The Changing Landscape of Mortgage Servicing

Moderator: Sheryl Krocek, U.S. BankPanelists: Scott Schmitt, U.S. Bank

Ansel Caine, Caine Mitter

Friday, April 5th 2013

2

How did we get here?

National HFA-MRB Servicers

2006 2011 Today / 2013

The New MLS Landscape

3

How did we get here?The New MLS Landscape

Scary: Declining Servicing Values

Scarier: Increasing Foreclosue and Repurchase Volume

Scariest: QM, QRM, Dodd-Frank and Basel III

4

The Decision Makers!

GSE Guidelines and Repurchase Requests!

OCC Regulations!

HUD Regulations!

5

MDIA > Confirm early TIL disclosed to borrower 3 days from application, verify APR not increased greater than .125

RESPA > Confirm Initial and Final GFE High Priced – FFIEC Verify lock date, apr, and term which calculates rate

spread of loan. High Cost > Run multiple tests to ensure borrower fees

not excessive Regulations / Form Changes Programs Changes Credit Score / DTI Changes TBA Programs

Regulations

6

Re-Purchase & MI Rescissions

Requirements of Dodd-Frank & Basil III

Changing Value of Servicing

sk

The fun never stops!

7

Cost of ServicingLoss Mitigation, Basel III, Dodd-Frank, etc…

Fixed vs. Market Adjusted

Ability to Adapt to Market

Changing Servicing Values

8Ansel Caine

THE CHANGING LANDSCAPEFOR MORTGAGE SERVICING

SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA

Friday, April 5, 2013

9

Topics

MBS Secondary Market / TBA Overview

Adjusting Servicing for Secondary Market

Execution

Working with a Master Servicer for Best

Execution

10

Traditional Mortgage Revenue Bond Model is Broken

30yr Traditional

MRB (Non-AMT)

NIBP Bond

GNMA MBS

30yr Traditional MRB (AMT)

TraditionalRelationshipTraditional

Relationship

InvertedRelationship

InvertedRelationship

Date of Lehman Bankruptcy

Date of Lehman Bankruptcy

%

11

MBS Secondary Market is Highly LiquidU.S Fixed Income

Securities

12

Liquidity and transparency of MBS market allows for daily rate setting

MBS sale example – Assumes government loan with 3.75% mortgage, no points and 3.0% down payment assistance

(1) As of April 2, 2013(2) Purchase price of mortgage loan, down payment assistance, origination

fees and service release premiums, if appropriate(3) Present value of 0.19% servicing cash flows at 250% PSA and 5%

discount rate

MBS Secondary Market Sale Economics

GNMA sale price (1) 107.0

Less cost of GNMA (2) - 105.0

Value of Servicing (3) + 0.9

Net income 2.9

13

Origination Period Creates Interest Rate Risk

Market

Risk

GNMA PRICE

DAY 1: RATE

ISLOCKED

WAREHOUSEORIGINATION

DAY 45: LOAN

CLOSES

DAY 60: LOAN IS

PURCHASED

DAY 75: LOAN ISPOOLED

DAY 90: MBS IS

DELIVERED

14

Selling TBA Forward Hedges Market Risk

GNMA PRICE

DAY 1: RATE

ISLOCKED

WAREHOUSEORIGINATION

DAY 45: LOAN

CLOSES

DAY 60: LOAN IS

PURCHASED

DAY 75: LOAN ISPOOLED

DAY 90: MBS IS

DELIVERED

Market Risk

Eliminated

HFA sells TBA and locks in

price

15

What is TBA?

TBA is an agreement to deliver an Agency MBS on an agreed upon future date for an agreed upon price

Why is it called TBA?

In a TBA trade, only price, settlement date, type, amount and interest rate are specified; all other characteristics are “To Be Announced”

How does TBA trade?

Most major broker/dealer firms have a mortgage desk that will bid on standard TBA Most trades are done on a competitive basis

TBA Allows HFA to Sell MBS Forward

16

Adjusting Servicing for Secondary Market Sales

MBSs trade best when the pass-through rate is a multiple of 0.50%

Flexible servicing fees allows for the creation of MBS on the half coupon, even if mortgage rates are not

Sample servicing fees for various government loan rates

Mortgage rate 4.000 3.875 3.750 3.625 3.500

Servicing fee 0.440 0.315 0.190 0.565 0.440

Guarantee fee 0.060 0.060 0.060 0.060 0.060

Pass through rate 3.500 3.500 3.500 3.000 3.000

3.875%FHA

Mortgage

3.875%FHA

Mortgage

3.500%GNMA

3.500%GNMA

0.315%Servicing

0.060%Guarantee

Fee

17

Servicing Fee Affects Overall MBS Value

Mortgage Rate 3.250 3.375 3.500 3.625 3.750 3.875 4.000 4.125 4.250 4.375 4.500

Servicing Fee 0.190 0.315 0.440 0.565 0.190 0.315 0.440 0.565 0.190 0.315 0.440

Pass-Through 3.000 3.000 3.000 3.000 3.500 3.500 3.500 3.500 4.000 4.000 4.000

*Servicing Value calculated at

250% PSA and 5% discount rate

18

Composition of MBS Affects Value and Financing Options

TBA eligibility

Mortgage Revenue Bond eligibility

Investors “pay up” for certain MBS characteristics, including:

– Maximum loan balance

– CRA credit

– LTV

– FICO

– Issuance date

Example of pay-ups for low loan balance pools:

Pool Type Pool AmountMaximum

Loan Balance Winning Bid

GNMA I 4.00% 1,645,279 83,460 110.94

GNMA I 4.00% 2,081,961 103,981 110.75

GNMA I 4.00% 1,728,763 137,071 110.59

GNMA I 4.00% 1,077,594 173,764 110.41

19

Sample Monthly Cycle for Creating Pools for TBA

Sample April calendar:

– April 3: Cut off for loan purchases

– April 4: Pool optimization determined

– April 10: Notification of delivery published

– April 15: HFA purchases MBSs

– April 16: HFA notifies TBA counterparty of delivery

– April 18: TBA trade is settled

AprilS M T W T F S

1 2 3 4 5 67 8 9 10 11 12 13

14 15 16 17 18 19 2021 22 23 24 25 26 2728 29 30

20

Ansel CaineCaine Mitter & Associates Incorporated

(212) 686 - 8820acaine@cainemitter.com

279 Fifth Avenue Fourth FloorNew York, NY 10016

21

TBA Issues for Servicers

Multiple Pricing OptionsFrequent Price AdjustmentsDelivery timelinesLoan Lock Extensions

22

TBA – Multiple SRP’s

Sample Ginnie Mae

Note Rate 3.500% 3.625% 3.750% 3.875%

G-Fee 0.060% 0.060% 0.060% 0.060%

Servicing Fee 0.440% 0.565% 0.190% 0.315%

Pass-Thru 3.000% 3.000% 3.500% 3.500%

23

Challenges Current

&Future