The Global Role and Status of GSE Debt

The Global Role and Status of GSE Debt Doug Duncan Chief Economist Fannie Mae March 8, 2018

Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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Establishing the Context

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Outstanding Global General Government Debt* Outstanding Government Debt, ($Billions, 2016)

Total: $63.1 Trillion $14,043

United States $20,171 32%

$1,310 $1,330 $1,450 $1,620 $2,040 $2,100

$11,590 18%

$2,440

Japan

$2,450 $2,556

United States

Japan

Italy

Germany

France

United Kingdom

China

Canada

Brazil

Spain

India

Rest of World

*Includes both national and subnational government entities, as well as intragovernmental holdings Source: International Monetary Fund

Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Total Outstanding US Debt Outstanding Securities and Whole Loans By Type* ($Billions, Q3 2017) $616

Single-Family Home Mortgages

$2,516

Securities: $42.4 trillion

$3,526

Non-Securitized Loans: $17.3 trillion

$3,716

$16,231

US Treasuries

US Treasury securities Corporate bonds GSE MBS and Agency Backed Secutities Municipal securities Domestic Liabilty of Foreign Issued Debt

$6,894

Private Asset Backed Securities Commercial paper Business Loans and Other Loans and Advances

$982

Consumer Loans (Not Securitized)

$1,117

$8,789

$2,704

Corporate Bonds $3,803

Municipal Securities

Single Family Home Mortgages Loans (Not Securitized) Commercial Real Estate and Farm Mortgages (Not Securitized) Multifamily Residential Mortgages (Not Securitized)

$8,759

GSE MBS and Agency Debt *Loans that are used to collateral for asset backed securities are shown as securities debt. Loans shown are only non-securitized loans. Loans also do not include interbank lending or central bank credit.

Source: Federal Reserve

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A Brief History of the Housing Finance Government Sponsored Enterprises

Federal Housing Administration (FHA) – 1934 Federal National Mortgage Association (Fannie Mae) – 1938

Veterans Administration (VA) Loan Guarantee – 1944 Government National Mortgage Association (Ginnie Mae) – 1968 Federal Home Loan Mortgage Corporation (Freddie Mac) – 1970 Federal Housing Finance Agency – 2008 GSE Conservatorship – 2008

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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US Housing Demographics Households (thousands) Owners Renters

2017 119,272 76,170 43,102

Homeownership Rate

63.9%

Owner Households (thousands, 2016) With Mortgages Debt Free Aggregate Owner Equity Share

75,022 47,295 27,727 58.6%

Existing Home Sales (thousands) New Homes Sales (thousands)

5,536 615

Median Existing Homs Sale Price Median New Home Sale Price

$ 245,950 $ 323,200

Purchase Mortgage Originations (billions) Refinance Originations (billions)

$ $

Source: Census Bureau, National Association of REALTORSÂŽ, Fannie Mae, Federal Reserve

1,133 698

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Securitization Status of Residential Mortgage Debt in the US

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Outstanding Securitized Residential Real Estate Debt

Single-Family Home Mortgage Debt, ($Billions) Q3 2017

Multifamily Home Mortgage Debt, ($Billions) Q3 2017

$3,526 33.5% $616 48.5% $7,012 66.5%%

Whole Loan

Securitized

Total: $10,538 Billion Source: Federal Reserve

Whole Loan

$653 51.5%

Securitized

Total: $1,269 Billion Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Securitized SF First Lien Closed End Residential Mortgage Debt Outstanding SF First Lien Securitized Debt ($ Billions), Q3 2017

$474 7%

Total: $6,935 Billion

$1,778 26%

$2,889 42%

$1,794 26%

Fannie Mae Source: Federal Reserve

Freddie Mac

Ginnie Mae

PLS Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Agency Mortgage-Backed Securities by Investor Type* MBS by Investor Type ($Billions, Q3 2017) $275

$236 $118

Other Domestic $308

Banks and Credit Unions

$445

$2,373 27.1%

Banks and Credit Unions

$445

Federal Reserve Money Market and Mutal Funds Foreign

$482

Insurance Companies Houshold Sector

Foreign

State and Federal Government (non pension)

$1,001 11.4%

Private and Public Pensions GSEs

$1,775 20.3% $1,301 14.9%

REITS Other

Federal Reserve

Money Market and Mutual Funds

*Also includes non-MBS Agency debt Securities Source: Federal Reserve

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Foreign Investor Holdings of US MBS By Country Agency MBS Holdings ($Billions, Q2 2017) $73 8.2%

Total: $888 Billion of which $382 Billion held by official institutions

Taiwan

$78 8.8%

$227 26.5%

$112 12.6%

China

Taiwan Source: US Treasury

Japan

$177 19.9%

China

Europe

$221 24.9%

Japan

Asia, Less China, Japan, Taiwan

Rest of World © 2018 Fannie Mae. Trademarks of Fannie Mae.

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Outstanding US Government Agency and GSE Debt

$Billions

Outstanding Bond Debt by Major Agency/GSE*, ($Billions) Q4 2017 $1,200

$1,034 $1,000

$800

$600

$400 $277

$317

$265

$200 $16

$25

Farmer Mac

Tenn. Valley Authority

$0 Fannie Mae

Freddie Mac

Farm Credit

Federal Home Loan Banks

*Other minor agencies not shown Source: SIFMA

Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Mortgage-Backed Securities Make Up Majority of Single-Family Residential Mortgage Debt Single-Family First Lien Closed-Ended Mortgage Debt Outstanding

$12,000

$10,000

$474 $1,808

Billions

$8,000 $1,794

$6,000

$2,889

$4,000 $516

$2,000 $2,479

$'00

'01

'02

Banks and Credit Unions

'03

'04

'05

'06

'07

'08

'09

'10

Other Whole Loan Holdings (REITS, Insurance Companies, etc)

'11

'12

Fannie Mae

'13

'14

Freddie Mac

'15

'16

Ginnie Mae

'17

PLS

*Whole loans held for investment on GSE balance sheets are included in the MBS figures Source: Federal Reserve

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Federal Reserve, Depositories Largest Holders of MBS

Trillions

Holders of Agency MBS and Other Securities* $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 '00

'01

'02

'03

'04

'05

'06

Banks and Credit Unions Federal Reserve ABS Issuers Foreign

'07

'08

'09

'10

'11

Insurance Companies Money Market and Mutal Funds REITS State and Federal Government (non pension)

'12

'13

'14

'15

'16

'17

Private and Public Pensions GSEs Other Houshold Sector

* Includes GSE debt securities and other misc. Federal government agency debt Source: Federal Reserve

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Outstanding GSE Debt Declining as Investment Portfolios Run Off

Billions

Outstanding GSE Debt ($Billions) $2,000

$1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fannie Mae

Source: SIFMA

Freddie Mac © 2018 Fannie Mae. Trademarks of Fannie Mae.

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Policy Considerations

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2017 Loan Characteristics By MBS Issuer

2017 Issuance Fannie Freddie Ginnie FHA VA Rural Development Native American

Source: MRS Data

Total Outstanding

Number of Loans (Thousands)

Origination Balance (Billions)

Avg Loan Amount

Avg. Credit Score

2,203 1,508 2,115 1,290 681 140 4

$496.3 $344.4 $443.2 $250.5 $172.2 $19.9 $0.7

$225,574 $229,631 $210,230 $194,964 $253,027 $143,169 $179,836

743 746 685 673 708 692 696

Avg Orig Rte Avg LTV

4.13% 4.12% 4.03% 4.13% 3.83% 4.06% 4.05%

74 75 94 93 94 99 93

90 Day+ Delinquent

1.24% 1.08% 1.18% 1.21% 1.06% 1.30% 1.50%

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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Single-Family Mortgage-Related Security (MRS) Issuance Market Share

by Product Type $800 $700

$600

Billions

$500 $400

$300 $200 $100 $0 Fannie Mae

Freddie Mac 2013

Ginnie Mae

Fannie Mae

Freddie Mac

Ginnie Mae

2014 30YR FRM

Source: MRS Data

Fannie Mae

Freddie Mac

Ginnie Mae

Fannie Mae

2015 20YR FRM

15YR FRM

Freddie Mac 2016

ARM

Ginnie Mae

Fannie Mae

Freddie Mac

Ginnie Mae

2017

Other © 2018 Fannie Mae. Trademarks of Fannie Mae.

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2.5%

Post-Crisis Average

Primary Spread

166 bps

166 bps

Secondary Spread

116 bps

74 bps

50 bps

92 bps

Primary-Secondary Spread

2.0%

QE3

Pre-Crisis Average

QE1

3.0%

QE2 - Treasuries only

Mortgage Market Spreads

1.5%

1.0%

0.5%

0.0% '95

'96

'97

'98

'99

'00

Primary Spread Source: Federal Reserve Board, Fannie Mae, Freddie Mac

'01

'02

'03

'04

'05

'06

Secondary Spread

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

Primary-Secondary Spread © 2018 Fannie Mae. Trademarks of Fannie Mae.

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Spread Between Mortgage Rates and 10-Year Treasuries Lowest Since 2011 Primary Spread, 30YR FRM - 10YR Treasury 3.0%

2.5%

2.0%

1.5%

1.0%

0.5% '09

'10

Source: Federal Reserve Board, Freddie Mac

'11

'12

'13

'14

'15

'16

'17

'18

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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Comparative Bond Yields Bond Yields By Security Types 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% '00

'01

'02

'03

Ten Year Treasury Source: Bloomberg

'04

'05

'06

Ginnie CCY 30 YR

'07

'08

'09

Fannie CCY 30 YR

'10

'11

'12

'13

Moodys Corporate AAA

'14

'15

'16

'17

'18

Moodys Corporate BAA © 2018 Fannie Mae. Trademarks of Fannie Mae.

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The Role of the Federal Reserve

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As Net Federal Reserve MBS Purchases Stop, Mutual Funds and Banks Have Become Largest Net Buyers Net Change in MBS Holdings by Investor Type ($Billions) $1,500

$1,000

$500

$0

-$500

-$1,000

-$1,500 '06

'07

'08

'09 Banks

'10

'11

MM and Mututual Funds

'12 Fed

REITS

'13 Foreign

'14

'15

'16

'17 Through Q3

Other

* Includes GSE debt securities and other misc. Federal government agency debt Source: Federal Reserve

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Federal Reserve Balance Sheet Composition Mostly MBS and Mid/Long Term Treasuries

Billions

Federal Reserve Balance Sheet $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 '08

'09 Treasury Bill

Source: Federal Reserve

'10

'11

Treasury Note and Bond Holdings

'12 Floating Rate

'13

'14 TIPS

'15

'16

Federal Agency Securities

'17

MBS

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Federal Reserve Is Normalizing Monetary Policy The Fed Has Stepped into the Unknown by Shrinking the Balance Sheet

$5,000

Federal Reserve Balance Sheet ($Billions)

$4,500

$4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $'03

Source: Federal Reserve

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

'19

'20

'21

'22

Š 2018 Fannie Mae. Trademarks of Fannie Mae.

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Federal Reserve Balance Sheet Composition Change in Fed Balance Sheet Between September 29, 2017 and February 22, 2018

Floating Rate 0.4% TIPS 2.6%

Agency Securities 0.1%

UST 30-Year 17.7%

Billions

Composition of Fed Balance Sheet as of February 21, 2018

Fannie MBS 19.8%

$120

$100 UST 10-Year

$80

$60 UST 7-Year

UST 30-Year UST 10-Year UST 7-Year

$40 Freddie MBS 12.3%

UST 5-Year

$20

UST 10-Year 17.3%

UST 3-Year

UST 5-Year

UST 2-Year

$Roll-off

Ginnie MBS 10.1%

UST 7-Year 12.8%

Source: Federal Reserve, Bloomberg

UST 5-Year 4.1%

UST 3-Year 1.1%

UST 2-Year 1.6%

Purchases

Fannie MBS

Freddie MBS

Ginnie MBS

UST 2-Year

UST 3-Year

UST 5-Year

UST 7-Year

UST 10-Year

UST 30-Year

TIPS

Floating Rate

Agency Securities

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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Global Expansion of Central Bank Balance Sheets Coming to a Close Change in G4 Central Bank Balance Sheets $2,400

1.0%

$1,900

1.5%

$1,400 $Billions

2.0%

$900 2.5%

$400 3.0%

-$100

-$600

3.5% '11

'13

12-month Change in G4 Central Bank Balance Sheets

'15

'17

Barclays Aggregate Yield (Inverted, Right Axis)

G4 = Federal Reserve, Bank of England, European Central Bank, Bank of Japan Source: Bloomberg, Bianco Research

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The Future

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Fannie Mae’s Connecticut Avenue Securities (CAS) Program • Since 2013, our award-winning CAS program has grown to be the premier mortgage credit risk transfer program in the industry, established through: •

Industry-leading, innovative credit-risk management methodologies

•

Thoughtful issuance approach

•

Transparent and unique investor resources

•

Maturing and liquid market

The Benchmark for U.S. mortgage credit Proprietary credit risk management tools and processes manage credit risk on the largest mortgage credit book in the industry Innovative tools that improve the loan manufacturing process

Source: Fannie Mae

A benchmark issuer with a transparent issuance calendar $27.3 billion issued since 2013 Transferring a significant portion of risk on $908B in unpaid principal balance of mortgage loans

Historical research dataset of over 36 million loans Transparent webpages detailing our comprehensive credit risk management process Loan-level disclosures Unique Data DynamicsTM tool enabling analysis of loan-level data and deal performance © 2018 Fannie Mae. Trademarks of Fannie Mae.

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Single Security Initiative Overview

The Single Security is a mortgage-backed security with common features and disclosures, each of which will be issued and guaranteed by Fannie Mae or Freddie Mac.

Products in scope are fixed-rate 30-year, 20-year, 15year and 10-year securities.

Purpose: • Strengthen the US mortgage market by expanding liquidity in the To-Be-Announced (TBA) market, thereby lowering the cost of housing finance and benefitting borrowers, taxpayers, and investors •

Reduce the trading value disparities between Fannie Mae and Freddie Mac securities and help to reduce or eliminate the cost to taxpayers of subsidizing Freddie Mac’s securitization of singlefamily mortgage loans

•

Maintain TBA eligibility – the Enterprises will work with market participants to develop a single security that is compatible with the TBA market and subject to SIFMA’s good delivery guidelines

The Single Security will be called the “Uniform MBS” or “UMBS.” Single Class re-securitizations of UMBS will be called “SupersTM”.

FHFA calls for the Single Security Initiative is planned for Q2 2019. Because forward trading in the TBA market could start in Q1 2019, market participants need to complete preparations by year-end 2018.

Source: Fannie Mae

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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Speaker Biography Douglas G. Duncan is Fannie Mae's senior vice president and chief economist. He is responsible for providing all forecasts and analyses on the economy, housing, and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry. He serves as a voting member of the Fannie Mae Finance Committee.

Under his leadership, Fannie Mae’s Economic and Strategic Research Group won the NABE Outlook Award, presented annually for the most accurate GDP and Treasury note yield forecasts, in both 2015 and 2016 – the first recipient in the award's history to capture the honor two years in a row. In addition, the Group was awarded Pulsenomics best home price forecast.

Named one of Bloomberg / BusinessWeek's 50 Most Powerful People in Real Estate, Duncan is Fannie Mae's source for information and analyses on the external business and economic environment, the implications of changes in economic environment to the company's strategy and execution, and forecasting for housing activity, demographics, overall economic activity, and mortgage market activity.

Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives, and work on the Financial Institutions Project at the U.S. Department of Agriculture.

Duncan received his Ph. D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.

© 2018 Fannie Mae. Trademarks of Fannie Mae.

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Contact Information Doug Duncan Senior Vice President & Chief Economist Fannie Mae 3900 Wisconsin Avenue, NW Mail Stop 1H-2N/01 Washington, DC 20016 (o) 202-752-0160 douglas_g_duncan@fanniemae.com Doug Duncan on Twitter @D2_Duncan Economic & Strategic Research http://fanniemae.com/portal/research-insights/research-insights-overview.html

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