ECONOMIC FOCUS

Volume 15, Issue 06 For the week of February 14, 2011 Future Of The Mortgage Finance System Mark Zandi, chief economist for Moody's Dismal Scientist has published his vision of mortgage finance reform. Here are excerpts from the report: Nationalization vs. Privatization "Maintaining the federal government’s current domination of the mortgage finance system is one approach. Fannie and Freddie could be put into receivership, and their activities subsumed into the federal government. Permanently nationalizing the system in this way would ensure that mortgage lending is not disrupted in bad times, but the cost to taxpayers could be enormous if the system is not well managed. There is also a reasonable concern that government would stifle innovation, preventing the development of mortgage products that could more efficiently meet borrowers' needs." "At the other end of the spectrum is complete privatization of the mortgage finance system. The federal government would still regulate, but Fannie and Freddie would be downsized and their activities restricted. Some form of private-label securitization would have to be revived." Goodbye To The 30-Year Mortgage "A private system would also likely mean the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing finance. A privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate mortgages. Based on the experience overseas, the fixed-rate share in the U.S. would decline to an average of between 10% and 20% of the mortgage market compared with a historical average of closer to 75%." Create Catastrophic Insurance "Catastrophic insurance would be provided on mortgage securities only after major losses, much as the FDIC insures bank deposits. The FDIC ended runs by scared depositors on U.S. banks during the Great Depression. Catastrophic mortgage insurance would eliminate runs by scared investors on the global financial system such as those that sent the economy reeling in 2007 and 2008, precipitating the Great Recession." Mortgage rates would be higher "In a hybrid system, mortgage rates would be higher than they were before the housing crisis, but only because the previous system was undercapitalized...mortgage rates would be approximately 30 basis points higher." Reform Is Imperative "Given the fragile states of the U.S. housing market and economy, a transition from the current nationalized mortgage system to a hybrid system will take years and raise many issues, but these will be manageable. Given the expertise they have acquired over the past several decades, the downsized Fannie and Freddie could become federal catastrophic insurers. The transition would also involve establishing institutions and an infrastructure necessary to attract private capital." Key Economic Reports Released This Week RELEASE DATE ECONOMIC INDICATORS RELEASED BY CONSENSUS Wt. INFLUENCE ON INTEREST RATES Mon 02/14 1:00 pm et Weekly Bill Auction Dept. of the Treasury N/A **  If strong demand  If weak demand Tue 02/15 8:30 am et Retail Sales for January '11 Bureau of the Census Dept. of Commerce 0.5% x-atos 0.5% ****  If a! bove consensus  If below consensus Tue 02/15 8:30 am et Empire State Mfg Survey for February '11 Bureau of the Census Dept. of Commerce 13.0% *  If abov! e consensus  If below consensus Tue 02/15 8:30 am et Import & Export Prices for January '11 Bur. of Labor Statistics Department of Labor ImPrice 0.9% *  If above consensus  If below consensus Tue 02/15 10:00 am et Business Inventories for December '10 Bureau of the Census Dept. of Commerce 0.7% *  If above consensus  If below consensus Tue 02/15 10:00 am et NAHB Housing Index for February '11 National Association of Home Builders 16 ** Undetermined Wed 02/16 7:00 am et MBA Mtg Apps Survey for week ending 02/11 Mortgage Bankers Association of America N/A * Undetermined Wed 02/16 8:30 am et Producer Price Index for January '11 Bur. of Labor Statistics Department of Labor 0.9% core 0.3% ***  If above consensus  If below consensus Wed 02/16 8:30 am et Housing Starts/Permits for January '11 Bureau of the Census Dept. of Commerce 530k ***  If above consensus  If below consensus Wed 02/16 9:15 am et Industrial Prod/Utilization for January '11 Federal Reserve Board IP 0.5% CU 76.4% ***  If above consensus  If below consensus Wed 02/16 2:00 pm et FOMC Meetings for 01/25-26 meeting Federal Reserve Board FOMC N/A **** Determines Policy Thu 02/17 8:30 am et Jobless Claims for week ending 02/12 Bur. of Labor Statistics Department of Labor 410k *  If above consensus  If below consensus Thu 02/17 8:30 am et Consumer Price Index for January '11 Bur. of Labor Statistics Department of Labor 0.3% core 0.1% ***  If above consensus  If below consensus Thu 02/17 10:00 am et Leading Economic Indicators for January '11 Bur. of Econ. Analysis Dept. of Commerce 0.3% ***  If! above consensus  If below consensus Thu 01/17 10:00 am et Philadelphia Fed Survey for February ' 11 Federal Reserve Board 20.0% ** Undetermined * Low Importance ** Moderate Importance *** Important **** Very Important

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