1. Anthony J. Ross, MBA2 Mortgage Back Securities Finance Club – Sales & Trading Presentation Series

2. Anthony J. Ross, MBA2 What are Mortgage Back Securities? Mortgage-backed securities (MBS) are products that use pools of mortgages as collateral for the issuance of securities. Although these securities have been collateralized using many types of mortgages, most are collateralized by one- to four-family residential properties. MBS can be broadly classified into four basic categories: 1. mortgage-backed bonds 2. pass-through securities 3. collateralized mortgage obligations (CMO) and real estate mortgage investment conduits (REMICS) 4. stripped mortgage-backed securities

3. Anthony J. Ross, MBA2 Prepayment Structure “101” Possible Cash Flows of a Mortgage Pass-Through Scheduled Cash Flows for a 30- Year Fixed-Rate Mortgage Three Sequential Pay Bonds

4. Anthony J. Ross, MBA2 Historical Context “Early 2000 everyone took a step back as the curve was steep” Increasing complexity of CMO Industry Evolution of dealers managing interest rate risk with treasuries Customers - Banks, Money Mangers, Pension funds, Agencies

5. Anthony J. Ross, MBA2 Current Landscape Market Conditions Risks Wall Street Competitive Advantages Opportunities for Expansion

6. Anthony J. Ross, MBA2 Market Conditions – “A Consumer Focus” Macro Factors  Overheating Housing Market  Rising interest rate environment  Origination volumes cooling  leveraged borrower could = slow consumption  Curve flattening = Weakening demand for MBS  Banks shifting to Non-Agency MBS

7. Anthony J. Ross, MBA2 Non-Agency Issuance

8. Anthony J. Ross, MBA2 Risks More Dealers = Competitive pricing Banks & Savings institutions decreasing their Mortgage holdings Increase in Arm originations with, a regional focus (CA, FL) Decreasing credit quality of originations New Product Development  Agency/Non-Agency – Arms and I/O Neg-Am

9. Anthony J. Ross, MBA2 Wall Street Competitive Advantages Vertical Integration Origination SecuritizationCapital Markets Client Relationships MBS Research Local/National Originators Competition

10. Anthony J. Ross, MBA2 Opportunities for Expansion Origination  Expand product mix into deeper credit quality Alt B Credit solutions  Move back from hybrids to fixed  Delinquency Business Platform Agency & Non-Agency  Increased Demand in Asia  New Structures – Combine 2-3 Rich bonds  Derivatives - Floaters

11. Anthony J. Ross, MBA2 Questions & References Websites www.investinginbonds.com Books “The Mortgage Backed Securities Workbook” by Davidson & Herskovitz “Handbook of Mortgage Backed Securities” by Frank J FabozziFrank J Fabozzi