Relative to rents or median income house prices

Info icon This preview shows pages 66–68. Sign up to view the full content.

View Full Document Right Arrow Icon
Relative to rents or median income, house prices returned back to their historical average. Alongside the collapse in house prices, residential construction fell off a cliff: a 330% drop from the end of 2005 in residential investment. New housing permits went from 2 million units per year in 2002-2006 to a historic low of 0.5 million in 2009. The collapse in residential investment, alongside the decline in consumption and business investment, plunged the U.S. economy into the worst post-war recession. Real GDP fell four consecutive quarters from mid- 2008 to mid-2009. Since the recession officially started in December 2007, more than 8 million jobs have been lost. Macro-economic risk, as measured by the VIX index or by the volatility of GDP, has returned with a vengeance after nearly 25 years of calm.
Image of page 66

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
65 In the wake of falling house prices, new mortgage originations dropped sharply. Many of the largest private-label originators, such as Countrywide, either went out of business or were sold in distress to large commercial banks. Essentially the only new mortgages that were issued in the second half of 2008 and in 2009 were mortgages that could be bought by the GSEs or the FHA/VA. The PLS market was essentially dead in 2008 and 2009, accounting for less than 3% of MBS originations, down from 50% in 2006. Freddie and Fannie’s share in new mortgage originations increased back to 75% in 2009 (up from 30% in 2006), with the FHA accounting for 20% in 2009 (up from 3% in 2006). In today’s mortgage market, the government truly is the lender of last resort. The final aspect of the bust was the tidal wave of foreclosures. The initial wave of foreclosures in 2007 and 2008 was tied to the interest rate resets on ARMs and on other exotic mortgages such as option-adjusted ARMs. Such rate resets raised monthly payments at a time when refinancing was not an option due to falling property prices. However, as the economy entered into a full-force recession, increasing numbers of foreclosures came from people who lost their jobs. Foreclosures tend to follow job losses with a 3-6 month delay. In 2009, 2.8 million households received foreclosure filings, up 21% from 2008 and 120% from 2007. 5.2 The Collapse of Freddie and Fannie, and the Conservatorships 5.2.1 Early Warning Signs With nationwide housing markets collapsing, a deep recession, and an increasingly risky mortgage portfolio, the GSEs showed their first losses in 2007. The combined $5 billion loss was due to credit-related expenses of $8 billion. In early July 2008, three months after the mortgage-related collapse of Bear Stearns and with the stock market down 20% from its peak, speculation was rampant that the government would have to rescue Freddie Mac and Fannie Mae – at least in terms of their obligations to their creditors. By then, the GSEs had already lost an enormous amount of stock market capitalization. In 2007, Freddie’s share price fell by 50% from $64 to $32, while Fannie’s stock lost 36% of its value. By July 1, 2008, Freddie’s stock had dropped by another 50% to $16.
Image of page 67
Image of page 68
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern