1. Mike Awadis
Senior Vice President
FirstSouthwest Company
th Street, Suite 230 South
Santa Monica, CA 90404
Phone:
Single-Family Financing Essentials, Part 2: Securing the Best Price NCSHA 2014 HFA Institute Washington, DC January 15, 2015

2. Disclaimer
This presentation is intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this presentation was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute FirstSouthwest’s views as of the date of the report and are subject to change without notice. This presentation represents historical information only and is not an indication of future performance.

3. Contents Market Recap TBAs Underperform in the Rally
Mortgage Activity on the Rise
Specified pools
HFA CRA Partnerships
HFA TBA Production Trends

4. Market Recap Dollar up Stock Market Up – despite the recent correction
Yields way down
10-year Treasury near term lows hitting below 1.80%
30-year Treasury at an all time low hit 2.40%
Oil way down and pointing lower as a result of the economic slowdown in Asia, Europe and the stronger dollar
US economy strong – despite the disappointing retail sales announced yesterday
It’s all up to the US Consumer – the last bastion of economic growth

5. TBAs Underperforms
Last week’s Administration announcement related to the FHA MIP reduction was not well received by MBS investors
Fear of acceleration in prepayments
Evidenced by the BU/BD grids published earlier this month by Fannie
Analysts estimate 6-9 CPR impact at the 4% coupon (1% in price). The 4% coupon has been the worst performer
TBAs have underperformed in virtually every session this month compared to the benchmark 10 year Treasury
Liquidity only shows in the longer slower duration assets -- 3 and 3.5 coupon
Ginnie/Fannie swaps sold off drastically on the news
4% coupon Ginnie MBS was the worst performer
Given where rolls are trading 4% MBS is priced at 21 CPR (less than 4.5 year average life)

6. TBAs Underperform – Spread GN2 4s vs 10 Year

7. TBAs Underperform – Spread GN2/FN 4.0

8. TBAs Underperform – Spread GN2 4.0/3.5

9. Mortgage Activity On the Rise
Last week mortgage applications spike – biggest gain in 6 years
According to the Mortgage Bankers Association weekly survey
Total volume increased 49.1% over previous week on seasonally adjusted basis
Refinance applications up 66%
Conventional applications up 71%
Purchase activity up 24%
National average 30 year mortgage rate is now 3.89%
It’s a perfect storm -- 97% LTV announcement by Fannie, the reduction in MIP by FHA and the market rally is fueling the activity

10. Specified Pools – HFA Loan Pay-ups
A smaller but significant portion of agency MBS trade outside of the TBA market
Known as “Specified Pool”
The identity of the securities to be traded is specified at the time of trading
Some of these pools are typically not eligible for TBA trading
Backed by loans with more favorable prepayment characteristics – allowing them to achieve higher prices
Factors impacting pricing for specified pools today
Supply demand technicals and the volume of available MBS – GN1/GN2 swap
Interest rate environment – less demand in a rising rate market
CRA buyers make up a significant portion of the “specified” pool market

11. Benefits of HFA/Bank CRA Partnerships
HFA gets a forward dollar commitment at a specified spread to market
Allows the HFA to price the pay-up into the daily rate setting process making programs more competitive
Benefits buyer by allowing them to lock-in the cost of acquiring CRA investments
Allows buyer to specify the type, location and characteristics of collateral to be purchased
Potentially helps banks get a more favorable CRA rating in their periodic exams with regulators

12. HFA TBA Programs Continue to Grow – Despite Volatility
Since July 2012 representing 10 state HFAs and over $3.7 billion in locks
CY 2014 locks of $2.0 billion
Average daily locks are up over 50% in the last 12 months

13. Best Practices – What Have We Learned
Market Rate TBA Program
Best Practices – What Have We Learned
Expand your product menu include multiple DPA and rate options
The primary driver of HFA volume is still the need for DPA
Statistics show DPA does not have to be a grant to have a successful program
Jr lien DPA can be a significant source of residual income for an HFA
Manage your pull-thru rate by optimizing lock terms
Don’t give lenders more time than they need to close and sell the loans
This will keep your rate more competitive with market
Make your program as lender friendly as possible – eliminate unnecessary forms and streamline the approval process
Marketing, marketing, marketing – online, newsletters
Develop a robust marketing campaign with your lenders and realtors
Make sure lenders understand the HFA Preferred 97 benefits compared to standard
Rate does matter – keep interest spreads tight with market
Maintain flexibility in your gain-on-sale margins. A “set it and forget it” approach is less effective than maintaining a tighter spread to market

14. Agency TBA MBS Market
Appendix

15. TBA (Mortgage-Backed) Securities Market
Mortgage-backed securities (MBS) -- debt obligations
The most common form of MBS are pass-through certificates
MBS are highly liquid -- particularly those backed by agency guarantees
Most mortgages in the US are securitized through the agency MBS market
This trading convention significantly improves agency MBS liquidity – leading to lower mortgage rates for households
The key distinguishing feature of agency MBS is they carry a form of government guarantee – explicit (Ginnie Mae) or implied (Fannie and Freddie)
Other distinguishing feature is the existence of liquid forward market for trading
“TBAs” or “To Be Announced” are a form of future contracts

16. TBA (Mortgage-Backed) Securities Market – continued
Vast majority of MBS trading (over 90%) occurs in the forward market – TBA Market
Seller and buyer agree to a sale price without identifying the specific pool numbers
Six basic characteristics -- issuer, maturity, coupon rate, price, par amount and settlement date are agreed upon
Pools guaranteed by Ginnie Mae (a federal government agency), Fannie Mae or Freddie Mac (GSEs) can be allocated to TBA transactions
The goal of the TBA market was to create liquidity
A hedging tool – with settlement dates up to nine months out -- allows lenders to “lock in” sale prices for loans
The use of dollar rolls allows the seller to extend hedges
Drivers of market activity are broker dealers

17. TBA (Mortgage-Backed) Securities Market – continued
TBA trading occurs electronically on an over-the-counter basis
Two platforms, DealerWeb (interdealer trades) and TradeWeb (customer trades)
Trades can take place via telephone, fax or – not common
Securities Industry and Financial Markets Association (SIFMA) has specific rules regarding what constitutes TBA eligible deliveries also knows as “good delivery”
Only mortgages meeting certain size and credit quality criteria “conforming mortgages” are eligible for inclusion
Sheer aggregate size and the homogenous nature of agency MBS contribute significantly to liquidity – compared to corporate bonds or munis
TBA Market is the largest debt market in the world outside of US Treasuries
Virtually every primary broker/dealer on the street and in the world makes a market in TBA MBS

18. TBA (Mortgage-Backed) Securities Market – continued
TBA Market is made possible largely because agency MBS are exempt from the registration requirement of the Securities Act of 1933
Although not required, agencies do publicly disclose information about the composition of each pool
Similar to Treasury futures, TBAs trade on a “cheapest-to-deliver” basis
On a forty-eight-hour day, the seller selects which MBS in its inventory will be delivered to the buyer at settlement
In practice, most TBA trades do not ultimately lead to a transfer of physical MBS
In most cases the seller will either unwind or “roll” an outstanding trade

19. Liquidity

20. TBA Program Benefits When Compared to MRB
Market Rate TBA Program
TBA Program Benefits When Compared to MRB
Provides a no risk forward commitment mortgage program with no costs of issuance, negative arbitrage and legal expenses (outsourced)
Produces a significantly lower mortgage rate when compared with Pass-Thru and traditional MRB structures – including using zeros
Fund down payment and closing cost assistance without using HFA funds
Flexibility to adjust rates as the market moves -- no yield implications
Affords HFAs the option to pay higher lender compensation
Can be used to provide financing for non-first time homebuyers
Program is more lender friendly -- less paperwork for the lender
Can be combined with MCCs thus creating a lower effective mortgage rate
Gives HFAs the option of offering refinances
Significantly more profitable for HFAs than tradition MRBs and Pass-Thru structures both on present value and ongoing basis
It can be used as a tool to accumulate MBS for future bond transactions
Either “Pass-thru” or “Traditional MRB” structures
HFA has the option to repurchase its MBS at prevailing TBA levels

21. Market Rate TBA Program
Disadvantages
Because it does not require explicit authority to issue bonds or relies on volume cap, other entities can offer competing programs
Cal Rural Home Mortgage Finance Authority (CHF) operates a statewide program in California – in light of its power to only operate on 32 rural counties
National Homebuyers Fund – a nonprofit subsidiary of CHF – operates statewide programs is 24 other states
No ongoing issuer fee income, the HFA’s income is made up of gain-on-sale and residual income when the DPA or the second mortgage is repaid

22. Specified Pools – HFA Loan Pay-ups
A smaller but significant portion of agency MBS trade outside of the TBA market
Known as “Specified Pool”
The identity of the securities to be traded is specified at the time of trading
Some of these pools are typically not eligible for TBA trading
Backed by loans with more favorable prepayment characteristics – allowing them to achieve higher prices
Factors impacting pricing for specified pools today
Supply demand technicals and the volume of available MBS – GN1/GN2 swap
Interest rate environment – less demand in a rising rate market
CRA buyers and FHLB make up a significant portion of the “specified” pool market

23. TBA Market Snapshot

24. Pricing Example