Residential Mortgage Market Report 2007

MBA Research Monograph Series
The Residential
Mortgage Market and
Its Economic Context
in 2007
January 30, 2007

Primary author:
Michael Fratantoni, Ph.D., Senior Director, Single-Family Research
and Economics
Contributing authors:
Douglas G. Duncan, Ph.D., Senior Vice President and Chief Economist,
Research and Business Development
Jay Brinkmann, Ph.D., Vice President, Research and Economics
Orawin Velz, Ph.D., Director, Economic Forecasting, Research and

Business Development
Table of Contents
Introduction and Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Global Capital Markets, Monetary Policy

and the Supply of Mortgage Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Decelerating Housing Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Composition of New Mortgage Originations

and Outstanding Mortgage Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Trends in Mortgage Delinquencies and Foreclosures . . . . . . . . . . . . . . . . . . 31
The Outlook for the Year Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Mortgage Bankers Association The Residential Mortgage Market and Its Economic Context in 2007
ii The Residential Mortgage Market and Its Economic Context in 2007 Mortgage Bankers Association
Introduction and
Executive Summary
The purpose of this monograph is to provide a brief overview of the primary economic trends impacting
the housing and mortgage markets as of the beginning of 2007. In doing so, it provides readers with
an economic context for the market developments we are anticipating, and for the policy issues that
are likely to be the focus of policymakers and the industry over the next year.
The discussion begins with an overview of the macroeconomic factors that impact the supply of
mortgage credit, then moves to a discussion of the current state of the housing and mortgage markets,
including origination activity and trends in mortgage performance. The report ends with a discussion
of MBA’s economic and mortgage finance outlook as of January 2007.
Key points:
• The U.S. economy is strong and resilient. The economy will continue to grow in 2007, but at a
slightly below trend rate of growth.
• The housing market is nearly back to normal. The housing market will regain its footing by
mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to
increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any
significant increase until late 2007 or early 2008.
• The residential finance market is fundamentally sound and working efficiently. The housing
market will continue to benefit from low long-term interest rates. For ARM borrowers, we expect
short-term interest rates to be steady going forward.
• As they always will, consumers are choosing products that fit the current economics of
the market.
• Mortgage originations will fall in 2007 relative to 2006 given the decline in home sales and
diminished refinance activity.
• Delinquency rates are evolving as any seasoned observer of the mortgage market would expect
them to do. Barring any unexpected downturn in the economy, the recent increase in mortgage
delinquency rates will likely peak by the end of 2007, but at levels well below those of past peaks.
This lower peak will come despite the change in the composition of outstanding loans, namely a
larger proportion of subprime loans in recent years.
Global capital markets, monetary policy and the supply of mortgage credit:
• The primary reason for the relatively low level of long-term interest rates is the massive inflows
of global capital into U.S. fixed income markets. These capital inflows are the flip side of the
historically large U.S. trade deficit.
• The composition of foreign holdings of U.S. long-term debt securities has changed over time
with a greater volume of foreign investment being directed into mortgage-related securities.
This is one reason spreads between mortgage and Treasury rates are tighter than they might
otherwise be.
• The U.S. economy has settled into a solid pace of growth, and the job market is still quite strong.
• Beginning in June of 2004, the Fed raised the fed funds target 17 straight times in quarter point
increments. It is not surprising that the economy, and the housing market in particular, has slowed
from a previously brisk pace in the face of tighter monetary policy.
• Several foreign central banks have either begun or have continued to raise their target rates in
response to domestic inflationary pressures. For global investors, this is yet another incentive to
move out of U.S. assets, putting additional downward pressure on the dollar.
Decelerating housing markets:
• In 2006, the pace of home sales, both for new and existing homes, declined fairly abruptly.
• This decline took place on a national basis. In most cases, sales volumes returned to levels last seen
in 2003, a strong sales pace at that time, but not nearly as robust as seen in 2004 and 2005.
• As the sales pace dropped, the months supply of unsold homes quickly ramped up. This buildup
in inventory changed the dynamics of most housing markets, making them much more favorable
for buyers and reducing the rate of price appreciation.
• Over the past five years, according to the OFHEO index, home prices at the national level have
increased at a greater than 9 percent rate. Over the most recent 12 months, this pace slowed to
less than 8 percent, and the annualized quarterly rate in the third quarter decelerated further to
less than 3.5 percent.
The Residential Mortgage Market and Its Economic Context in 2007 Mortgage Bankers Association
• The states in the Northeast and Midwest that have experienced home price declines have been
those with relatively weak employment growth, out-migration of population, or both.
• These same states have experienced high or increasing levels of mortgage delinquencies and
foreclosures.
• On a national basis, we anticipate that home prices will increase only at low single-digit rates
over the next couple of years.
The composition of new mortgage originations and outstanding mortgage debt:
• As with home sales volumes, the volume of purchase mortgage applications declined in 2006.
Again, this is well below volumes seen in 2004 and 2005, but still a solid year.
• Refinance volumes are well below the refi boom that stretched from 2001 through 2003. It is
likely that some portion of the end of 2006 pickup in refinance activity reflects borrowers paying
off ARM loans that either had already or were about to reset to higher payments.
• 30-year fixed mortgage rates peaked in June of 2006 above 6.8 percent, then fell sharply after
the Fed paused at their June meeting. At one point in the fall of 2006, the 30-year rate dropped
below 6 percent.
• Interest only (IO) loans, with both adjustable- and fixed-rates, and payment option loans that
allow negative amortization, have become a very important part of the market. In the second half
of 2005 and the first half of 2006, IOs accounted for about 25 percent of the dollar volume of
originations. In addition to their use as affordability products, these products offer homeowners
an innovative and flexible means to more actively manage their home equity.
• The share of the market accounted for by the government lending programs, FHA and VA, has
decreased considerably in recent years. Gaining market share have been the prime and subprime
segments.
• Much of the stock of outstanding loans has been originated in the past three years. This has
implications for mortgage delinquencies and foreclosures, as loans tend to hit their peak delinquency
rates three to five years after origination. We estimate that more than 80 percent of outstanding
loans have been originated since 2002.
• The ARM share of outstanding mortgages has grown from about 18 percent in 2003 to about
25 percent as of the third quarter of 2006.
• With the home price gains of the past few years, there has been a substantial growth of home
equity, even for recently originated loans. Even if home prices remain flat or decline somewhat
from their current level, most homeowners have built up a cushion of equity over the last several
years that could act as a buffer in any downturn.
Trends in mortgage delinquencies and foreclosures:
• Mortgage lenders stand to lose financially when loans do not perform, and thus have significant
incentives to prevent foreclosures. Historically, on a national basis, mortgage lenders’ loss
mitigation efforts have helped three out of four borrowers who enter the foreclosure process
avoid a foreclosure sale.
• Mortgage delinquencies are still caused by the same things that have historically caused mortgage
delinquencies: “life events,” such as job loss, illness, divorce or some other unexpected challenge.
Foreclosures following delinquencies may be caused by the inability to sell a house due to local
market conditions after one of the above items has occurred.
• As we had expected, delinquency rates increased across the board in the third quarter. However,
increases in delinquency rates were noticeably larger for subprime loans, particularly for subprime
ARMs. This is not surprising given that subprime borrowers are more likely to be susceptible to
the cumulative increases in rates we have experienced, and the slowing of home price appreciation
that has resulted.
• The percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at
the end of the third quarter, an increase of six basis points from the second quarter of 2006.
A basis point is 0.01 percentage points.
• Across all loan types, the states with the highest overall delinquency rates were Mississippi, Louisiana
and Michigan. Based on foreclosure inventory rates across all loan types, the top three states
were Ohio, Indiana and Michigan. From the third quarter of 2005, 44 out of 51 states saw their
delinquency rates increase, while 35 states saw an increase in the foreclosure inventory rate.
• The most important driver for the elevated serious delinquency rates in the Midwest is the
persistent loss of employment, especially manufacturing employment, which is a result of ongoing
productivity gains. Loss of employment is one of the most common unanticipated shocks to
household finances.
• There are many false claims about mortgage lenders profiting from foreclosures. In reality, every
party to a foreclosure loses — the borrower, the immediate community, the servicer, mortgage
insurer and investor.
• The market is working, responding to a changing economic environment quickly and appropriately.
In response to mortgage payment performance that has deteriorated somewhat from the very
strong performance of recent years, investors have demanded higher returns in the form of wider
credit spreads, particularly for loans originated in 2006.
• These price signals from the capital markets directly and immediately impact the rates that
mortgage lenders can offer to borrowers, in this case particularly to borrowers with blemished
credit. The result of these adjustments in the capital markets will be that risk-adjusted returns
will be equalized across segments of the market. Far from being a problem, these clear market
signals will help the market to more efficiently maintain its equilibrium.
• We would strongly caution policymakers to avoid any regulatory or legislative actions that would
impede the ability of the market to respond to changes in underlying economic conditions or
continue to be innovative in creating credit solutions for borrower needs. An important role of public
policy should be to facilitate efficient markets, as these will ultimately benefit consumers.
• We expect the housing market to fully regain its footing between the middle and the end of 2007.
In the meantime, we anticipate some further increases in delinquency and foreclosure rates in the
quarters ahead.
Global Capital Markets,
Monetary Policy and
the Supply of Mortgage Credit
Over the past fifty years, we have seen two interest rate regimes. From the 1950s through 1980,
interest rates increased as inflation spiraled upwards. Then, beginning with Chairman Volcker, and
continuing with Chairmen Greenspan and Bernanke, the Fed has committed to maintaining a low
inflation environment, resulting in a sustained downward trend in long-term interest rates.
10-Year Treasury, Fed Funds Rate and Mortgage Rate
Source: Federal Reserve Board, Freddie Mac
Today, we operate in increasingly globalized markets. One outcome of this trend has been what
former Chairman Greenspan referred to as a “conundrum” — even though the Federal Reserve has
raised its short-term interest rate target 4.25 percentage points over the last 3 years, long-term rates
have remained relatively flat. Although long-term inflationary expectations are well-contained, and
economic growth is forecasted to be somewhat below trend, the primary reason for the relatively low
level of long-term rates is related to the massive flows of global capital into U.S. financial markets.
Treasury Yield Curve
Source: Federal Reserve Board
These capital inflows are the flip side of the historically large U.S. current account deficit. This
country imports more than it exports by a considerable margin: the deficit is about 7 percent of GDP.
The deficit must be financed with borrowings from abroad, both from foreign official (government)
and private investors.
U.S. Current Account
Source: Bureau of Economic Analysis
This imbalance in terms of trade and capital flows is also unprecedented in that almost every
region of the world is a net lender to the U.S. As shown in the chart below, Asia including Japan, the
oil exporting countries and Europe have been running current account surpluses while the U.S. has
had increasingly large current account deficits.
Current Account Balances Around the World
Source: “Europe and Global Imbalances.” Philip Lane and Gian Maria Milesi-Ferretti
The series of ever larger yearly deficits has steadily eroded the net foreign asset position of the
U.S., making the country the world’s largest debtor. An examination of the composition of these
borrowings shows that it is primarily in the form of debt securities. The U.S. net position in bank
loans, equity securities and foreign direct investment (FDI) is approximately balanced.
Net Foreign Asset Positions (Percent of GDP): Europe and the U.S.
Source: “Europe and Global Imbalances.” Philip Lane and Gian Maria Milesi-Ferretti
The composition of foreign holdings of U.S. long-term debt securities has changed over time,
though. According to UBS, in 2006, 44 percent of central banks around the world were approved to
invest in MBS and ABS, up from 2 percent in 1998. Only 3 percent of central banks invest only in
U.S. Treasuries, down from 31 percent 4 years ago. UBS estimates that central bank purchases alone
can absorb half of the net new 2007 supply of MBS and ABS. Additional demand will come from
“stabilization funds” held by the oil exporting countries and private foreign investors. All of this
implies that GSEs and domestic banks are unlikely be large net purchasers of mortgage securities in
the year ahead, as there will be substantial competition for these assets from foreign investors.
Changing Composition of Foreign Holdings
Source: U.S. Department of Treasury
One impact of this diversification by foreign investors and others out of Treasuries and into
mortgages and other debt securities is that spreads across fixed-income markets have been compressed.
Some describe this as a result of investors “reaching for yield,” accepting additional risk for less than
the historically required excess return. Mortgage spreads continue to be narrow for much of the
market, although spreads on the lower-rated tranches of subprime securities have widened recently
following increased levels of subprime delinquencies, as the failure of some subprime lenders has
caused investors to recalibrate their expectations of losses on these securities.
10 The Residential Mortgage Market and Its Economic Context in 2007 Mortgage Bankers Association
Yield Spread: 30-Year Fixed Mortgages and 10-Year Treasuries
As economist Herb Stein famously noted, trends that are not sustainable tend to reverse. The
same will be true for this trend of ever larger current account deficits. Most likely, the reverse will
come through a gradual decline in the foreign exchange value of the dollar, which will increase the
price of imports for U.S. consumers, and decrease the price of U.S. exports for foreign consumers. In
the past year, export growth has been above import growth, but it will need to grow much more to
significantly reduce the trade deficit.
There is a chance that foreign investors could suddenly lose confidence in the dollar, leading to
a precipitous decline in its value. This would coincide with a sharp decline in the value of U.S. debt
securities, leading to a spike in interest rates. This scenario is unlikely, but is possible, and should be
on radar screens as we move ahead. Note that the chart below regarding the exchange rate is trade
weighted, giving greater weight to countries who are primary trading partners of the U.S.
Exchange Rate
Mortgage Bankers Association The Residential Mortgage Market and Its Economic Context in 2007 11
The U.S. economy has settled into a solid pace. The auto and housing sectors are a drag on
growth presently, leading overall GDP to grow slightly below our estimate of its trend growth rate
of about 3.25 percent. However, the job market is still quite strong. In December, the unemployment
rate stood at 4.5 percent, below what most economists view as the non-accelerating inflation rate of
unemployment (NAIRU), the unemployment rate below which inflation will begin to accelerate, as
firms bid up wages to attract workers, leading to increased pressure on prices.
Unemployment Rate
Source: Bureau of Labor Statistics
For much of 2006, most of the inflation story related to sustained high energy prices. However,
as energy prices declined towards the end of the year, core inflation, which excludes food and energy
prices, remained stubbornly high, and outside of the Fed’s implicit target range. In public comments,
Fed officials consistently have noted that they are uncomfortable with the pace of inflation, and see
inflation, not weak growth, as the primary risk to the economy in the near term.
Inflation
Source: Bureau of Labor Statistics
These sentiments are in the context of the Fed’s recent pause after a two year march of increasing
rates. Following the recession at the early part of this decade, the Fed lowered its rate target to a
40-year low of 1 percent. Beginning in June of 2004, the Fed raised the fed funds target 17 straight
times in quarter point increments. Fed officials spoke of bringing the funds rate to a “neutral” level,
a level which neither stimulated nor held back the economy. By June of 2005, at a target rate of 5.25
percent, the Fed apparently had reached this level. A mountain of empirical research suggests that the
cumulative impact of a monetary policy tightening is realized with “long and variable lags,” often
taking 18 to 24 months to play out. Thus it is not surprising that the economy, and the housing market
in particular, has slowed from a previously brisk pace in the face of tighter monetary policy.
Monetary Policy
However, the global capital flows mentioned earlier have an effect here, as well. Even though
the Fed paused in June, other central banks around the world have not. The Japanese central bank
recently lifted its target rate above zero percent for the first time in years. The European Central Bank
and the Bank of England also have been raising their target rates in response to domestic inflationary
pressures. For global investors, this is yet another incentive to move out of U.S. assets and into those
denominated in euros or yen, putting additional downward pressure on the dollar. To some extent,
this is another factor that argues against the Fed cutting rates in the near term — if it does, this will
further incent global investors to sell dollar assets. At some point, the increase in import prices could
cause inflationary pressures to heat up.
International Rates are Rising Relative to U.S. Rates
Source: Financial Times
Decelerating Housing Markets
As noted below, the housing market has been impacted substantially by the cumulative impact of
the Fed’s increases in short-term rates over the past few years. 2003 was the record in terms of total
mortgage originations with close to $4 trillion of new loans made. But 2004 and 2005 were successively
bigger years in terms of home sales and purchase mortgage originations, fueled by a strong economy
and low interest rates. In 2006, the pace of home sales, both for new and existing homes declined
fairly abruptly.
Total Home Sales
Source: National Association of Realtors, Census Bureau, and MBA Forecast
This decline took place on a national basis. In most cases, sales volumes returned to levels last
seen in 2003, a strong sales pace at that time, but not nearly as robust as seen in 2004 and 2005.
EXISTING Home Sales by Region
Source: National Association of Realtors
Prior to the falloff in sales volume, the absolute number of unsold homes on the market had been
increasing. However, when the sales pace dropped, the months supply of unsold homes quickly ramped
up, particularly for condos, the vehicle of choice for many investors. The buildup in inventory changed
the dynamics of most housing markets. After years of sellers being able to name their price, in most
markets buyers once again had some negotiating power. Homes stayed on the market longer, and by
some measures over certain time periods, median sales prices fell on a national basis. We expect that
the inventory of unsold homes has peaked for this cycle, and that by the middle of 2007 the housing
market will regain its footing, with home construction and home sales beginning to increase modestly
from that point.
Months Supply for New Home Sales and Real Residential Investment
Source: Bureau of the Census and Bureau of the Economic Analysis
A more accurate gauge of home values, the Office of Federal Housing Enterprise Oversight
(OFHEO) repeat transactions index, has not shown a decline in home prices at the national level,
although it has shown some declines in values for a handful of states. Because the OFHEO index is
built upon repeat transactions on the same properties, it controls at least somewhat for the quality
of homes being sold; the National Association of Realtors (NAR) median sales values are heavily
influenced by the composition of sales, and have no controls for changes in the quality or geographic
distribution of homes being sold.
Over the past five years, according to the OFHEO index, home prices at the national level have
increased at a greater than 9 percent rate. Over the most recent 12 months, this pace slowed to less
than 8 percent, and the annualized quarterly rate in the third quarter decelerated further to less than
3.5 percent.
The states that have experienced home price declines in recent data, a handful of states in the
Northeast and Midwest, have been those with relatively weak employment growth, out migration of
population, or both. As will be examined below, these same states have experienced high or increasing
levels of mortgage delinquencies and foreclosures. We anticipate that home prices at the national level
will increase only at low single-digit rates over the next couple of years. With inflation running at two
to three percent, there is a greater likelihood that real (inflation-adjusted) home prices will decline
at the national level, but it is unlikely that the OFHEO index will show a decline in nominal home
prices on a year-over-year basis.
Home Price Growth Rates
Source: Office of Federal Housing Enterprise Oversight (OFHEO)
The Composition of
New Mortgage Originations
and Outstanding Mortgage Debt
Owner Occupied Units with Mortgage or Home Equity Debt
Owned free
and clear
34%
Mortgage or
home equity loan
66%
Source: 2005 American Housing Survey
According to 2005 American Housing Survey (AHS) data, only 66 percent of homeowner households
have a mortgage on their residence. As shown in the chart above, the other 34 percent own their
home free and clear. This fact is important to keep in mind when considering the market impact of
any changes in mortgage originations or any trends in mortgage product choice.
As with home sales volumes, the volume of purchase mortgage applications declined in 2006.
Again, this is well below volumes seen in 2004 and 2005, but still a strong year. Total mortgage
originations in 2006 were the fifth highest ever.
2002–06 Purchase Index: 4 Week Moving Average (Seasonally Adjusted)
Source: MBA’s Weekly Application Survey
Refinance volumes are well below the refi boom that stretched from 2001 through 2003. 30-
year fixed mortgage rates peaked in June of 2006 above 6.8 percent, and then fell sharply after the
Fed paused at their June meeting. At one point in the fall of 2006, the 30-year rate dropped below
6 percent. This decline in long-term rates was sufficient to spur an increase in refinancing, with the
refi share of applications rising above 50 percent in certain weeks.
2002–06 Holiday Adjusted Refinance Index: 4 Week Moving Average
30-Year Fixed Mortgage Rates: 1990–Present
Although the evidence is not definitive, it is likely that a large portion of this refinance activity
reflects borrowers paying off ARM loans that either had already or were about to reset to higher
payments. In many cases, borrowers with an ARM could expect their rate, which might have been
close to 4 percent if they originated a loan in 2003, to rise to a 7.5 percent rate. This at a time when
they could get a 30-year fixed rate at 6 percent. Not surprisingly, given the low level of fixed mortgage
rates, and the inverted yield curve, which led to a very narrow spread between FRM and ARM rates,
the share of loan applications that are ARMs declined through much of 2006, reaching 20 percent
by the last week of the year.
ARM Share vs. Long/Short Term Interest Rate Spread
Traditional and Non-traditional Mortgage Products
A continuing topic of interest in 2006 was the marked growth in the use of so-called non-traditional
products. The regulatory agencies have defined “non-traditional” as including interest only and
payment option loans.
A recent Wall Street Journal Online/Harris Interactive personal-finance poll indicated that younger
borrowers have been more likely to use non-traditional products. For example, the poll indicated
that 23 percent of 18–34 year old borrowers have an interest only product, while only 7 percent of
45–54 year old borrowers do. This aligns with the notion that these products are often used to extend
affordability.
Interest only (IO) loans, with both adjustable- and fixed-rates, and payment option loans that
allow some amount of negative amortization, have become a significant part of the mortgage market.
In the second half of 2005 and the first half of 2006, IOs accounted for about 25 percent of the dollar
volume of originations. In the first half of 2006, there was a move towards fixed-rate IOs mirroring
the overall trend in the market towards fixed-rate products. Payment option loans accounted for
about 15 percent of the dollar volume of originations. (Note that MBA’s Mortgage Origination Survey
classifies payment option loans separately, so it is not appropriate to add the IO percentage to the
payment option percentage to get an overall non-traditional share.)
IO loans permit the borrower to make interest only payments for some portion of the loan term.
For IO ARMs, a common structure has the interest rate fixed for 5 years, and an interest only period
of 5 years, followed by 25 years where the loan amortizes, i.e. the principal balance is paid down,
and the rate can adjust on an annual basis. For fixed-rate IO loans, a common structure is for the
rate to be fixed for the entire 30 years, with a 10-year interest only period. Note that borrowers can
at their discretion make payments of principal during the interest only period.
Payment option loans typically give borrowers a choice of 4 different payments with each monthly
statement. Borrowers could make fully amortizing payments calculated over a 30- or 15-year term.
Alternatively, they could make an interest only payment, which would not reduce the loan balance,
or a minimum payment less than the interest only payment. Making the minimum payment would
negatively amortize the loan, as the interest due above the minimum payment would be added to the
loan balance. Typically, the extent of negative amortization is capped at 110 or 115 percent of the
loan’s original balance.
Why have these loans gained in popularity? They have existed as niche products for twenty or more
years, but it is only in the last 3–4 years that they have gained mass market appeal. We believe that
changing interest rates and housing market environments can at least partially explain the changing
popularity of different mortgage products.
An important point is that credit spreads across all types of fixed income securities: corporate
debt, emerging markets debt and mortgages have been historically tight in the last few years. Largely
as a result of the massive flows of global capital, Treasury rates have been low, leading investors to
reach for yield by moving into securities with higher risk. The flow of capital into these securities
compressed credit spreads including spreads on mortgages relative to other assets. As a result of these
compressed credit spreads, risk spreads related to all types of mortgage products and features were
reduced, making non-traditional products much more appealing to borrowers.
In a market where home prices were increasing at a double digit pace year after year, borrowers
moved to ARMs, historically the product homebuyers would turn to extend their purchasing power.
However, as home prices continued to rise, and as the Fed began increasing short-term interest rates,
ARMs began to lose their affordability advantage. IOs in particular allowed borrowers to afford
homes in a booming market.
In addition to their use as affordability products, these products offer homeowners an innovative
and flexible means to more actively manage their home equity. With the rapid accumulation of home
equity over the past few years, many owners can benefit by taking equity out of their home and
investing in a more diversified set of assets.
Mortgage Product Choice
Originations by Amortization Type (Second Half of 2005) Originations by Amortization Type (First Half of 2006)
Percent Percent
100 Dollar volume 100 Dollar volume
Loan count Loan count
80 80
60 55% 60 54%
44% 43%
40 31% 40 31%
28% 28%
22%
19%
20 14% 20 13%
6% 5%
3% 3%
0 0
Fixed Rate Adjustable Rate Interest Only — Interest Only — Fixed Rate Adjustable Rate Interest Only — Interest Only —
(Excluding (Excluding ARM Fixed (Excluding (Excluding ARM Fixed
interest only) interest only) interest only) interest only)
Source: MBA’s Midyear 2006 Mortgage Originations Survey
The subprime segment of the market has typically had a much higher share of adjustable-rate
loans. In the first half of 2006, 67 percent of subprime originations were ARMs, with 17 percent of
these being IO ARMs.
Originations by Loan Purpose and Amortization Type for Subprime Loans
Source: MBA’s Midyear 2006 Subprime Mortgage Originations Survey
A further analysis of data from MBA’s Midyear 2006 Mortgage Originations Survey shows
little trend in first mortgage LTVs over time. The weighted average LTV over the past two years has
remained in the mid-70s. The distribution of LTVs has changed somewhat, with a slightly larger
proportion of loans in the 71–80 and higher LTV ranges.
With respect to credit score, its trends in MBA’s Mortgage Origination Survey have been stable.
About half of the dollar volume of first mortgage originations in the first half of 2006 were for loans
with FICO scores above 700. About three quarters were for loans with FICO scores above 650. Of
the remaining one quarter, most were in the 600–650 bracket.
First Mortgage LTV Distribution
Percent
Midyear 2006
Greater than 100%
Yearend 2005
Midyear 2005
91% to 100% Yearend 2004
81% to 90%
71% to 80%
61% to 70%
51% to 60%
50% or less
0 10 20 30 40 50 60
Based on percent share of dollar volume. Distributions based on all survey participants
and not restricted to repeater companies.
Source: MBA’s Midyear 2006 Mortgage Origination Survey
Credit Score Distribution in the First Half of 2006
501–550
500 or less 2%
0% 551–600
6%
Greater
than 750 601–650
27% 15%
651–700
701–750 24%
26%
Source: MBA’s Midyear 2006 Mortgage Origination Survey
Analysis by Bear Stearns of 2005 originations provides a more detailed breakdown by market
segment. This chart only captures a portion of all securitized product. MBA estimates that total
first mortgage originations in 2005 were approximately $3 trillion, while the total originations from
this chart are $813 billion. However, some of the comparisons across market segments are quite
interesting. Note that average loan size and FICO score is highest in the prime sector, and lower for
the near prime and subprime sectors.
LTV and cash out percentages are lowest in the prime sector. The proportion of loans that are
option ARMs is highest in the near prime sector. These sources report that one percent of subprime
loan volumes are Option ARM; other sources suggest that there are no subprime Option ARMs.
The investor share is highest in the near prime sector, while the interest only share is highest among
prime ARM loans.
Loan Characteristics by Sector: 2005 Originations
Avg.
Orig. Loan % % % %
Bal. Initial Size Comb. % Full Cash- % % Prepay Option Gross
Sector ($MM) GWAC ($K) FICO LTV CA Doc Out Investor IO Penalty ARM Margin
Prime $123,575 4.25 $453 732 73.9 54.0 44.3 26.4 4.5 55.1 15.4 24.4 256.2
ARM
Near
Prime $189,195 3.88 $321 711 80.0 50.2 24.9 34.9 14.2 45.1 52.6 43.9 282.4
ARM
Subprime $290,601 7.10 $200 624 85.9 32.2 56.9 51.2 5.5 30.4 72.4 1.1 582.6
ARM
Prime $47,114 5.86 $499 742 70.6 39.2 54.7 27.6 1.0 15.2 1.7 NA NA
Fixed
Near
Prime $94,944 6.21 $215 717 76.2 26.8 40.0 38.3 15.7 28.9 15.6 NA NA
Fixed
Subprime $66,446 7.48 $128 636 81.2 26.9 70.2 68.4 4.0 5.5 76.6 NA NA
Fixed
Source: Bear Stearns, Loan Performance
Changing focus to discuss the composition of outstanding mortgages, several trends emerge.
First, the share of the market accounted for by the government lending programs, FHA and VA,
has decreased considerably in recent years. These programs accounted for more than 30 percent of
outstanding loans in 1998. Today, they account for about 10 percent of all outstanding loans. Gaining
market share have been the prime and subprime segments.
See the 2006 RIHA study “Lender Perspectives on FHA’s Declining Market Share” at www.housingamerica.org.
Outstanding Loans by Loan Type: 1998–Present
Percent
100
FHA
90 VA
80 Subprime
70 Prime
60
50
40
30
20
10
0
‘98 ’99 ‘00 ’01 ‘02 ’03 ‘04 Q1 Q2 Q3 Q4 Q1 Q2
‘05 ’05 ‘05 ’05 ‘06 ’06
Source: MBA’s National Delinquency Survey
The other noteworthy characteristic of the market relates to the record-setting refi year in 2003,
when 30-year rates were at 40-year lows, and the strong purchase years of 2004 and 2005. With this
bunching of activity, much of the stock of outstanding loans was originated in the past three years.
This has implications for mortgage delinquencies and foreclosures, as loans tend to hit their peak
delinquency rates three to five years after origination. Moreover, the data indicate that more than
86 percent of outstanding loans have been originated since 2000, and 80 percent since 2002. For
subprime loans, an even greater proportion was originated in the last couple of years, with almost
75 percent of outstanding subprime loans originated since 2003. The average age across all loans
as of the end of 2005 was three years. For FHA and VA loans the average was five years, while for
subprime ARMs the average loan was only two years old.
Outstanding loans by Origination Year (Q4 2005 Data)
Percentage
of sample
40
35
30
25
20
15
10
0
Pre-1998 1998 1999 2000 2001 2002 2003 2004 2005
Source: MBA’s NDS Origination Year Supplement
The ARM share across all types of mortgages has grown from approximately 18 percent in 2003
to approximately 25 percent as of the third quarter of 2006. Among prime mortgages, the ARM
share has increased from about 16 percent in 2003 to about 20 percent; for subprime mortgages
the ARM share increased from about 45 percent to about 59 percent. ARMs have typically been
more popular in high housing cost areas. For example, California has always had a higher ARM
share than much of the nation, while Texas and other states in the Southwest have had consistently
lower ARM shares. In the third quarter of 2006, Nevada had the highest ARM share in the country
with 42 percent of outstanding loans being ARMs. The Nevada housing market has boomed in
recent years as population growth rates have consistently been in the double digits. These recent
buyers have followed the national trend of choosing ARM loans at a higher rate than homebuyers
in earlier years.
ARM Share by Loan Type
Percent Prime ARM Share FHA ARM Share

of Loans
Subprime ARM Share Total ARM Share
70
60
50
40
30
20
10
0
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006
With the home price gains of the past few years, there has been a substantial growth of home
equity, even for recently originated loans. The Federal Reserve’s Flow of Funds data show that aggregate
home equity increased from $9.4 trillion in 2004 to $11 trillion by the third quarter of 2006. In the
charts below, this growth in equity is tracked by state by examining the initial LTV at origination
for the 2004 and 2005 cohorts, then calculating the LTV as of the second quarter of 2006. The loan
balance changes through amortization (assuming a 30-year term and holding the rate constant at the
initial rate). The home value changes based upon the cumulative change in the state-level index.
According to this analysis, even for 2005 originations, mark-to-market LTVs have dropped
appreciably in most areas of the country. The implication is that even if home prices remain flat or
decline somewhat from their current level, most homeowners have built up a cushion of equity over
the last several years that could act as a buffer in any downturn.
To conclude, the stock of outstanding mortgages is predominantly composed of young loans.
Due to the strong housing markets of recent years, homeowners have built up a substantial buffer
of home equity. Therefore, even though we anticipate somewhat weaker housing markets over the
next couple of years as the market normalizes, as well as some modest increases in overall mortgage
delinquency and foreclosure rates, we do not expect any significant decline in overall mortgage credit
quality, although there could be some further weakening in the subprime sector.
Estimated Change in Current LTV by State for 2005 Originations
Change in LTV by State (Alaska–Mississippi)
Percent 2005 Loans Original LTV

100 2005 Loans — LTV as of 2006 Q2
80
60
40
20
0
AK
AL
AR
AZ
CA
CO
CT
DC
DE
FL
GA
HI
IA
ID
IL
IN
KS
KY
LA
MA
MD
ME
MI
MN
MO
MS
Change in LTV by State (Montana–Wyoming)
Percent 2005 Loans Original LTV

100 2005 Loans — LTV as of 2006 Q2
80
60
40
20
0
MT
NC
ND
NE
NH
NJ
NM
NV
NY
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VA
VT
WA
WI
WV
WY
Source: OFHEO, FHFB and MBA calculations
Trends in Mortgage Delinquencies
and Foreclosures
Mortgage lenders stand to lose financially when loans do not perform, and thus have significant incentives
to prevent foreclosures. Historically, on a national basis, mortgage lenders’ loss mitigation efforts have
helped three out of four borrowers who enter the foreclosure process avoid a foreclosure sale.
Mortgage delinquencies are still caused by the same things that have historically caused mortgage
delinquencies: “life events,” such as job loss, illness, divorce or some other unexpected challenge.
Foreclosures following delinquencies may be caused by the inability to sell a house due to local market
conditions after one of the above items has occurred.
As we had expected, delinquency rates increased across the board in the third quarter. However,
increases in delinquency rates were noticeably larger for subprime loans, particularly for subprime
ARMs. This is not surprising given that subprime borrowers are more likely to be susceptible to the
cumulative increases in rates we have experienced, and the slowing of home price appreciation that
has resulted. It is important to remember that delinquency and foreclosure rates have been quite low
the last two years.
In the third quarter of 2006, more than 95 percent of borrowers were current on their mortgage.
The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 4.67
percent of all loans outstanding in the third quarter of 2006 on a seasonally adjusted (SA) basis,
up 28 basis points from the second quarter, and up 23 basis points from one year ago, according to
MBA’s National Delinquency Survey. A basis point is 0.01 percentage points.
The increase was driven by increases in delinquencies for all major loan types, most notably for
subprime and FHA loans. Delinquency rates for prime, subprime and FHA loans increased on a
seasonally adjusted basis relative to the second quarter.
Total Delinquency Rate by Loan Type
The percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at the
end of the third quarter, an increase of six basis points from the second quarter of 2006, while the
SA rate of loans entering the foreclosure process was 0.46 percent, three basis points higher than the
previous quarter. Compared with the third quarter of 2005, the percentage of loans in the foreclosure
process was up eight basis points while the percentage of loans entering the foreclosure process was
up five basis points.
Foreclosure Inventory Percentage by Loan Type
Delinquency rates increased during the third quarter of 2006 for all loan types. The delinquency
rate increased 15 basis points for prime loans (from 2.29 percent to 2.44 percent), increased 86 basis
points for subprime loans (from 11.70 percent to 12.56 percent), increased 35 basis points for FHA
loans (from 12.45 percent to 12.80 percent), and increased 23 basis points for VA loans (from 6.35
percent to 6.58 percent). As noted above, the largest increase was for subprime ARM loans, whose
delinquency rate increased from 12.24 percent in the second quarter of 2006 to 13.22 percent in the
third quarter.
Total Delinquency Rate by ARM and Fixed
Across all loan types, the states with the highest overall delinquency rates were Mississippi (11.05
percent), Louisiana (9.50 percent) and Michigan (7.44 percent). Based on foreclosure inventory rates
across all loan types, the top three states were Ohio (3.32 percent), Indiana (2.90 percent) and Michigan
(2.20 percent). All state level results are not adjusted for seasonal effects.
The states with the largest increase in overall delinquency rates in the past year were Michigan
(135 basis points), Rhode Island (128 basis points) and Ohio (96 basis points). The states with the
largest increase in foreclosure inventory rate were Michigan (59 basis points), Rhode Island (46 basis
points) and Maine (43 basis points).
From the third quarter of 2005, 44 out of 51 states saw their delinquency rates increase, while
35 states saw an increase in their foreclosure inventory rates.
At the regional level, the Northeast region had an overall SA delinquency rate of 4.39 percent,
the North Central region had a delinquency rate of 5.44 percent, the South had a delinquency rate
of 5.37 percent and the West had a delinquency rate of 2.81 percent, compared to the national rate
of 4.67.
Total Loans Past Due Rates by State for Q3, 2006
For the foreclosure inventory rate, the Northeast region had a rate of 1.06 percent, the North
Central region had a rate of 1.89 percent, the South had a rate of 0.99 percent and the West had a rate
of 0.49 percent, compared to the national foreclosure inventory rate of 1.05 percent of all loans.
The most important driver for the elevated serious delinquency rates in the Midwest is the persistent
loss of employment, especially manufacturing employment. The main factors contributing to job
losses in the sector include rapid productivity growth, increased international competition and a shift
in demand structure, which substitutes imports for some domestically produced goods. Given that
these factors will continue to be at work in a growing global market, a large portion of the job cuts
in recent years could represent permanent layoffs that will only gradually be offset by job creation in
other sectors in the economy. This suggests that the areas’ delinquency rates could remain elevated
for some time.
To expand upon this explanation, there are a number of factors that can be identified as being
responsible for the elevated delinquency and foreclosure rates in these areas.
• Loss of employment is one of the most common unanticipated shocks to household finances. All
of the states in the East North Central and East South Central continued to suffer job losses from
their peak employment prior to the recession in 2001. In addition, these states are among the
most concentrated in manufacturing in the nation. Through a vast improvement in productivity
growth and increased globalization, it is likely that manufacturing employment will remain soft
in the coming years.
• Many low-income households have few or no financial assets to cushion them in times of financial
difficulties — putting them at risk of being delinquent or of defaulting on their mortgages. The
East North Central’s median income is somewhere in the middle of the nation’s, while the East
South Central has maintained the lowest median income in the nation.
• A high level of homeownership is a sign of strength for a local economy. However, in the midst of
a significant regional downturn, homeowners, who are typically less mobile than renters, may have
difficulty making their mortgage payments, leading to delinquency and potentially foreclosure.
• Areas with very strong home price appreciation have lower foreclosure rates. If home price
appreciation is strong, the odds of having a mortgage loan exceeding the value of a home are
lower. In addition, strong home price appreciation provides an opportunity for borrowers to liquefy
equity in the home in a time of financial distress, reducing the likelihood that the borrowers would
become delinquent or would default on the loan.
• Areas that are growing, either due to strong labor markets or because they are popular retirement
destinations, will have strong housing and mortgage markets. Population growth, if very strong,
could partly compensate for weak labor markets. By contrast, areas that are losing population
are more likely to experience home price declines and rising foreclosure rates.
• On average, loans with a high loan-to-value ratio (LTV) are riskier than lower LTV ones. Borrowers
with little equity in a home can walk away more easily from their homes, putting lenders more
at risk. Furthermore, when the LTV is high, there is increased risk that the home value could
fall below the loan balance, creating a negative situation during the early years of the loan. The
average LTVs of loans in most states in the two divisions are significantly higher than the national
average.
• A 2003 Federal Reserve Board working paper notes that, on average, foreclosures in judicial
foreclosure states take 148 days longer than those in non-judicial foreclosure states. Because it
takes longer for foreclosures to be handled in the judicial states, their inventories at the end of
each period tend to be higher.
Market analysts and others have examined other factors, for example the share of a market composed
of subprime loans or the ARM share. These factors are not such significant drivers as those listed
above.
With respect to the subprime share, borrowers in distressed areas are more likely to have blemished
credit as a result of a regional downturn. An increased frequency of job loss and other economic
dislocations lead to a greater number of borrowers being unable to qualify for prime credit. Thus,
the increase in the subprime share of the market is typically a result, not a cause, of the increasing
delinquency and foreclosure rates.
Adjustable rate mortgages present additional credit risk in an environment of rising interest rates
due to the potential for payment shock. Historically, delinquency rates on ARMs have been higher
than those on fixed rate mortgages, but ARMs provide many homeowners with financial flexibility
and affordability in the early years of a loan.
There are many false claims about mortgage lenders profiting from foreclosures. In reality, every
party to a foreclosure loses — the borrower, the immediate community, the servicer, the mortgage
insurer and the investor. It is important to understand that profitability for the mortgage industry
rests in keeping a loan current and, as such, the interests of the borrower and lender are mostly
aligned. The Fed study cited earlier notes that, “estimated losses on … foreclosures range from 30
percent to 60 percent of the outstanding loan balance because of legal fees, foregone interest, and
property expenses.”
A home foreclosure is a multi-step process with a notice of default letter being the first step. Several
things happen before a foreclosure sale takes place. In most instances, the borrower brings the note
current, negotiates a payment plan, or sells the house and pays off the mortgage. If these options are
not possible, the borrower can turn the house over to the lender in lieu of foreclosure.
Otherwise, the house is acquired by the lender in a foreclosure, returned to marketable condition
and sold. These types of sales only take place in about 25 percent of all loans that enter the foreclosure
process. In the remainder of the cases, either the borrower pays off the arrears through an agreed
upon payment plan with the lender, or sells the home.
Rates of foreclosure vary as different groups measure foreclosures at different steps of the process.
MBA looks at when the foreclosure action is initiated. Some firms look at the foreclosure sales, while
others look at the foreclosed homes up for sale. These companies are interested in (and make money
by) marketing foreclosed properties to investors. They typically are less interested in gauging the
overall health of the mortgage market, which is MBA’s goal with the National Delinquency Survey.
In order to understand the health of the mortgage market and capture credit conditions, one has
to look at the dynamics for the entire market. Many other measures simply reflect certain parts of
the process, and can vary significantly based on local conditions. It is important to consider changes
in the percentage of foreclosure sales or foreclosed homes for sale in the proper context. Due to a
long-run trend of an increasing homeownership rate, there are many more loans outstanding . Even
if the foreclosure rate is unchanged, the number of foreclosures will increase. One must look at the
percentage of foreclosures against historic norms. Even with the expansion of credit availability with
the growth of the subprime market, foreclosures are well below their historic highs and will not have
a macroeconomic impact.
Mortgage companies have recognized the impact of foreclosures on their bottom lines and over
the last ten years have developed innovative techniques to help borrowers resume payments. These
options have proven successful both for homeowners and servicers.
Foreclosure Inventory Rates by State for Q3, 2006
The market is working. In response to mortgage payment performance that has deteriorated
somewhat from the very strong performance of recent years, investors have priced for the increased
risk, demanding higher returns in the form of wider credit spreads, particularly for loans originated
in 2006. These price signals from the capital markets directly and immediately impact the rates
that mortgage lenders can offer to borrowers, in this case particularly to borrowers with blemished
credit. The result of these adjustments in the capital markets will be that risk-adjusted returns will be
equalized across segments of the market. Far from being a problem, these clear market signals will
help the market to more efficiently regain its equilibrium.
Second, this widening of credit spreads in the secondary markets passes back through to new
borrowers in the form of higher rates. This means lenders reduce credit availability to less creditworthy
or subprime borrowers first.
Third, we have no evidence that the increases we have seen in delinquency and foreclosure rates
are the result of non-traditional products such as interest only or payment option mortgages. These
products have made up a significant portion of originations in recent quarters. However, we do not
have and are not aware of information that would indicate significant deterioration in performance
related to the non-traditional products.
Finally, given the first three points, we would strongly caution policymakers to avoid any regulatory
or legislative actions that would impede the ability of the market to respond to changes in underlying
economic conditions. An important role of public policy should be to facilitate efficient markets, as
these will ultimately benefit consumers.
We expect the housing market to fully regain its footing in the middle of 2007. In the meantime,
we anticipate some further increases in delinquency and foreclosure rates in the quarters ahead.
The Outlook for the Year Ahead
The economy will continue to grow, but at or slightly below our estimate of the trend rate of growth.
Growth is expected to pick up during the spring of 2007, as the drag from housing and autos comes
to an end. Payroll employment growth is expected to moderate somewhat further, in lagged response
to the slowdown in economic expansion underway since the spring of 2006, raising the unemployment
rate to close to 5 percent by the end of 2007. Core inflation is expected to moderate gradually. Fed
policy is expected to remain on hold, with the federal funds rate staying at 5.25 percent throughout
the year. As hopes for an easing of monetary policy fade, long-term interest rates are expected to back
up, with the yield on the 10-year Treasury at 5 percent by the end of 2007.
Home prices will increase in 2007, but at a much lower growth rate than we have seen in the
past few years. Home sales are expected to decline through the middle of 2007 before picking up
slightly in the second half of the year. For all of 2007, new home sales are projected to decline about
8 percent relative to 2006 levels, compared with a decline of about 7 percent for existing home sales.
For 2008, new and existing home sales should be up by about 3 percent relative to 2007.
Homebuilding activity likely reached a trough in the fourth quarter of 2006. However, activity
should improve very modestly this year. For all of 2007, we expect total housing starts to decline
by about 14 percent relative to 2006. The decline will be more pronounced in single-family starts,
which are projected to be down 16 percent, compared with about 4 percent for multifamily. For 2008,
housing starts should increase about 5 percent relative to 2007.
Slowly improving inventories of unsold homes should cause home prices in 2007 to be flat relative
to 2006. The gains in the median home price for both new and existing homes should be about 1 to
2 percent through 2008.
Mortgage originations will fall in 2007 relative to 2006 given the decline in home sales and
diminished refinance activity. For all of 2007, we project that purchase originations will decline by
about 5 percent from 2006’s level to $1.33 trillion. Given the drop in mortgage rates in the fourth
quarter of 2006, refi originations will be strong in the first quarter of 2007. Furthermore, as a
significant share of loans with adjustable rates will face their first reset in 2007, we expect that a
portion of these loans will be refinanced into either fixed-rate mortgages or into other adjustable-rate
mortgages with an initially lower rate, providing strong support for refi activity this year. We expect
refi originations in 2007 to decline by about 4 percent relative to 2006 to $1.06 trillion.
Total originations in 2007 are projected to decline by about 5 percent to $2.39 trillion from an
estimated $2.51 trillion in 2006. They should decline by an additional 4 percent to $2.29 trillion in
2008 as a result of a drop in refi originations of 10 percent. Purchase originations should be about
the same as the 2007’s level.
The narrow spread between fixed-rate mortgage and adjustable-rate mortgage yields has caused the
share of loans with adjustable mortgage rates (both purchase and refi) to decline to about 23 percent of
the number of loans by the end of December, according to the Mortgage Bankers Association weekly
survey of mortgage applications. The share of loans with adjustable mortgage rates from the Federal
Housing Finance Board (FHFB)’s Mortgage Interest Rate Survey (which only includes conventional
loans for home purchase) showed a more pronounced decline in the usage of adjustable rate mortgages
from 31 percent at the beginning of the year to 14 percent in November. We believe that this measure
of the ARM share will remain at about 14–15 percent through the end of 2008.
Annual Mortgage Production
Source: Mortgage Bankers Association and Department of Housing and Urban Development

Residential Mortgage Market Report 2007

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Residential Mortgage Market Report 2007

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MBA Research Monograph Series

January 30, 2007

Jay Brinkmann, Ph.D., Vice President, Research and Economics

Orawin Velz, Ph.D., Director, Economic Forecasting, Research and

Introduction and Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Global Capital Markets, Monetary Policy

Decelerating Housing Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

The Composition of New Mortgage Originations

Trends in Mortgage Delinquencies and Foreclosures . . . . . . . . . . . . . . . . . . 31

The Outlook for the Year Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Decelerating housing markets:

The composition of new mortgage originations and outstanding mortgage debt:

10-Year Treasury, Fed Funds Rate and Mortgage Rate

Source: Federal Reserve Board, Freddie Mac

Treasury Yield Curve

Source: Federal Reserve Board

U.S. Current Account

Source: Bureau of Economic Analysis

Current Account Balances Around the World

Changing Composition of Foreign Holdings

Source: U.S. Department of Treasury

Source: Federal Reserve Board

Source: Federal Reserve Board

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Source: Federal Reserve Board

International Rates are Rising Relative to U.S. Rates

Source: Financial Times

Total Home Sales

Source: National Association of Realtors, Census Bureau, and MBA Forecast

EXISTING Home Sales by Region

Source: National Association of Realtors

Source: Bureau of the Census and Bureau of the Economic Analysis

Source: Office of Federal Housing Enterprise Oversight (OFHEO)

Owner Occupied Units with Mortgage or Home Equity Debt

Source: 2005 American Housing Survey

Source: MBA’s Weekly Application Survey

2002–06 Holiday Adjusted Refinance Index: 4 Week Moving Average

Source: MBA’s Weekly Application Survey

Source: MBA’s Weekly Application Survey

ARM Share vs. Long/Short Term Interest Rate Spread

Source: MBA’s Weekly Application Survey

Mortgage Product Choice

Source: MBA’s Midyear 2006 Mortgage Originations Survey

Source: MBA’s Midyear 2006 Subprime Mortgage Originations Survey

Source: MBA’s Midyear 2006 Mortgage Origination Survey

Credit Score Distribution in the First Half of 2006

Source: MBA’s Midyear 2006 Mortgage Origination Survey

Loan Characteristics by Sector: 2005 Originations

Source: Bear Stearns, Loan Performance

Source: MBA’s National Delinquency Survey

Outstanding loans by Origination Year (Q4 2005 Data)

Source: MBA’s NDS Origination Year Supplement

ARM Share by Loan Type

Percent Prime ARM Share FHA ARM Share

Source: MBA’s National Delinquency Survey

Estimated Change in Current LTV by State for 2005 Originations

Change in LTV by State (Alaska–Mississippi)

Percent 2005 Loans Original LTV

Percent 2005 Loans Original LTV

Source: OFHEO, FHFB and MBA calculations

Source: MBA’s National Delinquency Survey

Foreclosure Inventory Percentage by Loan Type