U.S.A. Mortgage Banking: Changes In The Landscape

1. U.S.A. Mortgage Banking: Changes In The Landscape World Bank Housing Finance in Emerging Markets Conference March 15, 2006 – Washington DC Doug Duncan, Senior Vice President & Chief Economist Mortgage Bankers Association

2. Ownership structures for mortgage banking companies • Privately held • Public stock ownership • Depository institution • Diversified financial holding company subsidiary • Diversified nonfinancial holding company subsidiary • Other

3. Marketing Selling and pricing new loan product Origination Creating new loan product Appraisal Determining the value of the real estate Processing Gathering loan documents and verifications Underwriting Approving or denying the loan Closing Culminating the mortgage transaction Warehousing Obtaining financing for loan originations Delivery Transferring loan files to the investor Secondary Marketing Selling existing loan product Loan Administration Collecting and remitting loan payments The mortgage banking process includes:

4. Directly Retains whole loans or participations in portfolio To Fannie Mae Which sells Guaranteed Mortgage Pass-Through Certificates Through securities dealers or FNMA trading desk Sells whole loans or participations To Freddie Mac Which sells mortgage Participation Certificates or CMOs Through securities dealers or FHLMC trading desk To a conduit Which sells loan packages, pass-through securities or CMOs Through securities dealers or private placements As GNMA MBSs Mortgage lender (Issuer) To Investors As Fannie Mae MBSs And sells through securities dealers, FNMA/FHLMC trading desks, or private placements As Freddie Mac PCs Converts mortgages to mortgage-backed securities As MBSs issued in lender’s own name Through investment bankers Converts mortgages to mortgage-backed bonds As private placements The secondary mortgage market process

5. Type of Risk Risk Is Present In Primary Market Secondary Market Both, in different forms Legal Loan Agreement √ Enforceability √ Property √ √ Consumer Protection √ Business Fraud √ Borrower Credit (Default) Repayment √ √ Collateral (Property) √ √ Interest Rate Prepayment √ √ Pipeline Operations √ √ Liquidity √ Risks present in U.S. mortgage market √

6. Current trends – product types • Structural change – refinancing • Structural change – adjustable rate mortgages • Structural change – nonprime • Cyclical factors – continued existence but less dramatic • Demographic factors – second homes and reverse mortgages

7. Annual mortgage production Billions of Dollars forecast Source: Mortgage Bankers Association and Department of Housing and Urban Development.

8. Originations by loan type Source: MBA’s First Half of 2005 Mortgage Originations Survey.

9. Current account balance Source: Bureau of Economic Analysis.

10. Foreign holdings of long term securities Source: U.S. Department of Treasury.

11. Implications of product type trends • Permanently higher prepayment rates • Permanently higher adjustable component • Permanently broader access to higher risk borrowers • Product innovation assisted by technology based financial innovation will continue

12. Current trends - lender types • Vertical integration of investment bankers • Small mortgage bankers become GSE franchisees • Niche product or market standalone companies • Aggregators continue to grow share

13. Single family production by channel

14. Summary of changes in market share Source: IMF

15. RMBS Issuance by quarter

16. Implications of lender type trends • Barbell shaped size distribution but with a fatter handle • Capital is key to size because of risks • Fulfillment advantage recedes • Few standalone full service entities • Many institutions competing then keeping profit margins competitive with benefits to consumers

17. Current trends – nonlender food chain • Marketing specialization/consumer segmentation • Process re-engineering • Changing business environment/model for: • Title companies • Warehouse lenders • Private mortgage insurance companies • Technology vendors • Security of transaction flows becoming critical • Risk-sharing permutations continue through financial re-engineering • Multiplicity of products generates multiplicity of investors

18. Implications of nonlender food chain trends • Cost reduction/efficiency improvement is paramount • Diversification or business model shifts • Emergence of industry utilities • Broader investor base remains • Sustainability depends on capital and flexibility

19. Conclusion • A dynamic but temporarily slowing market • A dynamic food chain • The consumer is king and products fit the royal lifecycle • Profit maximization equals cost minimization

20. Contact information/resources Doug Duncan dduncan@mortgagebankers.org 1919 Pennsylvania Ave - Washington, DC 20006 202-557-2825 • MBA homepage: www.mortgagebankers.org • Research and Forecasts: http://www.mortgagebankers.org/ResearchandForecasts/EconomicOutlookandForecasts • Research Data: • http://www.mortgagebankers.org/ResearchandForecasts/ProductsandSurveysmarketdata/ • MBA Newslink: http://www.mortgagebankers.org/NewsandMedia/MBANewsLink • Home Loan Learning Center: http://www.homeloanlearningcenter.com/default.html • RIHA: http://www.housingamerica.org/sitemap.html