Laurie Goodman, Analyst, Amherst Securities Group Lp

AUGUST 4, 2011

SPEAKERS: TOM KEENE, BLOOMBERG SURVEILLANCE HOST

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST

LAURIE GOODMAN, ANALYST, AMHERST SECURITIES GROUP LP

8:03

TOM KEENE, BLOOMBERG SURVEILLANCE HOST: One of our authorities on Fannie and Freddie and considered an animal over at Fannie Mae, Laurie Goodman. Laurie, good morning.

LAURIE GOODMAN, ANALYST, AMHERST SECURITIES GROUP LP: Good morning. How are you doing?

KEENE: Well, good. Thrilled to have you on. Since the last time we've had you on, is there any more clarity to our agencies than there was six months or a year ago?

GOODMAN: No, there is not. I think it is going to be a very, very - years and years of discussion. My bottom line is that there is no shot that anything happens in terms of GSE reform for years and years and years.

The way I see it, basically the fact that the Treasury was unable to put forward a single strong option, but rather had three options when they came out with their reform paper in February suggests no legislation in 2011 or in 2012. That means the earliest we could conceivably get legislation is 2013, after the election.

KEENE: Right.

GOODMAN: You rarely see legislation the first year after an election. So let's say you get legislation in 2014, which I think is the earliest it can happen. And let's say the legislation is we are going to have a lot of little securitizers.

KEENE: Right.

GOODMAN: It is going to take two years to write the rules as to how you are going to be licensed as a securitizer, how you are going to price the catastrophic risk guarantee from the government, and then another year for implementation. So you are looking at 2017 at the earliest.

KEENE: One more question on this. Have you calculated the cost to taxpayers of our well intentioned inability to confront this mess?

GOODMAN: I actually think that the cost isn't to taxpayers. That is, when you look at Fannie and Freddie's new book of business, it is absolutely pristine. Last year, the average Freddie loan was a 762 FICO 67 percent LTV.

KEENE: Wow.

GOODMAN: So just extremely high quality origination. The cost we are all paying is actually going to be in terms of the housing market decline because basically Freddie and Fannie are currently restricting credit availability so much, as are the banks, that what you are only getting is pristine loans so that there is not enough demand to absorb the huge supply of homes.

KEENE: Yes. You have fantastic research on this. Folks, again, we protect the copyright of our research analysts. Do not email me - the 50 of you - for Ms. Goodman's Amherst Securities research. We won't send it out.

Laurie, how broken is the housing market.

GOODMAN: The housing market is very, very broken. We figured - you know, beyond reasonable circumstances, about 10.4 million units that are going to have to liquidate before this crisis is over.

That includes non-performing loans. That includes re-performing loans that are eventually going to default and be liquidated. And that includes always performing loans that are under water that are also likely to default. So 10.4 million units, we don't have the demand to absorb it.

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST: How does that translate into years?

GOODMAN: We figure it is going to work its way out over the next six years or so - five, six years -

PREWITT: Six years?

GOODMAN: - it's going to be. It is going to be a very long time. I mean home prices may hit their bottom sometime next year, but you are not going to go up. You are going to have a long period of flat.

Meanwhile, what is going to have to happen over time, you don't have enough home owners to absorb the overhang of homes. There has to be put in for homeowners to absorb the overhang of homes. It as to be liquidated with the tight standards.

These homes are going to have to gravitate to investors. And over time, you are going to see basically single family homes as an asset class that is going to be rented out.

PREWITT: Well, if it drags on another six years, that is going to add up to about a decade, right?

GOODMAN: Yes.

PREWITT: Yes.

KEENE: Laurie, you do exquisite research on this, and I am honored to ask you this question. Many are talking about a disaggregated housing market where we can parse the housing market into a quality area, a non- distressed area, and then we can parse a garbage area, a distressed area - a two part housing economy. Do you do that? Or do you look in the aggregate?

GOODMAN: We do both.