Presentation to IPED

1
Analysis of the Mortgage Crisis and International
Impact

• Presentation to IPED
• Ira G. Peppercorn
• President
• Ira Peppercorn International, LLC

2008 Real Estate Update Affordable Housing in
Todays Market December 1012 ? San Juan,
Puerto Rico Sponsored by Reznick Group, Nixon
Peabody LLP and IPED, Inc.
2
What Caused the Crisis?

• 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.

3
Overview

• 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 Coordination

4
90s Policies to Increase Homeownership Amongst
Non-Traditional Groups

• 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

5
Homeownership Rate Growth

• Overall Rate 64 in 1995 69 in 2005
• Caucasian Growth 71 1995 75 2005
• Minority Growth 44 1995 51 2005

6
Minority Groups Disproportionately Affected

• 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

7
European Mortgage Markets

• 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

8
European Housing Starts

• 2003 600,000
• 2004 650,000
• 2005 1,100,000
• 2006 1,200,000
• 2007 550,000

9
United Kingdom Significant Decline

• 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

10
Netherlands Challenged but More Stable

• 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)

11
Eastern Europe Costs Increasing and Lending
Tightening

• 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

12
Causes of the Crisis

• 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

13
Causes of the Crisis Fragmented Regulatory
System

• Federal Deposit Insurance Corporation
• Federal Reserve
• Federal Housing Finance Board
• State and Local Regulators

• Federal Housing Administration (FHA) Mortgage
  Insurance
• FHA Mission Oversight of Fannie/Freddie
• Office of Federal Housing Enterprise Oversight
• Mortgagee Review Board

14
Causes of the Crisis New Financial Products

• 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

15
Causes of the Crisis Desperation, Fear and
Opportunism

• 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

16
Growth of the Non-Regulated Sector

• 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

17
FHA Market Share
18
Causes of the Crisis Minorities and Sub-Prime
Mortgages

• 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

19
Causes of the Crisis System Wide Accountability

• Realtors
• Mortgage Brokers
• Appraisers
• Lenders
• Servicers
• Rating Agencies
• Investment Banks
• Second Mortgage Originators and Lenders
• Mortgage Purchasers and Packagers

20
Causes of the Crisis No Early Warning System

• 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

21
Solutions

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

22
Solutions Responsible Mortgage Lending

• Clear Underwriting Standards
• Income Verification and Documentation
• Reasonable Debt to Income Ratios
• Sensitivity Analysis Performed on Adjustable
  Mortgages

23
Solutions Coordinated Regulatory System

• 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
  Monitored

24
Solutions Appraisal System

• 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 Monitoring

25
Solutions Accountability

• 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 Players

26
Solutions Early Warning System

• 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 Properties

27
Conclusion

• 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
  Ethic

28
Thank You

• For More Information
• IraPeppercorn_at_IraPeppercorn.Com
• IraPeppercornInternational_at_Yahoo.com