U.S.A. Mortgage Banking: Changes In The Landscape Doug Duncan, Senior Vice President & Chief Economist Mortgage Bankers Association World Bank Housing Finance in Emerging Markets Conference March 15, 2006 – Washington DC

Ownership structures for mortgage banking companies Privately held Public stock ownership Depository institution Diversified financial holding company subsidiary Diversified nonfinancial holding company subsidiary Other

Marketing Origination Appraisal Processing Closing Underwriting Warehousing Delivery Secondary Marketing Loan Administration Selling and pricing new loan product Determining the value of the real estate Gathering loan documents and verifications Approving or denying the loan Culminating the mortgage transaction Obtaining financing for loan originations Transferring loan files to the investor Selling existing loan product Collecting and remitting loan payments Creating new loan product The mortgage banking process includes:

The secondary mortgage market process Retains whole loans or participations in portfolio To a conduit Directly Sells whole loans or participations To Fannie Mae To Freddie Mac Mortgage lender (Issuer) Converts mortgages to mortgage-backed securities Which sells loan packages, pass-through securities or CMOs Which sells Guaranteed Mortgage Pass-Through Certificates Which sells mortgage Participation Certificates or CMOs Through securities dealers or FNMA trading desk Through securities dealers or FHLMC trading desk Through securities dealers or private placements To Investors As private placements Through investment bankers Converts mortgages to mortgage-backed bonds And sells through securities dealers, FNMA/FHLMC trading desks, or private placements As GNMA MBSs As Fannie Mae MBSs As Freddie Mac PCs As MBSs issued in lender’s own name

Type of Risk Risk Is Present In Primary MarketSecondary Market Both, in different forms Legal Loan Agreement √ Enforceability √ Property √√ Consumer Protection √ Business Fraud √ Borrower Credit (Default) Repayment √√ Collateral (Property) √√ Interest Rate Prepayment √ √ Pipeline Operations √√ Liquidity √ √ Risks present in U.S. mortgage market

Current trends – product types Structural change – refinancing Structural change – adjustable rate mortgages Structural change – nonprime Cyclical factors – continued existence but less dramatic Demographic factors – second homes and reverse mortgages

Annual mortgage production Billions of Dollars Source: Mortgage Bankers Association and Department of Housing and Urban Development. forecast

Originations by loan type Source: MBA’s First Half of 2005 Mortgage Originations Survey.

Current account balance Source: Bureau of Economic Analysis.

Foreign holdings of long term securities Source: U.S. Department of Treasury.

Implications of product type trends Permanently higher prepayment rates Permanently higher adjustable component Permanently broader access to higher risk borrowers Product innovation assisted by technology based financial innovation will continue

Current trends - lender types Vertical integration of investment bankers Small mortgage bankers become GSE franchisees Niche product or market standalone companies Aggregators continue to grow share

Single family production by channel

Summary of changes in market share Source: IMF

RMBS Issuance by quarter

Implications of lender type trends Barbell shaped size distribution but with a fatter handle Capital is key to size because of risks Fulfillment advantage recedes Few standalone full service entities Many institutions competing then keeping profit margins competitive with benefits to consumers

Current trends – nonlender food chain Marketing specialization/consumer segmentation Process re-engineering Changing business environment/model for:  Title companies  Warehouse lenders  Private mortgage insurance companies  Technology vendors Security of transaction flows becoming critical Risk-sharing permutations continue through financial re- engineering Multiplicity of products generates multiplicity of investors

Implications of nonlender food chain trends Cost reduction/efficiency improvement is paramount Diversification or business model shifts Emergence of industry utilities Broader investor base remains Sustainability depends on capital and flexibility

A dynamic but temporarily slowing market A dynamic food chain The consumer is king and products fit the royal lifecycle Profit maximization equals cost minimization Conclusion

Contact information/resources MBA homepage: Research and Forecasts: rg/ResearchandForecasts/Eco nomicOutlookandForecasts Research Data: rg/ResearchandForecasts/Pro ductsandSurveysmarketdata/ Doug Duncan 1919 Pennsylvania Ave - Washington, DC MBA Newslink: ewsandMedia/MBANewsLink Home Loan Learning Center: com/default.html RIHA: map.html