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Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC 2008 Real Estate Update: Affordable Housing in Todays Market December.

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Presentation on theme: "Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC 2008 Real Estate Update: Affordable Housing in Todays Market December."— Presentation transcript:

1 Presentation to IPED Ira G. Peppercorn President Ira Peppercorn International, LLC 2008 Real Estate Update: Affordable Housing in Todays Market December 10–12 San Juan, Puerto Rico Sponsored by Reznick Group, Nixon Peabody LLP and IPED, Inc. Analysis of the Mortgage Crisis and International Impact

2 Competing Theories of Blame: –Homeowners, Investment Banks, Government, Fannie Mae, Freddie Mac, Lenders Conservative commentators argue that it was because people received mortgage loans that were not qualified. Blames Clinton era policies for increasing homeownership Reality is far more complicated and indicative of a system wide failure. What Caused the Crisis?

3 Myth of the Cause of the Crisis The Key Causal Factors in a Fragmented System How it has Affected Mortgage Markets Internationally Practical Solutions to Ensure Accountability, Fairness and CoordinationOverview

4 African-American, Latino, Immigrant significantly lagged Caucasian rates –1995: 43% African Americans; 44% Latinos; 71% Caucasians Governmental Policy Objectives to Increase Fannie/Freddie saw traditional market flat and non-traditional as growth sector 90s Policies to Increase Homeownership Amongst Non-Traditional Groups

5 Overall Rate: 64% in 1995; 69% in 2005 Caucasian Growth: 71% 1995; 75% 2005 Minority Growth: 44% 1995; 51% 2005Homeownership Rate Growth

6 Historically, Affordable Mortgages Better Payment Histories than Low-Documentation Mortgages NYT: Neighborhoods with Large Poor and Minority Populations Experienced Sharp Rise in Defaults Chicago: Areas where non-White over 80% Accounts for 65% of Foreclosure Cases Same Trends Documented in Atlanta, Cleveland, Philadelphia and other Cities Minority Groups Disproportionately Affected

7 2007 Growth: 7.4%; 2006: 11.2% Lower In 2008 Only 7 Countries In Europe Experienced Growth; 4 In Eastern Europe Housing Supply Fell Significantly In Several EU Countries, Except Eastern Europe European Mortgage Markets

8 2003: 600,000 2004: 650,000 2005: 1,100,000 2006: 1,200,000 2007: 550,000 European Housing Starts

9 Average House Price Is £158,872, 14.6% Decrease In One Year From £186,044. April To July 2008, Transaction Volumes Averaged 57,887 Transactions Per Month. 48% Decrease In One Year When Sales Volumes Averaged 110,828 Gross Lending Year To Date: £211bn Compared To £276bn In The Same Period Last Year, A 24% Fall 34,000 House Purchase Approvals In September Down From 97,000 In One Year; A 65% Fall United Kingdom: Significant Decline

10 Rising interest rates from fall 2005 Consumer confidence has fallen from summer 2007 Decline in housing transactions from summer 2006 Growing supply of houses Housing prices relative stable2008: +1½% and 2009: +1% (regional differences)Netherlands: Challenged but More Stable

11 Increase In Interest Rates For Mortgages Due To Scarcity Of Money (Between 12%-24% For Local Currencies). Serbia, Moldova, Romania: Large Inflow Of Remittances Helped The Mortgage Markets. Likely To Decrease Tightening Of The Prudential Requirements By The Central Banks In Eastern Europe Regarding Mortgage Lending New Legislative Initiative To Regulate The Primary Mortgage Markets New Attitude Of The Markets Regarding Securitizations. No Immediate Prospects For Such Transactions Eastern Europe: Costs Increasing and Lending Tightening

12 Fragmented Regulatory System Development of New Financial Products Growth of the Non-Regulated Sector Desperation, Fear and Opportunism Treatment of Minority Borrowers Desire of GSEs not to Lose Market Share Lack of Accountability No Early Warming System Causes of the Crisis

13 –Federal Housing Administration (FHA): Mortgage Insurance –FHA Mission Oversight of Fannie/Freddie –Office of Federal Housing Enterprise Oversight –Mortgagee Review Board Federal Deposit Insurance Corporation Federal Reserve Federal Housing Finance Board State and Local Regulators Causes of the Crisis: Fragmented Regulatory System

14 Products –80/20 First and Second Mortgage –High LTV, Sometimes over 100% –Interest Only –Low and No Documentation Mortgages (Self-certified) Implications –Interest rate shock from adjustment –High debt to income ratios –Vulnerability to financial or economic downturn –No skin in the game Causes of the Crisis: New Financial Products

15 Housing prices in Major Cities Doubling and more from 1998 to 2005 Fear of Being Closed Out of the Market Desperation to Use New Mortgage Products to Afford a Mortgage Investor Opportunism to Take Advantage of Rising Prices Causes of the Crisis: Desperation, Fear and Opportunism

16 FHA Market Share Drops from 14% in 1999 to 4% in 2007 Regulation Cause Move to Non-Regulated Sector –Example: Appraisal Reform 40% of No/Low Documentation Say They Did Not Believe They Could Qualify for a Mortgage Fannie/Freddie Buying Mortgage and Bonds Not to Lose Market Share Growth of the Non-RegulatedSector

17 FHA Market Share

18 1999 To 2006: Sub-prime Loans By Minorities Grew From 15% To 27% Non-Traditional Market Sector Twice As Likely To Have Taken Out Sub-prime Disparity Exists Even with Similar Incomes –$51K to $75K 23% Minority 10% Caucasian Interest Rates 3% Higher Than Prime, More Likely To Be Adjustable And Have High Fees And Prepayment Penalties Causes of the Crisis: Minorities and Sub-Prime Mortgages

19 Realtors Mortgage Brokers Appraisers Lenders Servicers Rating Agencies Investment Banks Second Mortgage Originators and Lenders Mortgage Purchasers and Packagers Causes of the Crisis: System Wide Accountability

20 Foreclosure Crisis Known in Key Areas Two Years Ago No System-wide Mechanism for Emerging Patterns Few Ways of Identifying and Disciplining Cause of Problems No System for Planning for Impact on Communities Causes of the Crisis: No Early Warning System

21 Responsible Mortgage Lending Coordinated Regulatory System Consumer Education Unified, Accurate Appraisal System Accountability from Responsible Parties Careful Analysis Early Warning System Planning for Financial CrisesSolutions

22 Clear Underwriting Standards Income Verification and Documentation Reasonable Debt to Income Ratios Sensitivity Analysis Performed on Adjustable MortgagesSolutions: Responsible Mortgage Lending

23 Mission and Financial Oversight Should be Coordinated Safety and Soundness Should be Stress Tested Consumer Education and Protection Critical Mortgages Outside of Regulated System Should be MonitoredSolutions: Coordinated Regulatory System Coordinated Regulatory System

24 Appraisers Should be Trained and Certified Analysis Should be Performed on the Basis of Closed Loans, not Open or Listed Sales Appraisals Should be Subject to MonitoringSolutions: Appraisal System

25 Investors Should Trust but Verify Mortgage Analysis and Investment Paper Analysis Should be Clear and Transparent Legal Violations Investigated Quickly and Effectively Ensure a Share of the Risk of the Key PlayersSolutions:Accountability

26 Database to Report and Analyze Patterns of Delinquency, Default and Foreclosure Servicers and Lenders Should Establish Strong Foreclosure Prevention Systems Communities Should Plan for Large Influx of Real Estate Owned PropertiesSolutions: Early Warning System

27 Sub-Prime a Misleading Definition of the Crisis Causal Factors Complex, but Low- Documentation Mortgages, Fragmented Oversight, and a Lack of Accountability Strong Factors Solutions Include Strong Underwriting Standards, Coordinated Regulation, and a Trust but Verify EthicConclusion

28 For More Information: IraPeppercorn@IraPeppercorn.Com Thank You

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