GSE REFORM MADE SIMPLE: (CASH-OUT) REFINANCES VS. HOMEOWNERSHIP LENDING November 13,2013 Joel S Singer, CEO California Association of Realtors

THE PREMISE : SHOULD REFINANCES BE EQUIVALENTLY GUARANTEED AND PRICED TO HOMEOWNERSHIP LENDING ? From the twin standpoints of risk and privatization, GSE reform should begin here…

GSE MISSION STATEMENTS & GOVERNMENT COMMITMENT TO HOMEOWNERSHIP

Fannie Mae & Freddie Mac: Stewards of Homeownership Chartered by Congress to provide liquidity, stability, and affordability to the U.S. housing and mortgage markets Fannie Mae: Our mission is to tear down barriers, lower costs, and increase the opportunities for home ownership and affordable rental housing for all Americans. Because having a safe place to call home strengthens families, communities, and our nation as a whole. Freddie Mac: Freddie Mac was chartered by Congress in 1970 with a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market.

THE RISK ASPECT: CAUSES OF THE FINANCIAL CRISIS

Caveats: Yes, There Were A Myriad Causes Underlying the Financial Crisis Extremely low interest rates High-yield MBS’s looking increasingly attractive Credit rating agencies gave AAA to junk Derivatives – complex & unregulated 1998: Glass-Steagall repealed Lend to sell to “securitizers” model meant no one was focused on credit quality Proliferation of “innovative” mortgages with much higher default rates than 30 Yr FRM

THE REALITY: AN EPIDEMIC OF “CASH-OUT” REFI’S

What led to the Refinancing Boom? Three trends in the U.S. housing market Rising home prices Falling interest rates More “efficient” refinancing Reduced Documentation Inflated on no appraisals Marketing

Mortgage Rates Dropped Significantly in Early 2000’s SERIES: 30Yr FRM, 1Yr ARM, Federal Funds SOURCE: Federal Home Loan Mortgage Corporation

Median Home Prices Surged in the Mid 2000’s SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Refi and Cash-Out Between million homeowners refinanced at least twice In 2006 – 86% of borrowers who refinanced took out cash. $320 B

Mortgage Originations: REFINANCE/PURCHASE SHARE SERIES: Mortgage Originations SOURCE: Mortgage Bankers Association of America

Home Purchase Loans vs. Refinance Loans

Cash-Out Refinance Peaked in 2006Q2 at $84 billion

89% Took “Cash-Out” At Refinance in Q3 2006

Rates of Seriously Delinquent Cash-Outs Higher 2005 And Earlier Purchase21.8%4.1% Refi14.4%2.8% Cash-Out Refi23.8%3.2% Other10.4%3.7% Total20.2%3.5% Purchase27.6%14.2% Refi29.8%15.9% Cash-Out Refi31.7%14.2% Other20.0%16.3% Total28.8%14.6% 2009 And After Purchase0.5%0.3% Refi0.7%0.6% Cash-Out Refi0.5% Other1.8%0.3% Total0.6%0.5% Total Purchase18.4%5.6% Refi8.5%3.1% Cash-Out Refi19.5%4.6% Other15.5%5.5% Total15.0%4.5%

WHAT DID THIS LOOK LIKE IN REAL LIFE?

1872 W. Admiral, Anaheim CA bd, 2.5 ba, built in 1982 Sept 2005: Purchased for $594,000 with 30% downpayment April 2006: Added a second for $57,000 October 2006: Refinanced the second into a new second for $100, : Default October 2010 value: $364,000

1572 W. Orangewood, Anaheim, CA bd, 2 ba, 2,016 sq ft built in 1977 June 2003: Purchased for $455,000 with 30% down March 2004: Added a second for $75,000, a third for $90,500 and a fourth for $80,000 Within one year of purchase the property had $565,000 in debt on it! 2010: Default October 2010 value = $442,000

8871 Regal Anaheim, CA bd, 2 ba, 1,314 sq ft built in : Sold for $568, : Purchased as REO for $417,000, zero downpayment 2010: Default October 2010 value = $367,500 20

2414 E. Underhill Anaheim, CA bd, 2 ba, 1,459 sq ft built in Purchased for $640,000with piggyback financing: $500,000 first and $140,000 second, i.e. zero down 2010: Default October 2010 value = $387,000

WHAT MIGHT THIS LOOK LIKE IN THE AGGREGATE?

NBER Simulation: Without Cash-Out Refi, Outstanding Mortgages Totaled over $4 billion by December 2008 … Source: National Bureau of Economic Research – NBER Working Paper Series: Systemic Risk and The Refinancing Ratchet Effect (Sept 2009) No Cash-Out Refinancing $10,154 $4,105

NBER Simulation: With Cash-Out Refi, Outstanding Mortgages Tripled… Source: National Bureau of Economic Research – NBER Working Paper Series: Systemic Risk and The Refinancing Ratchet Effect (Sept 2009) Cash-Out Refinancing $16,570 $12,018

Cash-Out Refinancing Increases the Number of “Underwater” Homeowners Note: The data in the above table reflects figures as of December Source: National Bureau of Economic Research – NBER Working Paper Series: Systemic Risk and The Refinancing Ratchet Effect (Sept 2009)

A NOTE ABOUT TEXAS

Texas Model In Texas, cash out and home equity loans cannot exceed 80% of the home’s appraised value Result: significantly lower delinquency and foreclosure rates

Subprime Delinquency Rises More Slowly in Texas Note: Serious delinquencies are mortgages more than 60 days past due or in foreclosure Sources: Mortgage Bankers Association; Federal Housing Finance Agency; Federal Reserve Bank of Dallas

Differences between Texas and U.S. in Mortgage Characteristics Sources: First American Loan Performance data from Federal Reserve Bank of New York (August 2008); Federal Reserve Bank of Dallas

WHERE DO WE GO FROM HERE?

A FAR MORE TARGETED AND RATIONAL APPROACH TO DOWNSIZING THE GSE’S 1) Differentially Price Refi’s 2) Differentially Guarantee Refi’s

THANK YOU!