Mortgage Finance
SECTOR REVIEW
Weak Job Market Compounds Housing
Problems
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Treasury’s plan to purchase of Agency MBS/Debt significantly compressed
mortgage spreads and lowered mortgage rates. Thirty year conforming fixed rate
mortgage yields have plummeted to 4.49% (from 5.760% year ago) spurring a
spike in refinance application activity. These loans generally require a 20% down
payment. However, yields for FHA loans with 3% down payment are 100 bps
higher at 5.52 %( from 5.760% year ago). Similarly eligibility and availability of
non-agency jumbo mortgages remains tight. Purchase activity faces headwinds
from deteriorating job market/consumer confidence and expectations of further
home price decline. However increase in Refinance activity could be a catalyst
for housing activity and turnover. Policy changes that could allow for refinancing
above 80% LTV could significantly enhance 2009 originations.( see Exhibit 1 )
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While policy mandated delays have slowed the pace of Foreclosure (“FC”) starts;
over 1.6 million home FC/ REO inventory and forced sales continues to exert
downward price pressure. The October reading of home prices measured by
OFHEO decreased 7.5% year over year (and down 6.1% in Q3) while Case
Schiller’s 20 city index fell 22% year over year. (see pages 6-7)

Future housing market performance hinges on 1) mortgage rates 2) eligibility and demand
for housing credit 2) employment outlook and 4) success of loan modification/ foreclosure
mitigation programs. In regions with steep home price decline, the key unknown variable for
these programs continues to be the size and response of 1) investor properties and
2) borrowers with inaccurately stated incomes. Lower debt to income ratios and requirement
of significant cash down payments will curtail homebuyers from bidding up home prices
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We would expect that the GSEs will be used as a “policy tool” to increase mortgage credit at
least through the duration of this crisis, which should allow for broadening of standards.
However, home equity loans and cash out refis are not expected to be a source of liquidity
to homeowners.
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Performance deteriorated across Sub-prime; Alt-A and Prime segments with rising
delinquencies/default rates/ loss severities (See Page 23). Although ABS/RMBS/CMBS
security prices remain depressed, non-agency jumbo loans have recovered from their
recent lows Rising credit costs; reduced liquidity; dilutive capital and concerns about
business growth in a deleveraging environment keep the stock valuations at lows.
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Our 2009 origination forecast is $1.75 trillion with $1 trillion or 58% coming from refinance
activity and the balance from purchase. Our forecast is subject to variations that may be
caused by public policy measures. As noted above loosenning of LTV requirements could
cause a significant amount of refinance activity, therby exceeding our forecast.

Table of contents
Mortgage Market Overview 4
Housing Market Trends 6
Primary Mortgage Market Trends 19
Industry Credit Trends 23
Secondary Mortgage Market Trends 25
Fannie Mae 31
FirstFed Financial 33
Freddie Mac 34
Hudson City Bancorp 35
Performance 38
Valuation 40