Figure 1: The Traditional Lending Process Mortgage Lenders 1
Figure 2: The End of the Stable Interest Rate Environment 20.0 18.0 16.0 percent Recession 14.0 30-Yr Fixed Rate Mortgage 12.0 10.0 8.0 6.0 30-Yr Treasury 76 77 78 80 2
Figure 3: Wall Street Enters the Mortgage Market Payments Loan Funds Global Investors Investment Bankers Mortgage Originators 3
Figure 4: A Simple Senior-Subordinated Security Class A: AA rating Class B: BBB rating Class C: Not Rated Equity Residual The Coast Federal Savings and Loan Deal The advent of Senior/Subordinated securities 4
Figure 5: Mortgage and Treasury Rates: 1980-1981 20.0 18.0 16.0 14.0 12.0 10.0 8.0 Recession 30-Yr Fixed Rate Mortgage 30-Yr Treasury Recession 6.0 80 81 5
Figure 6: Stagnating Home Prices: 1979-1983 Repeat Home Price Index, percent change from a year ago 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Recession Recession 0.0 1976 1977 1978 1979 1980 1981 1982 Source: OFHEO 6
Figure 7: Interest Rates: 1981-2007 20.0 percent 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Recession Recession 30-Year Fixed Rate Mortgage 30-Yr Treasury Core CPI 81 82 83 85 86 87 89 90 91 93 94 95 97 98 99 01 02 03 05 06 07 7
Figure 8: Home Prices: 1994-2007 240 220 Home Price Index, March 1994 = 100 200 180 160 140 120 100 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: OFHEO, The HPI is a broad measure of the movement of single-family house prices. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties 8
And more Predictably than Stocks 350 March 1994 = 100 300 S&P 500 250 200 150 Home Price Index (HPI) 100 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: OFHEO, The HPI is a broad measure of the movement of single-family house prices. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties 9
Why Save for a Downpayment? Source: http://www.corridormtg.com/programs/conventional.asp 100% Financing (80% 1st Mortgage & 20% 2nd Mortgage No M.I.) 80/15/5 (80% 1st Mortgage & 20% 2nd Mortgage No M.I.) 80/10/10 (80% 1st Mortgage & 10% 2nd Mortgage No M.I.) 103% Financing (allows you to include up to 3% of closing costs) 107% Financing (allows you to include up to 7% of closing costs) 10
Figure 9: Representative Website for Subprime Lender Source: http://www.corridormtg.com/programs/alta.asp 100% Stated Income 95% NO DOC/No Income/No Asset/No Employment 125% Equity Lines Rate/Term Refinance (95% to $417,000K & No Seasoning) Investor Cash-Out Refinance 100% Investor Purchase 95% Purchase & Rate/Term Refinance (with 575 credit scores) 90% Purchase & Rate/Term Refinance (with 525 credit scores) 100% Financing to $417,000 (no minimum scores) 107% Financing (roll in 7% closing costs) 103% Financing (roll in 3% closing costs) 97% Purchase & Rate/Term Refi (with 580 credit scores) 11
Figure 10: Representative Website for Subprime Lender (part 2 Source: http://www.corridormtg.com/programs/alta.asp 100% Stated Income 95% NO DOC/No Income/No Asset/No Employment 125% Equity Lines Rate/Term Refinance (95% to $417,000K & No Seasoning) Investor Cash-Out Refinance 100% Investor Purchase 95% Purchase & Rate/Term Refinance (with 575 credit scores) 90% Purchase & Rate/Term Refinance (with 525 credit scores) 100% Financing to $417,000 (no minimum scores) 107% Financing (roll in 7% closing costs) 103% Financing (roll in 3% closing costs) 97% Purchase & Rate/Term Refi (with 580 credit scores) 12
Figure 15: Mortgages Outstanding: 2007 Mortgage Market, $ trillion Mortgage Market, $10.2 trillion 17
Figure 16: Weakening Underwriting Standards: 2001-2006 90 88 Combined Loan to Value 87.4 89.1 35% 30% 100% Financing 33% 86 85 25% 24% 84 82 80 79.8 80.5 82.3 20% 15% 10% 8% 16% 78 5% 3% 3% 76 2001 2002 2003 2004 2005 2006 0% 2001 2002 2003 2004 2005 2006 50% 45% 40% Limited Documentation 41% 38% 44% 16% 14% 12% 100% Financing & Limited Doc 12% 15% 35% 30% 27% 31% 35% 10% 8% 6% 7% 25% 4% 3% 20% 2001 2002 2003 2004 2005 2006 2% 0% 1% 1% 2001 2002 2003 2004 2005 2006 Source: Estimates by T2 Partners 18
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Home Equity Withdrawals ($ Billions) Prices only Increase, So Your House is Free Money Home Equity Withdrawals ($ billion) 1,000 900 800 700 600 500 400 300 200 100 0 Source:Freddie Mac, Federal Reserve, Fed staff Working Paper 2005-41 by Greenspan, Kennedy and Wachovia Securities 19
Figure 17: The Structure of a CDO Raw Material Sr./Subordinated Securities MBS Collateral CDO Structure AAA (84%) Super-senior (70%) US real estate loans Portfolio of BBB/ BB / B / A / AA notes of MBS securitizations AAA (10%) AA (2%) A (3%) BBB (4%) AA (8%) A (5%) BB (3%) BBB (3%) B (1%) BBB- (2%) Equity (2%) Equity (2%) Source: Commercial Mortgage Alert, Goldman Sachs 20
Figure 18: Delinquencies Increase for Mortgages 25.0 Percent of loans Seriously Delinquent (90 days or more past due or in foreclosure) 20.0 Subprime ARM 15.0 10.0 Subprime FRM 5.0 Prime FRM Prime ARM 0.0 98 99 00 01 02 03 04 05 06 07 Source: Mortgage Bankers Association 21
Figure 19: Precipitous Drops in Cap Rates Source CBRE/Real Capital Analytics
Figure 20: Loan Underwriting Standards Decline from 2002 to 2007 Source: Eastdil Secured/Wachovia Capital Markets, Intex Solutions & Trepp (2008 Info)
Figure 21: CMBS Issuance Grows in the 21st Century Domestic CMBS Gross Issuance, $ billion 12.0 Source: Commercial Mortgage Alert, RCG Banc of America Securities 2008 E 24
BPS Over 10Y UST Figure 22: CMBS Spreads Reach New Lows in 2007 2000 CMBS Spreads to Ten-Year Treasuries 1500 1000 500 68 79 90 120 140 0 AAA AA A BBB BBB- 1/4/2007
BPS Over 10Y UST Figure 23: Spreads Widen to Unprecedented Levels in 2008 4000 3500 3757 3000 3307 2500 2000 2157 1500 1657 1000 500 647 0 AAA AA A BBB BBB- 10/31/2008
Figure 24: The Historical Record of Capitalization Rates