1. Housing and Mortgage Market Update CML Webinar: Economic Forecast for 2010 January 26, 2010 Amy Crews Cutts, PhD Deputy Chief Economist

2. Office of the Chief Economist 1 Signs of Recovery?  Economy Still In Recession…  Real GDP fell only 0.7% in 2Q 2009, and turned positive in 3Q at 2.8%.  Unemployment rate is high – at 10% currently, could go higher  Current inflation risk is low - could be more problematic in the future  Exact date of the recession end will come from the National Bureau of Economic Research – some think it ended sometime in 3Q, some in 4Q, some think it will be 1Q 2010  But Positive Signs Are Appearing  Financial market indicators show some improvement – but not yet normal  Home sales are at or near bottom; about a third are foreclosure sales  Single-family construction is lowest since 1945, small positive signs  Rate of decline in home prices appears to be slowing (?)  Risks to the outlook  Are the signs of improvement real or just a temporary thing?  Commercial real estate credit market remains a concern

3. Office of the Chief Economist 2 Mortgage Market: Refis Up, Defaults Up  Low mortgage rates promote demand  More purchase-money mortgages because of higher home sales in ’10 and stabilizing prices  Refinance volumes will fall  Expected higher mortgage interest rates in 2010 than in 2009  Even if rates remain very low, most people who were in the money to refi have already done so (burn-out effect)  FHA volume up sharply and expected to avg $110 B/qtr in 2010  Housing Market to be hit by recession problems in addition to mortgage market crisis problems leading to a rise in defaults  Unemployment main trigger event for delinquency among prime conventional borrowers  Cumulative house price declines add to foreclosure risk  Serious delinquency rates likely to rise further in 2010  Prime loans are now being affected in addition to subprime and Alt-A

4. Office of the Chief Economist 3 Sources: Department of Commerce, Freddie Mac (January 2010 Outlook) Real Gross Domestic Product (Annual Percentage Change) This Is the Most Severe Recession Since Early 1980s – Look for Positive Growth in 3Q’09 Forecast – Recession

5. Office of the Chief Economist 4 7.2 million U.S. Non-Farm Payroll Jobs Were Lost 12/07-12/09 – Most in Post-WWII Period Sources: U.S. Bureau of Labor Statistics, Freddie Mac – National Recession Change in Non-Farm Payroll Employment (in thousands)Unemployment Rate (Percent) Forecast

6. Office of the Chief Economist 5 Mortgage Rates Are Near 50-Year Lows – Currently at 4.99% (week ended Jan. 21, 2010) 30-Year SF Fixed Conforming Mortgage Rate Annual Average Interest Rate (Percent) 10-Year Treasury December 2008 2.42% April 1954 2.29% July 1965 5.80% 0.5 points Source: Freddie Mac’s Primary Mortgage Market Survey ®, Federal Reserve Record Low: December 3, 2009 4.71% 0.7 points

7. Office of the Chief Economist 6 Conforming Rates Have Risen Recently; Jumbo Rates, Less So Source: HSH Associates (last data: week ending January 15, 2010) Note: Effective rate adds fees and points to the interest rate. 6.08% 5.24% Effective Interest Rate for 30-Year Fixed-Rate Mortgages Assuming LTV of 80% & Prime Credit (Percentage Points) 5.39% Jumbo-Conforming Spread currently =.82 ppts

8. Office of the Chief Economist 7 3-Month LIBOR Spread to Treasuries Has Returned to Normal Source : Bloomberg© (last data: January 15, 2010) Basis Points Record: 463 bps 10/10/08 Current: 19 bps 1/15/10

9. Office of the Chief Economist 8 Primary and Secondary Mortgage Market Rate Spread for 30-Year Fixed-Rate Mortgages Remains Wide Source: Freddie Mac (last update: January 19, 2010). Primary Mortgage Market Survey (PMMS) effective yield is based on average contract rate and number of points; RNY is Required Net Yield averaged Monday through Wednesday for each week. Basis Points

10. Office of the Chief Economist 9 Share of Single-Family Originations Sources: HUD (1935-1997), Freddie Mac & Inside Mortgage Finance (1998 – Present) 1942: FHA=29% 2009Q3: FHA=20% FHA Lending Has Ramped Up – Dollar Volumes Are Averaging About $110 Billion Per Quarter

11. Office of the Chief Economist 10 More Home Sales But Fewer Refis Result In Slight Decrease in Expected 2010 Originations Sources: Freddie Mac (January 2010 Outlook) Total Single-Family Mortgage Originations (Billions of Dollars) ForecastEst.

12. Office of the Chief Economist 11 Single-family Building Has Fallen to Lowest Level Since Before 1946; Has It Hit Bottom? One-Family Housing Starts (thousands of units, SAAR) Sources: Bureau of Census, Freddie Mac; Annual data 1946-2003; quarterly thereafter – Recession Annual Data 3rd Quarter 2005 record: 1.75 million units 1st Quarter 2009: 0.36 million units 3Q 2009: 0.50 million units

13. Office of the Chief Economist 12 Existing Home Sales Fell 36% From Peak in 2Q05 to 1Q09 But Have Since Risen 16% 1-Year (3Q/3Q) Percent Change in Existing Home Sales Nationally: +5.9% Source: National Association of Realtors 37% -14% DC: 28% 31% Up more than 30% Up 5-10% Up 10-15% Up 0-5% Down more than 10% Down 0-5% Down 5-10% 37% -11% Up 15-30%

14. Office of the Chief Economist 13 Home Sales in AZ, CA and NV Are Now Rising Fast Existing Home Sales Including Condos and Co-ops (100 = 2002Q1) Source: National Association of Realtors, Moody’s Economy.com. Based on Seasonally adjusted annualized rates.

15. Office of the Chief Economist 14 Large Inventory Surplus Remains in Market Source: Bureau of Census (1996-2004:Annual Data, 2005Q1–2009Q3:Quarterly Data) Note: The excess unsold homes were estimated based on the average vacancy rate from 1996Q1 to 2005Q4 (1.7%). Excess Unsold Homes for Sale (Numbers in Thousands) Annual DataQuarterly Data 200520062007 Q1Q4Q1Q4Q1Q4Q1 2008 Q4Q1 2009

16. Office of the Chief Economist 15 Excess Homeowner Vacancy Rate by State as of 3Q 2009 <= 0.0% 0.1 to 0.75% >2.0% 0.76 to 1.5% 1.6 to 2.0% Estimated overhang of vacant-for-sale homes as a percent of state homeowner dwellings Source: U.S. Census Bureau and Freddie Mac calculations (difference between 2008 homeowner vacancy rate and 1996-2005 average homeowner vacancy rate for each state).

17. Office of the Chief Economist 16 Since the 4th Quarter of 2006, Some Metro Areas Have Seen Price Declines of Up to 61% Source: FHFA 09Q3 HPI, Freddie Mac

18. Office of the Chief Economist 17 Home Values Appear to Be Leveling Off, or Slowing Their Descent in Most Indices Conventional Mortgage Home Price Index (2005Q1=100, Classic Series) Source: Freddie Mac

19. Office of the Chief Economist 18 California Has the Largest Number of Properties with Negative Equity, Nevada the Largest Share Sources: First American CoreLogic; Data as of Sept 30, 2009. Near Negative Equity properties have TLTV between 95 and 100%; Percent values above bars represent share of loans with negative equity. Number of Mortgaged Properties Positive Equity Near Negative Equity Negative Equity 20% 35% 45% 11% 8% 37% 14% 48% 18% 24% 16% 9% 6% 22% 65% 15% Nationally: 10.7 million mortgaged properties with negative equity, 23% Negative Equity Share

20. Office of the Chief Economist 19 Prime & Alt-A Delinquencies Are Highest in Areas With Largest Negative Equity Shares National = 6.26% Seriously Delinquent (90+ days delinquent or in foreclosure, Prime & Alt-A Conventional) Data as of September 30, 2009 Below 3.0% 3.14-3.99% Above 9.0% 4.02-4.95% 5.02-6.88% Source: Mortgage Bankers Association 14.33% 14.35% 9.38% 9.55%

21. Office of the Chief Economist 20 Relative to Serviced Loans, Subprime Accounts for a Very Large Share of Foreclosures Number of Foreclosures Started (Annual Rate in Thousands) Source: Mortgage Bankers Association National Delinquency Survey (2003 is only for second half). Numbers adjusted for 85% coverage. Shares may not sum to 100% due to rounding 33% 31% 33% 45% 28% 39% 8% 15% 21% 47% 53% 46% 33% 28% 39% 35% 10% 55% Subprime Share of Loans Serviced in US Peak (2007): 14% 3Q2009-2009: 11% 37% 9% 54% 28% 12% 61%

22. Office of the Chief Economist 21 Subprime, Alt-A ARMs, and Option ARMs Drive Foreclosures in the U.S Source: Mortgage Banker’s Association National Delinquency Survey. Numbers adjusted for 85% coverage. Percent 53 million Loans 1.9 million Foreclosure Starts SUBPRIME FHA & VA PRIME & Alt-A ARM PRIME & Alt-A FIXED RATE

23. Office of the Chief Economist 22 Recent Default Experience Is Unlike Any Previous Business Cycle Since the 1930s Prime conventional loans 90 days or more delinquent or in foreclosure (percent) – Recession Year Source: National Bureau of Economic Research, Mortgage Bankers Association (Prime Conventional includes Alt-A; prior to 1998 includes all loans). Data through Sept 30, 2009.

24. Office of the Chief Economist 23 Subprime Loans Are Performing About 5 Times Worse Than Prime & Alt-A – Scale Matters Too Loans 90 Days or More Delinquent or in Foreclosure (percent of number) Source: Mortgage Bankers Association; “Prime Loans” includes Alt-A (Quarterly data not seasonally adjusted;1998Q1-2009Q3).

25. Office of the Chief Economist 24 Bad Economy Is Exacerbating Problem: Serious Delinquencies Are Rising For All Loan Types Source: LPS Applied Analytics (Formerly McDash Analytics); Data as of June 2009 Loans 90 days or more delinquent or in foreclosure (percent of number)

26. Office of the Chief Economist 25 Freddie Mac Holds or Guarantees 24% of All Loans, But Has Only 9% of Problem Loans Sources: FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, First American CoreLogic (LoanPerformance). Note: data as of September 30, 2009. Seriously Delinquent loans are at least 90 days delinquent or in foreclosure. Components may not sum to 100% because of rounding. Freddie Mac and Fannie Mae figures include only whole loans held in portfolio and in outstanding guaranteed securities. Number of First Mortgages Outstanding (in millions) Seriously Delinquent Mortgages (in millions) Total: 54 Million Total: 4.7 Million

27. Office of the Chief Economist 26 Challenge: High Vacancy Rates Impact Our Ability to Reach Borrowers Source: Freddie Mac. Vacancy Rate based on vacant/unknown properties, excludes any REO acquisitions. Vacancy Rate for Key States (Overall Rate for 90+Foreclosure Loans for 10/31/2009 ) StatePercent Vacant Arizona37 California30 Florida44 Georgia41 Illinois30 Michigan25 Nevada41 New York29 Ohio29 Pennsylvania32 Texas36 34%

28. Where to Get More Information Look for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance Contact us at chief_economist@freddiemac.com 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. © 2010 by Freddie Mac.