92
8 5
85
0
20
40
60
80
100
120
140
160
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
AAA DowngradesIn the Asset-Backed Securities Markets
Source: Moody’s Source: Moody’s
Downgrades in the Asset-Backed Securities Markets
0 1 15
0 13
12 30
123 1 0 4 140
80 171
122 539
1,635
1,215
210
415
6,566
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0 1 0 0
6 6
23
0 0 0 0 0 0
15
7 9
78
134
92
8 5
85
0
20
40
60
80
100
120
140
160
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
AAA DowngradesIn the Asset-Backed Securities Markets
Most New Securities Were Rated AAAby S&P in 2007
200
400
600
800
1,000
1,200
1,400A
AA
AA A
A+
AA
-
BB
B A-
BB
B
AA
+ B
A1+ B
-
B+
CC
C
BB
-
BB
+ B
BB
CC
C C
Number
1,295 or 45% of new securities rated
by S&P were rated AAA in 2007
When is a AAA not a AAA? Multilayered structured credit products
AAA 80%
AA 11%
A 4%
BBB 3%
BB-unrated 2%
Senior AAA 88%
Junior AAA 5%
AA 3%
A 2%
BBB 1%
Unrated 1%Mortgage bonds
Mortgage loans
High-grade structured-finance CDO
Senior AAA 62%
Junior AAA 14%
AA 8%
A 6%
BBB 6%
Unrated 4%
Senior AAA 60%
Junior AAA 27%
AA 4%
A 3%
BBB 3%
Unrated 2%
Mezzanine structured-finance CDO
CDO-Squared
Source: International Monetary Fund.
Most Texas Banks Were AAA in the 1980s
First RepublicBank Corporation
Foreclosures in Houston
30,000
1,000
10,000
20,000
1980 1986 1992
Source: Harris County Foreclosure Listing Service.
Widening Spreads Mortgage-backed and High-yield Bonds
Source: Bloomberg.
ML High-Yield Bond Index
ML BBB Mortgage-Backed Securities Index
0
200
400
600
800
1000
1200
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Basis point spread above 10-year treasury bond
ML High-Yield Bond Index
ML BBB Mortgage-Backed Securities Index
0
200
400
600
800
1000
1200
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Basis point spread above 10-year treasury bond
Widening Spreads Municipal Bonds
Source: Bloomberg.
ML municipal master index yield spread
-80
-40
0
40
80
120
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Basis point spread over 10-year treasury bond
ML municipal master index yield spread
-80
-40
0
40
80
120
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Basis point spread over 10-year treasury bond
Market for Liquidity Freezes
Thirty-Day AA Rated Commercial Paper Rates
Nonfinancial Commercial
Paper
Financial Commercial
Paper
Asset-backed Commercial
Paper
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
May07
Jun07
Jul07
Aug07
Sep07
Oct07
Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
Percent
Source: Federal Reserve.
Mortgage Loan Fraud Surges
Source: Financial Crimes Enforcement Network.
0
10
20
30
40
50
60
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Thousands
293225
429
1,014
813
946
0
200
400
600
800
1,000
1,200
2002 2003 2004 2005 2006 2007
US$ Millions
Dollar Losses in Reported Cases of Mortgage Fraud
Source: Federal Bureau of Investigation.
The end of S&L crisis
LTCM Dotcom
Subprime
-40
-20
0
20
40
60
80
100
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Percent
The end of S&L crisis
LTCM Dotcom
Subprime
-40
-20
0
20
40
60
80
100
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Percent
-40
-20
0
20
40
60
80
100
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Percent
Tightened Standards For Real Estate Loans
Net percentage of domestic respondents tightening standards for commercial real estate loans
Source: Federal Reserve.
Despite Federal Funds Rate Cuts, Mortgage Rates Remain Relatively Flat
Sources: Federal Reserve, Freddie Mac.
Freddie Mac 30-year fixed mortgage rate
Federal funds rate
Spread
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
January 2007 June 2007 November 2007 April 2008
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Freddie Mac 30-year fixed mortgage rate
Federal funds rate
Spread
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
January 2007 June 2007 November 2007 April 2008
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Percentage of people in a study who could not correctly identify various loan terms using current mortgage disclosure forms
Is Adequate Information Disclosed to Consumers?
Source: Los Angeles Times, June 14, 2007. Percent
Loan amount: 51
Monthly payment: 21
Total upfrontCost: 87
Existence of prepayment
penalty: 68
Annual percentage rate: 20
0 20 40 60 80 100
Loan amount: 51
Monthly payment: 21
Total upfrontCost: 87
Existence of prepayment
penalty: 68
Annual percentage rate: 20
0 20 40 60 80 100
Does this feel like the bottom of a downturn?
Yes: 27%
No: 73%
Looking For a Bottom
Source: The Wall Street Journal, April 11, 2008.
Economists say the economy isn’t at its low point yet, and house prices likely won’t get there until 2009
When will home prices hit bottom?
4%
17%
38%
29%
6%
1st half
2008
2nd half
2008
1st half
2009
2nd half
2009
1st half
2010
Annual rents as % of house prices
Source: :”The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing,” December 2007.
How Far Do Home Prices Have to Fall?
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
1960
Q1
1962
Q3
1965
Q1
1967
Q3
1970
Q1
1972
Q3
1975
Q1
1977
Q3
1980
Q1
1982
Q3
1985
Q1
1987
Q3
1990
Q1
1992
Q3
1995
Q1
1997
Q3
2000
Q1
2002
Q3
2005
Q1
2007
Q3
2010
Q1
History of Credit Disruptions: 1998–Today
Nov - Aug 1998
4Q 2001 - 2002 Jul 2007- Present
Key Causes
Russian credit default
Long Term Capital
Weak credit fundamentals
Major corporate defaults and accounting scandals
(Enron, WorldCom)
Deteriorating housing/subprime market
Market de-leveraging
Investment Grade Spread Widening
70+ bps 80+ bps 1200+ bps
Key Issues
Significant counterparty risk
Corporate scandals and fraud
Tremendous supply/demand imbalance
Recapitalization of financial institutions
Recent credit disruption was preceded by 5 years of benign credit market
What Went Wrong:
1960s
1980s
Today
2020s?
Nonresident speculators
Regulators/central bankers
Brokers/other intermediaries
Rating agencies
Institutional investors
Home buyers
Appraisers
Enough Blame to Go Around
The “Nifty Fifty” stocks - early 1970s
Sovereign debt: 1980s
Texas banks/Southwest real estate: 1980s
Japanese real estate/equities: 1980s-90s
Technology: 2000
Housing-related investments: 2007-8
$1 Trillion Losses
Ratings consistency
Real estate price fluctuation
Interest rate volatility
Sovereign debt risk
Leverage
Business volatility
Liquidity risk
Counterparty risk
Currency risk
Unexpected regulatory requirements
Complexity
Credit Issues
1974:
The most important year
in financial history
since World War II.
Interest rates double in one year; highest level in recent recorded U.S. history
Regulation restricts lending
Energy prices skyrocket
U.S. stock market plunges 50%
1974:
1974:
RESULT
Companies with the highest returns on Companies with the highest returns on
capital, fastest rates of market share capital, fastest rates of market share
and employment growth, greatest and employment growth, greatest
contributions to technological and contributions to technological and
new- product innovation were denied new- product innovation were denied
access to equity and debt capital.access to equity and debt capital.
For 1975 through 1976, the return on For 1975 through 1976, the return on
investment non-investment debt-grade investment non-investment debt-grade
portfolios to investors was 100% portfolios to investors was 100%
unleveraged. unleveraged.
Fewer than 1 percent of those companies Fewer than 1 percent of those companies
projected to be candidates for projected to be candidates for
bankruptcies actually defaulted.bankruptcies actually defaulted.
“I’ll Never Own a Stock Again”Dow Jones Industrial Average
1052 on 11 Jan. 1973
578 on 6 Dec. 1974
Index
1973 1974 1975 1976500
600
700
800
900
1,000
1,100
“I’ll Never Own a Stock Again”Dow Jones Industrial Average
1052 on 11 Jan. 1973
578 on 6 Dec. 1974
Index
1973 1974 1975 1976500
600
700
800
900
1,000
1,100
The $55 Billion MisunderstandingInvesting in the Nifty Fifty
12/31/72 – 12/31/81
90% of the “Nifty Fifty” showed a negative
return over nine years. The average
inflation-adjusted rate of return was -46%.
Avon ADP Coke Disney
Dr. Pepper Kodak H-P J&J
Eli Lilly Marriott McDonald’s Merck
Polaroid Rite-Aid Wal-Mart Xerox
Avon ADP Coke Disney
Dr. Pepper Kodak H-P J&J
Eli Lilly Marriott McDonald’s Merck
Polaroid Rite-Aid Wal-Mart Xerox
The $55 Billion Misunderstanding
Investing in the Nifty Fifty12/31/72 – 12/31/81
The average P/E ratio of these 16 companies dropped from 66 to 11.
Imperial Palace Imperial Palace (Tokyo)(Tokyo)
Residential Property Residential Property (California)(California)
19901990US$5.1 trillionUS$5.1 trillion
19901990US$2.4 trillionUS$2.4 trillion
Imperial Palace Imperial Palace (Tokyo)(Tokyo)
Residential Property Residential Property (California)(California)
20062006US$1.7 trillionUS$1.7 trillion
20062006US$6.5 trillionUS$6.5 trillion
““Real estate pricesReal estate prices
collapsed, creditcollapsed, credit
dried up, housedried up, house
building stopped ...building stopped ...
““Real estate pricesReal estate prices
collapsed, creditcollapsed, credit
dried up, housedried up, house
building stopped ...building stopped ...
in 1792.”in 1792.”