Mortgage Industry Update

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Mortgage Industry Update

• NTRP Workshop
• September 25, 2008

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MORTGAGE PANEL DISCUSSION

• Allison Basley Wells Fargo
• Mortgage Market Meltdown
• What it Means to You
• Rob Kreiling Bank of America
• The Housing Market
• High Cost of Living Solution Mortgage Subsidies
• Marnita Williams- Countrywide
• Mortgage Bailout Plan
• Short Pays
• Scott Eggen- Prime Lending
• Tightening of Mortgage Guidelines
• Mortgage Industry Future Trends

3
Mortgage Market Meltdown What it Means to
You

• Allison Basley
• Wells Fargo Home Mortgage

4
Mortgage Market Trends What Happened?

• Boom Ended August 2005
• Mortgage Rates Rose Almost One Percent During the
  4th Quarter of 2005
• Affordability Conditions Deteriorated
• Speculative Investors Pulled Out
• Homebuyer Confidence Plunged
• Resort Buyers Went to Sidelines
• Trade-Up Buyers Went to Sidelines
• Some First-Time Homebuyers Priced Out of Market

5
Perfect Storm
6
2007 Nationwide Home Price Adjustments
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What Effects Mortgage Rates?

• Mortgage rates are dictated by the trading
  activity of mortgage - backed securities (MBS)
• THIS ACTIVITY IS INFLUENCED BY
• U.S. Economic activity and The Federal Reserves
  Policies
• Activity in the stock market and the bond market
• General demand including foreign governments
  demand for MBS and other fixed income securities
• Worldwide economic and political events
• Value of the dollar vs. other major currencies
• Price of oil
• War/terrorism

8
Consumer Confidence
The Conference Board index of consumer confidence
fell again in January

• Surging energy prices
• Oil prices
• Gasoline prices
• Heating and cooling costs
• Housing market trouble
• Declining Values
• People owe more than their home
• is worth
• Reduced credit availability
• Consumer finances
• Household wealth is declining
• High debt burdens
• Record low savings

9
Impact on Relocation

• Buyers with Homes sidelined
• Increasing inventory
• Increasing foreclosures
• Declining Sales Price on Homes

10
Impact on Transferees

• BVOs force homeowners to wait on sale of home
• Higher Interest Rates
• Tighter Qualification Requirements
• Higher Down Payments in declining markets
• More Documentation Required
• Shrinking sub-prime availability

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• The Housing Market
• And
• Mortgage Trends
• Rob Kreiling, CRP, GMS
• Bank of America Mortgage

12
Home Prices
The SP/Case Shiller Home Price Index recorded a
record 15.4 decline in Q2 2008. The 10-City and
20-City Composites posted record declines the
second quarter as well. The housing market
peaked around June/July of 2006
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Foreclosures

• Foreclosure activity rose 121 in Q2 2008
  compared to 2007. This was in addition to a 75
  increase for the calendar year 2007 over
  2006.
• There were 739,714 foreclosure filings in the
  nation in Q2 one for every 171 households
• A large number of ARMs reset in the second
  half of 2008 which should continue to increase
• California had the highest number of
  foreclosures filings 202,599 which was
  triple 2007. In addition, 2007 year-end was
  more than triple year-end 2006

Source Foreclosure Activity Up 14 in Second
Quarter, By RealtyTrac Staff
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Mortgage Subsidy
A Solution to High Cost Areas
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Mortgage Subsidy
Definition -- What is a Mortgage Subsidy?
In the most generic sense, a Mortgage Subsidy is
a reduction in a transferees new mortgage
payment for a defined period of time. It is a
benefit provided by an employer to a transferee,
most often used when moving into designated high
cost markets. The dollar amount and term of the
mortgage subsidy is determined by the employer.
Two Types
There are typically two types of mortgage
subsidies interest rate driven and dollar
driven. Within each type, there are several
options and choices.
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Mortgage Subsidy
Interest Rate Driven Subsidy The employers
relocation policy determines the transferees
subsidy rate. Initially, the cost of the
mortgage subsidy is not known because the
transferee has not found a new home. The cost of
an interest driven subsidy is a function of the
loan amount, interest rate and term of the
mortgage note. The employer will pay the
difference between the mortgage payment at the
note rate and the transferees subsidy rate.
Each year, the transferees subsidy rate will
increase by approximately 1, thus easing them
into their higher mortgage payment.
Common Options/Choices 5-4-3-2-1 4-3-2-1 3-2-1 2-1
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Mortgage Subsidy
Interest Rate Driven Subsidy 3-2-1 Example
The loan amount, interest rate, and term of the
note will determine the cost of the subsidy.
The interest rate reduction is spread over 3
years (3 in year one, 2 in year two, 1 in year
three).
Assumptions Loan Amount 350,000 Note
Rate 7.000 Program 30 Year Fixed
Company
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Mortgage Subsidy
Dollar Driven Subsidy The employer determines the
term (i.e., 2, 3, 4, 5 years) and the dollar
amount of the subsidy/financial assistance. The
Mortgage Company builds a subsidy schedule based
on the transferees loan details and the subsidy
program guidelines.

• Most Common Options/Choices
• Employer determines the amount of
  subsidy/financial assistance (cost of the
  subsidy).
• The most common term is 3 or 4 years.

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Mortgage Subsidy
Dollar Driven Subsidy 3-Year Example
The employers relocation policy determines the
amount of financial assistance and thus the cost
of a Dollar Driven Subsidy Program. The benefit
is spread over a specified term. This example
illustrates a 15,000 declining benefit spread
over 3 years (50 in year one, 33 in year two,
16 in year three).
Assumptions Loan Amount 350,000 Note
Rate 7.000 Program
30 Year Fixed
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Mortgage Subsidy

• Pros
• Easy to communicate to transferees.
• Amount of financial assistance is normally not
  challenged by the transferee.
• Cons
• Cost of the subsidy is not known until the
  transferee get a mortgage.
• Dual income households typically buy bigger homes
  resulting in an increase cost of the subsidy.

• Pros
• Cost is determined at time of relocation.
• The cost/amount of the subsidy can be customized
  to meet the individual needs of the transferee.
• Cons
• Need to determine a method for calculating the
  amount of financial assistance.
• Transferees could challenge the method of
  calculating the financial assistance.

vs.
Interest Rate Driven Subsidy
Dollar Driven Subsidy
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Mortgage Subsidy
Advantages of a Mortgage Subsidy Program vs. Cash
Payment

• Solution A more effective alternative to a cash
  payment program.
• Buying Power Increases purchasing power.
• Stability Payment gradually increases easing the
  transferee into the higher cost market.
• Usage Employer knows how the assistance is being
  used.
• Control If the transferee terminate employment or
  relocates again, the subsidy stops and any
  unused subsidy is returned to the company.
• Taxability Most Companies do not tax assist the
  subsidy since the transferee can deduct the
  mortgage interest at the note rate.
• Flexibility Mortgage companies are flexible and
  can develop a program to meet the needs the
  company.
• Convenience The Mortgage Company handles much of
  the administration.

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Mortgage Subsidy
Why More Important Now?

• Getting Transferees into the home
• More obstacles Transferees still need to be
  able to purchase a home in the new area and
  have more challenges now in financing than in
  recent history.
• Seller funded Mortgage Subsidies
• Selling Tool May be used to help sell homes as
  an alternative to lowing the price.
• Underwriting There are underwriting rules as
  to how much a seller may contribute to buyer.
  Limits will vary based on down payment of
  buyer and product type.

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Mortgage Subsidy- 2008 Expanded Conforming Limits
March 6th - The Office of Federal Housing
Enterprise Oversight (OFHEO) today released the
maximum conforming loan limits that will be in
effect through year-end as a result of The
Economic Stimulus Act of 2008. That legislation
permits Fannie Mae and Freddie Mac to raise their
conforming loan limits in certain high-cost
areas. The new jumbo limits are a function of
median home prices as estimated by the U.S.
Department of Housing and Urban Development
(HUD). The maximum for temporary jumbo
conforming loan limits, which apply to loans
originated in the period between July 1, 2007 and
December 31, 2008, are as high as 729,750 for
one-unit homes in the continental United States.
Seventy-one Metropolitan and Micropolitan
Statistical Areas are affected including 224
counties and cities not in counties. In addition,
there are 21 counties outside of Metropolitan or
Micropolitan areas that show increases, plus Guam
and four municipalities in the Marianas Islands.
The newly increased limits range from 417,500 in
Greeley, Colorado to the highest of 793,750 in
Honolulu, Hawaii.
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Mortgage Subsidy- 2008 Expanded Conforming Limits

• Why does this matter ? Rates, spread on
  conforming vs. jumbo, not as large as end of 07
  but still significant
• Difficulties of transferees knowing limits and
  MSAs. Applying and locking in can be difficult
• Limitations of using subsidy with expanded
  conforming products
• Congress reviewing 2009 caps could be even
  more complex formula

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Mortgage Bailout - Government Home Retention
Options - Lenders

• Marnita Williams
• Countrywide Mortgage

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Why a Mortgage Bailout?

• Foreclosure rates in the US are at an all time
  high
• Hundreds of thousands of homeowners are expected
  to lose their homes by 2010
• Fallout will cause a major hit to the US economy
  and potentially affect the stock market

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Which Mortgages Qualify for Bailout?

• ONLY loans made at the start of 2005 - July 30,
  2007
• ONLY loans that will reset to a higher rate
  between January 1, 2008 through July 31, 2010
• ONLY owner occupied properties
• ONLY Adjustable Rate Mortgages
• ONLY those borrowers who CAN afford teaser
  payments and CANNOT afford resetting payments
• ONLY those borrowers who can prove they cannot
  afford resetting payments
• ONLY borrowers making their payments on time

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Home Preservation

• HOPE NOW Alliance
• Fast Track
• Project Lifeline
• Government Stimulus Package/
• Mortgage Relief
• FHASecure

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The Housing and Economic Recovery Act of 2008

• Federal Housing Finance Regulatory Reform Act of
  2008
• Reforms the regulation of Fannie Mae, and Freddie
  Mac to ensure safe and sound operations.
• Permanently raises the loan limits in high cost
  areas.
• Temporary expands its line of credit to Fannie
  and Freddie and permit the U. S. treasury to
  purchase an equity stake in the companies through
  2009.

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The Housing and Economic Recovery Act of 2008

• Hope for Homeowners Act of 2008
• Temporary FHA program to help homeowners
  refinance into a 30-year Fixed
• Loans issued January 2005 January 2007
• Authorized to insure up to 300 billion
• Expected to help 400,000 homeowners
• Starts October 1, 2008 September 30, 2011

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The Housing and Economic Recovery Act of 2008

• Foreclosure Prevention Act of 2008
• 3.92 billion will be provided to communities
  hardest hit by foreclosure
• Pre-foreclosure counseling provides 150 million
  in additional funding for housing counseling and
  30 million for legal services
• Ensures timely and meaningful disclosures
• Lengthens the time a lender must wait before
  starting foreclosure proceedings on a veteran

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The Housing and Economic Recovery Act of 2008

• Tax Credit
• First-time home buyers
• 10 of purchase price - Maximum of 7,500
• Must be paid back over 15 years
• Homes purchased between April 9, 2008 - July 1,
  2009.

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Home Retention Options

• Loan Modification
• Original loan terms are modified
• Past due amounts are added to the unpaid
  principal balance and re-amortized
• The loan must meet certain criteria and varies by
  lender
• Loan becomes current and borrowers credit is not
  impacted
• Does not repair any previously reported
  delinquency

34
Home Retention Options

• Short Sales
• Homeowner sells the property for less than what
  is owed.
• Difference between the sale and amount needed to
  satisfy the debt is referred to as forgiven
  debt.
• Initial packet to lender
• letter of explanation proving hardship
  circumstances
• proof of current financial condition
• purchase offer
• listing agreement.

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Home Retention Options

• Short Sales Contd
• Formal appraisal is done to determine current
  market value.
• Could require approval from a number of
  interested parties.
• Allow up to 90 120 days to process from time
  complete package is received.
• Borrowers credit is impacted, but less than with
  a foreclosure.
• Forgiven debt no longer taxable income through
  2010
• (Mortgage Forgiveness Debt Relief Act of 2007).
• Not all properties qualify for short sales
• Typically lenders will not accept less than fair
  market value.
• Do not assume the short sale will be accepted.

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What Lenders Can Do?

• Repayment plans to allow a delinquent loan to be
  brought current
• Forbearance plans that will suspend payments for
  a short period of time
• Modifications and refinances that can help make
  the loan more affordable for the long term
• Short sale

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What Borrowers Can Do?

• Contact their lender immediately
• Communicate, communicate, communicate
• Be honest about their financial situation
• Share information about income, expenses and
  circumstances that may impact their ability to
  repay their loan
• Be patient and persistent

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• Tightening of Mortgage Guidelines
• Mortgage Industry Future Trends
• Scott Eggen
• Prime Lending

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Started During World War II

• Consumer Leverage 1942 Present

• America Celebrates End of the War, an Era of
  Prosperity Begins

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Effects on Current Economy

• Deleveraging / Deflated US Assets
• Foreclosure rates in US are at an all-time high
• Hundreds of thousands of
• homeowners are
• expected to lose
• their homes by 2010
• Fallout will cause a major hit to the US
• economy and potentially affect
• the stock market

41
Effects on National Lending Services

• Consumers credit maxed-out and unable to repay
• Tighter underwriting standards (will be based on
  historical data, including rising prices)

42
Current Lending Environment

• Equity will no longer support spending habits
• All loans effected by Fico
• score
• Lower Loan-to-Value
• Mortgage Insurance Changes
• Government Loans still a safe haven,
• but many changes

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Mortgage Qualification Tightens

• On July 23rd, 2008 Capital Hill passed the
  Housing and Economic Recovery Act of 2008
• GSE Reform
• FHA Rescue Plan (Hope)
• Licensing Nationwide Licensing and registry for
  Loan Officers
• FHA Modernization

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Mortgage Qualification TightensCont

• 100 financing is gone
• Properties located in designated soft market
  areas require a higher down payment
• A soft market is an area that shows evidence of
  declining property values, an over supply of
  property, or a marketing time of more than six
  months
• The maximum allowable LTV/CLTV (Loan
  toValue/Cumulative Loan-to-Value) must be reduced
  on any program when it is determined the property
  is located in a soft market area
• Subprime loans are limited to Expanded Approval
  products offered portfolio lenders only

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Impact on Relocation

• Fewer potential buyers
• Increasing inventory
• Increasing foreclosures
• Increased pricing
• pressure

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Impact on Transferees

• Caught in a trap Non-Conforming
• Stated income/asset
• borrowers Alt-A
• No-doc Loans
• Still free to roam with caveats Conforming and
  Govt
• Vanilla Fannie Mae Full-doc type
• Some stated deals still exist (Only) Portfolio
  Lenders
• FHA VA Down payment assistance eliminated
• Dont get too comfortable

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Calming of the Storm
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Fannie and Freddie

• Place GSEs in conservatorship
• Treasury to provide capital to keep net worth of
  GSEs positive
• Treasury and the Fed to establish a new secured
  lending facility for Fannie, Freddie, and the
  FHLB.
• Treasury to purchase MBS
• (mortgage backed securities) in the open market

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Closing Message

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Closing Message
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Closing Message

• The mortgage market has always been cyclical and
  the current difficult times will pass.
• Stay in tune to market changes.