What Goes Around Comes Around What Goes Around Comes Around Mark Fogarty

					  What Goes Around
     Comes Around
              Mark Fogarty
American Enterprise Institute
 Post-Bubble World Seminar
            October 6, 2010
     Overheard at a Thrift Conference, 1989


“Those Neg-am loans everybody’s been doing
  are toxic mortgages. It’s a good thing we
  won’t be seeing them any more.”
 Overheard at a Mortgage Banking Conference, 2009



“Those neg-am loans everyone’s been doing
  are toxic mortgages. It’s a good thing we
  won’t be seeing them any more.”
      The Mortgage Industry, 1984

95% of mortgages done through Freddie Mac,
  Fannie Mae, Ginnie Mae.
A few “hard money” lenders (the predecessors of
  subprime, except the loans were actually
  underwritten).
Volume: $200 billion. (13% mortgage rates)
     The Mortgage Industry, 2010

95% of mortgages done through Freddie Mac,
  Fannie Mae, and FHA.

A few hard money lenders (the successors to
 subprime).

Volume: $1.5 Trillion (e). Mortgage rates
 4.3%.
 -The U.S. residential mortgage market currently has      $9.8 trillion in
receivables (servicing).

  In the United States  60 million         dwellings have mortgages on them, with the
   majority being prime (conforming) first mortgages.

  Second mortgages serviced are $800 billion.
    Subprime servicing is at $700 billion and declining as a lot of these
     mortgages default or reprice into prime mortgages.

  Source: SourceMedia’s e-MID
    Originations, 2009-2011
                             2
Originations have          1.8
  stabilized but at        1.6
  extraordinarily low      1.4
  levels.                               2009
                           1.2
Next year expected to be     1
                                        2010(e)
  flat to 2010.            0.8
Record year for            0.6
                                        2011
  mortgage originations    0.4
                                        (e)
  was 2005, at $3.9        0.2
  trillion.                  0
                           $TRILLIONS
Source: Mortgagestats.
         Mortgage Employment
600                    Cut in half over three
                        years.
500
                       But has stabilized
400
               2007     around 250,000.
300
               2008    Mortgage brokers
               2009
200
               2010
                        have been especially
100                     reduced.
  0                    Source: BLS.
 workers, in
 thousands
         Biggest Trends
                     The ascendancy of loss mitigation and
                      servicing to supremacy over loan
90                    origination.
80                   Whether a tentative housing recovery will
                      be choked off by the end of a housing tax
70          Yes       credit and the end of Federal Reserve
                      purchases of mortgage securities to prop
60                    up the market.
            No       The shape of the post Dodd-Frank reform
50
                      landscape.
40                   The future of Fannie and Freddie (near and
                      dear to Alex’s heart).
30
20
                   Survey question on
                    NMN.com (left): Will
10
                    Dodd-Frank reform be good
 0                  for the mortgage industry?
     %
                               A Double Dip?
   Trend: Double Dip Housing Recession?
    Mortgage originations are projected to fall in 2010 (see previous slide) and home sales and housing starts
    have dropped since the ending of the single-family tax credit, raising the possibility of a double dip in
    housing.

   Is the dip in home sales going to continue downward, or will it even out?

   A good maxim to remember: “Housing leads the economy both into and out of recessions.”

   Housing CERTAINLY led the economy into recession in 2007!

   IF there is a double dip in housing, will that extend to the general economy?

   See maxim above!
             Housing Starts
600                      Housing starts have fallen
                          each of the last three
500
                          months.
400
                         Implications: trouble for
               Apr-10
300
               May-10
                          home builders, new home
200            Jun-10     sales, and lenders.
100
               Jul-10    Source: Commerce
                          Department.
  0
   (000
  omitted)
              New Home Sales

 Tremendous drop since       600

  April.                      500

 Continued disarray in       400

  home builder sector.        300

 Hurt by discontinuing tax   200
  credit.                     100
 (units in thousands)          0
                                    April   May   June   July
        Existing Home Sales
                             Dramatic recent drop
5000                          in sales.
4500
4000
3500
3000
2500
                             Positive factor- low
2000                          rates induce refis.
1500
1000
 500
    0                        Units in thousands
        May   June   July
Banks now sell more homes than home builders
  do!
New Home sales are abysmal.
Realtors and lenders now combine to do both
  short sales and REO.
                                           Loss Mit
   Trend: Loss Mitigation
    Loss mitigation strategy has become a key driver for all lenders who retain servicing on their loans. Loan
    modifications and short sales (where the delinquent property is sold before foreclosure) have gone from
    little-used techniques to ubiquity.

   There are more than 7.3 million loans in distress. More than 4 million of these are 90 days or more overdue.
    (Lender Processing Services, June 2010). Foreclosures may hit 1.24 million this year. --CoreLogic

   How long for the glut to work its way through?
    2 years
    3 years
    4 years
    None of the above

The latest: Servicers rubberstamping tens of thousands of foreclosure files without looking at them: investigations
    by state AGs, servicers halting foreclosures, total mess.
  Short Sales at Fannie, Freddie
                                Short sales tripled at
18000                            both Fannie Mae and
16000                Fannie      Freddie Mac between
14000                Mae
12000
                                 the first quarter of
                     Freddie
10000
                     Mac
                                 2009 and the first
 8000
 6000
                                 quarter of 2010, and
                     3-D
 4000
                     Column
                                 are expected to move
 2000
     0
                     3           even higher.
         9 10 9 10
                          Regulatory Burden
   Trend: New Regulatory Burden
    Dodd-Frank Reform bill adds 5% risk retention rule for certain MBS issuers, creates Consumer Financial
    Protection Bureau, establishes mortgage broker compensation standards, abolishes the Office of Thrift
    Supervision, mandates federal or state regulation of appraisal management companies, strengthens the
    SEC’s oversight of the credit rating agencies, and many other things. It is a thorough and wide-ranging
    reform of allegedly lax regulation that led to the subprime mortgage crisis. Industry was able to carve out
    certain exemptions in the 5% rule. (National Mortgage News, July 5, 2010)

   New Consumer Financial Protection Bureau.
   Will oversee 18 laws.
   Will promulgate between 150-330 rules.
   Is not subject to overruling by Federal Reserve.
   Needs a 2/3 vote by another new body to overrule.
    Fannie/Freddie Reform
 Geithner at recent GSE meeting: “No
  consensus” on reform. Jan. 2011 deadline to
  report to Congress.
 Idea: Many mini-GSEs.
 Idea: One super-GSE including Fannie/Freddie
  and Ginnie Mae.
 Idea: Government guarantees the assets but not
  the issuer.
 Idea: Your own idea here!
             To Be Overheard at a 2029 Credit


 “Those neg am loans everybody’s been doing are toxic
mortgages. It’s a good thing we won’t be seeing them any
                          more.”
                    Questions?

Thanks for your attention!

MARK FOGARTY
Editorial Director, SourceMedia Mortgage Group
mark.fogarty@sourcemedia.com
212-803-8226
917-776-7827 (cell)

				
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