1. Making the most of TBA Executions
Sept 2016
INNOVATE>
Making the most of TBA Executions
Marc Paskulin
Manager National Housing Group
Senior Vice President

2. Best Execution Options
Loan Types & Pooling
Agency Securities:
Mortgage Backed Securities (MBS)
Participation Certificates (PCs)
Best Execution Options
Government Loans
FHA/VA/USDA/PIH
Ginnie Mae MBS
TBA Contract Specified Buyers
Conventional Loans
Fannie/Freddie
Fannie Mae MBS
Freddie Mac PCs
Whole Loans
TBA Contract Specified Buyers
Cash Window

3. Market Pay-Ups for Government Loans
“Pay-ups” are additional amounts paid by investors for MBS/PC pools with characteristics that provide prepayment protection and extend the average life. Higher coupons tend to pay higher pay-ups.
GNMA II Custom Pool Pay-Ups
MBS Coupon
3.00%
3.50%
4.00%
Loan Rates
3.250% %
3.750% %
4.250% %
Max Loan Balance < $85,000
0.531%
2.031%
2.969%
Max Loan Balance < $110,000
0.313%
1.406%
2.344%
Max Loan Balance < $125,000
0.156%
0.781%
1.500%
NOTES: Source: GKB Capital Markets Group, Pay-ups are represented as a % of par and are indications reflecting market conditions as of 09/22/16. They are subject to change and are locked in at the time the custom pool (no less than $1 million in size) is delivered.
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.
Because of the incentives associated with cheapest-to-deliver pricing, not all eligible MBS pools actually trade on a TBA basis.
Higher-value pools (those with the most advantageous characteristics from an investor’s point of view) can command a higher price in the less liquid specified pool market. FRBNY Economic Policy Review, May 2013
Low Loan Balance (LLB) less than $85,000
Mid Loan Balance (MLB) less than $110,000
High Loan Balance (HLB) less than $150,000
Super High Loan Balance less than $175,000
Other Pay-Up Worthy Characteristics
Pay-Up Uses
Max Loan Balance < $150,000
CRA Credit
Buy Down Loan Rates
Max Loan Balance < $175,000
< 700 Credit Score
Supplement Borrower Assistance
No Mortgage Insurance (MI)
CLTV (2nd Loans vs Gifts)
Further Housing Initiatives

4. Investor Feedback on Pricing
“Increasing issuance of loans originated by the various state finance agencies in the Agency MBS market has created opportunities for specified pool investors. We believe that, although differences in [home price appreciation] across states have been one of the main factors driving the observed prepay differences, servicer efficiency and the availability of refinance programs are also important.”
 Nomura Securitized Products Weekly,
Introduction to HFA Pools, August 12, 2016

5. Program Administration & HFA Cost/Benefit Analysis
An HFA’s ability to capitalize on pay-ups depends on the HFA’s average loan size, monthly loan volume and relationship with its Advisor or Security Purchaser. Is the additional time and expense of managing your pipeline and pooling worth the pickup in additional value?
In-House
Advisor
Administrator
Responsibility
HFA
Security Purchaser
MBS Pricing X
MBS Hedging
MBS Delivery
Liability
Revenue
Per Loan Fee
Pay-Ups
GKB serves in all three capacities for its HFA clients.
GKB has also trained HFAs for those HFAs interested in absorbing the TBA pricing, hedging and liability.
For audit purposes, GKB can also serve as a back for all TBA operations.
“Trans-FEE-ency”: every pay-up on every loan

6. Why Conventional Loans?
HFA Preferred and HFA Advantage offer unique loan features and pricing concessions not available to Lenders for standard Home Ready and Home Possible loans.
Lower Mortgage Insurance Coverage
No Delivery Fees
Higher Income Limits
DPA Pricing
Take advantage of lower mortgage insurance premiums, particularly at the 700+ credit score level.
HFA Preferred and HFA Advantage are available through the respective Cash Windows

7. Freddie Mac Cash Window HFA Advantage Pay-Ups
Cash Window Pay-Ups
Freddie Mac offers HFA Advantage markups on a per loan basis through its Cash Window and they can be locked in at the time of the loan commitment. No minimum pooling requirements!
Freddie Mac Cash Window HFA Advantage Pay-Ups
Loan Rates
3.375% %
4.125% %
4.625% %
Max Loan Balance < $85,000
0.594%
1.734%
2.695%
Max Loan Balance < $110,000
0.500%
1.484%
2.133%
Max Loan Balance < $150,000
0.406%
1.110%
1.414%
Credit Score
< 700
0.000%
0.187%
0.226%
Easier to recruit new lenders, particularly banks and credit unions.
Easier for HFAs to become a Freddie Mac “Seller” in their own right.
Attractive to those lenders who wish to price and hedge their own loans – at no additional cost - and retain the servicing rights (Cash Window offers both mandatory and best efforts pricing).
Centralized reporting for a Multi-Servicer platform.
Establish a dedicated interest only ongoing (paid monthly) payment stream in lieu of a per loan fee, as compensation for an HFA investment or as security for a Second Loan Bond.
“Co-Issue” Seller and Servicer. Seller prices, hedges and delivers loan to the Cash Window, assigns the servicing rights at the point of sale to a designated HFA approved Servicer. Representations and warranties are split between Seller and Servicer.
NOTE: Source: Freddie Mac, Pay-ups are represented as a % of par and are indications reflecting market conditions as of 09/22/16. They are subject to change and are locked in at the time of commitment.
Pay-Up Uses
Buy Down Loan Rates
Supplement Borrower Assistance
Further Housing Initiatives

8. Cash Window Pricing Model
Easier to recruit new lenders, particularly banks and credit unions.
Easier for HFAs to become a Freddie Mac “Seller” in their own right.
Attractive to those lenders who wish to price and hedge their own loans – at no additional cost - and retain the servicing rights (Cash Window offers both mandatory and best efforts pricing).
Centralized reporting for a Multi-Servicer platform.
Establish a dedicated interest-only ongoing (paid monthly) payment stream in lieu of a per loan fee, as compensation for an HFA investment or as security for a Second Loan Bond.
“Co-Issue” Seller and Servicer. Seller prices, hedges and delivers loan to the Cash Window, assigns the servicing rights at the point of sale to a designated HFA approved Servicer. Representations and warranties are split between Seller and Servicer.
Easier to recruit new lenders, particularly banks and credit unions.
Easier for HFAs to become a Freddie Mac “Seller” in their own right.
Attractive to those lenders who wish to price and hedge their own loans – at no additional cost - and retain the servicing rights (Cash Window offers both mandatory and best efforts pricing).
Centralized reporting for a Multi-Servicer platform.
Establish a dedicated interest only ongoing (paid monthly) payment stream in lieu of a per loan fee, as compensation for an HFA investment or as security for a Second Loan Bond.
“Co-Issue” Seller and Servicer. Seller prices, hedges and delivers loan to the Cash Window, assigns the servicing rights at the point of sale to a designated HFA approved Servicer. Representations and warranties are split between Seller and Servicer.

9. INNOVATE> TBA is Here to Stay TBA will…
still be used by many HFAs to limit market exposure as HFAs move back to Mortgage Revenue Bonds
be a complement to Bonds to provide funding for Non First-Time Homebuyers, more moderate income homebuyers
offer a fallback program should Bonds become no longer viable
in the event of a volume cap shortage (?!), be a source for more loan production

10. Enjoy Miami! Marc Paskulin
National Housing Finance Group
George K. Baum & Company
Miami Innovation Tower
GKB’s National Housing Finance Group: (people at the conference shown in bold)
Jim Stretz, Casey Biegelsen, Kathy Li, Errin Jackson and Barton Withrow,
Beth Riley, Scott Riffle, Larry Englande, Keith Tully, DeDe Cross, Misty Dalke & Gary Machak
This report was prepared from data believed to be reliable but not guaranteed by us without further verification or investigation, & 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.