Urban Neighborhoods Weathering The Storm

1
Urban Neighborhoods Weathering The Storm

• United Neighborhood Centers of America
• Constant Change Led by Constant Values
• Craig Nickerson, Vice President
• Freddie Mac, Expanding Markets
• February 28, 2008

2
Overview

• A Crisis of Unprecedented Proportions
• How Did It Happen?
• How Bad Is It?
• On People
• On Urban Neighborhoods
• 4 Keys To Neighborhood Stabilization
• Where do we go from here?

3
A Crisis of Unprecedented Proportions

• Is There A Housing Crisis? Yes
• One of the most significant in last 80 years
• A Slow Moving Tsunami
• Subprime wave
• Alt A wave
• Option ARM and I/O wave
• Prime market high LTV wave
• Impact most people devastate some
• Long term impact on our neighborhoods

4
How Did It Happen?

• America has a sophisticated, efficient mortgage
  system
• Last 5 years . . . a world awash in liquidity
• Subprime grew, unsafe practices expanded, buoyed
  by property value increases
• Parallel universes . . . Different results
• Subprime loans accounted for over half of
  foreclosures in 2006 and 2007
• Subprime borrowers often first-time minority
  homebuyers
• More than 1.3 million loans began foreclosure in
  2007
• Credit markets dried up house of cards
  collapses
• Many areas become declining markets

5
Focus of Subprime Lenders

• Minorities and Immigrants
• The Uneducated or Uninformed
• Those Fearing Rejection or Needing Quick Decision
• Those Who Are Intimidated By The Process
• Urban Market Residents

In 2002, subprime loans were made more often to
minority borrowers than white borrowers

• 28 home purchase loans received by African
  Americans
• were from subprime lenders.
• Nearly 20 of home purchase loans received by
  Latinos
• were from subprime lenders.
• In contrast, only 7.8 of home purchase loans
  received by
• whites were from subprime lenders.

6
Minority Families Subprime Lending2006
Half of minority households with purchase
mortgages chose a subprime product
White/Asian 17.2
Black 54.7
Hispanic 46.1
Source Federal Reserve Board
7
Subprime vs. Prime FICO Ranges
Source MBA/STRATMOR Peer Group Survey, 2005
8
Non-traditional Loan Originations Have Grown
Rapidly
Interest-Only Negative Amortization Share of
Originations in Private Label Securities (percent
of loans)
Interest-Only Neg Am Share of Originations
Interest Only Share of Originations
Source LoanPerformance-a unit of First American
Corp (Securities issues through December 2006)
9
Subprime Default Rates Are 10 Times Those on
Prime and Equal Previous High
Loans 90 days or more delinquent or in
foreclosure (percent of number)
Subprime
FHA
VA
Prime Conventional
Source Mortgage Bankers Association and Loan
Performance (through 4Q 2006)
10
Subprime ARM Defaults Are 12 Times Those on Prime
Loans 90 days or more delinquent or in
foreclosure (percent of number)
Subprime ARM
Subprime FRM
FHA VA
Prime Conventional
Source Mortgage Bankers Association (Quarterly
data not seasonally adjusted1998Q1-2007Q3)
11
The 2006 Subprime Cohort is Performing Far Worse
than Prior Years Originations
Cumulative REO as a Percentage of Original Balance
2006 Origination
2005 Origination
2004 Origination
2003 Origination
Age in Month
Source LoanPerformance, a subsidiary of First
American Real Estate Solutions
12
Existing Home Sales Are Down Everywhere
-47
-48
-65
-42
-45
-57
-52
Percent change in existing home sales Fourth
quarter 2005 through Fourth quarter 2007
Existing Home Sales Nationwide Down 29
Source National Association of Realtors
13
Delinquency Rates Have Jumped In Markets With
Flat or Falling House Values
Percentage Point Difference
? 0.00
0.01 to 0.20
0.21 to 0.40
0.41 to 0.60
0.61 to 0.80
0.81 to 1.25
3Q 06 to 3Q 07 Change in Level of Serious
Delinquency Rate (90 days or in foreclosure,
Prime Conventional Loans) National Average Change
0.52 Data as of September 2007
Source Mortgage Bankers Association
14
Employment Growth Weakest in Northeast and Great
Lakes Region
Percent change in the non-farm payroll
employment November 2006 through November 2007
0.0 to 0.8
Above 2.0
National employment up 1.1
1.5 to 1.9
Below 0.0
0.9 to 1.4
Source U.S. Bureau of Labor Statistics
15
Subprime Delinquencies Are Lowest in Northwest
and Mountain States
3.8 to 5.9
6.0 to 7.9
8.0 to 9.9
10.0 to 11.9
12.0 to 18.5
National 11.38 Seriously Delinquent (90 days
delinquent or in foreclosure, Subprime
Loans) Data as of September 2007
Source Mortgage Bankers Association
16
Freddie Mac Leadership

• In 2007 Freddie Mac made a series of
  announcements detailing our position and
  initiatives around subprime.
• Key Highlights
• First to stop buying subprime short-term hybrid
  ARM mortgages - excessive payment shock
• 20 billion in subprime loans to help - Safe Step
  Mortgages
• Roper Study - Most borrowers do not seek help
• In 2007 modified over 50,000 mortgages High
  Touch Servicing
• In 2008, focus on foreclosure prevention and
  neighborhood stability

17
Neighborhoods Weathering The Storm

• The Problem
• First-time homebuyers are on the sidelines
• For Sale signs are increasing desperate moves
• Number of abandoned properties is growing
• Property values are plummeting
• The Solution
• Proactive strategy
• Dont wait till the dust settles
• Align local interests
• Increase demand decrease housing supply

18
4 Keys to Neighborhood Stabilization

• Mitigate the Damage
• Foreclosure avoidance
• Short sales
• Property bank
• REO discounts
• Bricks and Mortar Solutions
• Acquisition and rehab
• Demolition/reuse
• Lease To Own - Occupy at all times
• New construction
• Increase Buyer Demand
• Sourcing channels employers, counseling
  agencies, real estate professionals
• Downpayment assistance
• Equity protection
• Tax incentives

19
Keys to Neighborhood Stabilization

• Rebuild Neighborhood Resident Confidence
• Its not all about bricks and mortar
• Intangible problems are most important
• Neighborhoods are like people they get sick
• Dont treat the symptoms treat the root cause
• Build confidence . . . pride . . . leadership
• We are facing a Strategic Inflection Point
• You Are Key To The Future!