1. ACHIEVING TBA BEST EXECUTION SINGLE FAMILY FINANCING ESSENTIALS: MBS & TBA January 14, 2016

2. TBA is Good Execution a simple and important financing tool for HFAs an effective hedge against changing MBS prices

3. TBA delivery offers better execution than MRB in most cases TBA is a simple, flexible means of hedging mortgage pipeline * “Evolving Mortgage Funding Strategy Has Mixed Impact on Business Models”, Moody’s Investors Service, June 30, 2015; “TBA” includes whole loan sales and MBS sales Early 20152015 Moody’s*Caine Mitter MRB TBA MRB TBA Most new HFA loans are financed with TBA TBA is an important financing tool for HFAs

4. TBA hedges interest rate risk TBA allows HFAs to lock in MBS price on new loan reservations, hedging the change in price due to rising interest rates TIME PRICE TBA LOCKED PRICE MBS SALE PRICE TBA is an effective hedge against changing MBS prices

5. TBA market is not always best execution After hedging in the TBA market, HFA does not have to deliver loans against TBA commitments Good execution vs. best execution HFAs can easily “pair off” TBA trade to achieve best execution HFAs can aggregate loans without interest rate risk while determining how to permanently finance loans TBA market is liquid and flexible

6. TBA Can Achieve Best Execution specified pool sales MRB (mortgage revenue bond) issuance

7. Unlocks additional value of HFA loans TBA pricing is generic Generic pricing assumes that loans delivered will meet the minimum requirements of TBA sale Many HFA loans have slower prepayment speeds than private sector loans; investors will pay more TBA Best Execution: Specified Pool Sales

8. Unlocks additional value of HFA loans Addition to TBA price for: HFA DPA loan Smaller loan sizes CRA credit New issue GNMA II multi-issuer pools up to 0.75% up to 2.20% 0.38% or more, depending on demand up to 0.25% (was >1.00% earlier in 2015) TBA Best Execution: Specified Pool Sales

9. Tax exempt MRBs provide unique opportunities MRB vs. MBS Sale Full spread can be better execution than generic TBA trade TBA Best Execution: MRB Issuance PREPAYMENT SPEED PRESENT VALUE NET INCOME MRB MBS Sale Full spread MRB with zeroes zeroes MRB with swap Swaps allow for better execution than full spread

10. Achieving TBA Best Execution TBA  specified pool sale TBA  MRB issue

11. Execution is similar to TBA Specified pool is delivered against trade on standard settle date Best execution mechanics: TBA  specified pool HFA avoids interest rate risk HFA has already hedged against interest rate risk via TBA HFA can extract additional income from loans Specified pool CUSIP and Pool # provided to potential investors Potential investors determine value over TBA Competitive sale enhances results

12. Best execution mechanics: TBA  specified pool TIME PRICE TBA LOCKED PRICE CURRENT TBA PRICE Locked TBA Price Spec Pool Price (Pay Up + Current TBA) Pay ups are not affected by TBA price movement Pay Up Current TBA Price Original TBA trade Specified Pool Sale

13. Buy TBA to cancel out original hedge position, sell specified pool Current TBA Price Best execution mechanics: TBA  specified pool Pay ups are not affected by TBA price movement Locked TBA Price Pay Up Current TBA Price Current TBA Price Original TBA tradeSpecified Pool Sale buy TBA sell specified Current TBA pricing does not change net income

14. Pair off income + MRB spread = full spread Requires Qualified Hedge ID to be included in tax law spread analysis Rising interest rates cause TBA prices to decline and MRB issue to be below full spread Locked TBA Price Pair Off Income Actual MRB Spread at Time of Issuance TBA can effectively hedge against rising MRB yields Best execution mechanics: TBA  MRB TBA Price at MRB Issuance Full Spread Pair off income = Locked TBA price – TBA Price at MRB issuance

15. TBA is an effective hedge and good execution KEY TAKEAWAYS Best execution requires more than TBA alone More profit ≠ more work PRESENT VALUE INCOME Best Execution

16. THANK YOU Patricia Ho Caine Mitter & Associates Incorporated pho@cainemitter.com (212) 686 - 8820