Mortgages, Ginnie Mae & the TBA Market

Ted Tozer Real Estate Broker Conference August 8, 2013

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Ginnie Mae Overview: Who We Are

• Government National Mortgage Association (GNMA or Ginnie Mae) • Established as a corporation within HUD by the Housing & Urban Development Act of 1968* • Effectively split from Fannie Mae, which was created in 1938 in response to the Great Depression • Mission is to expand affordable housing by linking global capital markets to the U.S. housing finance markets *HUD Act [12 USC § 1716b] 1

Ginnie Mae Overview: What We Do

• Guarantee Mortgage-Backed Securities (MBS), which raise funding for virtually all loans insured or guaranteed by U.S. Government agencies (FHA, VA & USDA Rural Housing) – Ginnie Mae does not originate loans or issue MBS – Private lending institutions issue MBS • Facilitate the financing of a variety of products: – Single-family: forward & reverse mortgages, manufactured homes – Multifamily: construction & permanent loans, hospitals, nursing homes, assisted living facilities • Over $1.4 trillion in outstanding MBS guaranteed – FHA loans back about 75% of outstanding MBS • In 2012 about half of all purchase mortgages were financed through Ginnie Mae MBS 2

Ginnie Mae MBS Outstanding Relative to GSEs

MBS outstanding in billions $3 000

May 2013: $2,763B

$2 500 $2 000 $1 500 $1 000 $500 $0

May 2013: $1,601B May 2013: $1,406B

Ginnie Mae Freddie Mac Fannie Mae Sources: Fannie Mae and Freddie Mac Monthly Reports; Ginnie Mae data includes HECMs 3

U.S. Mortgage Market

• U.S. mortgage market is comprised of two segments: – Primary market is made up of the borrower and lender/Issuer – Secondary market is made up of the lender/Issuer and investor • The secondary market enables lenders to sell the loans they originate to a third party – Lenders transfer loans off balance sheet & transfer risk that borrower will default – Lenders transfer risk that interest rates will rise to investors – Lenders use proceeds to make new mortgage loans available 4

TBA Market Overview

• • • • • • To-Be-Announced (TBA) market was created in 1970s to support Ginnie Mae securitization & financing of government insured loans – Virtually all government insured mortgages are sold into the TBA market – sold as part of MBS guaranteed by Ginnie Mae, Fannie Mae & Freddie Mac Facilitates forward trading of mortgages (delivery can take over three months, on average takes two months)

Enables lenders to lock in rate for loan originations prior to actually originating loans

Most liquid & important secondary mortgage market System provides broad & stable capital availability for potential homebuyers throughout the U.S.

TBA securities have U.S. Government guaranty, which facilitates scale of market & fungibility of securities 5

TBA Volume Traded Daily

2012 Average Daily Trading Volume in Billions $600

$518,9

$500 $400

$280,4

$300 $200 $100 $0

Treasury TBA (Agency MBS) $4,5 Non-Agency MBS $16,7 Corporate Debt

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Stylized TBA Transaction Example – Day 1

Sun. 9PM • U.S. Dealer Bank sells $100 million of Ginnie Mae or GSE MBS with 4% coupon rate to Asian investors Mon. 9AM • Mortgage Banker shorts (promises to deliver) $100 million of 4% MBS to Dealer Bank locking in rate for loan originations Monday Bus. Hrs .

• Throughout day, Mortgage Banker’s loan originators across the U.S. make loans at 4% to fill position 7

Stylized TBA Transaction Example – Day 2 thru Settlement,

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weeks later

Day 2 up to 48 hrs. to Settlement • Mortgage Banker has ability to fine tune trade, e.g., sell excess loan production or buy shortfall in TBA market At most 48 hrs. to Settlement • Mortgage Banker sells loans to GSE or delivers loans to Ginnie Mae for pool processing in exchange for guaranteed MBS 48 hrs. to Settlement • Mortgage Banker must provide specific MBS pool information to Dealer Bank at this point Settlement Date • Mortgage Banker delivers MBS to Dealer Bank, Dealer Bank delivers MBS to investors 8

FHA Loan in the Securitization Process

60-90 days Borrower finds home they’d like to buy Borrower goes to FHA-approved lender to obtain mortgage Lender had already pre-sold the mortgage & locked in a rate;

See slide 7, “Mon. 9AM”

Once mortgage is closed & delivered, servicing of the loan begins Borrower’s application is processed & mortgage closes Lender pools loan & delivers MBS to investors;

See slide 8, “Settlement Date”

Borrower makes monthly payment to lender/servicer who forwards it to investors 9

Securitization Bifurcates Risk

Lender’s Inherent Risks

Credit Risk & Interest Rate Risk

Credit Enhancer & Issuer MBS Investor

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Government Exposure to Mortgages

• The U.S. Government has had a significant role in the mortgage market going back at least 30 years 11

Our Guaranty Matters – it Provides Safety & Liquidity

• • • • • • Ginnie Mae provides a U.S. Government guaranty on the monthly payment of MBS to investors Government guaranty qualifies mortgages for the TBA market & attracts capital from throughout the world to invest in U.S. mortgages Guaranty makes investment in U.S.-backed mortgages exceptionally safe & provides liquidity to them Guaranty assures investors they will get paid regardless of loan performance or servicer performance Guaranty homogenizes mortgages & lender/servicers so they are indistinguishable to investors Homogenization of mortgages & lender/servicers enables investment in enormous blocks of mortgages – $280.4 billion in daily TBA MBS trading in 2012 – TBA market would not exist without government guaranteed MBS 12

Scope of Mortgage Market & Government Involvement

• Total U.S. outstanding mortgage debt is currently at almost $10 trillion – Outstanding mortgage debt is roughly equivalent to total value of assets on banks’ balance sheets – In 2012, only about 10% of mortgages were kept on banks’ balance sheets – If all banks did was invest in mortgage loans, they would barely be able to fund all mortgages in market, i.e., banks would not fund auto loans, credit card loans, etc.

• Government-backed securitization is necessary to maintain current volume available & preserve the 30-year fixed rate mortgage 13