1. Funding the Mortgage Pipeline -  - Where does all that money come from? -- and -- Whose money is it anyway? Jack Konyk Senior Vice President Regulatory and Compliance Management National City ® - - - - - for American Association of Residential Mortgage Regulators Examiner Training School: Fundamentals of Mortgage Banking April 5, 2006

2. Funding the Mortgage Pipeline §What “Funding the Pipeline” means to: l Mortgage Broker l “Table-Funded” Mortgage Broker l Portfolio Lender l Mortgage Banker §Funding Terms and Concepts l Table Funding l Warehouse Line l Rate Locks versus Floating Rates l Hedging

3. Funding the Mortgage Pipeline - - - “Simple” Mortgage Broker Perspective §Get approval and pricing from Lender §Get borrower acceptance §Advise Lender when ready to close §Wait for closing to occur and lender to pay out §Get income

4. Funding the Mortgage Pipeline - - - What is “Table Funding” ? §“Simple” Broker l Loan closes with Lender’s funds l Loan documents are in Lender’s name §“Table-Funded” Broker l Loan closes with Lender’s funds l Loan documents are in Broker’s name l Loan is immediately assigned to Lender

5. Funding the Mortgage Pipeline - - - “Table-Funded” Mortgage Broker Perspective §Get approval and pricing from Lender §Get borrower acceptance §Advise Lender when ready to close §Set up closing with settlement agent §Wait for closing to occur and lender to pay out §Get income

6. Funding the Mortgage Pipeline - - - Portfolio Lender Perspective §Make loan offer to borrower §Get borrower acceptance §Set up closing with settlement agent §Send money to closing §“Book” loan §Get income

7. Funding the Mortgage Pipeline - - - What is a “Warehouse Line” ? §Line of Credit extended to a Mortgage Banker §Used by Mortgage Banker to get money to make loans §Secured by the loans made with the proceeds §Repaid when the Mortgage Banker sells the loans to the ultimate investor

8. Funding the Mortgage Pipeline - - - Mortgage Banker Perspective §Make loan offer to borrower §Get borrower acceptance §Set up closing with settlement agent §Draw against Warehouse Line to send money to closing §Deliver documents to Warehouse Lender or Custodian §Get Investor approval and pricing (unless already done) §Deliver loan to Investor §Investor sends payment to Warehouse Lender §Warehouse Lender repays Warehouse Line advance l Releases loan documents to Investor l Releases excess Investor payment to Mortgage Banker §Get Income

9. Funding the Mortgage Pipeline - - - Risks, and How To Manage Them Pipeline RisksManagement Strategy §Interest Rate Risks  Hedging l “Locked” rates l “Floating” rates §Product Risk  Product Discipline §Investor / Credit Risk  Underwriting Discipline §Fallout Risk  Trend Monitoring

10. Funding the Mortgage Pipeline - - - Risks, and How To Manage Them Risk Management Strategies Hedging §“Hedging is avoiding risk in the secondary mortgage market. It provides the primary strategy for offsetting interest rate risk. Hedging involves the deliberate acceptance of one risk, calculated to offset the effect of interest rate changes. Hedging is also balance, compensating one risk with another, more predictable risk.” Source: Mortgage Bankers Association of America §Common Hedging Instruments l Forward Sales Commitments l Substitute Sales Commitments l Futures and Options

11. Funding the Mortgage Pipeline - - - Risks, and How To Manage Them Risk Management Strategies §Product Discipline l Don’t originate products you don’t already have a buyer for l Don’t deviate from standard products §Underwriting Discipline l Choose Investors carefully l Stay within Investor’s guidelines §Trend Monitoring l Know your “pull-through” l Anticipate effects of market developments

12. Securitization of Mortgages -  - What is it? How does it work? -- and -- What’s all the fuss about? Jack Konyk Senior Vice President Regulatory and Compliance Management National City ® - - - - - for American Association of Residential Mortgage Regulators Examiner Training School: Fundamentals of Mortgage Banking April 5, 2006

13. Securitization of Mortgages §What is it? l Definition: Process by which mortgage loans with common features and maturity are “converted” into interest-bearing securities with marketable investment characteristics. l In plain language: Investment security (like a bond) is created for sale to investors Loans are grouped together into a “pool” and “given” to issuer Issuer “gives” security to lender in return for loans Lender then has an investment security instead of loans on the books –They can sell it on to other investors –They can hold it themselves

14. Securitization of Mortgages §How does it work? (Creation) l Identify closed loans with common features l Create the security (legal contract) l Obtain rating (if private security) l Obtain or create required credit enhancements l Determine issue date and pass through rate l Place individual loans into security pool l Deliver documents to custodian l Security is issued l Service for master issuer (or place servicing)

15. Securitization of Mortgages §How does it work?(Ongoing) l Servicer receives payments on loans in pool l Servicer remits principal and interest (less fee) to issuer Servicer remits only what was actually collected l Issuer sends full principal and interest payment to investor Issuer remits full principal and interest regardless of amt. collected l Default risk may be assumed by servicer or issuer

16. Securitization of Mortgages §Why do it? l Converts mortgages to “better” asset More readily saleable, increases liquidity Increases fee income by converting what would have been interest into fees Better accounting treatments on carry and on sale Provides more flexibility in fiscal management Accesses alternative, often lower costs, sources of capital funding §What are the risks? l Delinquency and default assumptions too low; compromises profitability l Security does not sell as anticipated; compromises liquidity

17. Securitization of Mortgages Q U E S T I O N S ? C O M M E N T S ? D I S C U S S I O N ? D I S A G R E E M E N T S ?