1. Federal Home Loan Bank of Chicago
Best Execution
Federal Home Loan Bank of Chicago
Comparing MPF® Pricing to Other Alternatives
January 17, 2008
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2. Best Execution After an institution has committed to
making residential mortgage
loans it has two choices:
Hold the loans
Sell the loans
This presentation focuses on evaluating the
economics of the sales alternatives
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3. Q: How do I maximize my return on a loan sale?
Best Execution
Q: How do I maximize my return on a loan sale?
A: Perform a best execution analysis
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4. Mortgage Servicing Rights
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Mortgage Servicing Rights
Best execution analysis
To whom do I sell?
What is my true economic sales price?
Cash today plus expected future cash flow
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5. Mortgage Servicing Rights
Best Execution
Mortgage Servicing Rights
To whom do I sell?
FHLB
Fannie Mae
Freddie Mac
Correspondent
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6. What are the true economics?
Best Execution
What are the true economics?
Upfront cash
Cash price
Loan level additions / deductions
Servicing released premium (SRP)
Future cash flow (expressed in present value)
Value of retained servicing
Value of credit enhancement fee (MPF program)
Value of credit enhancement obligation (MPF program)
Estimate of SRP recapture
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7. Upfront Cash Pricing Components
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Upfront Cash Pricing Components
Interest rate
Lock length
Type of commitment – mandatory versus best efforts
Other adjustments
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8. Best Execution Best Execution Upfront Cash Pricing Comparison
December 31, 2007
Slide 8

9. Mortgage Servicing Rights
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Mortgage Servicing Rights
Common mistakes in performing a
best execution analysis
Ignoring future cash flows
Servicing retained vs. servicing released
Credit enhancement fees
Float value
Not adjusting for lock period day differences
Ignoring transaction fees and loan sale price deductions
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10. Mandatory Versus Best Efforts
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Mandatory Versus Best Efforts
Better price
More control
More risk – fallout risk – estimation of fallout
Slide 10

11. Factors affecting fallout
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Factors affecting fallout
Market interest rates
Type of origination
Length of lock
Purpose of loan
Type of loan
Processing status of loan
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12. Mandatory versus Best Efforts Break-Even Analysis
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Mandatory versus Best Efforts Break-Even Analysis
Slide 12

13. Use position & mark-to-market reports to manage mandatory positions
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Secondary Marketing
Use position & mark-to-market reports to manage mandatory positions
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14. Future cash flow – retained servicing valuation components
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Future cash flow – retained
servicing valuation components
Servicing fee percentage – varies by investor and type of loan
Ancillary income
Expected loan life – prepayment
Payment and prepayment float
Discount rate
Costs to service – market costs
Delinquency rate and foreclosure losses – recourse versus non-recourse
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15. Servicing Fee Receivable Yield Curve
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Best Execution
Servicing Fee Receivable Yield Curve
Slide 15

16. Remittance methods Actual / Actual Scheduled / Scheduled Combination
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Remittance methods
Actual / Actual
Scheduled / Scheduled
Combination
Value of “Float”
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17. Mortgage Servicing Rights
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Mortgage Servicing Rights
MPF Basics
Slide 17

18. credit enhancement fee
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Future cash flow - MPF
credit enhancement fee
Paid to member for assuming credit risk (credit obligation) on mortgage defaults
Determined by the quality of the loans at the pool level, the MPF program selected and the performance of the loans
Sensitive to prepayments
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19. Future cash flow - credit enhancement obligation variables
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Future cash flow - credit enhancement obligation variables
Cumulative prepayment rate (CPR)
Cumulative default rate (CDR)
Severity of actual losses
First loss account
Obligation cap %
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20. Best Execution
Future cash flows
Slide 20

21. Best Execution
Future cash flows
Slide 21

22. CE Fee Receivable Yield Curve
Best Execution
Best Execution
CE Fee Receivable Yield Curve
Slide 22

23. Best Execution
Best Execution
Best Execution
Slide 23

24. Background on Wilary Winn LLC
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Background on Wilary Winn LLC
Wilary Winn provides independent, fee-based advice to financial intermediaries, including banks, credit unions, finance companies, and mortgage bankers.
Our services include assessments and valuation of complex financial assets, including mortgage servicing rights and credit enhancement fees receivable, as well as the development and implementation of interest rate risk management programs.
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25. First National Bank Building 332 Minnesota Street, Suite W-2062
Best Execution
Wilary Winn LLC
First National Bank Building
332 Minnesota Street, Suite W-2062
St. Paul, MN 55101
Douglas Winn
Eric Nokken
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