Presentation on Background on the Subprime Mortgage Crisis by vev19514

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									                 Presentation on


Background on the Subprime Mortgage Crisis




                  Richard W. Peach
                Senior Vice President
          Federal Reserve Bank of New York

                 December 9, 2008
                 Overview

• To get a better understanding of the
  subprime mortgage crisis it is useful to:
  – Consider the structure of the US housing
    finance system and the innovations in that
    system over the past decade.
  – Look at developments in the housing market
    and in mortgage loan performance from a
    regional perspective.
        Overview of U.S. Housing Finance System

 Primary                                                                          Providers of
                 Mortgage        Secondary           Rating
 Mortgage                                                       MBS Investors     Short Term
                 Products      Mortgage Market      Agencies
  Market                                                                           Financing

                Prime          GSE’s                           Commercial
                Conforming      Fannie Mae                      Banks
                Conventional    Freddie Mac                    Thrifts
Portfolio       FHA/VA          Ginnie Mae                     Credit Unions
 Lenders                        Federal Home                   Pension Funds
                                 Loan Banks                    Life Insurance
                                                                Companies

Non-portfolio                                                  Leveraged        Commercial
 Lenders        Jumbo          Private-label MBS   S&P          Investment       Banks
                Alt-A           Issuers            Moody’s      Vehicles        Money Market
                Subprime                           Fitch        (Hedge Funds)    Mutual Funds
                                                                                Broker/Dealers
                  Mortgage Originations by Loan Type
                          (billions of dollars)
                        2001-2003
                         Average    2004   2005   2006   2007   2008Q1   2008Q2
 Conventional
 Conforming                1810     1210   1090    990   1149    323      288
   percent                  63      46.7   39.6   38.8   55.2    74.1     72.9
 FHA/VA                     190     135     90     80    120      46       70
   percent                  6.9      5.2    3.3    3.1    5.8    10.6     17.7
 Jumbo                      555     515    570     480   347      37       26
   percent                 19.9     19.9   20.7   18.8   16.7     8.5     6.6
 Alt A                      69      190    380     400   275      20        7
   percent                  2.5      7.3   13.8   15.7   13.2     4.6     1.8
 Subprime                   223     540    625     600   191      10        4
   percent                  7.8     20.8   22.7   23.5    9.2     2.3     1.0
 Total                     2848     2590   2755   2550   2082    436      395


Source: Inside Mortgage Finance
                                  Risk Factors by Loan Type

                       Programatic Characteristics              Average Values for 2006 MBS Collateral*
                    Prime Conforming                      Prime Jumbo           Atl-A              Subprime
  Risk Factors                           FHA / VA
                       Conventional                       Fixed / ARM        Fixed / ARM          Fixed / ARM

                                       FHA < $362,000
  Loan Amount          < $417,000                       $562,000 $573,000 $237,000 $336,000 $168,000 $213,000
                                        VA < $417,000

Max Loan-to-Value    > 80% with PMI      FHA 97%
                                                         75%      75%       79%       85%       79%       87%
      Ratio             97% Max          VA 100%

      Debt              F ≤ 27%
                                        VA B < 50%       36%      37%       39%       38%       40%       42%
 Service/Income         B ≤ 36%

Full Income/Asset
                          Most              All          53%      34%       23%       19%       75%       55%
 Documentation

   FICO Score                                            744      739       710       710        622      620

Investor / Second
                          20%                            6%       10%       19%       18%        5%        7%
      Home
*Source: Loan Performance
            Static Data for Subprime Loans
                                                  Origination Year
                          2000    2001    2002       2003    2004    2005    2006     2007
% CA                       8.53   13.84   19.30      21.70   22.01   18.57   15.74    13.18
% FL                       7.76    7.68    8.72       9.16    9.07   10.71   12.01    12.87
% NV                       0.63    0.99    1.12       1.28    1.91    2.13    1.75     1.34

Average LTV                  79      79      80         81      81      80      80       80
% with LTV >80            37.67   42.10   43.67      46.61   43.34   38.13   38.14    45.08
% with Additional Liens    0.48    1.05    1.46       5.80   20.55   36.11   32.46     2.09
Average Combined LTV         96      96      98         98      99      99      99       99

Debt-to-Income Ratio        37      38      38         39       39      40      41       41

Average FICO score          590     596     609        618     619     621     618      610
% with FICO < 620         62.96   62.91   56.33      51.78   50.78   49.54   51.63    57.68

% Purchase                33.14   32.42   30.51      30.22   36.03   41.26   41.79    29.98
% Refinance               66.86   67.55   69.48      69.77   63.96   58.73   58.20    70.02
% Cash Out Refinance      56.12   54.59   56.92      58.14   56.01   52.38   52.14    56.93

%   Full Doc              77.73   77.26   71.49      67.85   66.40   63.70   62.57    65.92
%   Low-Doc               21.48   22.24   27.77      31.65   33.32   36.05   37.15    33.72
%   Interest Only          0.39    0.02    0.59       2.30   11.57   21.28   12.63     9.53
%   ARM                   48.41   57.85   65.95      65.31   75.89   80.96   76.77    69.35

% in Early Default 6 m     N/A     N/A     N/A         N/A   0.24%   0.32%   0.77%    1.10%
% in Early Default 12 m    N/A     N/A     N/A         N/A   4.11%   5.75%   9.39%   12.07%
             Household Mortgage Debt Securitization
Percent of Total Debt                                                            Percent of Total Debt

70                                                                                                70


60                                                                                    Total       60


50                                                                                                50

                                                                                      GSE
40                                                                                                40


30                                                                                                30


20                                                                                                20


10                                                                                                10
                                                                                 Private Label
  0                                                                                               0
  1970                  1977         1984            1991          1998             2005


Source: Board of Governors, Flow of Funds Accounts          Note: Shading represents NBER recessions.
Housing Starts per 1,000 People
Starts per 1,000 people                                       Starts per 1,000 people
12                                                                               12
11                                                                               11
10                                                                               10
 9                                                                               9
                                    Total U.S.
 8                                                 CA, AZ, NV, FL                8
 7                                                                               7
 6                                                                               6
 5                                                                               5
 4                                                         All Other States      4
 3                     25 year                                                   3
                       average
 2                                                                               2
 1                                                                               1
 0                                                                               0
  1965          1973         1981        1989          1997            2005

Source: Census Bureau and Economy.com     Note: Shading represents NBER recessions.
Housing Completions
Thousands                                                                                   Thousands

2400                                                                                           2400
                          Start of Current Forecast

2200                                                                                           2200

2000                                                                                           2000

1800                                                                                           1800
                                    Difference:
1600                                1.7 million                                                1600

                                                                     Difference:
1400                                                                                           1400
                                                                     -1.7 million

1200                                                                                           1200

1000                                                                                           1000
                                                                           April Forecast
  800                                                                                          800

  600                                                                                          600
     2000          2002   2004             2006           2008             2010
                                        Note: Trend demand for housing completions based on current
                                 population growth and 250,000 units per year of replacement demand.
Source: Census Bureau                                          Shading represents NBER recessions.
Home Price Indexes
2000 Q1 = 100
Index                                                                                               Index
 200                                           Conventional Mortgage                                 200
                                                 Home Price Index

180                                          OFHEO Home                                             180
                                              Price Index
                                 Case-Shiller Home
160                                 Price Index                                                     160

140                                                                                                 140
                                                                                Census Constant
                                                                               Quality Home Price
120                                                                                   Index         120
                                                           Median Price of
                                                          Existing 1-Family
100                                                         Homes Sold                              100
                                      Median Prices of
                                      New Homes Sold

  80                                                                                                80
       2000     2001      2002       2003      2004      2005      2006       2007      2008
Source: U.S. Census, National Association of Realtors, Freddie
Mac, Office of Federal Housing Enterprise Oversight and
Standard and Poors.                                    Note: Shading represents NBER recessions.
                      Home Price Change by State
% Change - Annual Rate, 5 year                                                                % Change - Annual Rate, 5 year
18                                                                                                                              18
                                                           DC        HI
16         CA          FL                                                                                                       16
            NV                                                 MD
                                      AZ
14                                                                                                                              14
                                                RI
                                                               NJ        VA
12                                                                                                                              12
                                                                          NY       DE
                                                                                              OR
                                                                                         VT         WA
10                                                             CT                              ID            MT        WY
                                                                                                                                10
                                                                                              ME
                                                                NH                  AK        PA
                                                                                                     NM
                                                          MA
 8                                                                                                                              8
                                                                MN            IL
                                                                                                   LA   ND        UT
 6                                                                                       WI   WV                                6
                                                                                        MOAR          SCSD
                                                                                                 MS TN AL
                                                                                                       NC
                                                                                            GA         OK
                                                                                                KY
                                                                                               KS
                                                                                               IA          TX
 4                                                                                        NECO                                  4
                                                MI                            OH            IN
 2                                                                                                                              2

 0                                                                                                                              0
     -12    -10       -8         -6        -4        -2              0                  2                4        6         8
                                      % Change -Annual Rate, 1 year
Source:Office of Federal Housing Enterprise Oversight
90+ Day Delinquencies and FHFA Price Index
Percent                                                                            % Change - Year to Year

2.5                                                                                                    16

                                                                                                       14

2.0                                                                                                    12

                                                                                                       10

1.5                                              FHFA House Price Index                                8
                                                       (right axis)
                                                                                                       6

1.0                                                                                                    4

                                                                                                       2

0.5                                                     90+ Day                                        0
                                                    Delinquencies,
                                                  Percent of all Loans                                 -2
                                                       (left axis)
0.0                                                                                                   -4
   1979     1982     1985      1988     1991       1994      1997        2000   2003     2006     2009

Source: Mortgage Banker’s Association and FHFA                   Note: Shading represents NBER recessions.
           Foreclosure Initiation and Home Price Appreciation
% Change in Home Prices- AR, 5 yr                                       % Change in Home Prices-AR, 5 yr
18                                                                                                           18

                              HI DC
16                                                                            CA                  FL         16
                               MD                                                            NV
                                                                        AZ
14                                                                                                           14
                                                       RI
                                        VA NJ
12                                                                                                           12
                     DE      NY
                       OR
                     WA
                    VT
10          MT
            WY              ID CT ME                                                                         10
                 AK PA
                 NM            NH
                    MA                          US
 8                                                                                                           8
                                          MN
                                         IL
             NDUT        LA
 6               WV          WI                                                                              6
             SDARSC AL
                     MO
             NC TN          MS
              OK              GA
              KSTX KY
                  IA
 4               NE      CO                                                                                  4
                        IN OH             MI
 2                                                                                                           2

 0                                                                                                           0
     0.0           0.3            0.6            0.9        1.2   1.5        1.8       2.1             2.4
            Percentage Point Increase from the 2005Q2-2006Q1 Foreclosure Initiation Rate Average
Source:Office of Federal Housing Enterprise Oversight & Mortgage Bankers Association
All Loans: Serious Delinquencies By State (SA)
Percent                                                                 Percent
4.5                                                                        4.5

4.0                                                                         4.0
                                                            Michigan
3.5                                                                         3.5

3.0                    Ohio                                                 3.0

2.5                                                                         2.5

2.0                                                                         2.0
                                                Florida
1.5                                                                         1.5

1.0                                                                         1.0
                        California
0.5                                                                         0.5

0.0                                                                         0.0
   1975        1981         1987       1993         1999        2005

Source: Mortgage Bankers Association   Note: Shading represents NBER recessions.
                                 90+ Day Delinquencies
Percent                                                                            Percent

1.2                                                                                   1.2
          Variable                      Coefficient T-statistic
          Vacancy, lagged                  0.02         2.69
          Delinquency, lagged              0.72        54.27
  1       Foreclosure started, lagged      0.17         4.65                          1
          Conforming mortgage spread      -0.01        -0.89
          OFHEO positive                   0.00        -1.15
          OFHEO negative                   0.01         5.21
0.8       FFR                              0.02         2.83                          0.8
          DPI                             -0.02       -10.47


0.6                                                                                   0.6
                       Actual

0.4                                                                                   0.4
                                               Predicted


0.2                                                                                   0.2



  0                                                                                   0
      1992              1995               1998               2001   2004   2007


Source: MBA & Author's Calculations
Homeowner Vacancy and Prices
Percent                                                % Change - Year to Year
4                                                                         10
                        Real Constant                                     8
                        Quality Home
                         Price Index                                      6
3
                         (Right Axis)                                     4
                                                                          2
2                                                                         0
                                                                          -2
                                                                          -4
1
                                          Vacancy Rate                    -6
                                               (Left Axis)                -8
0                                                                         -10
 1968        1976       1984            1992            2000       2008

Source: Census Bureau
Measures of Excess Supply of Housing
Thousands                                                                                      Thousands

 2000                                                                                              2000
                                   Start of Forecast
 1800                                                                                              1800

 1600             Based on vacant units                                                            1600
                  relative to estimate of
 1400             equilibrium vacancies                                                            1400

 1200                                                                                              1200

 1000                                                                                              1000

  800                                                                                              800

  600                                                                                              600

  400                                                                                              400

  200                                                                                              200

     0                                                                                             0
      2001              2003       2005            2007              2009              2011
                                            Note: Red line based on construction data; blue line based on
                                                           vacant homes relative to their equilibrium rate.
Source: Census Bureau                                             Shading represents NBER recessions.
30-year FNMA Mortgage Spreads (OAS to Treasury)
Basis Points                                                   Basis Points
 200                                                                  200
                                        Current Episode
160                                     (begins 6/2007)                160

120                                                                    120

  80                                                                   80

  40                                1998 Episode                       40
                                   (begins 7/1998)
   0                                                                   0
       0       3      6       9       12       15         18      21
                    Months after beginning of episode
Source: Merrill Lynch and Bloomberg
Reference Charts
        Ratio of Owners' Equivalent Rent to OFHEO Home Price Index
Index: 1984Q1=100                                                                  Index: 1984Q1=100

120                                                                                              120


                                   Owners' Equivalent Rent                                       110
110                                   to OFHEO Index
                                          (left axis)                                            100

                                                                                                 90
100
                                                                                                 80

 90                                                                                              70

                                                                                                 60
 80
                                                                                                 50
          Reference: S&P 500
            Dividend Yield                                                                       40
 70           (right axis)
                                                                                                 30

 60                                                                                              20
   1984       1987      1990      1993      1996      1999         2002        2005       2008


Source: BEA, OFHEO, Census Bureau and S&P                    Note: Shading represents NBER recessions.
                    Static Data for Alt-A Loans
                                                  Origination Year
                          2000    2001    2002       2003    2004    2005    2006    2007
% CA                      23.53   26.07   28.08      28.65   29.25   29.66   30.66   34.57
% FL                       7.49    8.31    8.60       8.30    8.45   10.89   12.43   10.09
% NV                       1.60    1.58    1.58       2.59    3.83    3.65    3.28    2.57

Average LTV                  82      79      79         74      76      75      76      75
% with LTV >80            47.59   34.24   34.44      25.55   16.80   10.22    9.64   14.74
% with Additional Liens    0.04    0.18    0.36       3.03   17.46   34.07   37.38    7.48
Average Combined LTV         88      97      92         92      95      94      95      94

Debt-to-Income Ratio        35      36      35         34       35      36      37      38

Average FICO score          691     698     707        711     709     711     707     713
% with FICO < 620          9.09    5.59    4.58       2.14    1.72    1.21    0.56    0.18

% Purchase                69.52   54.15   49.44      41.79   56.47   53.24   49.43   39.19
% Refinance               29.95   45.85   50.56      58.21   43.52   46.73   50.55   60.81
% Cash Out Refinance      18.18   29.66   29.55      32.23   28.17   33.78   34.93   37.03

%   Full Doc              42.94   42.59   44.17      37.29   37.75   31.89   19.34   18.97
%   Low-Doc               49.72   45.61   48.09      55.87   55.83   63.69   76.16   76.05
%   Interest Only             0    2.44    5.34      11.37   40.19   40.65   40.12   47.32
%   ARM                   16.58   14.90   15.46      24.16   60.58   61.27   62.58   54.96

% in Early Default 6 m     N/A     N/A     N/A         N/A   0.08%   0.22%   0.19%   0.41%
% in Early Default 12 m    N/A     N/A     N/A         N/A   0.80%   1.21%   2.62%   5.66%
                              Homeownership Rate
1995
                   Income Percentile
 Age                   20              40     60      80      100    Total
 less than 35         18.1%       29.2%      37.0%   60.1%   69.6%   41.3%
 35 - 44              36.5%       47.0%      56.7%   75.6%   90.1%   67.5%
 45 - 64              56.0%       71.2%      76.1%   86.7%   93.3%   81.0%
 65 and older         63.7%       75.4%      89.7%   95.3%   89.8%   78.3%

           Total      46.9%       57.1%      62.8%   78.0%   88.5%   67.7%


2004
                   Income Percentile
 Age                   20              40     60      80      100    Total
 less than 35         12.9%       34.4%      45.7%   65.7%   88.1%   43.6%
 35 - 44              31.9%       43.4%      70.8%   82.6%   91.4%   70.3%
 45 - 64              50.7%       63.2%      78.1%   87.8%   94.7%   79.9%
 65 and older         67.1%       84.0%      95.1%   93.3%   96.9%   83.7%

           Total      43.5%       58.3%      72.1%   83.1%   93.4%   70.8%


Change
                   Income Percentile
 Age                   20              40     60      80      100    Total
 less than 35          -5.2            5.2    8.7     5.7    18.4     2.3
 35 - 44               -4.6        -3.6      14.1     7.0     1.4     2.8
 45 - 64               -5.3        -8.1       1.9     1.0     1.4     -1.0
 65 and older          3.4             8.6    5.4     -2.0    7.2     5.4

           Total       -3.4            1.2    9.3     5.1     4.9     3.1
                      60+ Day Delinquency Rates by Loan Type
         Subprime (6%)*    FHA (6%)     VA (2%)    Prime Conforming (82%)         Prime Jumbo (4%)


   16%                                                                                                2.4%

                                                                                 Right
   14%                                                                                                2.1%
                                                                                 Axis

   12%                                                                                                1.8%


   10%                                                                                                1.5%
                                                                                       Right
                                                                                       Axis
    8%                                                                                                1.2%


    6%                                                                                                0.9%


    4%                                                                                                0.6%


    2%                                                                                                0.3%
      Jan-05      Jul-05     Jan-06      Jul-06    Jan-07        Jul-07       Jan-08       Jul-08



                                                  Note: Series plotted on left axis unless otherwise indicated
Source: FirstAmerican CoreLogic LoanPerformance   *The percent of total loans that falls into specified category
                            Number of Loans Outstanding
  Millions                                                                                          Millions
  4.5                                                                                                     40

                 Subprime
  4.0                                                                                                     35

  3.5
                          Prime Conforming                                                                30
                             (Right Axis)
  3.0
                                                                                                          25
  2.5
                          FHA                                                                             20
  2.0
                                                                                                          15
  1.5                                                                         Prime Jumbo
                                                   VA
                                                                                                          10
  1.0


  0.5                                                                                                     5


  0.0                                                                                                     0
     Jan-05      Jul-05         Jan-06    Jul-06        Jan-07       Jul-07        Jan-08        Jul-08



Source: FirstAmerican CoreLogic LoanPerformance    Note: Series plotted on left axis unless otherwise indicated
60+ Day Subprime ARM Delinquencies by Year Securitized
Percent                                                          Percent
 24                                                                  24
      Latest data: 03/2008                                2001
 20                                         2006          2005         20
                       2007
 16                                                       2002         16
                                                          2003
12                                                        2004         12

 8                                                                     8

 4                                                                     4

 0                                                                     0
     0          6         12           18           24            30
                     Months since beginning of year
Source: Moody's Investors Service     Note: Percent of original balance.

								
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