Govt Housing Market

8/9/2019 Govt Housing Market

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2010 SECURITIZED PRODUCTSOUTLOOK CONFERENCE

2

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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3

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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4

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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5

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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6

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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7

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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8

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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9

___________________________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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10

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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11

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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12

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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14

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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15

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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16

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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18/65


Rajiv Setia

US Interest Rates Strategy

GSEs The Long and Winding Road

2010 SECURITIZED PRODUCTS


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19

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


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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23

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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25

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?


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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OUTLOOK CONFERENCE

27

FHA Likely to Bear Significant Losses


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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OUTLOOK CONFERENCE

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Private Label and Covered Bond Alternatives


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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OUTLOOK CONFERENCE

29

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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OUTLOOK CONFERENCE

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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?




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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.


GSES Lowered Lending


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GS S o e ed e d gStandards to Retain Market Share


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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OUTLOOK CONFERENCE

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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



Improving the Current Model


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OUTLOOK CONFERENCE

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Close to 90% of origination is to borrowers with FICO >750/OLTV 750 &OLTV 750 &OLTV


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OUTLOOK CONFERENCE

35

___________________________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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OUTLOOK CONFERENCE

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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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OUTLOOK CONFERENCE

37

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


T S i S F


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40

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?


Agencies Have Cornered the TopE d f h M k


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41

End of the Market

Share of >740 FICO,


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Private Originations Were Only9% f M k t


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43

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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45

Superior to Non-Agency Securitization


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


What Can Bring Non-AgencySecuritizations Back?


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46

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


Sizing Near-Term Private Market


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47

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


Medium Term Outlook forSecuritizations


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48

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


Risk-Based Pricing from GNMA


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49

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


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


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)


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?


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


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


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


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


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


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


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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Govt Housing Market

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