NYSAR Mortgage Industry Update

Presented by Scott Vahue, Senior Vice President

M&T Bank, Mortgage Division

February 11, 2015

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.

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

2014$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Origination Volumes and 30-Year Rate

Purchase Refinance 30-Yr. Fixed Rate

Orig

inati

on V

olum

e ($

mill

ions

)

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.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0%

10%

20%

30%

40%

50%

60%

Mortgage Originations by Product

HE LoanAlt-ASubprimeJumboConv/ConfGov'tARM %

Historical Perspective

4

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

19901992

19941996

19982000

20022004

20062008

20102012

2014*0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

New and Existing Home Sales

New Existing Median Sale Price

Units

in T

hous

ands

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.

19911991

19921993

19941994

19951996

19971997

19981999

20002000

20012002

20032003

20042005

20062006

20072008

20092009

20102011

20122012

20132014

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Single Family Delinquency Rate

Delinquency Rate

Historical Perspective

7

Historical Perspective

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.

8

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

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

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 DemandsA host of government regulators have sued the issuers of mortgage-backed securities for misrepresentation and other violations.

• To date, settlements in excess of $40 billion1 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

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.

2013 Q1

2013 Q2

2013 Q3

2013 Q4

2014 Q1

2014 Q2

2014 Q3

2014 Q4

2015 Q1F

2015 Q2F

2015 Q3F

2015 Q4F

0

100

200

300

400

500

600

0

10

20

30

40

50

60

70

80

Recent and Projected Origination Volume

Qtrly. Volume Refinance %

$ B

illio

ns

13

U.S. Unemployment Rate

2%

4%

6%

8%

10%

12%

14%

16%

18%

5.6%

94 96 98 00 02 04 06 08 10 12 14

5.0% averageJan 1994 to Dec 2007

Source: U.S. Bureau of Labor Statistics

RECESSION

RECESSION

Oct 200910.0%

11.2%

8.8% averageJan 1994 to Dec 2007

April 201017.2%

U-3 UnemploymentRate

U-6Unemployment

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

Un

em

plo

ym

en

t R

ate

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

5.0% averageJan 1994 to Dec 2007

Source: U.S. Bureau of Labor Statistics

UnemploymentRate

Private Employment Relative to Pre-Recession Peak

90%

95%

100%

105%

110%

115%

120%

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: ?????

Em

plo

ym

en

t S

inc

e P

re-R

ec

es

sio

n P

ea

k

16

$46,000

$48,000

$50,000

$52,000

$54,000

$56,000

$58,000

$60,000

$51,939

U.S. Real Median Household Income

2007$56,140

RECESSION

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics. Data stated in constant 2013 dollars.

RECESSION

90 92 94 96 98 00 02 04 06 08 10 12 13

RECESSION

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

Ho

us

eh

old

In

co

me

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

New M

exico

Maine

New Ham

pshire

New Je

rsey

Missouri

Pennsyl

vania

Michiga

n

Nebras

ka

Massach

usetts

North Caro

lina

Florid

a

North Dak

ota

Kansas

Georgi

a

Kentucky

Tenness

eeIowa

Nevad

aTe

xas

Arkansas Utah

Wyo

ming

Montana

Alaska

Virginia

Dist. o

f Columbia

0%

5%

10%

15%

20%

25%

30%

35%2012 to 2018 Forecasted Single Family Median Home Price Appreciation

Median Increase 22%

18

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

50

100

150

200

250

300

350

400

450

500

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-

Fam

ily

Ho

me

Per

mit

s S

AA

R (

Tho

usan

ds)

U.S

. Mu

ltifamily H

om

e Perm

its SA

AR

(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: SF MF

New York State 2% 18%

Albany MSA -1% 20%

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140.0

0.5

1.0

1.5

2.0

2.5

0

5,000

10,000

15,000

20,000

25,000

30,000

U.S. Housing Starts NY Housing Starts

U.S

. H

ou

sin

g S

tart

s (

MM

) N. Y

. Ho

us

ing

Sta

rts

20

First-Time Homebuyers are Under Participating

20%

25%

30%

35%

40%

45%

50%

55%

1990's Average

Firs

t-tim

e H

om

eb

uye

r S

ha

re

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 billion1

• 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

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

Higher FHA and Private Mortgage Insurance Premiums

Less than 640 640 to 760 760+0%

10%

20%

30%

40%

50%

60%

70%

Pre-Bubble ('00 to '03) Post QM ('13 to YTD '14)

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

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

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

Looking Forward - New TILA/RESPA Rules

What’s changing?• The new rules consolidate four existing documents into two new disclosures:

Current August 1, 2015Initial TILA Disclosure & Good Faith Estimate Loan 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

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

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

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

2014 2015 Change

GDP Growth Rate 2.20% 2.80% 0.60%

Unemployment Rate 6.20% 5.60% -0.60%

Housing Starts (000's) 995 1,110 12%

New Single-Family Home Starts (000's) 442 503 14%

Median Existing Home Sale Prices (000's) 207.5 206.9 0%

30 Year Fixed Mortgage Rates 4.20% 4.80% 0.60%

Source: MBA Mortgage Finance Forecast, December 15, 2014.

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

Questions?