0 GKB’s Housing Finance Group Public Finance Headquarters 1400 Wewatta Street, Suite 800 Denver, CO (800) Updates on the HFA Single Family Market NCSHB ANNUAL CONFERENCE | AUGUST 17, 2015 | Annapolis, Maryland JIM STRETZ S ENIOR V ICE P RESIDENT | S AUM. COM

1 GKB’s Housing Finance Group Provide Lower Rates MRBs Borrow Short, Lend Long Subsidize Benefits Through Credit Risk Down Payment Assistance Conventional whole loan indentures  PMI exposure Captive PMI Be the Master Servicer Other Values Service Loans Locally Flexible Delivery What is an HFA’s Added Value in the Mortgage Market? What are my payments? What do I need to close?

2 GKB’s Housing Finance Group The Fed’s Effect on Mortgage Rates For the month of June 2015, the Fed chased 30% of new GSE mortgage MBS production.

3 GKB’s Housing Finance Group The Fed’s Big Effect on Mortgage Rates Today "An increase in Federal Reserve holdings of Treasury securities also lowered the MBS yield. Using this estimate, the level of the MBS yield is about 76 basis points lower if the Federal Reserve holds 22 percent of the available Treasury securities (on June 30, 2013, this was equivalent to about a $1.93 trillion portfolio). At the mean market share for the Federal Reserve’s Treasury security holdings, a $50 billion purchase of Treasury securities would lower the MBS yield by about 2 basis points." "Using these estimates, the level of the MBS yields is about 55 basis points lower when the Federal Reserve holds 24 percent of the available MBS securities compared with when it holds nothing at all (on June 30, 2013, this was equivalent to about a $1.21 trillion portfolio). The same estimate suggests that a $50 billion increase in the Federal Reserve’s MBS holdings would result in an increase for the mean market share of Federal Reserve MBS holdings (from 23.8percent) to 24.8 percent and a decrease MBS yields by around 2 basis points." Source: “How the Federal Reserve’s Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates” Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. December 2014 Mortgage rates today could be 1% to 2% higher without Fed purchasing 30% of new MRB production Mortgage rates today could be 1% to 2% higher without Fed purchasing 30% of new MRB production The 30 year fixed rate mortgage of 4.25% (as of June 30 th, 2013) would have been 5.50% without the Fed’s market influence. Based on a Fed Study:

4 GKB’s Housing Finance Group Single Family Mortgage Insurance Today

5 GKB’s Housing Finance Group The Mortgage Market Since 2008

6 GKB’s Housing Finance Group Using the Mortgage Market “TBA” P IPELINE M ANAGEMENT H EDGES M ORTGAGE P RODUCTION & S ETS M ORTGAGE R ATES M ASTER S ERVICER U.S. B ANK P URCHASES AND P OOLS M ORTGAGE L OANS Loan Proceeds P ROGRAM S PONSOR L OCAL M ORTGAGE L ENDERS O RIGINATES AND C LOSES M ORTGAGE L OANS B ORROWER / H OMEBUYER MBS I NVESTORS O R TBA C OUNTERPARTY MBS Sale Mortgage Payments MBS Sale Loan Sale C USTODIAN E H OUSING P LUS C OMPLIANCE + O NLINE R ESERVATIONS

7 GKB’s Housing Finance Group Hedging in the TBA Market Execution MRB Market Execution Profits Use historic pull-through data to optimize hedge strategy Minimize fall-out, if possible Encourage early loan delivery Use optimal MBS type – GNMA I or GNMA II Create “specified pools” desired by investors: CRA investor focused Low Loan Balance (LLB) Mid Loan Balance (MLB) High Loan Balance (HLB)

8 GKB’s Housing Finance Group Recent Market News D IFFERENCE IN THE P RICING OF 4% GN I AND GN II Jan 9, 2015: FHA announces lower annual mortgage insurance premium (MIP) rates. Spreads between GN I and GN II widen and prepayment protection is desired by investors.

9 GKB’s Housing Finance Group MBS Investors Paying Up For Prepayment Protection FHA’s lowering annual mortgage insurance rates provided an opportunity. The VALUE of prepayment protection increased substantially. One way for an investor to protect against increased prepayments is via loan size. Smaller sized loans are less likely to refinance than larger sized loans due to the relative benefit. The following are some defined categories of specified pools: – Low Loan Balance (LLB) less than $85,000 – Mid Loan Balance (MLB) less than $110,000 – High Loan Balance (HLB) less that $150,000 All of these specified pools have increased in value but the Low Loan Balance (LLB) specified pool has experienced the most dramatic increase. Another specified pool type with significant value is a pool created for CRA Investors (financial institutions motivated by Community Reinvestment Act credits). – Note: CRA credit is state specific M ARKET C ONDITIONS ARE G REAT FOR C ERTAIN S PECIFIED P OOLS

10 GKB’s Housing Finance Group Funding Down Payment Beyond Premium Pricing Increase the amount of Down Payment and Closing Cost Assistance Offered by securitizing 2 nd mortgage pools. More efficient in raising funds than premium bond or TBA funding solutions Flexible, supported by multiple collateral options Amortizing 2 nd mortgages Ginnie Mae MBS Cash Issuer Credit Rating Various funding options: Taxable or Tax-Exempt Rated or Non-Rated Stand-Alone or Subordinate Allows an HFA to fund future DPA assistance in the form of 0% 2 nd mortgages Deferred 2 nd mortgages Amortizing 2 nd mortgages

11 GKB’s Housing Finance Group An Alternative Map? States with active local HFAs using TBA MBS Deliveries include: OH, CA, AZ, TX, OK, KS, LA, FL, GA, MN, NV. Source: Moody’s Investor Service

12 GKB’s Housing Finance Group Who is Doing What? U.S. Bank MS – 3 rd Party Hedge U.S. Bank MS – Self Hedge w/ 3 rd Party Advice U.S. Bank MS – Non TBA Idaho MS – 3 rd Party Hedge Idaho MS – Self Hedge Alabama MS – Self Hedge Alabama MS – 3 rd Party Hedge Self Servicing – Self Hedge Multiple Servicers – Non-TBA Rhode Island Connecticut New Jersey Delaware Maryland Washington, D.C. Self Servicing – Non-TBA

13 GKB’s Housing Finance Group What Are Your Rates?

14 GKB’s Housing Finance Group (estimated) Whole Loan306 MBS1829 Mixed316 MCC1433 Changing HFA Strategies HFA’s switching to (or including) MBS’s are also selling into the cash or TBA market using their balance sheets, “zeros” or TBA as a rate hedge.

15 GKB’s Housing Finance Group Summary A DDING V ALUE Credit Crisis: 85% of HFA‘s provide Down Payment Successful Programs: Understand Lenders, and Fill Voids created by  Consolidation,  Credit Crisis, and  Needs of their Communities Going Where the Federal Subsidy is – Cash Market Look for opportunities to provide subsidy from Federal programs, balance sheet and lower costs

16 GKB’s Housing Finance Group This report was prepared from data believed to be reliable but not guaranteed by us without further verification or investigation, and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the entities covered by this report. Opinions expressed are subject to change without notice. George K. Baum & Company may act as a principal for its own account or as agent for another person, in connection with the sale or purchase of any security which is subject in this report. Disclaimer