Presentation to the Univ. of San Diego\'s Burnham-Moore Center on Real Estate

1. The Housing GSE’s:The Housing GSE’s:
Implications for the 2009Implications for the 2009
Financial MarketsFinancial Markets
Specially Prepared for:
Burnham-Moores Center for Real Estate,
Residential Real Estate Conference:
Outlook 2009
Presented by:
LaVaughn M. Henry, Ph.D.
Director, U.S. Economic Analysis
The PMI Group, Inc.
December 9, 2008

2. Presentation OutlinePresentation Outline
 The Role and Market Presence of the GSEs
 Remedies Proposed to Address the Financial
Risk of the GSEs
 Re-invention Proposals to Reinvigorate the
GSEs

3. The Role and Market Presence ofThe Role and Market Presence of
the GSEsthe GSEs

4. The Role of the GSEs is to provide liquidity andThe Role of the GSEs is to provide liquidity and
stability to the U.S. housing and mortgage markets.stability to the U.S. housing and mortgage markets.
Step 1
Banks lend money to
Households to purchase
and refinance home
mortgages
Step 2
The GSEs purchase these
mortgage from the banks
Step 3
GSEs bundle the
mortgages into mortgage-
backed securities
Step 4
GSEs sell mortgage-
backed and debt
securities to domestic and
international capital
investors
Step 5
Investors pay GSEs for
purchase of debt and
securities
Step 6
GSEs return funds to
banks to lend out again for
the issuance of new
mortgage loans

5. Partially in response to increased activity of thePartially in response to increased activity of the
GSEs, homeownership in the U.S. rose to recordGSEs, homeownership in the U.S. rose to record
levels over the last 20 years…levels over the last 20 years…

6. ……and Expanded the Dream ofand Expanded the Dream of
Homeownership to a Much Broader SegmentHomeownership to a Much Broader Segment
of American households.of American households.
78.8
48.6
42.6
70.2
42.2
84.6
53.1
49.7
76.2
50.1
83.0
52.0
47.8
75.1
49.5
Greater than Median
Family Income
Less Than Median
Family Income
African-American White Hispanic
HomeownershipRate
1994Q4 Peak 2008Q3

7. But the expansion of benefits alsoBut the expansion of benefits also
carried expanded costs…carried expanded costs…

8. ……to reflect the significantly increasingto reflect the significantly increasing
amount of risk assumed by the GSEs.amount of risk assumed by the GSEs.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Conv. MortgageHPA %Seriously Delinquent

9. The GSEs are a Significant andThe GSEs are a Significant and
Growing Part of the MortgageGrowing Part of the Mortgage
Market…Market…
Mortgages in the U.S.
Total:$12.1 Trillion
Owns
Guarantees
Guarantees
Owns
Fannie Mae
Freddie Mac

10. ……whose effect is spread across allwhose effect is spread across all
states of the nation.states of the nation.
53.2%
CA
62.4%
NV
64.0%
DC
68.1%
NY
68.6%
FL
71.4%
HI
72.2%
CT
72.5%
AZ
72.7%
MD
73.9%
VA
75.3%
NJ
77.0%
RI
77.3%
CO
77.7%
MA
79.1%
WA
80.0%
GA
81.0%
OR
81.3%
ID
81.6%
IL
81.8%
TX
82.4%
UT
82.7%
DE
83.0%
SC
83.3%
NH
83.5%
MN
83.8%
ME
84.2%
TN
84.4%
WY
84.4%
MI
84.5%
PA
84.9%
NM
85.8%
NC
86.0%
MT
86.4%
OH
86.8%
LA
87.1%
MS
87.6%
MO
88.0%
VT
88.3%
IN
88.4%
OK
88.4%
AL
89.2%
KY
89.4%
WV89.5%
KS
89.7%
WI
89.9%
AR
90.0%
AK
91.5%
NE
92.3%
IA
92.8%
SD
93.6%
ND
Less than 75.0%
75.0% to 80.0%
80.0% to 85.0%
85.0% to 90.0%
Greater than 90.0%
Geographic Distribution of GSE-backed Mortgages

11. There is a renewed and growing reliance onThere is a renewed and growing reliance on
GSE securitization in the mortgage markets…GSE securitization in the mortgage markets…

12. ……during this period of increasingduring this period of increasing
stress in the housing and mortgagestress in the housing and mortgage
markets.markets. Home Prices Decline
Loss Estimates
on MBS Increase
Market Price
of MBS Declines
Write-offs Increase
and Capital Declines
Lenders Tighten
Credit Standards
Borrowers Become
Less Able to Qualify
for Financing
Home Sales Decline
Due to Drop in Demand

13. Remedies Proposed to AddressRemedies Proposed to Address
the Financial Risk of the GSEsthe Financial Risk of the GSEs

14. Federal Intervention and ProgramFederal Intervention and Program
Announcements Accelerate…Announcements Accelerate…
Housing and Economic Recovery Act of 2008Housing and Economic Recovery Act of 2008
July
Establishment of Conservatorship by the FHFAEstablishment of Conservatorship by the FHFA
September
Announcement of Loan Modification
& Temporary Foreclosure Moratorium
Announcement of Loan Modification
& Temporary Foreclosure Moratorium
November
Announcement of Intended Debt & MBS
Purchases by the Federal Reserve
Announcement of Intended Debt & MBS
Purchases by the Federal Reserve
November

15. Housing and Economic Recovery ActHousing and Economic Recovery Act
of 2008of 2008
 Highlights
 Authorized the Secretary of the Treasury to support the GSEs by
purchasing obligations and other securities from the GSEs.
 Granted the Secretary broad authority to determine the
conditions and amounts of such purchases.
 Impact on the Market
 Fairly Minimal
 Credit Markets continued
to tighten
FR 30-yr Mtge Apps
12Jul08 6.37 30.40
19Jul08 6.26 -5.40
26Jul08 6.63 -15.50
2Aug08 6.52 0.40
9Aug08 6.52 -3.20
23Aug08 6.47 -2.70
3-mo Sprd 10-yr Sprd
Jun 2008 49 75.8
Jul 2008 85.8 78.7
Aug 2008 78 83.1

16. FHFA establishment ofFHFA establishment of
ConservatorshipConservatorship
 Highlights
 FHFA takes a conservatorship position relative to the GSEs with the purpose of
preserving and conserving the GSE’s assets and property and to put the
companies on a sound and solid footing.
 FHFA agreed to purchase senior preferred stock in the GSEs.
 Secretary of Treasury established two special facilities to purchase the securities
and debt of the GSEs.
 Treasury announces that it has essentially guaranteed Fannie Mae and Freddie
Mac securities.
 Impact on the Market
 Marginal, in the short-run
 Significant, in the long-run
FR 30-yr Mtge Apps
23Aug08 6.47 -2.70
30Aug08 6.40 3.70
6Sep08 6.35 -8.00
13Sep08 5.93 75.60
20Sep08 5.78 -13.40
27Sep08 6.09 -26.40
3-mo Sprd 10-yr Sprd
Aug 2008 78 83.1
Sep 2008 140.3 77.6
Oct 2008 154.3 115.7

17. Announcement of Loan ModificationsAnnouncement of Loan Modifications
& Foreclosure Moratorium& Foreclosure Moratorium
 Highlights
 November 11 - FHFA Director Lockhart announced a
streamlined, uniform loan modification program for qualifying
loans of the GSEs
 November 20 – The GSEs announced a moratorium on all
foreclosure activity until January 9.
 Impact on the Market
 Too early to call, but may
prove significant if done in
quantity and the moratorium
period is extended sufficiently
FR 30-yr Mtge Apps
25Oct08 6.04 33.70
1Nov08 6.46 -26.10
8Nov08 6.20 13.90
15Nov08 6.14 -9.50
22Nov08 6.04 -2.20
29Nov08 5.97 78.60
3-mo Sprd 10-yr Sprd
Oct 2008 154.3 115.7
Nov 2008 93.7 152.8

18. Announcement of Purchase of GSEAnnouncement of Purchase of GSE
Debt and MBS by Federal ReserveDebt and MBS by Federal Reserve
 Highlights
 November 25 – Fed announced its intention to purchase up to $100
billion in GSE direct obligations through a series of competitive auctions.
 Fed also announced that it would purchase up to $500 billion in MBS by
year-end.
 Impact on the Market
 Significant in both the short
and long run.
 Helps to improve the appeal
of the GSEs’ debt and remove
some of the uncertainty regarding
their future prospects.
FR 30-yr Mtge Apps
1Nov08 6.46 -26.10
8Nov08 6.20 13.90
15Nov08 6.14 -9.50
22Nov08 6.04 -2.20
29Nov08 5.97 78.60
6Dec08 5.53
3-mo Sprd 10-yr Sprd
Oct 2008 154.3 115.7
Nov 2008 93.7 152.8

19. Re-invention Proposals toRe-invention Proposals to
Reinvigorate the GSEsReinvigorate the GSEs

20. Reinvention of the GSEs will not beReinvention of the GSEs will not be
simple…simple…
 Broad agreement that the GSEs serve a
useful purpose
 Substantial disagreement on what the future
structure and mission should be
 Most common disagreement arises from the
reconciliation of the GSEs public mission and
its private ownership

21. Alternative Solutions that have beenAlternative Solutions that have been
proposed…proposed…
 Post-HERA 2008 and Pre-conservator status:
the return of the GSEs to the private sector,
with stronger regulation
 Public Utility Status – regulated activity and
return
 FHLB Structure – cooperative based on
customers/regional location
 Complete Privatization
 Nationalization

22. ConclusionsConclusions
 The GSEs have reached the point where a
new solution must be reached
 Role of the GSEs as a stabilizing element is
likely to gain as the housing and financial
markets remain in crisis
 Unlikely to see full resolution of the housing
and mortgage market problem in 2009,
pushing the likelihood of a resolution to the
GSEs future into 2010