Barclays 2010 Global Market Outlook Conferece

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2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Housing risks and prospectsGlenn Boyd

January 2010

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 19



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

A nascent recovery in HPA?

___________________________Source: S&P/CS, FHFA, First American Core Logic’s LoanPerformance HPI, Radar Logic, Barclays Capital

Home price appreciation (NSA, annualized)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-08 Jan-09FHFA CS-20 RPX LP



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Influential near-term factors

Shadow inventory

•Recent home price strength was largely possible because distressed inventories declined.

•But this decline is likely transitory. We estimate roughly 6mn homes will become distressed

sales over the next three years.

•Such a massive influx of supply should depress home prices. While the timing depends on

government and servicer programs, our models suggest 8% remaining depreciation before a

bottom.

•Changing distressed share causes abnormally strong seasonals

•Mortgage rates are historically low

•Tax incentives should boost demand in Q1

•Unemployment should gradually decline

Equilibrium and Seasonal factors



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Distressed sales are in abeyance

Shadow inventory

___________________________Source: LoanPerformance, Barclays Capital

-

500

1,000

1,500

2,000

2,500

3,000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

H o m e s ( 0 0 0 s )

Real-estate Owned

Foreclosure

90+



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Modifications not a cure-all

Redefaults

by % payment reduction

___________________________Note: Left chart selects 90-110 CLTV loans 2005-2007 vintage subprime loans modified from delinquent state in Q3

08.

Right chart shows re-defaults for 90-110 CLTV 2005-2007 vintage subprime loans with 20% payment reduction modified in Q3 03.

Source: LoanPerformance, Barclays Capital

Redefaults

by

months delinquent at time of mod

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6 7 8 9 10

Months since modification

0

1-2

3-4

5-8

Cum Delinquency

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Months since modification

Cum

Delinquency

0-10

10-20

20-30

30-40

40-50



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Distressed sales distort seasonal patterns

___________________________Note: As of December remittance. Source: LoanPerformance, Barclays Capital

0%

2%

4%

6%

8%

10%

12%

Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09

P c t o f H o u s i n g S t o c k

Distressed Voluntary TotalDistressed Share % (NSA)

0%

10%

20%

30%

40%

50%

60%

Jan-06 Jan-07 Jan-08 Jan-09

Voluntary sales exhibit seasonality… … So does the distressed share of EHS

•

The push to qualify for the tax incentive likely boosted voluntary sales in Oct and Nov, retarding theusual winter increase in distressed share.

•

A lull in voluntary demand should help restore the expected winter rise in distressed share.



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Housing model: Seasonal factors

Abnormal seasonals

across states

___________________________Source: First American Core Logic’s LoanPerformance HPI, Barclays Capital

-20

-15

-10

-5

0

5

10

15

20

25

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

ALL - DX (3m avg)Individual states Aggregate



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

The foreclosure pipeline

___________________________ As of December 1, 2009. Source: LoanPerformance, Barclays Capital

331,000

135,000

103,000

Foreclosure Bucket

118,000

REO Bucket

2.8mn loans

0.66mn

homes

Current > 30d > 60d > 90+ > Fcl

> REO > liquidated



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Distressed inventory and sales

___________________________Note: As of November remittance. Source: National Association of

Realtors, Census Bureau, LoanPerformance, Barclays Capital

0

100

200

300400

500

600

700

800

900

May

05

Feb

06

Nov

06

Aug

07

May

08

Feb

09

Nov

09

R E O S t o c k , T h o u s a n d s

0%

5%

10%

15%

20%

25%

30%

%

o f R

E O s t o c k

REO StockREO InfluxREO Outflux

Distressed inventories rose in November



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Foreclosure moratoria reduce supply…

___________________________Note: As of November remittance. Source: LoanPerformance, Barclays Capital

Foreclosure-to-REO roll rates have fallen since HAMP

0%

2%

4%

6%

8%

10%

12%

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

ALTA PRIME SUBPRIME



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

The answer is in the pipeline

Sector

No. Mtges

(000s)

Delinquent

(000s)

Foreclosure

(000s)

Alt-A 4,441 514 545 Subprime 8,087 1,654 1,237

Prime 4,404 143 142

Agency 40,274 875 865

Total 57,207 3,186 2,789

Current pipeline snapshot –

primary market

___________________________Source: LoanPerformance, Barclays Capital

Estimated new distressed homes

Year Model

12mo 2,235

24mo 2,083

36mo 1,555



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

National REO stock should peak in Q2 10

___________________________Source: Barclays Capital

We project 8% remaining depreciation, nationwide.

-

100

200

300

400

500

600

700

800

900

1,000

Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13

R E O I n v e n t o r y ( 0 0 0 s )

Optimistic

Base

Stress



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Regional model: Explanatory variables

CA REO inventory

___________________________Source: LoanPerformance, First American Core Logic’s LoanPerformance HPI, Barclays Capital

CA Change in REO

-50

-40

-30

-20

-10

0

10

20

30


HPA (nsaar)

0.0

0.4

0.8

1.2

1.6

2.0

HPA REO

REO as %stock

-50

-40

-30

-20

-10

0

10

20

30


HPA (nsaar)

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

HPA REO chg

REO change



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Regional model: Explanatory variables

Interest rate attractiveness

___________________________Source: Bureau of Labor Statistics, Bloomberg, First American Core Logic’s LoanPerformance HPI, Barclays Capital

Change in unemployment rate

-50

-40

-30

-20

-10

0

10

20

30


HPA (nsaar)

-100

-50

0

50

100

150

200

HPA RA RA no incentive

Adj Rate Attractiveness

-50

-40

-30

-20

-10

0

10

20

30


HPA (nsaar)

-1.5

-1

-0.5

0

0.5

11.5

2

2.5

3

HPA Une chg

Une ch



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Housing model: HPI projections

85

87

89

91

93

95

97

99

101

103

105

Nov-09 Nov-10 Nov-11 Nov-12

HPI

Delayed base

optimistic stress

Projected remaining depreciation


US aggregate HPI

State Stress Base Optimistic

AZ 22.0 17.3 6.2

CA 22.7 15.3 7.0

FL 22.4 12.2 2.2

IL 13.8 10.8 2.7

MI 24.9 19.4 16.0

NV 34.5 30.4 27.3

NY 13.4 6.0 0.2

OH 7.2 4.9 0.5

PA 1.7 1.7 -



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

600

620

640

660680

700

720

740

760

780

Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09

FICO

5%

10%

15%

20%

25%

30%

35%

40%

%LTV>80

FICO (FHLMC) FICO (FHA) Pct with LTV>80

Mortgage credit is limited

Agency underwriting has tightened…

___________________________Source: HUD, Freddie Mac, Barclays Capital

…cutting off credit to low FICO borrowers

0%

2%

4%

6%

8%

10%

12%

14%

16%

600 640 680 720 760 >800

FICO

2007 2009



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Model Intuition: California

Components of HPI forecast


Risk from shadow inventory

Variable HPA contributionLong-term norm 4.2

Une declines by 1.4% 1

tax incentive/rates 6.3

Suppressive effect from REO inventory -16.5

Effect from change in REO -6

Total -11

Seasonality -4.3

Projected remaining -15.3

100bp sell-off -6

Flat demand -10New fcl moratorium 6 to 13.8

Risks

000's of homes %stock

REO 95 1.1

FCL 335 3.9

90+ 344 4

60d 77.4 0.9

Total 851 9.9

Historical 222 2.6

Assumed 294 3.4

000's of new REO HPA effect

Hist Demand 113 -16.4

Assumed Demand 41 -6.0

Delinquency pipeline

Annual Distressed Demand

Net new REO if all Fcl hits in one year



2010 GLOBAL MARKETS

OUTLOOK CONFERENCE

Outlook

Risks to our view

•Further government intervention is probable, and a new modification program could entail

additional delays in REO resolution.

•Unless mortgage credit begins to expand, rank-and-file home buyers will have difficulty funding

purchases. Our stress scenario projects 14% remaining depreciation.•Soaring confidence could boost demand beyond our expectations, in which case housing may

have already bottomed. But prolonged weight from distressed inventories could render such a

recovery vulnerable to future shocks or liquidity withdrawal.

•Shadow inventory has not been eliminated, only delayed.

•Our regional housing model supports 8% remaining decline in CS/S&P national HPI, corresponding

to 34% peak-to-trough.

•Timing is uncertain, but continued foreclosure paralysis may well push the bottom to Q2 11.

8% Remaining depreciation

Barclays 2010 Global Market Outlook Conferece

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