2011 Q2 Recap Trends and Color for the Whole Loan Market

Erik K. Rand Senior Vice President Head of Mortgage Finance and Loan Trading Toll-Free: (888) 504-5100 Direct: (973) 549-4242Mobile: (201) 803-7885

This has been approved for institutional client distribution. Please note that this information is strictly Trader commentary and not the work of the Stifel Nicolaus Research Department. See below for additional disclosures. If you have any questions, please feel free to call (973) 549-4242.

Residential:Seasoned/Performing/Conforming Balance: We re-discovered the premium residential whole loan trade this quarter. Seasoned, high-quality loans with conservative LTVs continue to be in high demand. Most loans with updated LTVs less than 80%, strong credit scores, and solid payment histories are likely to trade over par. For agency eligible loans, FNMA / FHLMC securitization continues to maximize sales price. Eligible loans are usually full doc (possibly waived for seasoned portfolios) with updated LTVs <= 80% (unless with PMI) and must have updated FICOs >= 620. One of our clients said they were losing new originations to one of the “big banks” (no surprise there). They finished by saying the “big bank” was originating conforming loans at rates that were lower than the agencies would purchase at par (huge surprise here; if you’ve witnessed this yourself, please let me know). Performing Jumbo: Banks continue to have a shortage of high-quality jumbo loans available to originate. There would be tremendous market interest in pools of 15-Year Fixed or ARM jumbos – but the entire quarter passed without our seeing such a pool on the market. 30-Year Fixed-Rate portfolios are available. However, our constituency of community bank clients has only a limited to moderate interest in these high-duration assets. Jumbo Conforming loans continue to be available, but for the most part, only in the 30-year fixed-rate variety. Scratch and dent: We’ve seen an interesting nuance emerge in the Scratch and Dent and Alt A space. While we’ve known for some time that some non-performing loan buyers wouldn’t pay extra for similar loans with better performance, we’ve finally discovered some who will. Some funds clearly like high-velocity, low-duration assets (meaning: non-performing loans that are headed straight to foreclosure). Others actually prefer the ongoing cash flow of deeply distressed and underwater loans that continue to make payments, even if they do so inconsistently. Within the performing high LTV slice of the market, some players pay up for high credit quality and perfect performance, others don’t. There continues to be bank bids for the cleaner scratch and dent paper with updated LTVs capping out in the low 100s. Banks may bid this paper in the 80s, and sometimes in the 90s – if the updated LTVs are low enough. Non-performing: Non-performing loan pricing – in terms of price to BPO ratio (“Brokered Price Opinion” or collateral value) stayed constant. Top bids tend to be in the 60-65% of BPO range (holding constant), but collateral values in general have resumed their slide. More investors noted the difficulties associated with ever-extending and varying foreclosure timelines across myriad states. One example worth sharing (details slightly adjusted): Investor says the NY foreclosure timeline is now 4 years to foreclose plus 12 months to evict … 5 years total. If the loan is for $400,000 with a 4.5% coupon, the monthly payment due is: $2,027. That means the borrower lives in the house for 5 years while not paying $145,925 in monthly payments.

We saw increased activity in the non-performing FHA and VA space. Failed modifications and “re-defaulted” FHA/VA loans with middle of the road reps and warrants, sold servicing released or retained Actual / Actual are typically trading in the 80s. Large non-performing FHA/VA pools sold on a servicing retained, Scheduled / Scheduled basis, with strong reps and warran-ties (essentially supporting integrity of the insurance) can trade close to par.

Residential SummaryProduct Current Pricing 6 months ago Year ago

Performing Jumbo Best guess: 175-250 behind TBAs, insufficient trades to suggest an accurate spread, some said 400-500 back of TBAs due to lower rates causing premium compression

For low coupons, spread behind TBAs – 200-250 bp +/-, premiums cap around 102, discounts are tighter

For low coupons, spread behind TBAs – 200-275 bp +/- range but premiums cap out around 102

Scratch and Dent No change, but updated LTVs have resumed showing material deteriorations

50s to 90s based on LTV, FICO, delinquency, etc., higher floor for LTVs <100

50s to 90s based on LTV, FICO, delinquency, etc., higher floor for LTVs <100

Non-performing 50-65 as a percentage of BPO

55-65 as a percentage of BPO

55-65 as a percentage of BPO

CommercialPerforming commercial: Demand for high-quality performing commercial and multifamily loans continues to be strong, while supply is anything but. The upcoming wave of balloon maturities on commercial loans in securitizations is likely to affect the “large loan” side of the market by causing a significant number of maturity defaults. (Many loans will not be able to be refinanced at their current dollar amount because property values have declined). It is harder to tell if community banks will face the same sort of pressures from a massive number of bubble-era originations with balloon maturities. Across the spectrum, we noticed that loans that are truly high quality have been selling at more aggressive levels, but the gap between the “have” quality and the “have-not” quality loans has widened. DSCRs 1.25+ with LTVs <=75% are likely trade to less than a 6% yield. Par + pricing is achievable for multifamily and some CRE. Lesser quality CRE loans may trade in the 90s, 80s, or potentially lower. Bid levels for lower-quality CRE depend on rent rolls, DSCR ratios, updated LTVs, and so forth. Non-performing and scratch and dent: We experienced lively demand for the one “forced sale” situation we encountered in the second quarter. “Forced Sales,” that is, sales that are going to take place regardless of where the bids come in, can be a great yard stick to measure the market. In our example, though the timeline was extremely short, most of our potential buyers that we reached out to took a good hard look at the assets and we received more bids than expected. As for pricing, the general trend continues to hold. For assets in default and/or with LTVs more than a touch over 100%, the typical bid is in the 55%-65% range of updated collateral value. For assets with LTVs <= 100%, with decent cash flow on the underlying property, bank bids may show up in the 80% of collateral range. For voluntary sales, the bid-ask spread continues to be excessively wide. Bank sellers tend to be few and far between, except for those involved in one-off type transactions (like mergers, capital raises, regulatory issues, and so forth). ADC/construction loans: No major changes from the first quarter. However, we would expect to see the emergence of pockets of improvement in the most desirable locations. To that extent, we noticed certain investors specifically interested in certain geographies only, not because of where their operations are located but because of where they sense stabilization. Basic anecdotal evidence for pricing is: estimate pro forma sales price and time line, subtract cost to complete, build in a margin of error, price to yield 15%+. Trend is: pro forma sales price keeps going lower. Land buyers tend to pay 40-55% of property value. However, investors’ opinions of property value are consistently less than those of potential sellers.

ConsumerAuto loans: We saw an increase in the number of banks looking for consumer assets, including autos loans. However, as best we can tell, there wasn’t much change in pricing. Premiums are still rather high, especially by post-bubble standards. For a prime auto loan portfolio, a WAC of 6.25% would still command a premium over 103.5. In sum, we have more potential investors for prime, near prime, and sub-prime autos than we have sellers. A note to those who might consider selling for the first time: auto loan trades tend to have a higher success rate in due diligence than residential or commercial loan portfolios (auto loans are originated with the expectation of declining collateral values!) Inquiry ranges from $5 million up to $1 billion for the year. 2nd liens and HELOCs: We didn’t see many portfolios of 2nd liens or HELOCs available for sale in Q2. A few more banks mentioned they would look at high-quality 2nd lien portfolios, but we haven’t seen any increase in the number of portfolios available for sale. Clean new origination HELOCs and 2nd liens could easily trade in premium territory – if they have low combined LTVs, mid to high 700 FICOs, and interest rates slightly higher than comparable duration Jumbo loans. Performing bubble-era 2nd and HELOCs with updated LTVs > 100% would be unlikely to trade in the 70s, but could well find interest in the 60s.

Credit cards: Prime portfolios from strong sellers continue to be in high demand. We noted the reappearance of some potential purchasers who had been out of the market for a while. Pricing turned slightly more aggressive in the 2nd quarter, moving to 103 to 111 up from 103 to 108 in the first quarter and 100 to 106 at the end of the year. The drop-off in pricing for the slightly dinged / weak seller type portfolios remains severe because the type of investor changes. Non-performing consumer: One of our clients noted a pickup in activity during the second quarter. He pointed out that the biggest banks, plus the second-tier banks had brought more portfolios to market than during the first quarter, perhaps due to a passing of the paralysis inspired by “Foreclosuregate.” As for pricing, he noted most secured non-performing second liens trading in the 2.5-3.5 cent range, while the unsecured / foreclosed out 2nd liens were typically in the 30-60 basis point range, all pricing dependent on geography and portfolio specifics. That roughly fits within the range of our Q1 2011 color, but a little more carefully defined – here’s the prior color Q1: non-performing 2nds and HELOCs are trading in the 0-4 cent range, with the bulk of the assets valued at ½ to 2 cents. If the 2nd is foreclosed out, the asset is generally worthless – bids tend to cap out at 10 basis points. Most investors are willing to consider upside sharing arrangements.

Agency Servicing: FNMA/FHLMC/GNMANew origination bulk servicing trades seem to have a healthy market. Multiples continue to be in the 3-4 range, similar to the first quarter. A need for servicers to maintain portfolio size coupled with a low interest rate environment (meaning servicing valuations will increase if rates rise) is probably keeping pricing from falling too far in light of the upcoming Basel III rules, which will likely cap Mortgage Servicing Rights (MSRs) at 10% of Tier 1 capital. In the “no change” category from the last update, “Seasoned agency servicing continues to be difficult to trade. Certain MSR portfolios can only trade if a waiver of liability is attained from the owner of the loans. Seller strength and the value of their representations and warranties continues to affect the price where MSRs trade.” In summary: Loan to Value (LTV) ratios continue to dominate all aspects of real estate-backed loan trading (commercial and residential). Anecdotally, we saw: 1) commercial loans split based on location into a) really good loans with stabilized cash flows and collateral values and b) loan values continuing to decline, with poor prospects for increased rent rolls. This bifurcation tends to occur within local markets across the country as opposed to generalized across the country like the north vs. south, east vs. west, etc. We also saw: 2) residential collateral values broadly resume their decline. High-quality loans are harder and harder to come by (driving yields lower) while non-performing loans aren’t reaching the whole loan market in quantities reflective of their obvious abundance.

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The information contained herein has been prepared by the Stifel Nicolaus Whole Loan Trading Desk for institutional clients. It is neither a research report nor an impartial analysis of content discussed. The author is neither a Stifel Nicolaus Equity or Fixed Income Research Analyst, nor a member of the Stifel Nicolaus Equity or Fixed Income Research Department. The opinions expressed are those of the Whole Loan Trading Desk only and may differ from those of the Equity or Fixed Income Research Department. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. The information and statistical data contained herein has been prepared from sources believed to be reliable, but Stifel Nicolaus makes no representation or warranty as to the accuracy or completeness of any such information or data. The Whole Loan Trading Desk has made several assumptions to predict possible outcomes. Market events occurring that do not support these assumptions can change the outcome and affect the actual performance. The information and data contained herein is current only as of the date hereof, and Stifel Nicolaus has no obligation to update such information and data to reflect subsequent events.