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

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

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

GSE Guidelines and Repurchase Requests! 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

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

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

THE CHANGING LANDSCAPE FOR MORTGAGE SERVICING SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA Ansel Caine 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 Date of Lehman Bankruptcy % Their product: 2% and 4% DPA product 4% DPA most loans, 0 points Pay lenders 130+75 = 205 (origination + service release) GNMA I price Points 0 DPA 4 Sale premium today – CASH mkt price Mtge rate 4.50% SRP = 1.87 (44bps svc fee) DPA = -4 Lender fees = -2.05 Changes w prepayment speed? 4.05 – 12/8/9 Min of 10yr+.6 OR 4.05 – 9/15/10 Min of 10yr+.6 OR 3.61 – 12/31/10 End on 11/4/11 spread – 60 bps

MBS Secondary Market is Highly Liquid U.S Fixed Income Securities Their product: 2% and 4% DPA product 4% DPA most loans, 0 points Pay lenders 130+75 = 205 (origination + service release) GNMA I price Points 0 DPA 4 Sale premium today – CASH mkt price Mtge rate 4.50% SRP = 1.87 (44bps svc fee) DPA = -4 Lender fees = -2.05 Changes w prepayment speed? 4.05 – 12/8/9 Min of 10yr+.6 OR 4.05 – 9/15/10 Min of 10yr+.6 OR 3.61 – 12/31/10 End on 11/4/11 spread – 60 bps

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) + 0.9 Net income 2.9 As of April 2, 2013 Purchase price of mortgage loan, down payment assistance, origination fees and service release premiums, if appropriate Present value of 0.19% servicing cash flows at 250% PSA and 5% discount rate MBS Secondary Market Allows HFA to Continue Programs

Origination Period Creates Interest Rate Risk GNMA PRICE Market Risk MBS Secondary Market Allows HFA to Continue Programs DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE

Selling TBA Forward Hedges Market Risk GNMA PRICE HFA sells TBA and locks in price Market Risk Eliminated MBS Secondary Market Allows HFA to Continue Programs DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE

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

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 0.315% Servicing 3.875% FHA Mortgage 3.500% GNMA 0.060% Guarantee Fee Mortgage rate 4.000 3.875 3.750 3.625 3.500 Servicing fee 0.440 0.315 0.190 0.565 Guarantee fee 0.060 Pass through rate 3.000

Servicing Fee Affects Overall MBS Value 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 Pass-Through 3.000 *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 Type Pool Amount Maximum Loan Balance Winning Bid GNMA I 4.00% 1,645,279 83,460 110.94 2,081,961 103,981 110.75 1,728,763 137,071 110.59 1,077,594 173,764 110.41

Sample Monthly Cycle for Creating Pools for TBA April S M T W F 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 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

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

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

TBA – Multiple SRP’s Note Rate 3.500% 3.625% 3.750% 3.875% G-Fee 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%

Challenges Current & Future