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Hearing on Mortgage Foreclosure Issues: Texas Relative to Other States The Committee on Financial Institutions The Texas House of Representatives Presented by: Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University Austin, Texas June 11, 2008

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Hearing on Mortgage Foreclosure Issues: Texas Relative to Other StatesThe Committee on Financial InstitutionsThe Texas House of Representatives

Presented by:

Dr. James P. Gaines

Research Economist

Real Estate Center at Texas A&M University

Austin, Texas

June 11, 2008


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Current Mortgage/Capital Market

  • Downturn in capital and mortgage markets is more severe than the market anticipated

    • Loss of confidence in ratings and ratings services

    • Pricing of mortgage-backed assets by institutions

    • Potential legal/regulatory changes

    • Likely mergers, acquisitions or failures among financial institutions

    • Law suits

  • Foreclosures will remain high through 2009 maybe early 2010

    • Subprime ARM resets significant through 2009

  • Return to traditional mortgage loan underwriting

  • Mortgage delinquency/default problems are spilling over into consumer debt delinquencies and business loans

  • Plenty of liquidity in market, nobody knows how to lend


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Housing Market Bust 2007 - …

  • 2007 first decline in national median home price since 60’s

  • 1Q2008 annual house prices in US MSAs fell 5.2% on average

  • 33 states are experiencing year-over-year house price declines as of 1Q2008 (FACL); 15 states according to OFHEO

  • House price declines appear to be concentrated in larger MSAs

    • Small and mid-sized MSAs tend not be experiencing declines nearly as severe, if at all

  • MBA 1Q2008 mortgage delinquency and foreclosure data are highest on record – trend continues upward

    • The “Un-magnificant Seven” California, Florida, Nevada, Arizona, Michigan and Ohio

  • Falling home prices in key areas eliminates refinancing, renegotiating or selling when borrower gets behind

Sources: NAR, First American CoreLogic, Mortgage Bankers Association


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US Median Home Prices in 2008

2001 Trend

At 2001 Trend, 2008 median prices should be between $185,000 and $190,000. 2007 = $217,900,

if 2008 = $187,500 along trend line, down 14%;

if 2008 = $200,000, down 8.5%.

Source: NAR, Real Estate Center at Texas A&M University



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US and Texas Appreciation

Purchase Only Index Change Year over Year

US 1Q2008 = -3.1%

Texas 1Q2008 = 2.5%

US

Texas

Source: OFHEO


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US, Texas, California and Florida Appreciation

Purchase Only Index Change Year over Year

US 1Q2008 = -3.1%; Texas 1Q2008 = 2.5%

Florida = -14.5%; California = -19.1%

Florida

US

Texas

California

Arizona = -7%; Nevada = -11%

Source: OFHEO


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Price Change by State 1Q2007 – 1Q2008

Source: OFHEO, HPI Y/Y % Change


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Percent of Foreclosures Started by Type of Loan 1Q2008

Source: Mortgage Bankers Association, National Delinquency Survey, March 31,2008, Estimates by Real Estate Center


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Factors Leading to Higher Foreclosures

  • Traditional life events: loss of job, divorce, illness

  • Falling home prices

  • Significant number of non-owner-occupant, investor buyers

  • ARM resets, prime and subprime

  • Spikes in other housing costs, especially property taxes and utilities

  • Local employment losses – Ohio, Michigan, Indiana and other rust-belt states

  • Fraud and predatory lending practices


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Prime and Subprime ARM Resets

Source: First American LoanPerformance, The Market Pulse, September 2007


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Percent of Loans in Foreclosure:

U.S. and Texas

Texas

U.S.

Source: Mortgage Bankers Association, National Delinquency Survey


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US Mortgage Delinquency Rates

Subprime Mortgages

All Mortgages (average = 4.7%)

Prime Mortgages (average = 2.5%)

Source: Mortgage Bankers Association, National Delinquency Survey, March 31, 2008


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US Mortgages in Foreclosure at the End of the Quarter

Subprime Loans

All Loans (average 1.24%)

Prime Loans (average 0.5%)

Source: Mortgage Bankers Association, National Delinquency Survey , March 31, 2008


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Texas Mortgages in Foreclosure

at the End of the Quarter

Subprime Loans

All Loans (average 1.1%)

Prime Loans (average 0.5%)

Source: Mortgage Bankers Association, National Delinquency Survey, March 31, 2008


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Total Delinquency & Foreclosure Filings 2007

  • US 2,203,295, up 75%

  • Texas 149,703, down 4.6% (1 of only 6 down)

    • California 481,392, up 238%

    • Florida 279,325, up 124%

    • Ohio 153,196, up 88%

    • Michigan 136,205, up 68%

    • Arizona 69,970, up 151%

    • Nevada 66,316, up 215%

    • Virginia 24,199, up 456%

    • Maryland 25,109, up 455%

    • Connecticut 23,470, up 100%

    • Massachusetts 41,487, up 161%

16 states doubled or more; D.C. was up 608%

Source: RealtyTrac, Inc.

Data include all default, delinquency and foreclosure filings reported. The same property often has more than one filing.


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Monthly Foreclosure Filings

Source: RealtyTrac, Inc.

Data include Notices of Trustee Sales plus Notices of Foreclosure Sale as of April 2008


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Households per Delinquency or Foreclosure FilingUS = 519; Texas = 809

  • 10 – 205

  • 251 – 1,500

  • 1,501 – 9,999

  • 10,000 - +

Source: RealtyTrac, Inc. , April 2008


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Core Mortgage Risk Index by MSA – 2Q2008

  • High

  • Moderately High

  • Moderate

  • Low

Source: First American CoreLogic


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Seriously Delinquent by State 1Q2008

6.0%

3.5%

6.4%

4.3%

4.2%

6.0%

5.6%

4.9%

4.1%

Seriously Delinquent Rate

Greater than 6.64%

5.35% - 6.64%

4.04% - 5.34%

0 - 4.03%

National Rate = 4.03%

5.0%

4.1%

3.1%

6.7%

Source: Mortgage Bankers Association, National Delinquency Survey, (90-days delinquent + FC Inventory)


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Foreclosure Starts by State 1Q2008

1.26%

0.84%

1.93%

1.14%

1.16%

1.14%

1.59%

1.33%

  • Foreclosure Start Rate

  • Greater than 1.34%

  • 1.0% - 1.34%

  • 0-0% - .99%

    • National (SA) = 0.99%

0.98%

0.67%

1.86%

Source: Mortgage Bankers Association, National Delinquency Survey, Real Estate Center at Texas A&M University


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Monthly Texas Foreclosure Filings

Average Since May 2005 = 9,564

There are approximately 8.1 million occupied homes in Texas

Monthly average filings = 0.12% of total occupied homes

Source: RealtyTrac, Inc., American Community Survey, US Census

Data include Notices of Trustee Sales plus Notices of Foreclosure Sale


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Major Financial Risks

  • Falling home prices from peak of bubble

  • Prime residential mortgage delinquency up

  • Can’t value CDO’s and other mortgage-backed paper

  • Commercial mortgage delinquency rising – could become significant problem later

  • ADC loans to homebuilders and developers much tighter

  • Spillover onto credit card and auto loans

  • Credit Default Swaps (CDS) next major impact


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Hearing on Mortgage Foreclosure Issues: Texas Relative to Other StatesThe Committee on Financial InstitutionsThe Texas House of Representatives

Presented by:

Dr. James P. Gaines

Research Economist

Real Estate Center at Texas A&M University

Austin, Texas

June 11, 2008


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