Federal Home Loan Bank of Chicago Best Execution Federal Home Loan Bank of Chicago Comparing MPF® Pricing to Other Alternatives January 17, 2008 Page 1
Best Execution After an institution has committed to making residential mortgage loans it has two choices: Hold the loans Sell the loans This presentation focuses on evaluating the economics of the sales alternatives Page 2
Q: How do I maximize my return on a loan sale? Best Execution Q: How do I maximize my return on a loan sale? A: Perform a best execution analysis Page 3
Mortgage Servicing Rights Best Execution Mortgage Servicing Rights Best execution analysis To whom do I sell? What is my true economic sales price? Cash today plus expected future cash flow Page 4
Mortgage Servicing Rights Best Execution Mortgage Servicing Rights To whom do I sell? FHLB Fannie Mae Freddie Mac Correspondent Page 5
What are the true economics? Best Execution What are the true economics? Upfront cash Cash price Loan level additions / deductions Servicing released premium (SRP) Future cash flow (expressed in present value) Value of retained servicing Value of credit enhancement fee (MPF program) Value of credit enhancement obligation (MPF program) Estimate of SRP recapture Slide 6
Upfront Cash Pricing Components Best Execution Upfront Cash Pricing Components Interest rate Lock length Type of commitment – mandatory versus best efforts Other adjustments Slide 7
Best Execution Best Execution Upfront Cash Pricing Comparison December 31, 2007 Slide 8
Mortgage Servicing Rights Best Execution Mortgage Servicing Rights Common mistakes in performing a best execution analysis Ignoring future cash flows Servicing retained vs. servicing released Credit enhancement fees Float value Not adjusting for lock period day differences Ignoring transaction fees and loan sale price deductions Page 9
Mandatory Versus Best Efforts Best Execution Mandatory Versus Best Efforts Better price More control More risk – fallout risk – estimation of fallout Slide 10
Factors affecting fallout Best Execution Factors affecting fallout Market interest rates Type of origination Length of lock Purpose of loan Type of loan Processing status of loan Slide 11
Mandatory versus Best Efforts Break-Even Analysis Best Execution Mandatory versus Best Efforts Break-Even Analysis Slide 12
Use position & mark-to-market reports to manage mandatory positions Best Execution Secondary Marketing Use position & mark-to-market reports to manage mandatory positions Page 13
Future cash flow – retained servicing valuation components Best Execution Future cash flow – retained servicing valuation components Servicing fee percentage – varies by investor and type of loan Ancillary income Expected loan life – prepayment Payment and prepayment float Discount rate Costs to service – market costs Delinquency rate and foreclosure losses – recourse versus non-recourse Page 14
Servicing Fee Receivable Yield Curve Best Execution Best Execution Servicing Fee Receivable Yield Curve Slide 15
Remittance methods Actual / Actual Scheduled / Scheduled Combination Best Execution Remittance methods Actual / Actual Scheduled / Scheduled Combination Value of “Float” Page 16
Mortgage Servicing Rights Best Execution Mortgage Servicing Rights MPF Basics Slide 17
credit enhancement fee Best Execution Future cash flow - MPF credit enhancement fee Paid to member for assuming credit risk (credit obligation) on mortgage defaults Determined by the quality of the loans at the pool level, the MPF program selected and the performance of the loans Sensitive to prepayments Page 18
Future cash flow - credit enhancement obligation variables Best Execution Future cash flow - credit enhancement obligation variables Cumulative prepayment rate (CPR) Cumulative default rate (CDR) Severity of actual losses First loss account Obligation cap % Page 19
Best Execution Future cash flows Slide 20
Best Execution Future cash flows Slide 21
CE Fee Receivable Yield Curve Best Execution Best Execution CE Fee Receivable Yield Curve Slide 22
Best Execution Best Execution Best Execution Slide 23
Background on Wilary Winn LLC Best Execution Background on Wilary Winn LLC Wilary Winn provides independent, fee-based advice to financial intermediaries, including banks, credit unions, finance companies, and mortgage bankers. Our services include assessments and valuation of complex financial assets, including mortgage servicing rights and credit enhancement fees receivable, as well as the development and implementation of interest rate risk management programs. Page 24
First National Bank Building 332 Minnesota Street, Suite W-2062 Best Execution Wilary Winn LLC First National Bank Building 332 Minnesota Street, Suite W-2062 St. Paul, MN 55101 651-224-1200 Douglas Winn dwinn@wilwinn.com Eric Nokken enokken@wilwinn.com Page 25