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

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

Traditional Mortgage Revenue Bond Model is Broken 30yr Traditional MRB (Non-AMT) NIBP Bond GNMA MBS 30yr Traditional MRB (AMT) Traditional Relationship Inverted Relationship Date of Lehman Bankruptcy %

MBS Secondary Market is Highly Liquid U.S Fixed Income Securities

 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 (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 MBS Secondary Market Sale Economics GNMA sale price (1) Less cost of GNMA (2) Value of Servicing (3) Net income2.9

Origination Period Creates Interest Rate Risk Market Risk GNMA PRICE DAY 1: RATE IS LOCKED WAREHOUSEORIGINATION DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED

Selling TBA Forward Hedges Market Risk GNMA PRICE DAY 1: RATE IS LOCKED WAREHOUSEORIGINATION DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED Market Risk Eliminated HFA sells TBA and locks in price

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 TBA Allows HFA to Sell MBS Forward

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  Sample servicing fees for various government loan rates Mortgage rate Servicing fee Guarantee fee0.060 Pass through rate % FHA Mortgage 3.875% FHA Mortgage 3.500% GNMA 3.500% GNMA 0.315% Servicing 0.060% Guarantee Fee

Servicing Fee Affects Overall MBS Value Mortgage Rate Servicing Fee Pass-Through *Servicing Value calculated at 250% PSA and 5% discount rate

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: Pool TypePool Amount Maximum Loan BalanceWinning Bid GNMA I 4.00%1,645,27983, GNMA I 4.00%2,081,961103, GNMA I 4.00%1,728,763137, GNMA I 4.00%1,077,594173,

Sample Monthly Cycle for Creating Pools for TBA  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 April SMTWTFS

Ansel Caine Caine Mitter & Associates Incorporated (212) Fifth Avenue Fourth Floor New York, NY 10016