An Economic Prognostication for 2008 Massachusetts Mortgage Bankers Association West Newton, MA May 16, 2008 Frank E. Nothaft Chief Economist

An Economic Prognostication for 2008

Massachusetts Mortgage Bankers AssociationWest Newton, MAMay 16, 2008

Frank E. Nothaft

Chief Economist

2

Office of the Chief Economist

Recession Risk, Housing Contraction Worsen

1-in-2 chance of recession in 2008 Maybe in recession already; fiscal stimulus propels growth in second

half: Economic growth 1.5% in 2008 Job gain falls short of labor force growth; Unemployment rate up,

averages 5.2% in 2008 Core inflation at upper end of range preferred by policy makers Less housing starts, sales in 2008; house values down

Credit quality has deteriorated 2006 and 2007 subprime vintages have high early-payment defaults More than half of foreclosure starts since 2006 were subprime loans Banks have tightened underwriting on both prime and subprime

Risks to the outlook How much will liquidity constraints affect broader economy?

Current liquidity problems affecting jumbo, Alt-A markets as well as subprime Energy: high oil and natural gas prices act like a tax on the economy

3


Prime Conforming Mortgage Rates Remain Low By Historical Standards

3

4

5

6

7

8

9

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20083

4

5

6

7

8

9

Source: Freddie Mac’s Primary Mortgage Market Survey®

1-Year, ARM Rate

30-Year,Fixed Rate

Weekly Mortgage Interest Rate (Percent)

Forecast

4

Office of the Chief EconomistSource: Inside MBS & ABS

Private-Label Mortgage-Backed Security Issuance Has Fallen Sharply

$92$99$99$94$85

$1

$14$20$19 $4

$0

$8$37

$34$1

$1$6

$16

$30$52

$0

$50

$100

$150

$200

March-2007 June-2007 September-2007 December-2007 March-2008

Dollar Amount of Issuance (Billions)

$191 Billion $137 Billion$181 Billion $95 Billion

Subprime & OtherAlt-APrime JumboFreddie Mac & Fannie Mae

Prime Jumbo

Alt-A

Freddie Mac & Fannie Mae

Subprime & Other

$109 Billion

5


Highest Percentage of Banks Tightening Home Mortgage Standards Since 1990

-20

0

20

40

60

80

1991 1994 1997 2000 2003 2006

-20

0

20

40

60

80

Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: May 5, 2008)

Net Percentage of Banks Tightening Mortgage Standards During Three Previous Months

Subprime

Prime

6


Single-family Building Hit a Record in 2005, but Fell About 60% Since Then

400

700

1,000

1,300

1,600

1,900

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

1- to 4-Family Housing Starts (thousands of units, SAAR)

Sources: Bureau of Census, Freddie Mac

– Recession

Third Quarter 2005 record: 1.8 million units

Forecast

First Quarter 2008: 0.7 million units

7


Existing Home Sales Are Down 35% in Massachusetts from Their 2005 Peak

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

40

60

80

100

120

140

160

Source: National Association of Realtors (Existing Single-Family Houses, Apartment Condos & Co-ops); New England composite is the sum of their six states’ existing home sales: CT, MA, ME, NH, RI, VT

U.S. Existing Home Sales (Left Scale, 000s) Massachusetts Existing Home Sales (Right Scale, 000s)

Home Sales Change (2005:Q3 – 2008:Q1)

United States -31%Massachusetts -35%

Peak

Lowest MA Sales in 12 Years

8


Existing Home Sales Are Down Everywhere (except Alaska)

Existing Home Sales Nationwide Down 31%(2005Q3 to 2008Q1)Down more than 40%

Down less than 20%

Down 20-40%

Percent change in existing home sales Fourth quarter 2005 through Fourth quarter 2007

Source: National Association of Realtors

-52%

-42%

-48%

-45%

-65%

-57%

-47%

Up3%

9


Time-On-Market Up in Most Markets

0 30 60 90 120 150 180

1

2

3

4

5

6 Dec-07

Dec-06

Dec-05

Miami, FL

Metropolitan Statistical Areas

Pheonix,AZ

Tampa, FL

Chicago, IL

Detroit, MI

Washington /Baltimore

Up 71 days

Up 68 days

Up 57 days

Up 47 days

Up 40 days

Down 5 days

Days

0 30 60 90 120 150 180

1

2

California

State

Massachusetts Up 32 days

Up 23 days

Source: National Association of Realtors

10

Office of the Chief EconomistSource: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annual Growth Rates for 4Q2007)

Home Sales Prices Fell in Eighteen States Over 2007

United States –1.1%

> 5% Annual Change

< 0% Annual Change

0 – 5% Annual Change

DC

Pacific -4.6%

Mountain-0.9%

West South Central3.2%

East South Central

2.1% South Atlantic -0.9%

Middle Atlantic1.7%

New England-1.5%

East North Central-2.9%

West North Central0.2%

11

Office of the Chief EconomistSource: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 4Q2007)

Forty-eight States Had Falling Prices in the Fourth Quarter 2007

Pacific –18.8%

Mountain-13.5%

West South Central-3.7%

East South Central-4.0%

South Atlantic -7.7%

Middle Atlantic-2.5%

New England-8.2%

East North Central-12.4%

West North Central-7.5%

United States: -10.0%(4th Quarter Annualized Growth)

< 0% Quarterly Change

0 – 5% Quarterly Change

DC

12


Job Loss Is the Main Hardship Reason Among Delinquent Prime Borrowers

Hardship ReasonUnemployment or curtailment of income 43.0%

Illness or Death in the Family 25.5%

Excessive obligation 16.2%

Marital difficulties 6.6%

Property problem or casualty loss 2.0%

Extreme hardship 0.4%

Inability to sell or rent property 1.7%

Employment transfer or military service 0.9%

All other reasons 3.7%

2007

Source: Freddie Mac; data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects. Data cover only prime conventional conforming loans.

13


U.S. Unemployment Rate Averages 5.2% in 2008

2

3

4

5

6

7

8

9

10

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Unemployment Rate (Percent)

Forecast

Sources: U.S. Department of Labor, Freddie Mac

– National Recession

United States

Massachusetts

MarchUS 5.1%

MA 4.4%

14


Employment Growth Weakest In Markets With Flat or Falling House Values

U.S. employment up 0.4%Massachusetts: up 0.7%

0.0% to 0.5%

0.6% to 1.0%

Above 2.0%1.1% to 1.9%

Percent change in the non-farm payroll employmentMarch 2006 through March 2007

Source: U.S. Bureau of Labor Statistics

Below 0.0%

15


Default and Home Value Growth Are Inversely Related

Source: Mortgage Bankers Association, Freddie Mac

-10

-5

0

5

10

15

20

25

30

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

0

0.5

1

1.5

2

2.5

3

3.5

Percent of Massachusetts prime conventional loans delinquent 90+ days or in foreclosure (Right

Scale)Annual Massachusetts House Price Growth (Left Scale)

House Price Growth

Delinquency Percent

16


Prime Delinquencies Are Lowest in the Northwest

Massachusetts = 1.35%U.S. = 1.67% Seriously Delinquent

(90+ days delinquent or in foreclosure, prime conventional)Data as of December 2007

0.59-1.00%

1.01-1.40%

2.01-2.71%

1.41-1.60%

1.61-2.00%

Source: Mortgage Bankers Association

17


Delinquency Rates Have Jumped In Markets With Flat or Falling House Values

0.30%

0.31 to 0.40%

4Q ’06 to 4Q ’07 Change in Level of Serious Delinquency Rate(90+ days or in foreclosure, Prime Conventional Loans)

U.S. Change = 0.81%Massachusetts Change = 0.66%

0.41 to 0.60%

0.61 to 0.80%

Source: Mortgage Bankers Association

0.81 to 1.21%

Percentage Point Difference

1.45 to 2.05%

18


Subprime Credit Performance

Weak underwriting characterized subprime originations in recent years

Early payment defaults and serious delinquencies are worse for recent vintages of subprime loans

Subprime loans accounted for over half of foreclosures in 2006 and 2007

About 1.5 million loans began foreclosure in 2007 Credit problems are concentrated in economically

depressed regions

19


2006$3.0 trillion

20.1%

13.4%

16.1%

2.7% 14.4%

33.2%

2001$2.2 trillion

20.1%

7.2%

5.2%

57.1%

7.9%2.5%

Subprime and Alt-A Volume Quintupled Between 2001 and 2006, then Fell in 2007

Source: Inside Mortgage Finance (by dollar amount)

Alt-A Home EquityLoans

Conventional, Conforming Prime

Jumbo Prime Subprime FHA & VA

2007 Q4$1.8 trillion (annualized)

3.0%

6.0%

9.8%

6.9%

13.3%

61.0%

20


Subprime

Other ARM4.0%

3-year Hybrid6.2%

2-year Hybrid56.2%

30-Yr ARM

Balloon w/ 40-50 Yr Amtz28.1%

Fixed5.6%

In Massachusetts, ARMs Dominate Subprime Home-Purchase Loans in 2006

Prime Conventional

Other ARM6.5%

Fixed73.8%

ARM Hybrids19.7%

Source: LoanPerformance, a subsidiary of First American Real Estate Solutions, FHFB MIRS First liens only; by dollar amount

21


0

2

4

6

8

10

12

14

16

18

20

22

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Subprime ARM Defaults Are 12 Times Those on Prime

Loans 90 days or more delinquent or in foreclosure (percent of number)

Source: Mortgage Bankers Association(Quarterly data not seasonally adjusted;1998Q1-2007Q4)

Prime Conventional (includes Alt-A)

FHA & VA

SubprimeFRM

– Recession

SubprimeARM 20.43%

8.18%

5.18%

1.67%

22


843

553

691

616

0

1,000

2,000

3,000

Subprime

Regular Adjustment in 2008, in Default as of December 2007

First Adjustment in 2008, Current as of December 2007

Regular Adjustment in 2008, Current as of December 2007

About 1.4 Million Subprime Loans Will Have First Reset in 2008

Amount of ARMs Scheduled to Have a Reset (Number of Loans in Thousands as of December 2007)

Source: LoanPerformance ABS Securities, Freddie Mac. “Default” includes loans delinquent 30 or more days or that are in foreclosure.

First Adjustment in 2008, in Default as of December 2007

23


0

8

16

24

32

2004H1 2004H2 2005H1 2005H2 2006H1 2006H2 2007H1 2007H2

Prime FHA&VA Subprime

Number of Foreclosures Started in Massachusetts (Annualized Rate in Thousands)

Source: Mortgage Bankers Association’s National Delinquency Survey (Data as of December 2007; number expanded to reflect 85% coverage)

43% 50% 60%58%

63%

63%

40% 36% 33% 35% 32%33%17% 14% 7% 7% 5%

4%2.5K

3.6K

12.8K

18.8K

61%

35%

4%

Subprime: 11% of Loans Serviced (December 2007)

In Massachusetts, Subprime Accounted for About 60% of Foreclosures Since 2005

37%

59%

4%

Where to Get More InformationLook for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance and

Contact us at [email protected]

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose.

Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2008 by Freddie Mac.

Documents

An Economic Prognostication for 2008 Massachusetts Mortgage Bankers Association West Newton, MA May 16, 2008 Frank E. Nothaft Chief Economist