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U.S. Subprime Mortgage Market Meltdown U.S.U.S. SubprimeSubprime MortgageMortgage MarketMarket MeltdownMeltdown James R. Barth Auburn University and Milken Institute [email protected] 14th Dubrovnik Economic Conference The Croatian National Bank Dubrovnik, Croatia June 25–28, 2008 “Any real-estate investment is a good investment … ” “Any real-estate investment is a good investment … ” …… NOT! NOT! Homeownership Rate Reaches Historic High in 2004 Percent 69.2% in September 2004 70 69 68 67 66 67.8% in March 2008 65 64 63 62 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2008 Source: U.S. Census Bureau. Index, January 1987 = 100 600 500 400 Home Prices Peak in 2006 300 200 100 0 Sources 1987 California Association198 of Realtors,8 Moody's Economy.com. : U.S. Office of Federal Housing Enterprise Oversight (OFEHO), Standard & Poor's, 1989 1990 1991 California median 1992 S&P/Case-Shiller 1993 home price index home price 1994 1995 1996 1997 1998 1999 2000 conventional and 2001 conformingOFHEO home 2002 price index 2003 2004 2005 2006 2007 2008 Home Price Appreciation Peaks in 2005 House-price indices, % change on a year earlier 20 S&P/Case- Shiller 10 city 15 S&P/Case- Shiller national 10 OFHEO 5 0 -5 -10 -15 1988 1992 1996 2000 2004 2008 A Longer-Term Perspective on Home Prices 1890=100 220 220 Current Boom 200 200 180 180 Great Depression 160 160 World World 1970’s 1980’s War I War II Boom Boom 140 140 120 120 100 100 80 80 60 60 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Robert J. Shiller, 2006. History Repeats Itself: Home Prices Don’t Just Go Up Change in Home Prices in 100 plus years Percentage change, year ago 40% World Great World 1970’s 1980’s Current War I Depression War II Boom Boom Boom 30% 20% 10% 0% -10% -20% 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Robert J. Shiller, 2006. Millions Millions 4.8 4.2 3.6 Homes for Sale Take Off 3.0 2.4 1.8 1.2 0.6 0.0 Existing homes Source: 1989 (Left axis) U.S. Census1990 Bureau. 1991 1992 1993 1994 1995 1996 New homes (Right axis) 1997 0.8 1998 0.7 1999 2000 0.6 2001 0.5 2002 2003 0.4 2004 0.3 2005 0.2 2006 2007 0.1 2008 0.0 Single-family Home Sales Reach New High Before Plunging Millions, SAAR Millions, SAAR 6.5 1.4 6.0 1.2 New homes (Right axis) 5.5 1.0 5.0 0.8 4.5 0.6 Existing homes (Left axis) 4.0 0.4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: U.S. Census, National Association of Realtors, Moody’s Economy.com. Existing Home Sales Are Down Everywhere Over the Past Two Years Percent change in existing home sales Fourth-quarter 2005 through fourth-quarter 2007 Existing home sales nationwide down 29% Source: Freddie Mac. Median Existing Single-family Home Price: Too Good to Last Percent change, year ago 20 15 10 5 0 -5 -10 -15 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: National Association of Realtors, Moody’s Economy.com. Forty-six States Had Falling Prices in the Fourth Quarter 2007 United States: - 9.3% (fourth-quarter annualized growth) Source: Freddie Mac. Single-family Housing Starts Percent change, year ago 40 20 0 -20 -40 -60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: U.S. Census Bureau, Global Insight. Single-family Building Hit a Record in 2005 Thousands, SAAR But Was 53% Lower Two Years Later 2,000 1,800 Housing starts: Single-family privately owned 1,600 1,400 1,200 1,000 800 600 400 200 0 Source 1972 : U.S. Census Bureau.1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Homes Sit Longer on the Market Millions Months 4.0 11 10 3.5 9 3.0 Homes available 8 for sale 2.5 (Left axis) 7 6 2.0 5 Months supply 1.5 (Right axis) 4 1.0 3 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: National Association of Realtors, Moody’s Economy.com. Index, January 2000 = 100 250 Home Prices and Credit Boom 200 150 100 S&P/Case- Shiller® home price 50 index (L) originations 0 Total 1994 (R) 1995 1996 1997 1998 US$ billions 1999 4,500 2000 Subprime originations 2001 4,000 3,500 2002 (R) 3,000 2003 2,500 2004 2,000 2005 1,500 2006 1,000 500 2007 0 Interest Rates: Too Low Too Long? Fed Funds Rate vs. Rate on Long-term Government Bonds Percent 7 6 Government bond rate 5 4 3 Fed funds rate 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: Federal Reserve, Global Insight. Mortgage Rates: ARMs Appear Attractive to Many Percent 9.0 8.0 30-yr fixed 7.0 6.0 5.0 4.0 1-yr ARM 3.0 2.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: Mortgage Banker’s Association, Moody’s Economy.com. ARM Share of Mortgages Percent 40 35 30 Share of all applications 25 20 15 10 Share of all loans 5 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sources: U.S. Federal Housing Finance Board, Freddie Mac, Moody’s Economy.com. Percent of all loans 23 21 ARM Share of Mortgages 19 17 15 13 11 11.7 12.0 14.8 9 11.9 14.4 15.8 16.9 17.9 19.0 20.2 20.6 Source Q1 2003 20.9 Q2 2003 21.7 : Mortgage Bankers Association. Q3 2003 21.3 Q4 2003 21.4 Q1 2004 21.1 Q2 2004 Q3 2004 20.9 Q4 2004 20.2 Q1 2005 20.9 Q2 2005 20.8 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Percent of loan type 70 ARM Mortgage Share by Loan Type 60 50 40 30 20 10 0 Q1 2003 Source Q2 2003 : MortgageQ3 Bankers 200 Association.3 Q4 2003 Q1 2004 FHA Q2 2004 Prime Subprime Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Prime and Subprime Home Mortgage Originations Share of Total (%) Total Originations Year (US$ Trillions) Prime Subprime Originations Originations 1994 0.77 95.5 4.5 1995 0.64 89.8 10.2 1996 0.79 87.7 12.3 1997 0.86 85.5 14.5 1998 1.45 89.7 10.3 1999 1.31 87.8 12.2 2000 1.05 86.8 13.2 2001 2.22 92.2 7.8 2002 2.89 92.6 7.4 2003 3.95 91.6 8.4 2004 2.92 81.8 18.2 2005 3.12 78.7 21.3 2006 2.98 79.9 20.1 2007 2.43 92.1 7.9 2008 Q1 0.48 97.9 2.1 Source: Inside Mortgage Finance. Mortgage Originations by Product Subprime and Alt A shares quadruple between 2001 and 2006, then fall in 2007. 4.6% 14.4% 2.6% 8.0% 14.4% 2.7% 4.9% 33.2% 8.4% 13.4% 11.3% 47.3% 56.9% 19.4% 7.9% 20.1% 16.1% 14.3% 2007 2001 2006 $2.4 trillion $2.2 trillion $3.0 trillion Conventional, conforming prime Jumbo prime Subprime Alt-A Source: Inside Mortgage Finance. FHA & VA Home equity loans 2/28 ARMs Dominate Subprime Home-purchase Loan Originations in 2006 Other OtherOther ARM ARM Fixed 4% 7% 9% Other ARM ARM 30Yr ARM 2-year 23% ARM Hybrids Balloon W/ 23% & 3-year hybrids 40-50-Yr Fixed hybrids Fixed 46% Amtz 26% 70% 61% 31% Prime Subprime Alt-A conventional Source: Freddie Mac. US$ billions 1,400 Subprime Mortgage Loans Outstanding 1,200 1,000 800 600 400 200 290 0 283 319 Source 1995 344 : Inside Mortgage Finance. 1996 382 1997 416 479 1,200 1998 574 973 699 1999 1,240 2000 2001 940 2002 2003 895 2004 2005 2006 2007 2008 1Q Distribution of Prime an Percent of Total OriginationsMortgage Originations by FICO Score 16% 14% 12% 10% 8% 6% 4% d Subprime Residential 2% (2006) Subprime 0% 0 - 459 460 - 479 480 - 499 500 - 519 520 - 539 540 - 559 560 - 579 580 - 599 600 - 619 620 - 639 Prime FICO Score640 - 659 660 - 679 680 - 699 700 - 719 720 - 739 740 - 759 760 - 779 780 - 799 800 - 900 National Distribution of FICO Scores Percentage of Population 30 27 25 20 18 15 15 13 12 10 8 5 5 2 0 up to 500-549 550-599 600-649 650-699 700-479 750-799 800 499 Origin of “Securitization” “But I don’t know any other word to describe what we are doing. You will have to use it (securitization).” Lewis Ranieri “The Origins of Securitization, Sources of Its Growth, and Its Future Potential,” A Primer on Securitization Surge in Amount and Diversity of U.S. Asset-backed Securities Outstanding US$ trillions 10.0 Other 9.0 Student Loans 8.0 Home Equity 7.0 6.0 Credit Card 5.0 Automobile 4.0 3.0 Non-agency 2.0 MBS Agency CMO 1.0 0.0 Agency MBS 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Securities Industry and Financial Markets Association.
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