Freddie Mac's Chief Economist Gives 'Top Five' List

2002 was a phenomenal year for the housing and mortgage markets. Annual volume records were shattered, and mortgage credit was available in unprecedented amounts to support economic growth. Home construction and remodeling pumped money back into the economy, and refinancing either lowered families' monthly payments or enabled them to tap into home equity to support spending and personal investment. Mortgage credit was available without any bottlenecks. Last year was a testament to the housing finance system in the United States and to all the institutions and employees who are a part of it. Below are my five favorite facts about 2002 that I share with friends and family.

Fact #1: One out of 12 single-family properties were purchased in 2002.

Including condominiums, co-operatives, and 2- to 4-family homes, single-family property sales topped 7.6 million last year, a record. When compared with a single-family housing stock of about 90 million properties, that translates into 1-in-12 homes were bought and sold. This exceptional turnover rate for single-family homes underscores how easy and relatively low-cost it is to buy homes in the United States. As a comparison, only 1-in-20 homes were traded in Canada last year, even though the Canadian market enjoyed the lowest interest rates in more than 40 years.

Fact #2: Home equity grew by $500 billion in 2002.

Refinance originations totaled nearly $1.5 trillion last year, and more than 40 percent included some cash-out activity. In the conventional prime market, families used a first mortgage refinance to convert a record $90 billion of home equity into funds for home improvement, consumer spending, debt consolidation and personal investment. Even with this record volume of cash-outs, home equity still grew by $500 billion, or an average of about $7,000 for each home owned. That's important for the average family, because home equity accounts for the largest single component of a family's net wealth — about one-half. Certainly a much better return than in the stock market last year!

Fact #3: 100,000 loans were originated each day of 2002.

Mortgage originations shattered previous records and reached $2.5 trillion in 2002. Including second mortgages, that works out to about 25 million loan originations, or 100,000 per business day. This amount is five times larger in dollar volume — and about 2.5 times larger in number of loans — than during the first modern-era refinance boom in 1986. Yet mortgage lending in 1986 suffered from delays and bottlenecks in various parts of the loan origination process, since much was still done manually; consumers complained about losing their rate-locks as settlement took nine months or longer, and mortgage-to-U.S. Treasury spreads widened by over a percentage point.

The striking difference in 2002 was the lack of any significant delay in settling loans, a testament to the use of technology to reduce processing time and wring unnecessary costs out of the origination process. Just a decade ago, an underwriter spent an average of one hour to underwrite a mortgage loan. Today, Loan Prospector® can underwrite a loan in 10 seconds, and process many such applications at the same time! Automated valuation tools have also reduced the time, paperwork and cost of appraisals.

Fact #4: Freddie Mac financed a home every 1.5 seconds during 2002.

Freddie Mac shattered all purchase records by financing a record 4.2 million single-family homes and 330,000 multifamily apartments. In the time it takes you to read this article (about five minutes), Freddie Mac will have financed another 200 homes. By the time you leave work, Freddie Mac will have financed 18,000 more homes, equivalent to 7 percent of the homes in Washington, D.C. (see Exhibit 1).

Exhibit 1: Freddie Mac Financed a Home Every 1.5 Seconds During 2002 Activity Length of Time Average Number of Homes Financed by Freddie Mac Underwrite a loan with Loan Prospector® 10 seconds 7 Brush teeth 2 minutes 80 Lunch in the cafeteria 45 minutes 1,800 Drive from Washington, D.C. to Baltimore’s Camden Yards, see an O’s game, and return 6 hours 14,000 Work one day 1 day 18,000 Take a vacation 2 weeks 180,000 Note: Average number of homes financed has been rounded to two significant digits.

Fact #5: MBS trading volume surpassed $40 trillion in 2002.

The heart of the secondary market is the ability to raise funds in the capital markets with a security that is actively traded. Liquidity — the ability to sell an asset very quickly with little or no price concession — is essential to assure an active market with many investors looking to hold the asset. The liquidity of Freddie Mac's Participation Certificates (PCs) — securities backed by our mortgages — and debt enable us to raise funds in the global markets to supply cash to primary market lenders.

Freddie Mac's PC was the first mortgage-backed security (MBS) to be backed by pools of conventional loans. Summing together Freddie Mac, Fannie Mae and Ginnie Mae mortgage pass-through securities, trading volume surpassed $40 trillion in 2002, or a record $160 billion per business day! In comparison, trading of non-government-sponsored enterprise (GSE) corporate debt (with a term over one year) totaled $4.7 trillion last year. Thus, mortgage-backed security trading volume was more than eight times larger than that of non-GSE corporate debt, even though the amount of securities outstanding was approximately the same. For instance, as of the end of the third quarter last year, GSE and Ginnie Mae mortgage pass-through securities outstanding totaled $3.1 trillion, compared with about $3.3 trillion in non-GSE corporate bonds (see Exhibit 2). On average, our PCs traded once a month, while non-GSE bonds traded once every eight months.