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Agenda
The extent of government support of the housing market
The effect of these government actions and the state of the housing market
The cost of these government programs and the future of the GSEs and GNMA
The prospect for a private mortgage market
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Government Actions Prevented aComplete Collapse of the Housing Market
Supported demand for housing by
Ensuring uninterrupted supply of mortgage credit through the GSEs and GNMA
Ramping up the FHA program to provide leverage to home buyers Keeping mortgage rates low, making housing more affordable
Providing tax credits to new home buyers
Decreased distressed supply of homes in the market by
Helping at-risk borrowers through various foreclosure prevention programs suchas HAMP, foreclosure moratoria and Hope-for-Homeowners
Helping current borrowers through home affordability refinancing programs(HARP) This program has yet to have a significant impact
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Availability of Mortgage Credit HasBeen Dependent on Government Programs
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
GSE FHA / VA Private Lable / Portfolio
GNMA / GSE Share of Originations
___________________________
Source: Inside MBS&ABS, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
Key Government actions
Conservatorship of the GSEs
Increase loan limit for both the GSEs and
GNMA to as much as 729K
Implications of these actions
Government now underwrites over$5 trillion of credit risk in the mortgagesector
This allows GNMA / GSEs to issue AAAMBS that trade without any perceived
credit risk This has been the main source of
mortgage financing
% of Total Mortgage Originations
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GNMA Is the Only Source of FundingAcross the FICO Spectrum
FICO Distribution of 2009 Purchase LoansFICO Distribution of Homeowners with Mortgages
0%
5%
10%
15%
20%
800
Private Label / Portfolio GNMA GSE
% of Outstanding Mortgage Universe (by Count)
0%
5%
10%
15%
20%
800
Private Label / Portfolio GNMA GSE
% of 2009 Purchase Originations (by Count)
___________________________Source: First American CoreLogic, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
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And the Sole Provider ofHigh-LTV Lending
0.0%
0.0%
9.1%
19.7%
20.3%
Alt-A
3.9%
23.8%
53.2%
15.2%
12.0%
GSE
96.1%
76.2%
26.4%
13.1%
14.3%
GNMASubprimeTotal
53.4%2,637,9392005
52.0%2,640,8682006
11.3%1,418,9262007
0.0%1,203,0782008
1,289,351 0.0%
Distribution Across Sectors
2009
90+ Combined Loan-to-Value Purchase Loan Originations
___________________________Source: First American CoreLogic, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
0%
90%
95%
5.06
5.23
WAC
761
698
FICO
% of Loans Above
64%
99%
75%
18%
99%
80%
5%
95%
90%LTVALS(K)
97.7180FHA / VA
74.9228GSE
Collateral Strats GNMA vs. GSE 2009 Purchase Originations
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The FED and Treasury Asset PurchaseProgram Kept Mortgage Rates Low
839
2,599
(1,000)
0
1,000
2,000
3,000
'06 '07 '08 '09E '09E-Ex
Fed/Tsy
'10E '10E-Ex
Fed
Spread Products Treasury Ex-Bills Net FI Supply
FED Purchase Decreased Supply in 2009
FED MBS Purchase Have Supported Spreads
0.0
0.8
1.5
2.3
3.0
Jan-07 Jul-07 Jan-08 Aug-08 Feb-09 Aug-09 Mar-10
Par Coupon 7.5 Yr Treasury 10 Yr Average
US$bn
___________________________Source: NAR, Haver Analytics, Barclays Capital.
Key government actions
The FED purchased $1.25 trillion of MBS and$300 billion of treasury securities
The Treasury purchased $300 billion of MBS The conservatorship of the GSEs allowed
them to retain a 1.5 trillion portfolio of MBS
Implications of these actions
Decreased the duration supply that wouldhave hit the market in 2009
Treasury / Fed and the GSEs own almost$2.5 trillion of the $5 trillion in outstandingagency MBS. This has been supportive to
mortgage basis
Overall mortgage rates could have been75100 bp higher without thepurchase programs
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Various Foreclosure Prevention ProgramsChoked Off the Supply of New REO Loans
Indirect foreclosure moratorium due to HAMP decreased supply of distressed properties
Lower rates, home prices and home buyer tax credit have helped increase demand
Foreclosure to REO Roll Rate
0%
3%
6%
9%
12%
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Jan-10
Alt-A Prime Subprime
___________________________Source: LoanPerformance, NAR, Barclays Capital.
F-to-REO Rate
0
40
80
120
160
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10
REO Outflux REO Influx
Number UnitsREO Flow Rates
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___________________________Source: Case-Schiller Wiese, First American CoreLogic, FHFA, Haver Analytics, Barclays Capital.
Leading to a Nascent Recovery inHome Prices
3.6%(1.4%)2.2%2009 2nd half
(8.8%)0.2%(4.6%)2009 1st half
(5.5%)(1.3%)(2.5%)2009
(16.7%)(8.2%)(18.2%)2008
(7.4%)(1.2%)(8.4%)20072.0%3.5%(0.3%)2006
16.2%9.3%14.7%2005
16.3%
10.7%
9.5%
8.8%
10.5%
FACLFHFACSWYear
6.9%9.8%2000
6.8%7.7%2001
7.6%10.6%2002
7.6%10.7%2003
14.6% 9.3%2004
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But Significant Hurdles Remain
Even as REO inventories have declined, delinquencies have ballooned
Over two million loans have been charged off since Jan-2008 and another five millionhomes are now seriously delinquent
Shadow Inventory Build-Up
0
750
1,500
2,250
3,000
Jan-05 Aug-05 Apr-06 Nov-06 Jul-07 Feb-08 Oct-08 May-09 Jan-10
Real-Estate Owned Foreclosure 90+
___________________________Source: LoanPerformance, NAR, US Census Bureau, Barclays Capital.
Homes (000s)
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Re-Default Rates on ModificationsRemain High
Loan modifications have had limited success
Over 10 million homeowners have negative equity in their homes
Re-Defaults Across Payment Reduction
0%
25%
50%
75%
100%
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
010 1020 2030 3040 4050
___________________________Source: LoanPerformance, Barclays Capital.
Months Since Modification
Cumulative Delinquency
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20% Down Payment Is Still aChallenge for Home Buyers
Home value / GDP and home price / income ratios have returned to historical norms
The low savings rate of the last decade, combined with recent declines in householdwealth, continue to make 20% down payment a problem for new home buyers
Declining equity position makes 20% down payment a problem for existing homeowners
___________________________Source: NAR, Haver Analytics, Barclays Capital.
20% Down Payment Equals 57% of Income
2.0
2.5
3.0
3.5
4.0
4.5
1981 1985 1990 1995 2000 2005 2009
Median Home Price / Median Family Income
Historical Average, Price / Income Ratio
Mortgage Debt Levels Are High
Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Dec-090.0
0.5
1.0
1.5
2.0
0
0.2
0.4
0.6
0.8
Home Value / GDP Mortgage Debt / GDP
Home Value / GDP Mortgage Debt / GDP
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What Does All This Mean forHome Prices?
On aggregate we expect home prices to be weaker in 2010 than 2009. Our base caseforecast would suggest a 7%9% decline in the CSW / FACL indices Similar to 2007
On the positive side
Home prices are now at or close to fair value
We expect stronger macro economic fundaments to increase demand for housing
On the negative side
It is inevitable that more distressed properties will come to market in 2010 than didin 2009
The spike in demand because of the home buyer tax credit is likely to fade
The developing theme for 2010 will be the breakdown in correlation across regions
Our forecast is contingent on two key factors
GNMA continues to provide leverage for home buyers and there is no significant declinein the availability of mortgage credit
Foreclosure prevention programs will have at least a modicum of success
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Government Exit Options
This is potentially the biggest problem for the housing market
Success of leasing and other renting programs are critical for
the recovery in housing to continue
Easiest to exit Have already stopped purchases
Likely to push rates higher by 75100bp. If the other actions
remain in place the housing market should be only
moderately impacted
The market, however, is not prepared for a significant sale of
these assets
The FHA program provided 1.2 million purchase borrowers
with over 95% financing
Private markets will not be able to do this
Reduce the dependency of the mortgage market on
leverage potentially a five-year plan and part FHA reform
Credible alternative to the government wrap to create AAA
securities backed by residential mortgages
While some portion of GSE originations can be sourced in the
private markets, it will take a long time to develop the depth to
support over $1 trillion in originations
Can They Exit These Programs
Ramp up the FHA program Provide leverage for
purchase borrowers
Quantitative easing through
purchase of $1.5 trillion in
mortgage and $300 billion in
treasuries
Keep the mortgage rates low
HAMP for at-risk borrowers
HARP for current borrowers
Reduce distressed supply
Increase availability of
mortgage credit
Support forHousing Market
Provide back stop funding in
Fannie Mae and Freddie Mac
Government Action
Stated objective should be to prevent a significant over-correction in home prices
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Future of Housing Finance
Financing Solutions
2009PurchaseLoan LTV
20052008PurchaseLoan LTV
2009Purch.Loans
MtgUniverse
FICORange
Credit Type(% of Universe / %of 2009 Purchase
Loans)
Is economic to originate
Private and public solutions
possible
Will need government support till
housing stabilizes
Can potentially be priced
economically
Will require government subsidy.
Need to reduce leverage overtime. DTI and other standards
need to be tightened to reduce the
subsidy
84%
92%
95%
77%
83%
84%
13%
15%
18%
7%
11%
12%
1%
4%9%
10%
6%
5%8%
9%
800
Good Credits
(48% / 53%)
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Rajiv Setia
US Interest Rates Strategy
GSEs The Long and Winding Road
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GSE Losses Should Continue in 2010
FRE Net Income FNM Net Income
___________________________Source: Fannie Mae, Freddie Mac, Barclays Capital.
Security impairments to recede; Guaranty expenses to continue weighing on results
Preferred stock dividends owed to Treasury will soon exceed historical earnings over thevast majority of past years
2001 2002 2003 2004 2005 2006 2007 2008 2009
0
10
20
(60)
(50)
(40)
(30)
(20)
(10)
2001 2002 2003 2004 2005 2006 2007 2008 2009
0
10
20
(60)
(50)
(40)
(30)
(20)
(10)
2001 2002 2003 2004 2005 2006 2007 2008 2009(70)
(60)
(50)
(40)
(30)
(20)
(10)
10
0
2010 SECURITIZED PRODUCTSG B k C dit L
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G-Book Credit LossesCould Total $260bn$330bn
Lifetime Losses Depend on HPA Lifetime Losses, Assuming 0% HPA ($bn)
Roughly 60% of our loss estimates have been provisioned for through 4Q09
Credit Provisions to Keep Rising Cumulative Treasury Draws Mount
020406080100
120140160180
FHLMC FNMA
Loss provision Estimated credit loss
___________________________Source: Fannie Mae, Freddie Mac, Barclays Capital.
0
2040
60
80
100
120
2005 2006 2007 2008 1Q09 2Q09 3Q09 4Q09FNM Provisions FNM Charge-offsFRE Provisions FRE Charge-offs
Cumulative, $bn
0
510
15
20
25
30
35
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1/1/100102030
405060708090
FNM (LHS) FRE (LHS)
Cum FNM (RHS) Cum FRE (RHS)
Capital infusion, $bnCapital infusion, $bn
$ bn FNM FRE Total
Book of Business 2826 1870 4696
90d+ Delinquencies 175 89 263
On-B/S NPA Loans 50 16 66Total NPA 225 105 330
90d+ by Balance 6.18% 4.75% 5.61%
90d+ by Loan Count 5.38% 3.87% 4.77%
Estimated losses, $bn 170 90 260
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Options for Housing Finance
2010 SECURITIZED PRODUCTSChoices Clean Break or Improving the
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Choices Clean Break or Improving theCurrent Model?
Nationalization Going down the GNMA path
Privatization
Private label securitization Covered bonds
Improving the current model Re-constituting FNM / FRE with stronger regulation
Making the loans safer and keeping the current model
Public utility
Co-operative structure the MBA proposal
___________________________Source: Barclays Capital.
2010 SECURITIZED PRODUCTSOnly the Government Has the Ability to
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Only the Government Has the Ability toAct Countercyclically
Avg FICO Score for GSE Originations Has Skyrocketed SF Mortgage Originations Market Share
___________________________Source: Barclays Capital, Inside MBS.
700
710
720
730
740
750
760
770
Sep-03 Sep-05 Sep-07 Sep-09
Origination Month
FHLMC FNMA
0%
10%
20%
30%
40%
50%
60%
70%
80%
2001 2002 2003 2004 2005 2006 2007 2008 2009
YTD
Conventional
Subprime/Alt-A/HEL
Jumbo
GNMA
FNM / FRE underwriting has tightened dramatically; In 2009, avg. FICO up from historical avg. of 720to 760+; Avg. OLTV now < 70%
GNMA has rapidly gained market share, now 3040% of new origination; bulk of GNMA loans are95% LTV+
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4
6
8
10
12
14
16
18
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
Debt Subject to Limit Plus FNM/FRE Limit
30%
40%
50%
60%
70%
80%
90%
100%
110%
Sep-06 Sep-09 Sep-12 Sep-15 Sep-18
Public debt Plus FNM/FRE
53% as of Sep-09
% of GDP
CBO projection (adj.)
Going Down the GNMA Path?
___________________________Source: Fannie Mae, Freddie Mac, Barclays Capital.
Nationalization before portfolio wind down is problematic for debt ceiling limits
Projected deficits in 201015 will already require a politically risky increase in the borrowing limit
As the debt-to-GDP ratio approaches 100%, sovereign ratings downgrades become a real risk
Debt Ceiling Is a Factor ($trn) Rising Debt Threatens AAA Status
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FHA Likely to Bear Significant Losses
___________________________Source: Barclays Capital.
The maximum premium earned ~$3.5/100 face
Given the weaker credit of borrowers, losses are highly sensitive to HPA
Original Losses (%) Max IncomeVintage Balance ($bn) Base +5 HPA -5 HPA Premium (%) Base +5 HPA -5 HPA ($)
2003 174 4% 4% 5% 3.5% 8 7 8 62004 84 6% 6% 7% 3.5% 5 5 6 32005 67 11% 10% 12% 3.5% 8 6 8 2
2006 68 13% 11% 14% 3.5% 9 7 10 22007 87 18% 14% 20% 3.5% 16 12 18 3
2008 242 16% 9% 19% 3.5% 38 22 45 82009 391 15% 5% 21% 3.5% 57 21 81 14
1,112 13% 7% 16% 141 80 175 39
Cumulative Losses ($bn)
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Private Label and Covered Bond Alternatives
___________________________Source: Fannie Mae, Freddie Mac, Barclays Capital.
Private label market can come to a standstill in crises, as in 2009
Principal-agent issues, rating agency role under scrutiny
Pro-cyclical, with no incentive to provide credit to targeted groups
Covered bonds as an alternative
FNM / FRE / GNMA securitization efficient for conforming collateral providescapital relief
FHLB advances entrenched for whole loan financing
Funding levels and haircuts need to be attractive to bank issuers
Hard to expand market absent legislative framework
May provide small source of alternative funding for largest lenders
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Can Covered Bonds Displace Advances?
Funding Sources for New Mortgages How Are US Residential Mortgages Financed?
Issuer Incentive Either Funding Cost or Haircut Must Be Lower
___________________________Source: Barclays Capital, Federal Reserve.Note: RHS figure as of 12/31/09.
Off Balance Sheet On Balance Sheet
Direct sales of whole loans Deposits
Private label securitization Unsecured debt
GSE securitization FHLB
FHA / GNMA Covered bonds
12m 2y 3y 5y
Treasury 0.29 0.80 1.32 2.28
Agency 0.39 0.88 1.51 2.54
Advance 0.52 1.29 1.97 3.01
Unsecured 1.25 1.85 2.46 3.39
GSE pools,
5214, 49%
FHLB
advances,
631, 6%
Other bank
funds, 2396,
22%
ABS pools,
1525, 14%
Other, 581,
5%
GSEs, 439,
4%
Total =
$10,786bn
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Improving the Current Model Public Utility?
Public utility Is the mortgage business a natural monopoly? Not so, based on the 200406 experience Can a rate-setting board truly determine the fee to offset the implied subsidy? What ROE is needed to invite private capital? Many countries have gone in the other direction, privatizing inefficient utilities
Co-operative structure The MBA proposal Lenders would post a part of loan-sale proceeds as collateral, refundable over time Co-op would determine pricing and credit standards, with strong federal regulation Small members could get neglected with 8,000 members, consensus is not easy
Government catastrophe insurance still needed to ensure secondary market
liquidity and counter-cyclicality. But can the government price this risk adequately?
___________________________Source: Fannie Mae, Freddie Mac, Barclays Capital.
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Designing a Safer System Is Paramount
House Financial Services Committee Chairman Frank on the future of the GSEs:
It is also the case in going forward, as we restructure housing finance, we will
make sure that there are no implicit guarantees, hints, suggestions, or winksand nods. We will be explicit about what is and is not an obligation of the federalgovernment.
It is not clear that there is going to be an entity about which there would be that
ambiguity.
Were not remaking Fannie and Freddie. Were going to start from scratch anddo housing finance.
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
GSES Lowered Lending
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GS S o e ed e d gStandards to Retain Market Share
___________________________Source: Barclays Capital.
Standards in non-agency origination started to loosen in 2002, allowing private labeloriginators to win GSE market share
In response to the competition, FNM / FRE relaxed lending standards to sustain volumes
0%
10%
20%
30%
40%
50%60%
70%
80%
90%
100%
2001 2002 2003 2004 2005 2006 2007
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gto Non-Agency MBS
GSEs Increased Credit Risk Profile ... Taking Advantage of Cheap Funding Levels
and Tightening Non-Agency Spreads
-25
-20
-15-10
-5
0
5
10
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Agency MBS LOAS 5y Agency ASW
bp
Before Jun 2007
10
15
20
25
30
35
40
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Subprime GS E PT Spread (bp)
GSE participation, endorsed by Congress and regulators,legitimized the sector, allowing it to grow larger than itmight have otherwise become.
By funding at L-10bp and being allowed 40x leverage,the GSEs hurdle rate for buying non-agency MBS (ate.g., L+30bp) was non-economic; but it improved theefficiency of private label securitization
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1999 2001 2003 2005 2007 2009
Agency Non-agency Loans
GSE retained portfolios, $bn
___________________________Source: Barclays Capital.
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Improving the Current Model
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Close to 90% of origination is to borrowers with FICO >750/OLTV 750 &OLTV 750 &OLTV
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___________________________Source: Barclays Capital, Haver Analytics.
0
2
4
6
8
10
12
14
1952 1963 1975 1986 1998 2009
Personal Saving Rate (SA, %)
0%
20%
40%
60%
80%
100%
120%
1952 1963 1975 1986 1998 2009
100%
120%
140%
160%
180%
200%
220%
240%
260%Household debt/GDP (LHS)
Federal debt/GDP (LHS)
Total nonfinancial debt/GDP (RHS)
gLeverage?
Overall Debt Continues to Rise Because ofIncreasing Government Debt
Low Savings Rate Means Greater Reliance onExternal Funding
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FY-2009, 53%
FY-2019, 98%
0%
20%
40%
60%
80%
100%
120%
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
0%
5%
10%
15%
20%
25%
30%
Debt Held by Public / GDP, % Interest Cost/Revenues, RHS %
___________________________Source: CBO, Barclays Capital. CBO Baseline has been adjusted using its own estimate of the president's policies (as of June 2009) andassuming that appropriations grow @GDP instead of inflation. Interest cost has been forecast assuming that the forward path is realized andthe Treasury gradually terms out debt.
Financeability Ability to raise debt
Affordability? Interest costs relative to federal revenues
Reversibility?? Political will to impose credible plan for fiscal discipline
US Fiscal Metrics on an Unsustainable Path
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Timeline of Evolution in GSEs
___________________________Source: GAO, Barclays Capital.
1932: FHLB System created as part of the New Deal 1938: FHA, established four years earlier, creates a national mortgage association (FNMA) to purchase and sell
mortgages
1948: Fannie Mae chartered with the power to buy and sell loans insured by FHA and VA
1954: Fannie Mae reorganized into a mixed-ownership corporation, with the Federal government and mortgageoriginators being the owners (a cooperative) at this time, the charter was revised to specifically provide
liquidity in the mortgage market, and support the mortgage market in case of a threat to the stability of theeconomy
1968: Fannie Mae split into two: the new Fannie Mae became a private shareholder-owned entity with a Federalcharter, overseen by HUD, whereas Ginnie Mae became the guarantor of FHA and VA loans and remainedwithin HUD
1970: Freddie Mac created to develop a secondary market for conventional mortgage loans and become a sourceof competition for Fannie Mae
1981: Fannie Mae first issues MBS 1989: Freddie Mac became a publicly traded, shareholder owned corporation; FHLB oversight transferred to the
Federal Home Loan Bank Board
1992: OFHEO is created within HUD to monitor the safety and soundness of Fannie Mae and Freddie Mac at thistime, numeric affordable housing goals were also set for FNMA / FHLMC
2000: FNMA / FHLMC begin buying subprime and Alt-A mortgages
20034: OFHEO discovers improper accounting practices at FNMA / FHLMC 2008: FHFA established as the successor to OFHEO and the FHLB Board, retaining the mission oversight and
goals of the two former regulatory bodies shortly thereafter, FNMA / FHLMC were placed intoconservatorship by FHFA
2020: TBD?
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Non-Agency Securitization What Will It Take?
Sandeep Bordia
March 22, 2010
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
T S i S F
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To Summarize So Far
Government support was, and will remain vital for housing market in coming years
Any viable near-term solution to housing finance will require status quo on GSEs
This raises the following questions
Is there room for private players in the current environment?
What areas is the private market more likely to support?
What effect will proposed regulations have on private label securitizations?
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Agencies Have Cornered the TopE d f h M k
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End of the Market
Share of >740 FICO,
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Private Originations Were Only9% f M k t
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9% of Market
___________________________Source: Inside MBS & ABS, First American Core Logic, Barclays Capital.Note: Conforming limits are according to 2009 MSA level agency limits.
Large chunk of these fall outside agency loan limits
Share of 2009 Originations Most Portfolio Loans Non-Conforming
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
Non-Conforming Conforming
0%
20%
40%
60%
80%
GSE GNMA Portfolio
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The Problem GSE Execution MuchSuperior to Non Agency Securitization
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Superior to Non-Agency Securitization
___________________________Source: Barclays Capital.
Private market does not want to be in the lower credit space
For better credits, conforming loans are being originated at 55.25% WAC
Typical non-agency structure requires 93-7 structure, this is still 100bps short for
securitization to make economic sense
Super Senior (93%)
Mezzanine (7%)
Yield: 5%
Yield: 15%
Overall Yield:5.7%
Collateral PoolWAC = 5.95%
Servicingfee: 25bps
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
What Can Bring Non-AgencySecuritizations Back?
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Securitizations Back?
Agency MBS widening can it make non-agency securitizations more attractive? We expect 2030bps widening will not be enough
Significant dial back on GSE underwriting guidelines; is it likely? Not in the short run
Will originators look to diversify exit options? Limited need
Therefore, near-term focus will mostly be on pristine quality loans above GSE
loan limits
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Sizing Near-Term Private Market
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Sizing Near-Term Private Market
Share of Non-Conforming Loans Across Time
___________________________Source: Inside MBS & ABS, First American Core Logic, Barclays Capital.Note: Conforming limits according 2009 MSA level agency limits.
Non-conforming loans were only 4.5% of the market, or about 80 billionin originations
Banks willing to hold these at rates significantly lower than private marketsecuritizations
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009
Non-Conforming Conforming
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Medium Term Outlook forSecuritizations
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Securitizations
Private market will be uncomfortable with FHA quality loans Some potential in 7585 LTV bucket if MIP requirements change and a strong
recovery ensues
Possibly greater competition to GSEs in better quality originations
Non-government guarantee solution in long run may make these viable
But the first target is likely to be bigger balance loans
No credible case for government to be in that market
Agency loan limits are artificially higher
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Risk-Based Pricing from GNMA
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Risk Based Pricing from GNMA
___________________________Source: FHA, First American Core Logic, Barclays Capital.
GNMA insurance premia do not change as LTVs rise - incentivizes borrowers to take out loans withmaximum possible LTVs
The last two years have seen a rise in >95 LTV share, at the cost of 7580 LTV bucket
Higher base rates and introduction of risk-based pricing could make private market more competitiveon loans in the 75-85 LTV bucket would require a strong recovery
GNMA Rates for Purchase Loans Share of >95 LTV Loans Has Risen
Running MIP
Up-Front MIP
LTV 95
1.75% 1.75%
0.5% 0.55%
0%
10%
20%
30%
40%
50%
2005 2006 2007 2008 2009
95
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Non-Government Guarantee Solutionfor GSEs
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for GSEs
Historically, Jumbos traded 2530bps back of agencies
Convexity difference accounted for 10bps; government guarantee and betterliquidity arguably made up the rest
Value of guarantee much more in uncertain times
Non-government guarantee solution will make the private pie much bigger amount securitized will depend on capital requirements / funding levels
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Bigger Balance Will Be the First Target
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Bigger Balance Will Be the First Target
Loan Limit Across Time
___________________________Source: FHFA, Barclays Capital.
GSE loans limits tied to home price appreciation but do not go down when home pricesdrop Stimulus Act artificially raised limits
According to loan-size limit formula based on HPA, agency limits shouldbe 385k
No likelihood of near-term change but may decrease in the medium / long term
729,000
386,500417,000359,650322,700
275,000
0
200,000
400,000
600,000
800,000
2001 2003 2005 2007 2009
Agency Loan Limit Agency Loan Limit (Accd to MIRS)
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Agency Loan Limit NormalizationResults in Another 15% Market Share
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Results in Another 15% Market Share
___________________________Source: First American Core Logic, Barclays Capital.
If GSE loan limits were to drop to 417k, a potential 250300bn could find their wayinto non-agencies
Most of these are >740 FICO, 417k Most Are >740 FICO, 417k 417k >740 FICO +
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Bullish investors drove funding levels lower
Banks used securitized vehicles to completely offload risk
Offloading Risk
/ Better CapitalTreatment
InvestorDemand /Funding
Fall in Place
What drove non-agency securitization in the past?
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Banks Cant Offload Risk Due toRegulations
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g
Historically, banks were able to sell almost of their risk through securitization
Rep and warranty related repurchase risk was considered low
Then
Proposed senate finance bill mandates that originator / securitizer retain 5% of
pool banks will have exposure to underlying collateral risk
New FDIC proposals mandate 12-month seasoning before a loan is securitized in the interim, banks will carry this risk on their books
Cannot ignore rep and warranty risks
Now
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Greater Contingent Liabilities from Repand Warranties
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___________________________Source: Freddie Mac, NIC, Barclays Capital.
Unclear if issue for non-agencies so far
Most likely an issue for both GSE and non-GSE originations push originators toproduce very high-quality loans only
Rep and Warranty Repurchases Repurchases by Loan Owner
Owner 2009 Repurchases
Freddie Mac $4.1bn
Fannie Mae $1015bn(est)
MI Companies ?
Monolines ?
Non-Agencies ?
Total $35.3bn
(bn)
0
5
10
15
20
'08
Q1
'08
Q2
'08
Q3
'08
Q4
'09
Q1
'09
Q2
'09
Q3
'09
Q4
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Capital Requirements Likely toBe Higher
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g
Securitized vehicles were kept off balance sheets no capital requirements
Capital requirements for parts that could not be sold were low
Then
FAS 166167 changes require consolidation of SPV if originator has controlling
and economic interest
Banks may have to hold capital against entire collateral pool at 50% risk weighting
Assuming 10% capital ratio, implies 5% capital requirement
Now
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Bankruptcy Remoteness Critical
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p y
With FAS 166167, bankruptcy remoteness of securitizations has entered agrey area
It appears that FDIC would retain the ability to repudiate the contracts transferringthe assets need more clarity on what this means
Proposal in present form, could be a serious impediment for securitization
Interim safe harbor expires on Sep. 30, 2010
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Regulation Will Drive Risk Retentionand Capital Requirement
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Proposed Regulations and Their Effects
FAS 166167
FDIC Safe-Harbor Rule
SenateFinance Bill
Recently introducedin the Senate,
legislative approvalrequired
FDIC has received
comments onproposal; few moremonths before any
decision
Optionaltwo-quarter
implementationdelay on capitalrequirements
Status
Common groundbetween this and
FDIC?
Considerablechanges likely
before enactment
Almost certain.Possible
workaroundsexist, but are
difficult
Likelihood
Increases riskretention fororiginators
Question mark overbankruptcy isolation
of SPVs
Capital
requirementsincrease
Effects
12-month seasoningrequired before
securitization, loanlevel reporting,
stronger rep andwarranties
Up to 5% riskretention, regulator
may decreaserequirements based
on collateral
SPVs come back onbalance sheet
Key Provisions
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Funding Levels Are Also Much Higher
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Investor demand, significant risk appetite and rating agency acceptance drovefunding levels lower
Then
Little chance of increased investor interest in the short term even if risk appetite
were to return, would be concentrated in super-clean prime loans To ensure wide participation among investors, rating agencies need to regain
credibility
High rating agency loss assumptions would keep enhancement levels high,increasing funding rate
Robust economic recovery and improving housing can eventually drive fundinglower but unlikely to happen in near term
Now
2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE
Putting Loans in Agency PoolsRemains the Most Attractive Option
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What Are the Options for a Bank?
GSE
Portfolio
Securitization
New proposalsmandate 5%
retention, Rep andWarranties
100% economic risk
Rep and Warrantyclaims
Economic Risk
Secondary market,very high at present
Deposits, very low
Agency basisremains tight
FundingLevels
Term funding
Floating
Term funding
Type ofFunding
High, 50% riskweight, ~5% capital
Based on FAS166167, could besimilar to portfolio
None. Likely to
remain the sameunder Senate bill, ifregulators create
exemptions
CapitalRequirement
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Disclaimer
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