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2011 Housing Outlook & Implications

for Maryland Bankers: The Long and Winding Road

Clifford Rossi

Executive-in-Residence, Tyser Teaching Fellow

August 4, 2011

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Continued disequilibrium and uncertainty in Maryland housing markets:

2011 will still be a year of house price decline

2010 should see slight improvement in a positive direction

Key Drivers to Watch:

Bank underwriting trends

Buyer composition

Consumer sentiment/General economic conditions

Re-entry of private capital in secondary market

Public policy – Credit risk retention/QRM, GSE Reform

Credit performance – Shadow foreclosure inventory

Takeaways

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Current State of Housing Scorecard

Housing market will continue to weaken as supply and demand drivers

further destabilize markets

Overall 2011 Outlook – Negative and Deteriorating

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Lenders appear to be backing off of extremely tight credit policies since the crisis

Balance sheet capacity and relative margins are issues affecting mortgage credit supply

Credit Availability

Source: Federal Reserve Board of Governors Senior Loan Officer Opinion Survey on Bank Lending Practices, April 2011. .

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Double dip in home prices coming off heels of FTHB tax credit expiration

Foreclosure inventories bloat supply, house prices fall further

National House Price Trends

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Maryland generally not as hard hit as other areas of the country but recovery also more moderate

Maryland House Price Trends

Bethesda/Frederick/Rockville Baltimore/Towson Cumberland Salisbury Hagerstown Bakersfield,CA

Forecast House

Price Changes

Q410-Q411 -12.40% 0.20% -2.60% -9.90% -3.90% -7.50%

Q411-Q412 1.20% 2.50% 2.50% 3.80% 1.10% 5.10%

Median Home Price $389,000 $265,000 $88,000 $150,000 $136,000 $129,000

Median Family Income $111,600 $80,900 $55,300 $62,400 $63,000 $47,900

Change in Home Price Q309-Q310 0% -5% -0.60% -1.40% -2.30% -5.30%

Worst 1 Year House Price Change 1980-2010 -14.70% -10.90% -8.90% -13.90% -12.40% -33.70%

Source: Fiserve, 2011

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Until foreclosure problem ebbs, expect home prices to be negatively impacted

Effects of Oversupply

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Shadow inventories continue to build

Added to 8.6 months of existing homes for sale reported by NAR and supply is THE major driver of slumping home prices

Remember that 6 months supply is about normal

Shadow Inventory Trends

Source: Core Logic Shadow Inventory Report, 2011.

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Public Policy

No coherent national housing policy creates market

uncertainty and hampers effective policy actions

Mortgage servicing industry settlements

Strength of economic recovery

Bank balance sheet capacity and mortgage risk

appetite

Housing Wildcards

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Debt crisis aftermath and potential effect on borrowing costs

US rating (and associated muni) downgrade

This would raise mortgage rates - just one more negative to

housing recovery

A 1% increase in nominal interest rates would have about a .5 to

.75% decline in residential real estate investment

Other Macro Factors

Unemployment

GDP

Inflation/Oil prices

Macroeconomic Wildcards

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State and Federal mortgage servicing settlements

What to Watch For:

Actions that accelerate or slow down foreclosure

State AG requirements on servicers

Federal interagency servicing standards

Principal writedowns

Foreclosure Wildcards

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Repurchase demands remain high, posing uncertainty for servicers,

investors

GSE repurchase demands

MI rescission rates (recent years +20% vs 7% historically)

Class action investor lawsuits

What to Watch For:

Broad settlements – a la Bank of America and Fannie Mae

Repurchases/Rescissions

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Final rule on credit risk retention and Qualified Residential Mortgage

(QRM) provisions

What to Look For:

Relaxation of MI and LTV QRM-eligibility criteria

Will this be enough to entice private capital?

Alternative approach for QRM allowing riskier assets but less

flexibility over form of risk retention

Vertical

Horizontal

L-shaped

Risk Retention & QRM

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Short-term – 2011

Expiration of loan limits will reduce GSE and FHA support

GSEs and FHA increase of mortgage insurance fees

Long-term – 2-3 years

Expect long-term solution to be more like Option 3 of Treasury GSE Reform proposal

Privately capitalized MBS issuers

No government guarantee on issuer debt

Explicit catastrophic guarantee on MBS

GSE Reform

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No silver bullets on the horizon to fix underlying breakdown in housing fundamentals

Instead fragmented and weak public policy solutions – expect then a prolonged multi-year recovery from this point forward

Expect supply drivers to dominate market outcomes

Shadow foreclosure inventory will build

Without artificial stimulus, hangover in supply will keep home prices depressed for several years

Significant slack in housing demand will remain through 2011, certainly insufficient to sop up excess supply

Higher than normal unemployment and weak economic growth limit demand

First-time homebuyers sidelined until sustained stable economic recovery emerges

Investors and 2nd homebuyers will remain opportunistic

2011 generally remains weak

Home prices continue to fall around Maryland housing markets thru 2011

Interest rates edge higher (about 50bps)

Foreclosure inventories rise by year-end

But 2012 looks a little brighter

Takeaways

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Stakeholder Outlook

Favorable Less Favorable

Distressed Asset Buyers Homebuilders

Loan Workout Firms Realtors

Large Mortgage Servicers

Small Banks

Due Diligence Firms

Appraisal Companies

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