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BUILDING TOMORROW ™ rbs.com/mib Recent Changes to Mortgage Regulation Panel I Moderator: Brian Lancaster, Managing Director and Co-Head of Structured Transactions,

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Presentation on theme: "BUILDING TOMORROW ™ rbs.com/mib Recent Changes to Mortgage Regulation Panel I Moderator: Brian Lancaster, Managing Director and Co-Head of Structured Transactions,"— Presentation transcript:

1 BUILDING TOMORROW ™ rbs.com/mib Recent Changes to Mortgage Regulation Panel I Moderator: Brian Lancaster, Managing Director and Co-Head of Structured Transactions, Analytics, Risk and Strategy, RBS, and Adjunct Professor of Finance, NYU Stern Panelists: Fred Matera, Managing Director and Chief Investment Officer, Redwood Trust Kelly Cochran, Deputy Assistant Director Regulation, Consumer Financial Protection Bureau Barry Zigas, Director of Housing Policy, Consumer Federation of America April Snyder, Senior Counsel, Board of Governors of the Federal Reserve System Andrew Miller, Senior Vice President & Director of Regulatory Policy, PNC Peter Carroll, Assistant Director Mortgage Markets, Consumer Financial Protection Bureau Kenneth Adler, Co-head of Mortgage Servicing and Secondary Group, Citibank

2 BUILDING TOMORROW ™ rbs.com/mib A. Recent Activity in the Private Label Market Brian P. Lancaster Managing Director, Co-Head of Structured Transactions Analytics Risk and Strategy RBS Adjunct Professor of Finance NYU Stern Fred Matera Managing Director and Chief Investment Officer Redwood Trust

3 33 Non-Agency RMBS Annual Issuance From an historic perspective non-agency RMBS issuance for the last few years has been anemic. At the peak of the market some $1 trillion of private label MBS was issued. In 2011 less than $2 billion was issued. Last year only about $6 billion was issued. For 2013 we expect about 2 deals per month on average for about a $12 billion - $13 billion pace. Some market participants expect more.

4 44 Recent Private Label RMBS Issuance Most of these deals have been collateralized by high quality, prime jumbo collateral (Sequoia and Credit Suisse deals) and about one third backed by legacy subprime mortgages. In addition there have been a number of unrated non- performing loan securitizations (NPLs). Most of the deals are backed by fixed rate mortgages although a few have been backed by hybrid ARMs. In 2011, seven deals were issued by 5 issuers totaling $1.7 billion. In 2012, there were 15 deals worth $6.2 billion is running at about a $13 billion annualized pace with several new entrants, such as JP Morgan.

5 55 Issuer Motivations Term Match Funding By issuing jumbo prime deals and retaining nearly all of the bond classes except the AAA rated classes issuers, such as Redwood, can add leverage and finance their mortgages thru better duration matched, term funding, reducing many of the issues associated with the carry trade which was discussed in the Mortgage REIT discussions this morning. Lower Financing Costs Springleaf can achieve a lower cost of financing than by issuing corporate debt.

6 6 Investors in Recent Private Label RMBS Banks and money managers account for the majority of investors in AAA jumbo prime MBS (90%) and AAA Springleaf bonds (85%). Lower rated, higher yielding Springleaf bonds are mostly purchased by hedge funds and money managers. AAA Jumbo Prime MBS InvestorsAAA Subprime MBS Investors Source: RBS

7 77 Investor Motivation in Buying Private Label RMBS (bln) Treasury1,4751,5911,0751, Agency Agency MBS IG Corporate Total2,1471,6531,2671,0751,328 Fed Purchases1, * Net of Fed5491, Source: RBS *We assume in January 2013 the Fed continues long Treasury purchases of $45bn a month, and continues $40bn a month in Agency MBS purchases through year end. We believe it will take at least that long for the Fed to see a “sustainable” recovery. Fed QE3 has been suppressing yields and reducing available bonds to investors. In 2013, NET supply available to the market may be close to zero.

8 88 Investor Motivation in Buying Private Label RMBS Comfort with the underwriting of high quality collateral and stable to increasing house prices make the sector more attractive to investors.

9 99 Further Growth of the Private Label RMBS Market: Impediments and Requirements Shrinking the Role of the US Government (GSEs) in Housing Finance Currently Fannie Mae, Freddie Mac and FHA/VA account for about 90% of all mortgage originations as they enjoy a financing advantage over the private sector because of their quasi government status. Reducing conforming loan limits from a range of $417,000 to $625,000 would create more collateral for private sector securitization. The Federal Reserve’s agency MBS purchase program (QE3) while reducing overall supply and stimulating investor demand for private label RMBS, also increases agency MBS prices which limits the growth of private label securitization. Balance sheet lenders, such as banks, finance mortgages with FDIC deposits have a funding advantage versus private securitizations. Agency MBS are exempt from Dodd Frank requirements, such as risk retention.

10 10 Further Growth of the Private Label Market: “G Fees” Need for further increase in GSE guarantee fees (“G” fees) to make private securitization more competitive. The GSEs have raised “G fees”. At the end of 2012 we estimate they were approximately in the low 50s. If G-fees rise another 15bp to 20 bps, to 70s area, private label RMBS securitization will be competitive with the GSEs. We expect G-fees to rise another 20 bps to 70s by the end of 2013 which could result in significant growth in private label RMBS issuance, all else equal. 10

11 11 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations Risk Retention Premium Capture Reserve Account US Regulators interpretation and implementation of Basel III (Simple Supervisory Formula Approach) QM Qualified Residential Mortgage (QRM) Mortgage Servicing

12 12 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations – Risk Retention/PCCRA Premium capture reserve account is being taken “off the table”. 5% risk retention expected to proceed. But for how long, 3 years, 5 years, life of deal?

13 13 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations - QM Definition of Qualified Mortgage (QM): A qualified mortgage is a mortgage that meets the “Ability to Pay” requirements of the Truth in Lending Act. A mortgage that meets this definition would provide protection to issuer from borrower lawsuits (by providing either safe harbor or rebuttable presumption) Qualified Residential Mortgage (QRM): Mortgages that can be securitized without risk retention on the part of issuer. To the extent QRM equals or is nearly equal to QM this will likely increase the amount of collateral available for private label RMBS issuance if these terms are not too narrowly defined.

14 14 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations - QM Qualified Mortgage (QM) definition as currently proposed: Qualified Mortgage: loans must have standardized features including periodic payments that are substantially equal, except for the payment changes on an ARM. Upfront points cannot be more than 3%. Loan must have back end debt to income (DTI) ≤ 43% or be eligible for agency execution. Safe Harbor: Mortgage rate is ≤ 1.5% above prime mortgage rate Rebuttable Presumption: (borrower is presumed to have the ability to pay but retains the ability to argue this): Mortgage rate > 1.5% above prime mortgage rate

15 15 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations Non-Qualified Mortgages Interest only mortgages Loans with balloon payments Negative amortization loans (e.g. option ARMs) No income or asset verification loans Loans with upfront fees > 3%, higher fees permitted for smaller loans Loan amount Cap on fees $100,000 3% $60,000 - $99,999 $3,000 $20,000 - $ $59,999 5% $12,500 - $$19,999 $1,000 Less than $12,000 8%

16 16 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations Research literature estimates that majority of mortgages (85% to 90%) originated after 2010 would meet qualified mortgage definition however 75% of mortgages originated before 2010 might be non-QM. Concern that few non-QM mortgages would be originated as lenders face legal action from borrowers for the first three years after origination or at any time during the foreclosure process. The financial damage facing lenders with non-QM loans would be up to three years of mortgage costs.

17 17 Further Growth of the Private Label Market: Clarification of Private Label MBS Regulations - QRM The definition of Qualified Residential Mortgage (QRM) is currently being debated by six Federal regulators, the Federal Reserve, HUD, FHFA, SEC, FDIC, and the OCC. Indeed, Bernanke mentioned it in his testimony, “QRM should not be so constraining”. Senator Corker has written a letter saying QRM should equal QM and the Mortgage Bankers Association is working with Senators Landrieu, Hagan, and Isaksen (authors of the original QRM in Dodd-Frank) on the definition of QRM. To the extent QRM equals or is nearly equal to QM, this will likely increase the amount of private label RMBS issuance.

18 18 The US Private Label MBS Market seems poised for significant growth towards the end of this year or early next year depending on: When “G-fees” are raised another 15 bps to 20 bps (expected towards the end of 2013). If QRM definition is the same as or close to the definition of QM How large an investor base is available to purchase bonds at or near current spreads Other factors that could stimulate/hinder its further growth: Reduction in maximum loan amounts guaranteed by the GSEs: mortgage servicing definition; Basel III/SSFA risk weights for US securitized products, less Federal Reserve buying of Agency MBS. Other issues?

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