An Economic Prognostication for 2008 Massachusetts Mortgage Bankers Association West Newton, MA May 16, 2008 Frank E. Nothaft Chief Economist

1 Office of the Chief Economist Recession Risk, Housing Contraction Worsen  1-in-2 chance of recession in 2008  Maybe in recession already; fiscal stimulus propels growth in second half: Economic growth 1.5% in 2008  Job gain falls short of labor force growth; Unemployment rate up, averages 5.2% in 2008  Core inflation at upper end of range preferred by policy makers  Less housing starts, sales in 2008; house values down  Credit quality has deteriorated  2006 and 2007 subprime vintages have high early-payment defaults  More than half of foreclosure starts since 2006 were subprime loans  Banks have tightened underwriting on both prime and subprime  Risks to the outlook  How much will liquidity constraints affect broader economy?  Current liquidity problems affecting jumbo, Alt-A markets as well as subprime  Energy: high oil and natural gas prices act like a tax on the economy

2 Office of the Chief Economist Prime Conforming Mortgage Rates Remain Low By Historical Standards Source: Freddie Mac’s Primary Mortgage Market Survey ® 1-Year, ARM Rate 30-Year, Fixed Rate Weekly Mortgage Interest Rate (Percent) Forecast

3 Office of the Chief Economist Source: Inside MBS & ABS Private-Label Mortgage-Backed Security Issuance Has Fallen Sharply $191 Billion $137 Billion $181 Billion$95 Billion Subprime & Other Alt-A Prime Jumbo Freddie Mac & Fannie Mae Prime Jumbo Alt-A Freddie Mac & Fannie Mae Subprime & Other $109 Billion

4 Office of the Chief Economist Highest Percentage of Banks Tightening Home Mortgage Standards Since 1990 Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: May 5, 2008) Net Percentage of Banks Tightening Mortgage Standards During Three Previous Months Subprime Prime

5 Office of the Chief Economist Single-family Building Hit a Record in 2005, but Fell About 60% Since Then 1- to 4-Family Housing Starts (thousands of units, SAAR) Sources: Bureau of Census, Freddie Mac – Recession Third Quarter 2005 record: 1.8 million units Forecast First Quarter 2008: 0.7 million units

6 Office of the Chief Economist Existing Home Sales Are Down 35% in Massachusetts from Their 2005 Peak Source: National Association of Realtors (Existing Single-Family Houses, Apartment Condos & Co-ops); New England composite is the sum of their six states’ existing home sales: CT, MA, ME, NH, RI, VT U.S. Existing Home Sales (Left Scale, 000s) Massachusetts Existing Home Sales (Right Scale, 000s) Home Sales Change (2005:Q3 – 2008:Q1) United States -31% Massachusetts -35% Peak Lowest MA Sales in 12 Years

7 Office of the Chief Economist Existing Home Sales Are Down Everywhere (except Alaska) Existing Home Sales Nationwide Down 31% (2005Q3 to 2008Q1) Down more than 40% Down less than 20% Down 20-40% Percent change in existing home sales Fourth quarter 2005 through Fourth quarter 2007 Source: National Association of Realtors -52% -42% -48% -45% -65% -57% -47% Up 3%

8 Office of the Chief Economist Time-On-Market Up in Most Markets Source: National Association of Realtors

9 Office of the Chief Economist Source: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annual Growth Rates for 4Q2007) Home Sales Prices Fell in Eighteen States Over 2007 United States –1.1% > 5% Annual Change < 0% Annual Change 0 – 5% Annual Change DC Pacific -4.6% Mountain -0.9% West South Central 3.2% East South Central 2.1% South Atlantic -0.9% Middle Atlantic 1.7% New England -1.5% East North Central -2.9% West North Central 0.2%

10 Office of the Chief Economist Source: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 4Q2007) Forty-eight States Had Falling Prices in the Fourth Quarter 2007 Pacific –18.8% Mountain -13.5% West South Central -3.7% East South Central -4.0% South Atlantic -7.7% Middle Atlantic -2.5% New England -8.2% East North Central -12.4% West North Central -7.5% United States: -10.0% (4 th Quarter Annualized Growth) < 0% Quarterly Change 0 – 5% Quarterly Change DC

11 Office of the Chief Economist Job Loss Is the Main Hardship Reason Among Delinquent Prime Borrowers Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects. Data cover only prime conventional conforming loans.

12 Office of the Chief Economist U.S. Unemployment Rate Averages 5.2% in 2008 Unemployment Rate (Percent) Forecast Sources: U.S. Department of Labor, Freddie Mac – National Recession United States Massachusetts March US 5.1% MA 4.4%

13 Office of the Chief Economist Employment Growth Weakest In Markets With Flat or Falling House Values U.S. employment up 0.4% Massachusetts: up 0.7% 0.0% to 0.5% 0.6% to 1.0% Above 2.0% 1.1% to 1.9% Percent change in the non-farm payroll employment March 2006 through March 2007 Source: U.S. Bureau of Labor Statistics Below 0.0%

14 Office of the Chief Economist Default and Home Value Growth Are Inversely Related Source: Mortgage Bankers Association, Freddie Mac Percent of Massachusetts prime conventional loans delinquent 90+ days or in foreclosure (Right Scale) Annual Massachusetts House Price Growth (Left Scale) House Price Growth Delinquency Percent

15 Office of the Chief Economist Prime Delinquencies Are Lowest in the Northwest Massachusetts = 1.35% U.S. = 1.67% Seriously Delinquent (90+ days delinquent or in foreclosure, prime conventional) Data as of December % % % % % Source: Mortgage Bankers Association

16 Office of the Chief Economist Delinquency Rates Have Jumped In Markets With Flat or Falling House Values  0.30% 0.31 to 0.40% 4Q ’06 to 4Q ’07 Change in Level of Serious Delinquency Rate (90+ days or in foreclosure, Prime Conventional Loans) U.S. Change = 0.81% Massachusetts Change = 0.66% 0.41 to 0.60% 0.61 to 0.80% Source: Mortgage Bankers Association 0.81 to 1.21% Percentage Point Difference 1.45 to 2.05%

17 Office of the Chief Economist Subprime Credit Performance  Weak underwriting characterized subprime originations in recent years  Early payment defaults and serious delinquencies are worse for recent vintages of subprime loans  Subprime loans accounted for over half of foreclosures in 2006 and 2007  About 1.5 million loans began foreclosure in 2007  Credit problems are concentrated in economically depressed regions

18 Office of the Chief Economist 20.1% 13.4% 16.1% 2.7% 14.4% 33.2% 20.1% 7.2% 5.2% 57.1% 7.9% 2.5% Subprime and Alt-A Volume Quintupled Between 2001 and 2006, then Fell in 2007 Source: Inside Mortgage Finance (by dollar amount) Alt-AHome Equity Loans Conventional, Conforming Prime Jumbo PrimeSubprimeFHA & VA 3.0% 6.0% 9.8% 6.9% 13.3% 61.0%

19 Office of the Chief Economist In Massachusetts, ARMs Dominate Subprime Home-Purchase Loans in 2006 Source: LoanPerformance, a subsidiary of First American Real Estate Solutions, FHFB MIRS First liens only; by dollar amount

20 Office of the Chief Economist Subprime ARM Defaults Are 12 Times Those on Prime Loans 90 days or more delinquent or in foreclosure (percent of number) Source: Mortgage Bankers Association (Quarterly data not seasonally adjusted;1998Q1-2007Q4) Prime Conventional (includes Alt-A) FHA & VA Subprime FRM – Recession Subprime ARM 20.43% 8.18% 5.18% 1.67%

21 Office of the Chief Economist Regular Adjustment in 2008, in Default as of December 2007 First Adjustment in 2008, Current as of December 2007 Regular Adjustment in 2008, Current as of December 2007 About 1.4 Million Subprime Loans Will Have First Reset in 2008 Amount of ARMs Scheduled to Have a Reset (Number of Loans in Thousands as of December 2007) Source: LoanPerformance ABS Securities, Freddie Mac. “Default” includes loans delinquent 30 or more days or that are in foreclosure. First Adjustment in 2008, in Default as of December 2007

22 Office of the Chief Economist Number of Foreclosures Started in Massachusetts (Annualized Rate in Thousands) Source: Mortgage Bankers Association’s National Delinquency Survey (Data as of December 2007; number expanded to reflect 85% coverage) 43% 50% 60% 58% 63% 40 % 36% 33% 35% 32% 33% 17% 14% 7% 5% 4% 2.5K 3.6K 12.8K 18.8K 61% 35% 4% Subprime: 11% of Loans Serviced (December 2007) In Massachusetts, Subprime Accounted for About 60% of Foreclosures Since % 59% 4%

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