The Changing Landscape of Mortgage Servicing Moderator Panelists

The Changing Landscape of Mortgage Servicing Moderator: Panelists: Sheryl Krocek, U. S. Bank Scott Schmitt, U. S. Bank Ansel Caine, Caine Mitter Friday, April 5 th 2013

The New MLS Landscape How did we get here? National HFA-MRB Servicers 2006 2011 Today / 2013 2

The New MLS Landscape How did we get here? Scary: Declining Servicing Values Scarier: Increasing Foreclosue and Repurchase Volume Scariest: QM, QRM, Dodd-Frank and Basel III 3

The Decision Makers! OCC Regulations! HUD Regulations! GSE Guidelines and Repurchase Requests! 4

Regulations § MDIA > Confirm early TIL disclosed to borrower 3 days from application, verify APR not increased greater than. 125 § RESPA > Confirm Initial and Final GFE § High Priced – FFIEC Verify lock date, apr, and term which calculates rate spread of loan. § High Cost > Run multiple tests to ensure borrower fees not excessive § Regulations / Form Changes Programs Changes Credit Score / DTI Changes TBA Programs 5

sk The fun never stops! Re-Purchase & MI Rescissions Requirements of Dodd-Frank & Basil III Changing Value of Servicing 6

Changing Servicing Values Cost of Servicing Loss Mitigation, Basel III, Dodd-Frank, etc… Fixed vs. Market Adjusted Ability to Adapt to Market 7

THE CHANGING LANDSCAPE FOR MORTGAGE SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA Ansel Caine Friday, April 5, 2013 8

Topics § MBS Secondary Market / TBA Overview § Adjusting Servicing for Secondary Market Execution § Working with a Master Servicer for Best Execution 9

Traditional Mortgage Revenue Bond Model is Broken Traditional Relationship 7 Inverted Relationship 30 yr Traditional MRB (Non-AMT) 6 5 % 30 yr Traditional MRB (AMT) 4 GNMA MBS 3 2 1 6. 22. 07 NIBP Bond Date of Lehman Bankruptcy 8. 16. 08 10. 11. 09 12. 6. 10 1. 31. 12 3. 27. 13 10

MBS Secondary Market is Highly Liquid U. S Fixed Income Securities Outstanding (12/31/12) Average Daily Trading Volume (2013) Billions Other ($8, 757) 23% Billions Corporate Debt ($20) 2% U. S. Treasury ($10, 921) 28% Municipal ($11) 1% Other ($15) 2% Agency MBS ($272) 31% Municipal ($3, 715) 10% Agency MBS ($5, 657) 15% Corporate Debt ($9, 088) 24% U. S. Treasury ($554) 64% 11

MBS Secondary Market Sale Economics § Liquidity and transparency of MBS market allows for daily rate setting § MBS sale example – Assumes government loan with 3. 75% mortgage, no points and 3. 0% down payment assistance GNMA sale price (1) 107. 0 Less cost of GNMA (2) - 105. 0 Value of Servicing (3) + Net income 0. 9 2. 9 (1) As of April 2, 2013 (2) Purchase price of mortgage loan, down payment assistance, origination fees and service release premiums, if appropriate (3) Present value of 0. 19% servicing cash flows at 250% PSA and 5% discount rate 12

Origination Period Creates Interest Rate Risk 105 GNMA PRICE 103 101 Market Risk 99 97 DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES ORIGINATION DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED WAREHOUSE 13

Selling TBA Forward Hedges Market Risk 105 GNMA PRICE 103 HFA sells TBA and locks in price 101 Market Risk Eliminated 99 97 DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES ORIGINATION DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED WAREHOUSE 14

TBA Allows HFA to Sell MBS Forward What is TBA? § TBA is an agreement to deliver an Agency MBS on an agreed upon future date for an agreed upon price Why is it called TBA? § In a TBA trade, only price, settlement date, type, amount and interest rate are specified; all other characteristics are “To Be Announced” How does TBA trade? § Most major broker/dealer firms have a mortgage desk that will bid on standard TBA § Most trades are done on a competitive basis 15

Adjusting Servicing for Secondary Market Sales § MBSs trade best when the pass-through rate is a multiple of 0. 50% § Flexible servicing fees allows for the creation of MBS on the half coupon, even if mortgage rates are not 0. 315% Servicing 3. 875% 3. 500% FHA Mortgage GNMA 0. 060% Guarantee Fee § Sample servicing fees for various government loan rates Mortgage rate 4. 000 3. 875 3. 750 3. 625 3. 500 Servicing fee 0. 440 0. 315 0. 190 0. 565 0. 440 Guarantee fee 0. 060 Pass through rate 3. 500 3. 000 16

Servicing Fee Affects Overall MBS Value Gross Value of GNMA MBS to HFA at Various Mortgage Rates 12, 00 10, 00 8, 00 Value of MBS Over Par 6, 00 4, 00 2, 00 0, 00 Mortgage Rate 3. 250 3. 375 3. 500 3. 625 3. 750 3. 875 4. 000 4. 125 4. 250 4. 375 4. 500 Servicing Fee 0. 190 0. 315 0. 440 0. 565 0. 190 0. 315 0. 440 Pass-Through 3. 000 3. 500 4. 000 Servicing Value* MBS Premium *Servicing Value calculated at 250% PSA and 5% discount rate 17

Composition of MBS Affects Value and Financing Options § § § TBA eligibility Mortgage Revenue Bond eligibility Investors “pay up” for certain MBS characteristics, including: – Maximum loan balance – – § CRA credit – LTV – FICO Issuance date Example of pay-ups for low loan balance pools: Maximum Loan Balance Winning Bid Pool Type Pool Amount GNMA I 4. 00% 1, 645, 279 83, 460 110. 94 GNMA I 4. 00% 2, 081, 961 103, 981 110. 75 GNMA I 4. 00% 1, 728, 763 137, 071 110. 59 GNMA I 4. 00% 1, 077, 594 173, 764 110. 41 18

Sample Monthly Cycle for Creating Pools for TBA S 7 14 21 28 M 1 8 15 22 29 T 2 9 16 23 30 April W 3 10 17 24 T 4 11 18 25 F 5 12 19 26 S 6 13 20 27 § Sample April calendar: – April 3: Cut off for loan purchases – April 4: Pool optimization determined – April 10: Notification of delivery published – April 15: HFA purchases MBSs – April 16: HFA notifies TBA counterparty of delivery – April 18: TBA trade is settled 19

Ansel Caine Mitter & Associates Incorporated (212) 686 - 8820 acaine@cainemitter. com 279 Fifth Avenue Fourth Floor New York, NY 10016 20

TBA Issues for Servicers § Multiple Pricing Options § Frequent Price Adjustments § Delivery timelines § Loan Lock Extensions 21

TBA – Multiple SRP’s Sample Ginnie Mae Note Rate 3. 500% 3. 625% 3. 750% 3. 875% G-Fee 0. 060% Servicing Fee 0. 440% 0. 565% 0. 190% 0. 315% Pass-Thru 3. 000% 3. 500% 22

Challenges Current & Future 23