FannieMae Economic & Mortgage Dev. Report 7/18/07

The report does not look great but does predict an improvement in 2008. Many problems are linked to subprime lending practices. Do you feel that the spate of subprime loans will have a long term effect or any effect on the market in the coming year?

Economic & Mortgage

Market Developments

July 18, 2007

Overview:

• Concerns about the credit quality of the subprime mortgage sector

have pushed spreads in that area up to record highs. Thus far there

are no real signs of contagion into the rest of the economy, and

overall economic growth accelerated modestly in the second quarter.

• Housing activity weakened further in May, with unsold inventories

remaining near record highs. Moreover, several of the leading

indicators of home sales suggest further weakness.

• There was no change in monetary policy at the most recent FOMC

meeting, as expected. Long-term interest rates have edged down

recently, however, but this likely stems from a modest flight to quality

in response to problems in the subprime mortgage sector.

• The latest data on mortgage delinquencies from the MBA show that

the share of troubled loans rose in the first quarter of 2007 - with the

increase most apparent in the subprime market.

• Core inflation continues to edge down, but there are concerns that

ongoing increases in food and energy prices could spill over into

the core rate.

• Economic growth is projected to stay a bit below trend in 2007

(after a small bounce in the second quarter) in response to past Fed

tightening, high energy costs, and the slowing housing market.

• We expect no change in policy by the Fed this year (but perhaps

some easing in 2008), with long-term interest rates little changed.

• Home sales are projected to fall further in 2007. National home

price appreciation is likely to move modestly negative this year.

• Mortgage originations and MDO growth are forecast to decline

again in 2007, with a large drop in purchase originations.

David W. Berson, David Kogut, and Molly R. Boesel Economics and Mortgage Market Analysis