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The Changing Landscape of Mortgage Servicing Moderator: Sheryl Krocek , U.S. Bank

The Changing Landscape of Mortgage Servicing Moderator: Sheryl Krocek , U.S. Bank Panelists: Scott Schmitt, U.S. Bank Ansel Caine, Caine Mitter Friday, April 5th 2013. The New MLS Landscape. How did we get here? National HFA-MRB Servicers 2006 2011 Today / 2013.

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The Changing Landscape of Mortgage Servicing Moderator: Sheryl Krocek , U.S. Bank

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  1. The Changing Landscape of Mortgage Servicing Moderator:Sheryl Krocek, U.S. Bank Panelists:Scott Schmitt, U.S. Bank Ansel Caine, Caine Mitter Friday, April 5th 2013

  2. The New MLS Landscape How did we get here? National HFA-MRB Servicers 2006 2011 Today / 2013

  3. The New MLS Landscape How did we get here? Scary:Declining Servicing Values Scarier:Increasing Foreclosue and Repurchase Volume Scariest:QM, QRM, Dodd-Frank and Basel III

  4. The Decision Makers! OCC Regulations! HUD Regulations! GSE Guidelines and Repurchase Requests!

  5. Regulations • 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

  6. sk The fun never stops! Re-Purchase& MI Rescissions Requirements of Dodd-Frank & Basil III Changing Value of Servicing

  7. Changing Servicing Values Cost of Servicing Loss Mitigation, Basel III, Dodd-Frank, etc… Fixed vs. Market Adjusted Ability to Adapt to Market

  8. THE CHANGING LANDSCAPE FOR MORTGAGE SERVICING SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA Ansel Caine 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 Traditional Relationship Inverted Relationship 30yr Traditional MRB (Non-AMT) % 30yr Traditional MRB (AMT) GNMA MBS NIBP Bond Date of Lehman Bankruptcy

  11. MBS Secondary Market is Highly Liquid U.S Fixed Income Securities

  12. MBS Secondary Market Sale Economics • 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 • As of April 2, 2013 • Purchase price of mortgage loan, down payment assistance, origination fees and service release premiums, if appropriate • Present value of 0.19% servicing cash flows at 250% PSA and 5% discount rate

  13. Origination Period Creates Interest Rate Risk GNMA PRICE Market Risk DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE

  14. Selling TBA Forward Hedges Market Risk GNMA PRICE HFA sells TBA and locks in price Market Risk Eliminated DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE

  15. TBA Allows HFA to Sell MBS Forward • 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

  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 0.315% Servicing 3.875% FHA Mortgage 3.500% GNMA 0.060% Guarantee Fee

  17. Servicing Fee Affects Overall MBS Value *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:

  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

  20. Ansel Caine Caine Mitter & Associates Incorporated (212) 686 - 8820 acaine@cainemitter.com 279 Fifth Avenue Fourth Floor New York, NY 10016

  21. TBA Issues for Servicers • Multiple Pricing Options • Frequent Price Adjustments • Delivery timelines • Loan Lock Extensions

  22. TBA – Multiple SRP’s

  23. Challenges Current & Future

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