1. NYSAR Mortgage Industry Update Presented by Scott Vahue, Senior Vice President M&T Bank, Mortgage Division February 11, 2015

2. 2 Historical Perspective In the lead-up to the financial crisis, both purchase and refinance volume were at record highs, stimulated by many factors: Historically low rates Increasingly sophisticated mortgage products Flexible underwriting Rising home values Robust securitization market Source: Volume data sourced from Mortgage Bankers Association and rate data sourced from Freddie Mac PMMS Survey.

3. 3 As the crisis neared, the fraction of total originations accounted for by Subprime and Alt-A products continued to grow, peaking at 34% or $1 trillion in 2006. At the same time adjustable rate mortgages (ARMs) comprised a much larger share of total originations, reaching 50% in 2004. Source: Data sourced from Inside Mortgage Finance; 2014 forecast represents annualized YTD September 2014 originations. Historical Perspective

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5. 5 As home prices rose, borrowers relied on their ability to quickly sell their home at a profit if their monthly payments became unmanageable. Home price appreciation also gave an additional measure of comfort to lenders, who predicted low losses in the event of default. * Unit sales estimated. Source: National Association of Realtors 12/31/14 Pending Homes Sales Release. Price data sourced from Board of Governors of the Federal Reserve System. Historical Perspective

6. 6 As prices stopped rising and the market slowed, the impact of fully indexed adjustable rates and subpar underwriting manifested in growing default rates. Mortgage servicers were poorly equipped to manage the volume of delinquencies that ensued. Source: Board of Governors of the Federal Reserve System. Historical Perspective

7. 7 The high number of delinquencies and servicers lack of preparedness resulted in extended foreclosure timelines. Source: RealtyTrac’s Mid-Year 2014 U.S. Foreclosure Market Report.

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9. 9 Industry Concerns During and after the crisis, several issues came to light: 1.Unsuitable Products and Deceptive Practices - in the years immediately preceding the crisis, some originators focused solely on sales volume, providing little guidance to borrowers regarding the mortgage products they were sold. 2.Poor Servicing - the inability of the largest servicers to effectively manage the default process led to several serious problems: Lack of effort to effectively engage with borrowers to mitigate losses “Robo-signing” scandal Illegal foreclosures Borrower confusion 3.Securitization - Collateral and Ratings MBS collateral misrepresentation Inappropriate security ratings

10. 10 Government Response to the Financial Crisis - Regulation As a result of these and other issues, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. Dodd-Frank tightened financial markets regulation, enacted consumer protection reforms and created the Consumer Financial Protection Bureau (CFPB) Dodd-Frank requires that residential mortgage lenders make a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms To guard against unsuitable products, Dodd-Frank established the Qualified Mortgage (QM). These loans enjoy a safe harbor from subsequent legal challenges by the borrower. The criteria include: Product Restrictions (e.g., no interest-only, negative amortization) Points and Fees Test Maximum 30 Year Term Satisfaction of Ability-to-Repay (ATR) guidelines

11. 11 Government Response to the Financial Crisis - Enforcement National Mortgage Settlement (NMS) Reached in February 2012 among 49 states, the federal government, and the country’s five largest mortgage servicers Provides $25 billion in relief to distressed borrowers as well as direct payments to states and federal governments Institutes a new set of servicing standards Repurchase Demands A host of government regulators have sued the issuers of mortgage-backed securities for misrepresentation and other violations. To date, settlements in excess of $40 billion 1 have been reached with many cases still pending In addition to demanding repurchase for material breaches of representations and warranties, demands are also being made for technical violations Regulators have taken full advantage of the opportunity to make examples of the industry’s largest players 1 Bank of America Merrill Lynch research report, September 7, 2014.

12. 12 Current Environment Industry volume totaled $1.1 trillion in 2014, a 39% decline from 2013 originations of $1.8 trillion. The MBA forecasts for 2015 stands at $1.2 trillion, an increase of 6% As the record high volumes experienced a decade ago had many drivers, so do the low originations of today: Anemic economic recovery Lender concern about future repurchase risk Fewer first time home buyers Increased student loan debt Source: December 15, 2014, MBA Mortgage Finance Forecast.

13. 13 U.S. Unemployment Rate 5.6% 94 96 98 00 02 04 06 08 10 12 14 5.0% average Jan 1994 to Dec 2007 Source: U.S. Bureau of Labor Statistics RECESSIONRECESSION RECESSIONRECESSION Oct 2009 10.0% 11.2% 8.8% average Jan 1994 to Dec 2007 April 2010 17.2% U-3 Unemployment Rate U-6 Unemployment Rate Source: U.S Bureau of Labor Statistics. Rates are seasonally adjusted. U-3 Unemployment Rate - the “official” unemployment rate, unemployed as a percent of the civilian labor force. U-6 Unemployment Rate - includes discouraged workers (those who want to work, but are not presently looking for work) and the under employed (part time workers who want full time work). While improving, the number of discouraged and under-employed workers remains high Year Unemployment Rate

14. 14 New York State Unemployment and Job Creation Primary source: U.S. Congress Joint Economic Committee, Economic Snapshot: New York, December 2014. Year Job growth in NY has been positive since the recession, while unemployment lags the national average

15. 15 5.0% average Jan 1994 to Dec 2007 Source: U.S. Bureau of Labor Statistics Unemployment Rate Private Employment Relative to Pre-Recession Peak 1980 1990 2001 115.7% 112.7% 104.1% 101.3% 2007 (Current Expansion) 0 1 2 3 4 5 6 Years Since Pre-Recession Peak The current expansion, relative to past expansions, shows an exceptionally weak recovery There would be an additional 3.1 million private sector jobs if the current expansion matched even the modest post-2001 expansion, and 15.9 million if the current expansion matched the 1980 recession. Source: ????? Employment Since Pre-Recession Peak

16. 16 $51,939 U.S. Real Median Household Income 2007 $56,140 RECESSIONRECESSION Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics. Data stated in constant 2013 dollars. RECESSIONRECESSION 90 92 94 96 98 00 02 04 06 08 10 12 13 RECESSIONRECESSION 1995 $51,948 1999 $56,642 A lack of growth has put downward pressure on consumer purchasing power Nationally, in 2013 the typical American household had 8% less income than before the Great Recession began—about on par with 1995 levels Within New York, 2013 household income is off 2% as compared to pre-recession levels ($53,843 vs. $54,988) Year Household Income

17. 17 Home Price Appreciation by State Sources: The Demand Institute, The Evolution of U.S. Housing Demand, February, 2014. Forecasted home price increases through 2018 range from 13% to 33% While in New York home prices are forecasted to appreciate by 14% through 2018 2012 to 2018 Forecasted Single Family Median Home Price Appreciation Median Increase 22%

18. 18 U.S. Single & Multifamily Home Building Permits Source: U.S. Census Bureau. Data is seasonally adjusted at annual rate. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Single Family Permits (Left Scale) Multi-Family (5+ units) Permits (Right Scale) U.S. 1-Family Home Permits SAAR (Thousands) U.S. Multifamily Home Permits SAAR (Thousands) Year Multi-family investment greatly exceeds single family, reflective of millennials delayed entry into the housing market The same permit issuance patterns are present New York State and Albany Nov., 2014 YTD Y/Y Chg: SFMF New York State 2%18% Albany MSA-1%20%

19. 19 Housing Starts While the decline in national housing starts has begun to reverse, the current pace is half that of a decade ago. New York home starts follow the national trend. Impacting this are the following: Lack of first-time homebuyers Delayed household formation for younger demographic Shift from owning to renting Primary source: US Census Bureau. The current pace is half that of a decade ago U.S. Housing Starts (MM) N. Y. Housing Starts

20. 20 First-Time Homebuyers are Under Participating 1990's Average First-time Homebuyer Share Chart source: National Association of Realtors, February 2014. 1 Student Loan Debt Curbs Housing Market by $83 Billion, Study Says”, The Los Angeles Times, by Tim Loan, September 22, 2014. A recent study estimated that home sales were reduced by 414,000 units in 2014 because of high levels of student debt. This is equal to about 8% of all home sales, or $83 billion 1 The study also estimates that the number of households under age 40 owing $250 or more each month in student loans has nearly tripled since 2005, to 5.9 million Overall student loan debt has almost tripled since 2005 to $1.1 trillion Soaring student loan debt is a significant contributor

21. 21 The Shift From Ownership to Renting Source: MBA, 2014. As a corollary to the first-time homebuyer dilemma, the economy has witnessed a significant increase in renter households since 2005 At the same time, the homeownership rate has declined to a level not seen since the mid-1990s Renter households have grown while owner households have declined

22. 22 Higher FHA and Private Mortgage Insurance Premiums Chart source: CoreLogic Distribution of Purchase Mortgage Originations by FICO Score While some potential homebuyers are avoiding the market due to student debt obligations, many have been shut out of the market due to: Tighter underwriting guidelines Higher mortgage insurance premiums Mortgage industry factors have also contributed to the decline in first time buyers

23. 23 FHA Mortgage Insurance From 2010, the Federal Housing Administration increased mortgage insurance premiums (MIP). As a result, Bank of America Merrill Lynch estimates that from 2010, FHA purchase origination volume was down 50%, from $215 billion to $105 billion With no subprime outlet and FHA priced out of the market for many borrowers, there was a significant void for first-time homebuyer financing HUD’s 50 bps reduction in MI fees in January, 2015 (to 85 bps) will help address this issue

24. 24 Tighter Underwriting Guidelines FHA, VA, Fannie Mae, and Freddie Mac all impose credit requirements in order to for a loan to be salable. In addition to their requirements, many lenders have implemented “credit overlays” which further restrict underwriting criteria. For example, where FHA may require a minimum credit score of 660 for a loan product, a particular lender may require a credit score of 700. These overlays exist for two main reasons: Lenders want to insulate themselves from underwriting issues that could result in future repurchase exposure A lender’s own default experience with a particular product may result in an unwillingness to underwrite borrowers with credit scores or loan-to-value ratios at the program minimums. Alternatively, a lender may originate the loan but charge a higher interest rate, impacting affordability for the marginal borrower

25. 25 Looking Forward - New TILA/RESPA Rules What’s changing? The new rules consolidate four existing documents into two new disclosures: CurrentAugust 1, 2015 Initial TILA Disclosure & Good Faith EstimateLoan Estimate Final TILA Disclosure & HUD-1 Settlement Statement Closing Disclosure The new documents were developed by the CFPB and aim at making the content easier to understand. The new rules also make significant changes to the timing of the delivery of the Closing Disclosure and disclosure revisions What’s the impact? The 1,888 pages of identifying requirements and over 400 regulatory citation changes detail requirements for producing and delivering the disclosures in ways that will impact a bank’s entire mortgage operation (i.e. business processes, technology, policies and procedures, vendor relationships, employee readiness and training, and customer service) Failure to comply with these rules could result in unprecedented fines and penalties

26. 26 Looking Forward - Repurchase Demands FHA, VA, and the GSEs have engaged in an aggressive approach to repurchase demands, some would say defying the spirit in which such warranties are made Examples: - Death of borrower who is current on loan at the time of passing - Repurchase requests made due to technical flaws in documentation GSEs have great market power to extract repurchase settlements In November, FHFA revisions to the GSEs “reps- and warrants” framework indicate positive changes may be coming The new rules, retroactive to January 2013, provide that lenders might not be required to repurchase loans that contain data inaccuracies or misrepresentations unless they are “significant” or appear in multiple loans

27. 27 Looking Forward - GSE Reform After taxpayers spent $187 billion bailing out Fannie Mae and Freddie Mac, it was generally agreed that the present system was unsustainable. But what should a new system should look like? The main obstacle to reform is the disparate views in Congress as to the proper role of the federal government in housing Dividend payments from the GSEs to the US Treasury further promote the current inertia Several bills have been proposed, with varying levels of government involvement in the housing market. Key questions include: Should there be a government guarantee and, if so, how much? What is the role of private capital in absorbing losses? What type of entity should replace the two GSEs? Should there be a common, government sponsored securitization platform? What type of new regulatory entity would accompany such a reform? The end result of any reform effort will impact mortgage products, credit availability, market liquidity, and investor interest for years to come The current election cycle will delay housing reform for the foreseeable future

28. 28 Looking Forward - Macroeconomic and Housing Forecasts Economic forecasts are currently biased towards growth in 2015 To the extent that regulatory uncertainty continues to influence credit availability, growth will be muted however: The tone of regulatory enforcement matters as it impacts lenders’ willingness to lend further down the credit spectrum Continued clarity on reps- and warrants is needed GSE reform will become increasingly important as time passes Source: MBA Mortgage Finance Forecast, December 15, 2014.

29. 29 Looking Forward - Macroeconomic and Housing Forecasts Housing Market Conditions Unfavorable Housing Market Conditions Neutral Housing Market Conditions Favorable Higher mortgage rates Stagnant home values Punitive regulatory enforcement Lack of regulatory clarity Delayed GSE reform Student debt Lack of income growth Anemic job market for young adults Stable or declining mortgage rates Moderate price appreciation Regulatory clarity Meaningful GSE reform Lower FHA MI premiums Healthy job market for young adults All stakeholders in the housing market have a vested interest in promoting a healthy market for housing finance As more informed voices make themselves heard, the odds of favorable change improve

30. 30 Questions?