1. 0 Mortgages, Ginnie Mae & the TBA Market Ted Tozer Real Estate Broker Conference August 8, 2013

2. 1 Ginnie Mae Overview: Who We Are Government National Mortgage Association (GNMA or Ginnie Mae) Established as a corporation within HUD by the Housing & Urban Development Act of 1968* Effectively split from Fannie Mae, which was created in 1938 in response to the Great Depression Mission is to expand affordable housing by linking global capital markets to the U.S. housing finance markets *HUD Act [12 USC § 1716b]

3. 2 Ginnie Mae Overview: What We Do Guarantee Mortgage-Backed Securities (MBS), which raise funding for virtually all loans insured or guaranteed by U.S. Government agencies (FHA, VA & USDA Rural Housing) –Ginnie Mae does not originate loans or issue MBS –Private lending institutions issue MBS Facilitate the financing of a variety of products: –Single-family: forward & reverse mortgages, manufactured homes –Multifamily: construction & permanent loans, hospitals, nursing homes, assisted living facilities Over $1.4 trillion in outstanding MBS guaranteed –FHA loans back about 75% of outstanding MBS In 2012 about half of all purchase mortgages were financed through Ginnie Mae MBS

4. 3 Ginnie Mae MBS Outstanding Relative to GSEs MBS outstanding in billions Sources: Fannie Mae and Freddie Mac Monthly Reports; Ginnie Mae data includes HECMs May 2013: $2,763B May 2013: $1,406B May 2013: $1,601B

5. 4 U.S. Mortgage Market U.S. mortgage market is comprised of two segments: –Primary market is made up of the borrower and lender/Issuer –Secondary market is made up of the lender/Issuer and investor The secondary market enables lenders to sell the loans they originate to a third party –Lenders transfer loans off balance sheet & transfer risk that borrower will default –Lenders transfer risk that interest rates will rise to investors –Lenders use proceeds to make new mortgage loans available

6. 5 TBA Market Overview To-Be-Announced (TBA) market was created in 1970s to support Ginnie Mae securitization & financing of government insured loans –Virtually all government insured mortgages are sold into the TBA market – sold as part of MBS guaranteed by Ginnie Mae, Fannie Mae & Freddie Mac Facilitates forward trading of mortgages (delivery can take over three months, on average takes two months) Enables lenders to lock in rate for loan originations prior to actually originating loans Most liquid & important secondary mortgage market System provides broad & stable capital availability for potential homebuyers throughout the U.S. TBA securities have U.S. Government guaranty, which facilitates scale of market & fungibility of securities

7. 6 TBA Volume Traded Daily

8. 7 Stylized TBA Transaction Example – Day 1 Sun. 9PM U.S. Dealer Bank sells $100 million of Ginnie Mae or GSE MBS with 4% coupon rate to Asian investors Mon. 9AM Mortgage Banker shorts (promises to deliver) $100 million of 4% MBS to Dealer Bank locking in rate for loan originations Monday Bus. Hrs. Throughout day, Mortgage Banker’s loan originators across the U.S. make loans at 4% to fill position

9. 8 Stylized TBA Transaction Example – Day 2 thru Settlement, 13 weeks later Day 2 up to 48 hrs. to Settlement Mortgage Banker has ability to fine tune trade, e.g., sell excess loan production or buy shortfall in TBA market At most 48 hrs. to Settlement Mortgage Banker sells loans to GSE or delivers loans to Ginnie Mae for pool processing in exchange for guaranteed MBS 48 hrs. to Settlement Mortgage Banker must provide specific MBS pool information to Dealer Bank at this point Settlement Date Mortgage Banker delivers MBS to Dealer Bank, Dealer Bank delivers MBS to investors

10. 9 FHA Loan in the Securitization Process Borrower finds home they’d like to buy Lender pools loan & delivers MBS to investors; See slide 8, “Settlement Date” Lender had already pre-sold the mortgage & locked in a rate; See slide 7, “Mon. 9AM” Borrower goes to FHA-approved lender to obtain mortgage Borrower’s application is processed & mortgage closes Borrower makes monthly payment to lender/servicer who forwards it to investors 60-90 days Once mortgage is closed & delivered, servicing of the loan begins

11. 10 Interest Rate Risk Credit Risk & Credit Enhancer & Issuer MBS Investor Securitization Bifurcates Risk Lender’s Inherent Risks Credit Risk Interest Rate Risk

12. 11 Government Exposure to Mortgages The U.S. Government has had a significant role in the mortgage market going back at least 30 years

13. 12 Our Guaranty Matters – it Provides Safety & Liquidity Ginnie Mae provides a U.S. Government guaranty on the monthly payment of MBS to investors Government guaranty qualifies mortgages for the TBA market & attracts capital from throughout the world to invest in U.S. mortgages Guaranty makes investment in U.S.-backed mortgages exceptionally safe & provides liquidity to them Guaranty assures investors they will get paid regardless of loan performance or servicer performance Guaranty homogenizes mortgages & lender/servicers so they are indistinguishable to investors Homogenization of mortgages & lender/servicers enables investment in enormous blocks of mortgages –$280.4 billion in daily TBA MBS trading in 2012 –TBA market would not exist without government guaranteed MBS

14. 13 Scope of Mortgage Market & Government Involvement Total U.S. outstanding mortgage debt is currently at almost $10 trillion –Outstanding mortgage debt is roughly equivalent to total value of assets on banks’ balance sheets –In 2012, only about 10% of mortgages were kept on banks’ balance sheets –If all banks did was invest in mortgage loans, they would barely be able to fund all mortgages in market, i.e., banks would not fund auto loans, credit card loans, etc. Government-backed securitization is necessary to maintain current volume available & preserve the 30-year fixed rate mortgage