Funding the Mortgage Pipeline - - Where does all that money come from? -- and -- Whose money is it anyway? Jack Konyk Senior Vice President Regulatory

Funding the Mortgage Pipeline- -

Where does all that money come from?-- and --

Whose money is it anyway?

Jack KonykSenior Vice President

Regulatory and Compliance Management

National City®

- - - - -

for

American Association of Residential Mortgage RegulatorsExaminer Training School: Fundamentals of Mortgage Banking

April 5, 2006

Funding the Mortgage Pipeline

What “Funding the Pipeline” means to: Mortgage Broker “Table-Funded” Mortgage Broker Portfolio Lender Mortgage Banker

Funding Terms and Concepts Table Funding Warehouse Line Rate Locks versus Floating Rates Hedging

Funding the Mortgage Pipeline- - -

“Simple” Mortgage Broker Perspective

Get approval and pricing from Lender

Get borrower acceptance

Advise Lender when ready to close

Wait for closing to occur and lender to pay out

Get income


What is “Table Funding” ?

“Simple” Broker Loan closes with Lender’s funds Loan documents are in Lender’s name

“Table-Funded” Broker Loan closes with Lender’s funds

Loan documents are in Broker’s name

Loan is immediately assigned to Lender


“Table-Funded” Mortgage Broker Perspective

Get approval and pricing from Lender


Advise Lender when ready to close

Set up closing with settlement agent

Wait for closing to occur and lender to pay out

Get income


Portfolio Lender Perspective

Make loan offer to borrower


Set up closing with settlement agent

Send money to closing

“Book” loan

Get income


What is a “Warehouse Line” ?

Line of Credit extended to a Mortgage Banker

Used by Mortgage Banker to get money to make loans

Secured by the loans made with the proceeds

Repaid when the Mortgage Banker sells the loans to

the ultimate investor


Mortgage Banker Perspective

Make loan offer to borrower Get borrower acceptance Set up closing with settlement agent Draw against Warehouse Line to send money to closing Deliver documents to Warehouse Lender or Custodian Get Investor approval and pricing (unless already done) Deliver loan to Investor Investor sends payment to Warehouse Lender Warehouse Lender repays Warehouse Line advance

Releases loan documents to Investor Releases excess Investor payment to Mortgage Banker

Get Income


Risks, and How To Manage Them

Pipeline Risks Management Strategy

Interest Rate Risks Hedging “Locked” rates “Floating” rates

Product Risk Product Discipline

Investor / Credit Risk Underwriting Discipline

Fallout Risk Trend Monitoring



Risk Management StrategiesHedging

“Hedging is avoiding risk in the secondary mortgage market. It provides the primary strategy for offsetting interest rate risk. Hedging involves the deliberate acceptance of one risk, calculated to offset the effect of interest rate changes. Hedging is also balance, compensating one risk with another, more predictable risk.” Source: Mortgage Bankers Association of America

Common Hedging Instruments Forward Sales Commitments Substitute Sales Commitments Futures and Options



Risk Management StrategiesProduct Discipline

Don’t originate products you don’t already have a buyer for Don’t deviate from standard products

Underwriting Discipline Choose Investors carefully Stay within Investor’s guidelines

Trend Monitoring Know your “pull-through” Anticipate effects of market developments

Securitization of Mortgages- -

What is it? How does it work?-- and --

What’s all the fuss about?

Jack KonykSenior Vice President

Regulatory and Compliance Management

National City®

- - - - -

for

American Association of Residential Mortgage RegulatorsExaminer Training School: Fundamentals of Mortgage Banking

April 5, 2006

Securitization of Mortgages

What is it? Definition: Process by which mortgage loans with common

features and maturity are “converted” into interest-bearing

securities with marketable investment characteristics.

In plain language:• Investment security (like a bond) is created for sale to investors

• Loans are grouped together into a “pool” and “given” to issuer

• Issuer “gives” security to lender in return for loans

• Lender then has an investment security instead of loans on the books

– They can sell it on to other investors

– They can hold it themselves


How does it work? (Creation) Identify closed loans with common features Create the security (legal contract) Obtain rating (if private security) Obtain or create required credit enhancements Determine issue date and pass through rate Place individual loans into security pool Deliver documents to custodian Security is issued Service for master issuer (or place servicing)


How does it work? (Ongoing)

Servicer receives payments on loans in pool

Servicer remits principal and interest (less fee) to issuer• Servicer remits only what was actually collected

Issuer sends full principal and interest payment to investor• Issuer remits full principal and interest regardless of amt. collected

Default risk may be assumed by servicer or issuer


Why do it? Converts mortgages to “better” asset

• More readily saleable, increases liquidity

• Increases fee income by converting what would have been interest into fees

• Better accounting treatments on carry and on sale

• Provides more flexibility in fiscal management

• Accesses alternative, often lower costs, sources of capital funding

What are the risks? Delinquency and default assumptions too low; compromises profitability

Security does not sell as anticipated; compromises liquidity


Q U E S T I O N S ?

C O M M E N T S ?

D I S C U S S I O N ?

D I S A G R E E M E N T S ?

Documents

Funding the Mortgage Pipeline - - Where does all that money come from? -- and -- Whose money is it anyway? Jack Konyk Senior Vice President Regulatory