III - Mortgage Industry

MORTGAGE FINANCE AND HOUSING

Mortgage financing has become an increasingly important element in the economy, involving a wide range of financial institutions from commercial banks, thrifts and credit unions to finance companies, life insurers and government-sponsored enterprises. In 2007 home mortgage debt outstanding amounted to $11.2 trillion, up from $7.2 trillion in 2003.

Beginning in the 1990s, the housing market entered a period of expansion, marked by a relaxation of mortgage underwriting requirements, the introduction of innovative mortgage products and a rise in median home prices. In 2006 the industry entered a downturn which continued into 2007 and 2008, with prices dropping, credit tightening and mortgage defaults rising. By second-quarter 2008, one in every 171 U.S. households was in the process of losing their home, according to mortgage data firm RealtyTrac. In September 2008 the steep rises in delinquencies and foreclosures prompted the federal government to step in and take over Fannie Mae and Freddie Mac, two privately run government enterprises which control or guarantee more than half the nation's home mortgages.

Demographic factors such as the size of various age groups within the population and changes in disposable income, interest rates and the desirability of other investment options influence the residential mortgage market. The commercial market has expanded in response to business growth. The total mortgage market grew 8.1 percent in 2007 from the previous year. In the home mortgage sector, the combined mortgage holdings of commercial banks and savings institutions rose 4.7 percent and the holdings of credit unions rose 11.5 percent. Holdings of finance companies fell 11.9 percent in 2007. Mortgages may be sold and packaged as securities, which frees up funds for the mortgage lender to make additional mortgages available. Mortgage-backed securities are sold by asset-backed securities (ABS) issuers. The sale transfers the risk of default from the originator to the ABS buyer.

The term mortgage origination refers to the original transaction, the point at which the homeowner purchases the mortgage from a financial services company such as a bank. The bank that originates the mortgage does not always “service” the mortgage itself. It may sell the servicing of the mortgage, which includes collecting and processing monthly payments, to another company. The servicing business of many of the leading mortgage originators is much larger than their origination business.

TOTAL MORTGAGES, 2003-2007

($ billions, end of year)

	2003	2004	2005	2006	2007
Total mortgages	$9,397.7	$10,667.7	$12,101.5	$13,511.7	$14,603.4
Home	7,230.5	8,273.4	9,379.4	10,451.7	11,158.3
Multifamily residential	564.9	617.9	687.7	741.2	837.2
Commercial	1,508.3	1,679.6	1,932.9	2,209.9	2,490.5
Farm	94.1	96.9	101.5	109.0	117.5
Source: Board of Governors of the Federal Reserve System, June 5, 2008.

HOME MORTGAGES BY HOLDER, 2003-2007 (1)

($ billions, end of year)

	2003	2004	2005	2006	2007
Total assets	$7,230.5	$8,273.4	$9,379.4	$10,451.7	$11,158.3
Household sector	106.3	112.4	118.5	124.6	130.7
Nonfinancial corporate business	26.1	39.9	40.6	31.0	21.4
Nonfarm noncorporate business	9.7	11.3	13.3	14.9	17.0
State and local governments	67.8	72.0	76.5	80.4	85.2
Federal government	15.3	14.8	14.4	14.6	14.8
Commercial banking	1,355.8	1,581.0	1,793.0	2,081.8	2,208.3
Savings institutions	702.8	874.2	953.8	867.8	879.0
Credit unions	182.6	213.2	245.6	276.6	308.4
Life insurance companies	7.1	7.9	7.7	11.3	11.1
Private pension funds	1.7	1.4	1.4	1.3	1.2
State and local government retirement funds	7.3	5.4	5.9	5.1	4.5
GSE (2)	514.7	508.0	454.9	457.2	450.8
Agency- and GSE (2)-backed mortgage pools	3,211.2	3,256.3	3,419.7	3,710.6	4,320.0
ABS issuers	664.0	1,049.8	1,609.7	2,105.5	2,132.4
Finance companies	320.2	422.0	489.8	538.1	474.2
REITs (3)	37.8	103.7	134.5	130.9	99.4
Home equity loans included above (4)	592.8	773.3	911.6	1,060.8	1,125.0
Commercial banking	366.0	483.5	549.0	653.6	692.3
Savings institutions	95.6	121.2	151.6	137.6	180.5
Credit unions	51.7	63.9	75.9	86.9	94.1
ABS issuers	15.6	21.0	37.1	75.1	63.3
Finance companies	64.0	83.7	98.0	107.6	94.8
(1) Mortgages on 1 to 4 family properties. (2) Government-sponsored enterprise. (3) Real Estate Investment Trusts. (4) Loans made under home equity lines of credit and home equity loans secured by junior liens. Excludes home equity loans held by mortgage companies and individuals. Source: Board of Governors of the Federal Reserve System, June 5, 2008.

HOME MORTGAGE-BACKED SECURITIES

Home mortgages are increasingly being packaged into securities and sold to investors. The dollar volume of such securities increased by 67 percent from 2003 to 2007. While the majority of mortgage securities (67 percent) are backed by agency- and government-sponsored enterprises, the dollar volume of privately issued mortgage securities has been rising dramatically, with the amount outstanding for such securities increasing by almost 221 percent since 2003.

SECURITIES COMPRISED OF HOME MORTGAGES,
CLASSIFIED BY ISSUER, 2003-2007

($ billions, amounts outstanding, end of year)

	2003	2004	2005	2006	2007
Home mortgages backing privately issued pool securities	$664.0	$1,049.8	$1,609.7	$2,105.5	$2,132.4
Agency- and GSE (1)-backed mortgage pools	$3,211.2	3,256.3	3,419.7	3,710.6	4,320.0
Total	$3,875.2	$4,306.1	$5,029.4	$5,816.1	$6,452.4
(1) Government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, June 5, 2008.

AVERAGE CONVENTIONAL SINGLE-FAMILY MORTGAGES, 1998-2007 (1)

($000)

Year	Mortgage loan amount	Purchase price	Adjustable rate mortgage (ARM) share (2)
1998	$131.8	$173.4	12%
1999	139.3	184.2	21
2000	148.3	198.9	24
2001	155.7	215.5	12
2002	163.4	231.2	17
2003	167.9	243.4	18
2004	185.5	262.0	35
2005	211.9	299.8	30
2006	222.3	306.4	22
2007 (3)	225.3	300.3	10
(1) National averages, all homes. (2) ARM share is the percent of total volume of conventional purchase loans. Does not include interest-only mortgages. (3) June-December average. Source: Federal Housing Finance Board, Monthly Interest Rate Survey.

Adjustable rate mortgages, loans in which the interest rate is adjusted periodically according to a pre-selected index, dropped from 35 percent of mortgages in 2004 to 8 percent for the first half of 2008, according to a 2008 Harvard Report.

INTEREST-ONLY MORTGAGES

In interest-only mortgage arrangements, the borrower pays only the interest on the capital for a set term. After the end of that term, usually five to seven years, the borrower either refinances, pays the balance in a lump sum or starts paying off the principal, in which case the monthly payments rise. The vast majority of interest-only mortgages are adjustable rate mortgages, according to First American LoanPerformance.

INTEREST-ONLY MORTGAGES AS A PERCENT OF ALL MORTGAGE ORIGINATIONS, 2003-2007

Year	Percent
2003	(1)
2004	8.8%
2005	13.7
2006	12.9
2007	9.5
(1) Less than 2 percent. Source: First American CoreLogic, LoanPerformance data; Federal Housing Finance Board, Monthly Interest Rate Survey.

The share of mortgages with interest-only features rose from under 2 percent in 2003 to 13 percent in 2006. By 2007 the share had dropped to less than 10 percent, reflecting the tightening credit market.

FORECLOSURES

With the nation's economy weakening and mortgage interest rates climbing for many borrowers, the number of homeowners unable to keep current on their mortgage payments has escalated. In 2007 there were 2,203,295 foreclosure filings reported, a 79 percent increase from 2006, according to a report by RealtyTrac, an online marketplace for foreclosure properties. The report also shows that more than 1 percent of all U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006. Although many of the foreclosures were concentrated in a handful of states, including Nevada, Florida, Michigan, California and Colorado, most areas of the country saw increases in foreclosure activity. Forty-eight states and 95 out of the nation’s 100 largest metro areas experienced increases in foreclosure activity in the second quarter of 2008, compared with the same period a year earlier.

U.S. FORECLOSURE MARKET STATISTICS BY STATE, 2007

State	Total foreclosure filings (1)	Percent change from 2006	Total properties with filings	Percent of households in foreclosure (rate )	Rank (2)
Alabama	7,903	81.76%	5,572	0.27%	37
Alaska	1,650	54.64	1,332	0.486	28
Arizona	69,970	150.91	38,568	1.516	8
Arkansas	14,310	26.44	6,406	0.513	26
California	481,392	237.99	249,513	1.921	4
Colorado	71,149	29.96	39,403	1.919	5
Connecticut	23,470	100.05 (3)	11,860	0.833	16
Delaware	1,430	225.00 (3)	999	0.266	38
D.C. (4)	800	607.96 (3)	777	0.280
Florida	279,325	123.96	165,291	2.002	2
Georgia	99,578	31.07	59,057	1.566	7
Hawaii	1,270	88.71	966	0.197	43
Idaho	6,032	140.51 (3)	3,640	0.611	20
Illinois	90,782	25.29	64,310	1.250	9
Indiana	52,930	11.31	27,980	1.027	10
Iowa	7,404	114.92 (3)	4,103	0.314	33
Kansas	4,978	20.85	2,434	0.203	42
Kentucky	8,793	23.45	5,105	0.274	35
Louisiana	7,331	151.58 (3)	3,968	0.204	41
Maine	NA	NA	286	0.042	48
Maryland	25,109	455.26	18,879	0.830	17
Massachusetts	41,487	161.14	17,737	0.660	19
Michigan	136,205	68.32	87,210	1.947	3
Minnesota	13,615	127.11 (3)	11,557	0.513	25
Mississippi	1,997	91.65	1,409	0.114	45
Missouri	32,022	80.93	23,492	0.906	13
Montana	1,378	29.27	1,150	0.268	36
Nebraska	3,971	30.88	3,636	0.474	30
Nevada	66,316	215.12	34,417	3.376	1
New Hampshire	NA	NA	1,238	0.212	40
New Jersey	53,652	34.06	31,071	0.902	14
New Mexico	3,893	-26.04	2,994	0.357	32
New York	57,350	10.19	38,688	0.493	27
North Carolina	37,426	66.52	29,101	0.739	18
North Dakota	308	74.01	250	0.082	46
Ohio	153,196	87.93	89,979	1.797	6
Oklahoma	13,594	-12.78	8,256	0.520	23
Oregon	10,746	12.25	8,461	0.543	22
Pennsylvania	34,089	-11.07	16,379	0.302	34
Rhode Island	3,241	153.80 (3)	1,838	0.410	31
South Carolina	5,038	-27.56	4,247	0.220	39
South Dakota	NA	NA	24	0.007	50
Tennessee	45,834	24.56	25,914	0.983	11
Texas	149,703	-4.57	84,469	0.936	12
Utah	9,668	-25.87	7,438	0.852	15
Vermont	61	35.56	29	0.009	49
Virginia	24,199	456.30	16,307	0.514	24
Washington	23,705	27.95	15,184	0.573	21
West Virginia	1,135	30.31	460	0.053	47
Wisconsin	17,503	131.15 (3)	12,133	0.486	29
Wyoming	497	21.52	356	0.151	44
United States	2,203,295	74.99%	1,285,873	1.033%
(1) Foreclosure filings include foreclosure-related documents in all phases of foreclosure, including defaults, auction notices and repossessions by banks. One property may have more than one filing. (2) Ranked on percent of households in foreclosure. (3) Actual increase may not be as high due to expanded data coverage in this state. (4) Not ranked. NA=Data not available. Source: RealtyTrac Inc.

TOP TEN MORTGAGE FINANCE COMPANIES BY MANAGED RECEIVABLES, 2007

($ millions)

Rank	Company	Total managed receivables (1)
1	Countrywide Financial Corporation	$1,476,039.0
2	Wells Fargo Home Mortgage Inc.	1,473,178.0
3	Citigroup Inc.	870,896.0
4	Chase Home Finance, LLC	775,940.0
5	Washington Mutual Bank	719,047.7
6	Bank of America Corporation	516,937.0
7	Residential Capital, LLC	454,308.3
8	GMAC LLC	453,310.0
9	Wachovia Corporation	407,900.0
10	Midland Loan Services, Inc.	268,500.0
(1) On-balance sheet receivables and loans sold that are still serviced and managed. Source: SNL Financial LC.

HOME EQUITY MORTGAGE LOANS

Home equity loans, in which the borrower's home serves as collateral, are generally used for major items such as education, home improvements or medical bills, as opposed to day-to-day expenses. The dollar value of home equity loans outstanding almost doubled from $592.8 billion in 2003 to $1.13 trillion in 2007.

HOME EQUITY MORTGAGE LOANS BY HOLDER, 2003-2007 (1)

($ billions, end of year)

	2003	2004	2005	2006	2007
Total	$592.8	$773.3	$911.6	$1,060.8	$1,125.0
Commercial banking	366.0	483.5	549.0	653.6	692.3
Savings institutions	95.6	121.2	151.6	137.6	180.5
Credit unions	51.7	63.9	75.9	86.9	94.1
Asset-backed securities issuers	15.6	21.0	37.1	75.1	63.3
Finance companies	64.0	83.7	98.0	107.6	94.8
(1) Loans made under home equity lines of credit and home equity loans secured by junior liens, such as second mortgages, which are subordinate to another mortgage. Excludes home equity loans held by individuals. Source: Board of Governors of the Federal Reserve System, June 5, 2008.

SUBPRIME LOANS

Subprime loans are offered to applicants with an incomplete or less than perfect credit record. The subprime interest rate is generally higher than the prevailing rate because of the additional risks involved in lending to less creditworthy applicants. During the housing boom years, which began in the 1990s, the subprime industry flourished, with lenders extending credit to borrowers previously unable to qualify for loans. By 2007 the tide had turned; subprime mortgages were harder to obtain and defaults were on the rise.

Each year Harvard University’s Joint Center for Housing Studies (JCHS) provides an analysis of factors shaping the U.S. housing market, including subprime mortgages. The JCHH’s 2008 State of the Nation’s Housing study documented steep declines in home prices and home sales, coupled with increases in mortgage defaults. The turmoil in the housing and credit markets has taken its toll on the subprime mortgage sector. Among the study’s findings:

The foreclosure rate on all subprime loans soared from 4.5 percent in the fourth quarter of 2006 to 8.7 percent in 2007, while the rate on adjustable rate subprime loans more than doubled from 5.6 percent to 13.4 percent.
Foreclosure rates on adjustable subprime mortgages were over five times higher than those on adjustable prime loans in 2007.
Subprime mortgages rose from only 8 percent of originations in 2003 to 20 percent in 2005 and 2006. Because of their poor performance, subprime loans fell to just 3.1 percent of originations in the fourth quarter of 2007.
The dollar volume of subprime mortgages (adjusted for inflation) plunged from $139 billion in the fourth quarter of 2006 to $14 billion at the end of 2007.

CASH OUT HOME MORTGAGE REFINANCING

With cash-out refinancing, borrowers refinance an existing mortgage for more than they currently owe, then pocket the difference. As with home equity loans, the proceeds are often used for tuition, debt repayment or other expenses that require a significant amount of cash.

CASH OUT HOME MORTGAGE REFINANCING, 1998-2007 (1)

($ billions)

(1) Represents homeowners’ cash withdrawals from home mortgage refinance transactions. Includes prime conventional loans only and is net of retirement of outstanding second mortgages.
(2) Estimated.

Source: Freddie Mac.

GOVERNMENT-SPONSORED ENTERPRISES

Government-sponsored enterprises (GSEs) are privately owned, federally chartered corporations with a public purpose created by Congress to assist groups of borrowers such as homeowners, mortgage lenders, students and farmers gain access to capital markets. Two of these entities, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, and the Federal National Mortgage Association, known as Fannie Mae, increase the supply of funds that mortgage lenders make available to home buyers by purchasing mortgages from banks and other lenders, packaging them into securities and selling them to investors. They also raise funds by purchasing mortgages from banks and other loan originators for their own investment portfolios. Together, Freddie Mac and Fannie Mae guarantee or control more than half of the nation's home mortgages. As the housing market entered a downturn in 2006, the two GSEs confronted steep rises in delinquencies and foreclosures. To reassure investors and provide continued liquidity in the housing market, the federal government stepped in to take control of Fannie Mae and Freddie Mac. The plan, announced by the U.S. Treasury in September 2008, put the firms into a conservatorship, giving management control to the Federal Housing Finance Agency.

GOVERNMENT-SPONSORED ENTERPRISES (GSEs) (1), 2003-2007

($ billions, amounts outstanding, end of year)

	2003	2004	2005	2006	2007
Total financial assets	$2,794.4	$2,882.9	$2,819.4	$2,872.9	$3,174.2
Checkable deposits and currency	28.8	39.1	14.6	16.4	13.7
Time and savings deposits	16.7	23.3	35.3	33.9	46.6
Federal funds and security RPs (2)	75.3	93.6	107.7	117.4	142.7
Credit market instruments	2,564.2	2,613.0	2,543.9	2,590.5	2,829.5
Open market paper	6.7	5.8	13.8	32.4	27.7
U.S. government securities	1,047.8	899.4	764.2	727.2	718.4
Treasury securities	13.5	12.9	13.1	14.2	15.5
Agency- and GSE (3)-backed securities	1,034.3	886.5	751.1	713.0	702.9
Municipal securities	44.4	44.6	39.7	36.1	33.3
Corporate and foreign bonds	277.4	414.8	465.7	482.7	464.4
Other loans and advances	545.8	619.4	671.8	704.9	942.6
Sallie Mae	0.3	0.0	0.0	0.0	0.0
Farm Credit System	43.8	43.6	51.6	63.5	75.5
Federal Home Loan Banks	501.7	575.8	620.2	641.4	867.1
Mortgages	621.5	629.0	588.8	607.2	643.1
Home	514.7	508.0	454.9	457.2	450.8
Multifamily residential	68.2	82.5	93.0	105.4	147.7
Farm	38.7	38.6	40.9	44.6	44.6
Consumer credit (4)	20.6	0.0	0.0	0.0	0.0
Miscellaneous assets	109.4	113.9	117.8	114.6	141.7
Total liabilities	$2,747.1	$2,818.0	$2,736.8	$2,782.0	$3,076.6
Credit market instruments (5)	2,601.3	2,676.3	2,592.2	2,627.8	2,910.2
Miscellaneous liabilities	145.8	141.7	144.5	154.2	166.4
(1) Federal Home Loan Banks, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, Farm Credit System, the Financing Corporation and the Resolution Funding Corporation. The Student Loan Marketing Association (Sallie Mae) was included until it was fully privatized in the fourth quarter of 2004. (2) Short-term agreements to sell and repurchase government securities by a specified date at a set price. (3) Government sponsored enterprise. (4) Sallie Mae student loans. (5) Consists of agency- and GSE-backed securities. Source: Board of Governors of the Federal Reserve System, June 5, 2008.

AGENCY AND GOVERNMENT-SPONSORED ENTERPRISE (GSE) (1)-BACKED MORTGAGES, 2003-2007

($ billions, amounts outstanding, end of year)

	2003	2004	2005	2006	2007
Total financial assets	$3,326.7	$3,374.6	$3,541.9	$3,837.3	$4,463.7
Home mortgages	3,211.2	3,256.3	3,419.7	3,710.6	4,320.0
Multifamily residential mortgages	114.5	117.4	121.3	123.5	139.2
Farm mortgages	1.0	0.9	0.8	3.2	4.5
Total pool securities (liabilities) (2)	$3,326.7	$3,374.6	$3,541.9	$3,837.3	$4,463.7
(1) Federal Home Loan Banks, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, Farm Credit System, the Financing Corporation and the Resolution Funding Corporation. The Student Loan Marketing Association (Sallie Mae) was included until it was fully privatized in the fourth quarter of 2004. (2) Such issues are classified as agency- and GSE-backed securities. Source: Board of Governors of the Federal Reserve System, June 5, 2008.

GOVERNMENT-SPONSORED ENTERPRISE (GSE) SHARE (1) OF 1 TO 4 FAMILY UNIT
MORTGAGE DEBT OUTSTANDING, 1998-2007

($ millions)

Year	Total volume	Government-sponsored enterprise share
1998	$4,609,259	38.8%
1999	5,076,536	40.6
2000	5,533,642	41.1
2001	6,127,326	44.5
2002	6,924,669	45.9
2003	7,795,333	46.6
2004	8,891,272	43.3
2005	10,067,059	39.9
2006	11,192,815	38.7
2007	11,995,455	41.1
(1) Federal Home Loan Banks, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, Farm Credit System, the Financing Corporation and the Resolution Funding Corporation. The Student Loan Marketing Association (Sallie Mae) was included until it was fully privatized in the fourth quarter of 2004. Source: Office of Federal Housing Oversight.

MORTGAGE STATUS OF OWNER OCCUPIED HOUSING UNITS, 2006

Mortgages
Number of owner occupied housing units with a mortgage	51,234,170
Percent of units of owner occupied housing with mortgage	68.2%
Mortgage status
With either a second mortgage or home equity loan, but not both	25.4%
Second mortgage only	6.1%
Home equity loan only	19.3%
Both second mortgage and home equity loan	1.1%
No second mortgage and no home equity loan	73.5%
Source: U.S. Census Bureau; American Community Survey.

REVERSE MORTGAGES

Reverse mortgages are special mortgages that allow homeowners over age 61 to sell their homes to a bank in exchange for monthly payments, a lump sum or a line of credit. The Home Equity Conversion Mortgage (HECM) is the federally insured reverse mortgage product. It is insured by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development. In 2008 HECMs accounted for over 90 percent of all reverse mortgages.

REVERSE MORTGAGES: ANNUAL ORIGINATION VOLUME FOR HOME EQUITY CONVERSION MORTGAGES (HECMs), FISCAL YEAR 2004-2008 (1)

(1) HECMs are federally insured reverse mortgage products.
(2) Through June 30, 2008; fiscal year ends September 30.

Source: National Reverse Mortgage Lenders Association.

CONVENTIONAL HOME PURCHASE LOANS ORIGINATED BY RACIAL/ETHNIC IDENTITY AND INCOME OF BORROWERS, 2002 AND 2006

	2002		2006
Race/ethnic identity	Number	Amount ($000)	Number	Amount ($000)
American Indian/Alaska native	14,244	$2,016,944	35,868	$6,722,088
Asian	193,931	41,838,932	302,275	76,956,869
Black or African American	189,817	25,243,811	550,729	84,331,152
Hispanic or Latino	314,951	44,746,538	893,134	163,222,889
White	2,822,776	469,029,081	4,627,989	846,788,394
Income (1)
Less than 50%	235,150	18,298,271	262,994	21,463,059
50 to 79%	657,626	69,858,317	881,326	91,724,238
80 to 99%	476,251	61,477,372	706,603	88,899,576
100 to 119%	442,731	64,829,193	663,330	95,116,965
120% or more	1,718,553	404,488,979	3,344,741	798,624,058
Income not available	165,244	33,922,659	391,652	76,637,401
(1) Percentage of metropolitan area median. Metropolitan area median is the median family income of the metropolitan area in which the property related to the loan is located. Source: Federal Financial Institutions Examination Council.