The Aftershock Perspective on The Aftershock Perspective on the Housing Debt Market and the Housing Debt Market and Government’s Changing RoleGovernment’s Changing Role

April 5, 2011April 5, 2011

Apartment Finance TodayApartment Finance TodayDallas, TexasDallas, Texas

Robert A. Wiedemer, Author - America’s Bubble Economy and Robert A. Wiedemer, Author - America’s Bubble Economy and AftershockAftershock

Managing Director, Absolute Investment ManagementManaging Director, Absolute Investment Management703-787-0139703-787-0139

bwiedemer@absolute-im.combwiedemer@absolute-im.com

America’s Bubble Economy America’s Bubble Economy

John Wiley & Sons, October 2006John Wiley & Sons, October 2006

Accurately predicted the fall of the real estate bubble and the stock Accurately predicted the fall of the real estate bubble and the stock crash crash

Chosen by Kiplinger’s as one of the Chosen by Kiplinger’s as one of the Best Business Books of 2006Best Business Books of 2006 Paul Farrell, Senior Columnist at Dow Jones MarketWatch, praised Paul Farrell, Senior Columnist at Dow Jones MarketWatch, praised

the book: “In short, America's Bubble Economy's prediction, though the book: “In short, America's Bubble Economy's prediction, though ignored, was accurate.”ignored, was accurate.”

AftershockAftershockJohn Wiley & Sons, November 2009John Wiley & Sons, November 2009

Wall Street Journal BestsellerWall Street Journal Bestseller In its 15In its 15thth printing with over 225,000 copies sold printing with over 225,000 copies sold Seen on CNBC’s Squawk Box and Fox Business NewsSeen on CNBC’s Squawk Box and Fox Business News Quoted and reviewed by Barrons, Reuters, Financial Times, WSJ, Quoted and reviewed by Barrons, Reuters, Financial Times, WSJ,

AP, Hedge Fund Journal, Seeking Alpha, Euromoney and othersAP, Hedge Fund Journal, Seeking Alpha, Euromoney and others Chosen by Chosen by Smart Money Smart Money magazine as one of the five magazine as one of the five Best Best

Investment Books of 2009Investment Books of 2009

America’s Bubble Economy and America’s Bubble Economy and Aftershock AbridgedAftershock Abridged

A virtuous upward spiral of rising bubbles have worked together to boost the A virtuous upward spiral of rising bubbles have worked together to boost the economy for the last two decades. economy for the last two decades.

Sooner, rather than later, this will become a vicious downward spiral of falling Sooner, rather than later, this will become a vicious downward spiral of falling linked bubbles that push the economy down.linked bubbles that push the economy down.

1.1. Housing, stock, private credit, consumer spending bubbles already starting Housing, stock, private credit, consumer spending bubbles already starting

to pop resulting in current downturnto pop resulting in current downturn

2.2. Long term, popping of these bubbles puts pressure on the two biggest Long term, popping of these bubbles puts pressure on the two biggest bubbles—Government debt and the dollarbubbles—Government debt and the dollar

How Do you Know You Have a How Do you Know You Have a Problem in Your Financial System?Problem in Your Financial System?

The bank returns your check marked The bank returns your check marked “Insufficient Funds” and you have to call “Insufficient Funds” and you have to call the bank to find out if they meant you or the bank to find out if they meant you or

them.them.

OverviewOverview

1.1. Financial reform—Is more regulation the Financial reform—Is more regulation the answer?answer?

2.2. How much will the role of government How much will the role of government change in the current housing debt market? change in the current housing debt market? Can we privatize the market?Can we privatize the market?

3.3. Longer term issues affecting the housing Longer term issues affecting the housing debt market—the Aftershock perspectivedebt market—the Aftershock perspective

Financial ReformFinancial Reform

1.1. Two new agenciesTwo new agencies

2.2. Limitations on prop trading, etc.Limitations on prop trading, etc.

3.3. Was the housing bubble/financial crisis Was the housing bubble/financial crisis really caused by a lack of regulation?really caused by a lack of regulation?

4.4. Was the Internet bubble caused by a lack of Was the Internet bubble caused by a lack of regulation?regulation?

Government’s Changing Role in Government’s Changing Role in Housing FinanceHousing Finance

Proposals:Proposals:

1.1. Get rid of Fannie and FreddieGet rid of Fannie and Freddie

2.2. HybridHybrid

3.3. Fannie and Freddie as back-upFannie and Freddie as back-up

Impact on Down PaymentsImpact on Down Payments

1.1. As of end of February FHA guaranteed As of end of February FHA guaranteed 46% of all mortgages—3% down payment46% of all mortgages—3% down payment

2.2. What would higher down payments do to What would higher down payments do to housing industry?housing industry?

3.3. In first half of 2010, household creation was In first half of 2010, household creation was zero for first time in 30 years—basic driver zero for first time in 30 years—basic driver of housing demandof housing demand

4.4. Do we want to keep down payments low?Do we want to keep down payments low?

Impact on Interest RatesImpact on Interest Rates

1.1. Government effectively guarantees almost Government effectively guarantees almost 90% of all mortgages90% of all mortgages

2.2. What would interest rates be without the What would interest rates be without the guarantees—lots of risks in mortgagesguarantees—lots of risks in mortgages

3.3. In 2008 spread widened to 300 bpsIn 2008 spread widened to 300 bps

4.4. Would guarantees sold by government to Would guarantees sold by government to banks be better?banks be better?

Change of AdministrationChange of Administration

1.1. What if Senate and presidency changed?What if Senate and presidency changed?

2.2. Still have down payment and interest rate Still have down payment and interest rate issuesissues

3.3. Some sort of replacement of Freddie/Fannie Some sort of replacement of Freddie/Fannie more likely, but see bullet #2more likely, but see bullet #2

Longer Term: What People Longer Term: What People Want to HearWant to Hear

Could This Cause Inflation?Could This Cause Inflation?

It’s not just what the Fed has printed, but also what it will print in the future.It’s not just what the Fed has printed, but also what it will print in the future.

Source: St. Louis Federal Reserve BankSource: St. Louis Federal Reserve Bank

U.S. Monetary Base Growth 1984 to 2010

0

400

800

1,200

1,600

2,000

2,400

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Bil

lio

ns

of

Do

lla

rs

Key QuestionKey Question

How much can the government increase the money supply, How much can the government increase the money supply, as defined by the monetary base, before it causes as defined by the monetary base, before it causes

inflation--long term (2-5 years)?inflation--long term (2-5 years)?

A.A. 100%100%B.B. 200%200%C.C. 300%300%D.D. 400%400%E.E. 500%500%F.F. NeverNever

If No Down Side, Let’s Do More!If No Down Side, Let’s Do More!

1.1. Nothing but benefits to the stock market, Nothing but benefits to the stock market, debt market and the economydebt market and the economy

2.2. Ben deserves two Nobel Prizes for his Ben deserves two Nobel Prizes for his work in finding the perfect system for work in finding the perfect system for funding deficitsfunding deficits

3.3. But, if it causes inflation and pushes up But, if it causes inflation and pushes up interest rates, could be a big game changer interest rates, could be a big game changer for housing financefor housing finance

Continuing Pressure on the Fed to Continuing Pressure on the Fed to Keep PrintingKeep Printing

1.1. Massive deficits put strong continuing Massive deficits put strong continuing pressure on Fed to keep printingpressure on Fed to keep printing

2.2. Will we have meaningful deficit Will we have meaningful deficit reduction that would take off that reduction that would take off that pressure? Will Congress get religion?pressure? Will Congress get religion?

3.3. Keep your eye out for inflation in Keep your eye out for inflation in another 1 – 2 yearsanother 1 – 2 years

US Government Is Largest Holder ofUS Government Is Largest Holder of

Adjustable Rate Debt in the WorldAdjustable Rate Debt in the World

Interest Expense Could Consume All Interest Expense Could Consume All of Our Tax Incomeof Our Tax Income

Forecasted 2013 Treasury Interest Expense

$0

$400,000

$800,000

$1,200,000

$1,600,000

$2,000,000

3.7% (Current) 5.0% 7.5% 10.0% 20.0%

Current and Assumed Interest Rates

(000

,000

's)

Good Time to Do Some FinancingGood Time to Do Some Financing

1.1. Things could change with inflation and Things could change with inflation and interest ratesinterest rates

2.2. Government unsettledGovernment unsettled

3.3. Change of party in Senate and Presidency Change of party in Senate and Presidency could help, but there are limitationscould help, but there are limitations

4.4. Fixed rates are lowFixed rates are low