Mortgage Meltdown:Mortgage Meltdown:The Saga Continues

Jason HendersonVice President and Branch ExecutiveFederal Reserve Bank of Kansas City

O h B hOmaha Branchwww.kansascityfed.org

December 4, 2008

The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

The U.S. economy is in recession.

Real GDP Growth

4 0

5.0

4 0

5.0Annualized percent change from previous quarter

Blue Chip ForecastAugust 2008

2.0

3.0

4.0

2.0

3.0

4.0August 2008November 2008

-1 0

0.0

1.0

-1 0

0.0

1.0

-3.0

-2.0

-1.0

-3.0

-2.0

-1.0

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

2007 2008 2009Source: Bureau of Economic Analysis and Blue Chip Economic Indicators

Aggregate demand will need to rebound.

Personal Consumption Expenditures

4.05.0

4.05.0

Annualized percent change from previous quarter

Blue Chip ForecastAugust 2008

1 02.03.04.0

1 02.03.04.0August 2008

November 2008

2 0-1.00.01.0

2 0-1.00.01.0

-4.0-3.0-2.0

-4.0-3.0-2.0

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

2007 2008 2009Source: Bureau of Economic Analysis and Blue Chip Economic Indicators

Will World Growth Rebound as Expected?

World GDP Growth

8

9

8

9Annual Percent Change

Emerging and Developing Countries

5

6

7

5

6

7

World

3

4

5

3

4

5World

0

1

2

0

1

2

Advanced Countries

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: International Monetary Fund, October 2008

Total Employment Growth(October 2007 to October 2008)(October 2007 to October 2008)

1 0% to 3 0% 0 4 to 0% 1 1% to 3 3%

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

-1.0% to -3.0%-0.5% to -0.9%

-0.4 to 0%0.1% to 1.0%

Source: BLS

1.1% to 3.3%

U.S. Single-Family Home Price Appreciation(Percent change 2007:Q1 to 2008:Q3)(Percent change 2007:Q1 to 2008:Q3)

5 1% or more 0 to 2 4% 5 1% or more

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

-5.1% or more-5.0% to 0

0 to 2.4%2.5% to 5%

Source: OFHEO

5.1% or more

Rural areas are fairing better than their metro peerstheir metro peers.

Metro and Non-Metro Employment Growth

2.5

3.0

2.5

3.0Annual Percent Change (three month moving average)

1.5

2.0

2.5

1.5

2.0

2.5

Metro

0.5

1.0

0.5

1.0Non-Metro

-0.5

0.0

-0.5

0.0

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

-1.0Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08

-1.0

Source: BLS

Rural Home Price Appreciation since Q1:2007(Existing Single-Family Homes)(Existing Single Family Homes)

5 1% or more 0 to 2 4% 5 1% or more

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

-5.1% or more-5.0% to 0

0 to 2.4%2.5% to 5%

Source: OFHEO

5.1% or more

Rural areas have fewer foreclosures and are further along in resetsare further along in resets.

Subprime ARM Loans(as of April 2008)Percent

Total Subprime Loans(as of April 2008) Percent

8

9

10

50

60Percent Percent

Non-Metro

5

6

7

30

40Metro

Non-Metro

Metro

3

4

5

20

30

0

1

2

C tl i 90 D0

10

Al d 0 11 12 23 24

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

Currently inForeclosure

90+ DaysDelinquent

AlreadyReset

0-11months

12-23months

24+months

Source: Federal Reserve Board of Governors

Falling Asset Prices and High Debt Levels are a Recipe for Bankruptcyare a Recipe for Bankruptcy.

Domestic Business Debt Outstanding

120 120Percent of GDP

Financial Business

80

100

80

100Households

40

60

40

60

Nonfinancial

20 20

Nonfinancial Business

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

01956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

0

Source: Federal Reserve Board of Governors

Financial market stress remains elevated.

LIBOR-OIS Spread

300

350

300

350

1 month3 month

Basis Points

200

250

200

250

3 month

100

150

100

150

0

50

0

50

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA

Feb-07 Jun-07 Sep-07 Jan-08 Apr-08 Aug-08 Oct-08 Nov-08 Dec-08

Source: Federal Reserve Board of Governors

Federal Reserve Bank of Kansas CityO h B hOmaha Branch

Presentation available atwww.kansascityfed.org/omaha

FEDERAL RESERVE BANK OF KANSAS CITYRegional, Public, and Community AffairsPhotos courtesy of USDA