April, 2012

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THE LATEST ANALYTICS Has the Housing Market Hit Bottom? Standard & Poor's conducts webinar to examine one of the industry's most pressing questions for 2012. key industry question: Is the housing market bottoming out? The broad inquiry served as the title for S&P's web-based presentation, which included contributing analysts Beth Ann Bovino, Erkan Erturk, and Valerie White. Offering their take on the current S state of U.S. real estate, the par- ticipants discussed home pricing, the return of the private- label securitization market, not-for-profit housing, corporate homebuilders, and the nation's housing agencies. The panel- ists didn't provide a final answer to the webinar's headlin- ing question, but the analysts did make it clear that they feel a market "bottom" has arrived or will be reached by the close of 2012. Bovino provided tandard & Poor's (S&P) recent webinar provided insight into a news could be just the starting point for a recovery." When asked why a privatized "We now forecast S&P/ Case-Shiller prices will drop another 4 percent from where they are now to a record commentary on the direction of specific market sec- tors, noting that it's likely the Federal Housing Finance Agency home index will not "reach its trough until next winter." Bovino went on to reveal her predictions for home pricing, saying, "We now forecast S&P/Case-Shiller prices will drop another 4 percent from where they are now to a record 36 percent below the July 2006 peak sometime in the fall." Tackling the matter of a re-emer- gence of private-label residential mortgage-backed securities (RMBS), Erturk called the future of private housing finance "unclear" and stated that following the transition to priva- tization, "the mortgage market is likely to [be] smaller." Erturk continued, "We have seen a few private-label RMBS transac- tions in the market during the last few years, but the sector's revival is still several years away and relies on more than just a turnaround in the housing market, but positive housing peak sometime in the fall." RMBS market "should" return to the housing industry, Erturk said, "We believe there is a strong desire by policymakers and market partici- pants to privatize housing finance and reduce the influence of Fannie and Freddie over time. Private-label RMBS provides an alternative to agency mortgage securities. Private- label RMBS would also increase the diversification of funding sources and expand the pool of both investors and funds." Speaking out 36 percent below the July 2006 on the interest rate decisions made by the country's hous- ing finance agencies during the webinar, White noted, "To compete, HFAs low- ered mortgage rates on the products they offered to at or below market rates in order to compete with commercial lenders. The resulting factors—low mortgage rates—not only limit loan production due to competition with the commercial mortgage market, but also limit issuer earnings on bond spread." White elaborated, adding, "In addition, low interest rates on invested monthly mortgage deposits pledged to semiannual bond payments further limit earnings and long-term growth of assets in bond transactions. Lower earnings on bond programs negatively affect the agency's bottom line, particularly in those instances where the agency's sole source of revenue comes from its bond programs. In examining continued low interest rates in the immediate future, through Fed Reserve Board low interest rate period, we projected assumed interest earnings and liability on bond payments would remain constant through 2014." CoreLogic's Index Records Sixth Consecutive Decline Recent data from the company confirms the nation's flagging home pricing. N ational home prices declined 1 percent between December 2011 and January 2012, according to the latest home price index from CoreLogic. It represents the sixth consecutive month the company has recorded a month-over-month drop in residential property values. The stretch of depreciation is much longer when comparing year-over-year numbers. Based on data through the end of January, annual declines in home prices have continued for 18 months straight by CoreLogic's assessment. The company is reporting a 3.1 percent falloff in home prices between January 2011 and January 2012. "Although home price declines are slowly improving and not far from the bottom, home prices are down to nearly the same levels as 10 years ago," said Mark Fleming, chief economist for CoreLogic. The 1 percent monthly and 3.1 percent annual declines seen in January include transactions involving distressed properties. CoreLogic provides a secondary set of results that illustrate just how much distressed properties such as short sales and REOs are weighing down home values. Excluding distressed sales, month-over-month prices posted an increase of 0.7 percent between December 2011 and January 2012, and year-over-year prices slipped by just 0.9 percent. Including distressed sales, the five states with the highest ap- preciation in January were South Dakota (+5.7 percent), North Dakota (+4 percent), West Virginia (+4 percent), Montana (+3.6 per- cent), and Michigan (+3 percent). States with the greatest depreciation during the month included Illinois (-8.7 percent), Nevada (-8 percent), Delaware (-7.9 percent), Alabama (-7.7 per- cent), and Georgia (-7.5 percent). THE M REPORT | 59 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET

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