Govt Housing Market

2010 SECURITIZED PRODUCTS
OUTLOOK CONFERENCE
Can the Government Exit the Housing Market?

V. S. Srinivasan, Rajiv Setia, Sandeep Bordia
March 22, 2002
PLEASE SEE ANALYST(S) CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER SLIDE 63
OUTLOOK CONFERENCE
Agenda
• The extent of government support of the housing market

• The effect of these government actions and the state of the housing market
• The cost of these government programs and the future of the GSEs and GNMA
• The prospect for a private mortgage market
2
Government Actions Prevented a OUTLOOK CONFERENCE
Complete Collapse of the Housing Market
• Supported demand for housing by

• Ensuring uninterrupted supply of mortgage credit through the GSEs and GNMA
• Ramping up the FHA program to provide leverage to home buyers
• Keeping mortgage rates low, making housing more affordable
• Providing tax credits to new home buyers
• Decreased distressed supply of homes in the market by
• Helping at-risk borrowers through various foreclosure prevention programs such
as HAMP, foreclosure moratoria and Hope-for-Homeowners
• Helping current borrowers through home affordability refinancing programs
(HARP) – This program has yet to have a significant impact
3
Availability of Mortgage Credit Has OUTLOOK CONFERENCE
Been Dependent on Government Programs
GNMA / GSE Share of Originations
• Key Government actions % of Total Mortgage Originations
100%
• Conservatorship of the GSEs
• Increase loan limit for both the GSEs and
GNMA to as much as 729K 80%
60%
• Implications of these actions
• Government now underwrites over 40%
$5 trillion of credit risk in the mortgage
sector
20%
• This allows GNMA / GSEs to issue AAA
MBS that trade without any perceived
credit risk 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
• This has been the main source of
mortgage financing
GSE FHA / VA Private Lable / Portfolio
___________________________
Source: Inside MBS&ABS, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
4
GNMA Is the Only Source of Funding OUTLOOK CONFERENCE
Across the FICO Spectrum …
FICO Distribution of Homeowners with Mortgages FICO Distribution of 2009 Purchase Loans
% of Outstanding Mortgage Universe (by Count) % of 2009 Purchase Originations (by Count)
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
<500
>800
500–525
525–550
550–575
575–600
600–625
625–650
650–675
675–700
700–725
725–750
750–775
775–800
<500
500–525
525–550
550–575
575–600
600–625
625–650
650–675
675–700
700–725
725–750
750–775
775–800
>800
Private Label / Portfolio GNMA GSE Private Label / Portfolio GNMA GSE
___________________________
Source: First American CoreLogic, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
5
… And the Sole Provider of OUTLOOK CONFERENCE
High-LTV Lending
90+ Combined Loan-to-Value Purchase Loan Originations
Distribution Across Sectors
Total Subprime Alt-A GSE GNMA
2005 2,637,939 53.4% 20.3% 12.0% 14.3%
2006 2,640,868 52.0% 19.7% 15.2% 13.1%
2007 1,418,926 11.3% 9.1% 53.2% 26.4%
2008 1,203,078 0.0% 0.0% 23.8% 76.2%
2009 1,289,351 0.0% 0.0% 3.9% 96.1%
Collateral Strats GNMA vs. GSE – 2009 Purchase Originations

% of Loans Above
ALS(K) FICO WAC LTV 75% 80% 90% 95%
FHA / VA 180 698 5.23 97.7 99% 99% 95% 90%
GSE 228 761 5.06 74.9 64% 18% 5% 0%
___________________________
Source: First American CoreLogic, Fannie Mae, Freddie Mac, GNMA, Barclays Capital.
6
The FED and Treasury Asset Purchase OUTLOOK CONFERENCE
Program Kept Mortgage Rates Low
FED Purchase Decreased Supply in 2009
• Key government actions US$bn
2,599
3,000
• The FED purchased $1.25 trillion of MBS and
2,000
$300 billion of treasury securities 839
1,000
• The Treasury purchased $300 billion of MBS 0
• The conservatorship of the GSEs allowed (1,000)
them to retain a 1.5 trillion portfolio of MBS '06 '07 '08 '09E '09E-Ex '10E '10E-Ex
Fed/Tsy Fed
Spread Products Treasury Ex-Bills Net FI Supply
• Implications of these actions
FED MBS Purchase Have Supported Spreads
• Decreased the duration supply that would
have hit the market in 2009 3.0
• Treasury / Fed and the GSEs own almost 2.3

$2.5 trillion of the $5 trillion in outstanding 1.5
agency MBS. This has been supportive to 0.8
mortgage basis
0.0
• Overall mortgage rates could have been Jan-07 Jul-07 Jan-08 Aug-08 Feb-09 Aug-09 Mar-10
75–100 bp higher without the
purchase programs Par Coupon – 7.5 Yr Treasury 10 Yr Average
___________________________
Source: NAR, Haver Analytics, Barclays Capital.
7
Various Foreclosure Prevention Programs OUTLOOK CONFERENCE
Choked Off the Supply of New REO Loans
• Indirect foreclosure moratorium due to HAMP decreased supply of distressed properties
• Lower rates, home prices and home buyer tax credit have helped increase demand
Foreclosure to REO Roll Rate REO Flow Rates

F-to-REO Rate Number Units
12% 160
9% 120
6% 80
3% 40
0% 0
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Jan-10 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10
Alt-A Prime Subprime REO Outflux REO Influx

___________________________
Source: LoanPerformance, NAR, Barclays Capital.
8
Leading to a Nascent Recovery in OUTLOOK CONFERENCE
Home Prices
Year CSW FHFA FACL
2000 9.8% 6.9% 10.5%
2001 7.7% 6.8% 8.8%
2002 10.6% 7.6% 9.5%
2003 10.7% 7.6% 10.7%
2004 14.6% 9.3% 16.3%
2005 14.7% 9.3% 16.2%
2006 (0.3%) 3.5% 2.0%
2007 (8.4%) (1.2%) (7.4%)
2008 (18.2%) (8.2%) (16.7%)
2009 (2.5%) (1.3%) (5.5%)
2009 – 1st half (4.6%) 0.2% (8.8%)
2009 – 2nd half 2.2% (1.4%) 3.6%
___________________________
Source: Case-Schiller Wiese, First American CoreLogic, FHFA, Haver Analytics, Barclays Capital.
9
OUTLOOK CONFERENCE
But Significant Hurdles Remain
• Even as REO inventories have declined, delinquencies have ballooned
• Over two million loans have been charged off since Jan-2008 and another five million
homes are now seriously delinquent
Shadow Inventory Build-Up

Homes (000s)
3,000
2,250
1,500
750
0
Jan-05 Aug-05 Apr-06 Nov-06 Jul-07 Feb-08 Oct-08 May-09 Jan-10
Real-Estate Owned Foreclosure 90+

___________________________
Source: LoanPerformance, NAR, US Census Bureau, Barclays Capital.
10
Re-Default Rates on Modifications OUTLOOK CONFERENCE
Remain High
• Loan modifications have had limited success
• Over 10 million homeowners have negative equity in their homes
Re-Defaults Across Payment Reduction

Cumulative Delinquency
100%
75%
50%
25%
0%
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Months Since Modification
0–10 10–20 20–30 30–40 40–50
___________________________
Source: LoanPerformance, Barclays Capital.
11
20% Down Payment Is Still a OUTLOOK CONFERENCE
Challenge for Home Buyers
• Home value / GDP and home price / income ratios have returned to historical norms
• The low savings rate of the last decade, combined with recent declines in household
wealth, continue to make 20% down payment a problem for new home buyers
• Declining equity position makes 20% down payment a problem for existing homeowners
20% Down Payment Equals 57% of Income Mortgage Debt Levels Are High
Home Value / GDP Mortgage Debt / GDP
4.5 2.0 0.8
4.0
1.5 0.6
3.5
1.0 0.4
3.0
2.5 0.5 0.2
2.0 0.0 0
1981 1985 1990 1995 2000 2005 2009 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Dec-09
Median Home Price / Median Family Income Home Value / GDP Mortgage Debt / GDP
Historical Average, Price / Income Ratio
___________________________
12
Housing Market Is Still Fragile – OUTLOOK CONFERENCE
But There Are Some Bright Spots
• Existing home sales have stabilized
• Low mortgage rates have driven the NAR affordability index to an all-time high
Existing Home Sales Have Stabilized Affordability Index Looks Attractive

Home Sales (mm) Affordability Index
9.0 200
150
6.0
100
3.0
50
0.0 0
2005 2006 2007 2008 2009 1981 1985 1990 1995 2000 2005 2009
All others Distressed Affordability Index Historical Average
___________________________
13
What Does All This Mean for OUTLOOK CONFERENCE
Home Prices?
• On aggregate we expect home prices to be weaker in 2010 than 2009. Our base case
forecast would suggest a 7%–9% decline in the CSW / FACL indices – Similar to 2007
• On the positive side
• Home prices are now at or close to fair value
• We expect stronger macro economic fundaments to increase demand for housing
• On the negative side
• It is inevitable that more distressed properties will come to market in 2010 than did
in 2009
• The spike in demand because of the home buyer tax credit is likely to fade
• The developing theme for 2010 will be the breakdown in correlation across regions
• Our forecast is contingent on two key factors
• GNMA continues to provide leverage for home buyers and there is no significant decline
in the availability of mortgage credit
• Foreclosure prevention programs will have at least a modicum of success
14
OUTLOOK CONFERENCE
Government Exit Options
Stated objective should be to prevent a significant over-correction in home prices
Support for
Housing Market Government Action Can They Exit These Programs
• Increase availability of • Provide back stop funding in • Credible alternative to the government wrap to create AAA
mortgage credit Fannie Mae and Freddie Mac securities backed by residential mortgages
• While some portion of GSE originations can be sourced in the
private markets, it will take a long time to develop the depth to
support over $1 trillion in originations
• Provide leverage for • Ramp up the FHA program • The FHA program provided 1.2 million purchase borrowers
purchase borrowers with over 95% financing
• Private markets will not be able to do this
• Reduce the dependency of the mortgage market on
leverage – potentially a five-year plan and part FHA reform
• Keep the mortgage rates low • Quantitative easing through • Easiest to exit – Have already stopped purchases
purchase of $1.5 trillion in • Likely to push rates higher by 75–100bp. If the other actions
mortgage and $300 billion in remain in place the housing market should be only
treasuries moderately impacted
• The market, however, is not prepared for a significant sale of
these assets
• Reduce distressed supply • HAMP for at-risk borrowers • This is potentially the biggest problem for the housing market
• HARP for current borrowers • Success of leasing and other renting programs are critical for
the recovery in housing to continue
15
OUTLOOK CONFERENCE
Future of Housing Finance
Credit Type
(% of Universe / % 2009 2005–2008 2009
of 2009 Purchase FICO Mtg Purch. Purchase Purchase
Loans) Range Universe Loans Loan LTV Loan LTV Financing Solutions
• Will require government subsidy.
<600 6% 1%
Need to reduce leverage over
Weak Credits 600–625 5% 4%
84% 95% time. DTI and other standards
(28% / 25%) 625–650 8% 9%
need to be tightened to reduce the
650–675 9% 10%
subsidy
• Will need government support till
Average Credits 675–700 11% 11% housing stabilizes
83% 92%
(24% / 23%) 700–725 13% 12% • Can potentially be priced
economically
725–750 13% 13% • Is economic to originate
Good Credits 750–7775 15% 15%
77% 84% • Private and public solutions
(48% / 53%) 775–800 15% 18%
possible
>800 6% 7%
16
OUTLOOK CONFERENCE
OUTLOOK CONFERENCE
GSEs – The Long and Winding Road

Rajiv Setia
US Interest Rates Strategy
OUTLOOK CONFERENCE
GSE Losses Should Continue in 2010
• Security impairments to recede; Guaranty expenses to continue weighing on results
• Preferred stock dividends owed to Treasury will soon exceed historical earnings over the
vast majority of past years
FRE Net Income FNM Net Income

20 10
10 0
0 (10)
(10) (20)
(20) (30)
(30) (40)
(40) (50)
(50) (60)
(60) (70)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2001 2002 2003 2004 2005 2006 2007 2008 2009
___________________________
Source: Fannie Mae, Freddie Mac, Barclays Capital.
19
G-Book Credit Losses OUTLOOK CONFERENCE
Could Total $260bn–$330bn
Roughly 60% of our loss estimates have been provisioned for through 4Q09
Lifetime Losses Depend on HPA Lifetime Losses, Assuming 0% HPA ($bn)
$ bn FNM FRE Total 180
Book of Business 2826 1870 4696 160
90d+ Delinquencies 175 89 263 140
120
On-B/S NPA Loans 50 16 66 100
Total NPA 225 105 330 80
60
40
90d+ by Balance 6.18% 4.75% 5.61% 20
90d+ by Loan Count 5.38% 3.87% 4.77% 0
FHLMC FNMA
Estimated losses, $bn 170 90 260 Loss provision Estimated credit loss
Credit Provisions to Keep Rising Cumulative Treasury Draws Mount

120 35 Capital infusion, $bn Capital infusion, $bn 90
Cumulative, $bn 80
100 30
70
25 60
80
20 50
60 15 40
40 10 30
20
20 5 10
0 0 0
2005 2006 2007 2008 1Q09 2Q09 3Q09 4Q09 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1/1/10
FNM Provisions FNM Charge-offs FNM (LHS) FRE (LHS)
FRE Provisions FRE Charge-offs
___________________________ Cum FNM (RHS) Cum FRE (RHS)
20
High Revenues Help, but Cannot OUTLOOK CONFERENCE
Offset Credit Losses
• Our base-case cumulative draws for FNM are $140bn; the stress case breaches $200bn
• Cumulative draws could be $90–100bn at FRE; the stress case is closer to $120bn
• Beyond 2011, dividends / commitment fees paid to Treasury offset net income
Fannie Mae Projected base scenario
$ mn 2008 2009 2010 2011 2012
Net interest income 8,782 14,510 13,059 10,447 8,358
Guarantee income 7,882 7,251 7,614 7,994 8,394 ←?
Other income 1,033 733 733 733 733
Total income 17,697 22,494 21,406 19,174 17,485
Provision for credit losses -29,809 -72,626 -45,000 -20,000 -5,000

OTTI on securities -6,974 -9,861 -5,000 -3,000 -2,000
Derivatives gain/loss -15,416 -6,350 0 0 0 ←?
LIHTC impairment 0 -5,287 0 0 0 ←?
Admin and other expense -1,979 -1,377 -1,500 -1,500 -1,500
Tax expense/benefit -13,749 985 0 0 0
Net income -58,707 -72,022 -30,094 -5,326 8,985

Preferred stock dividend -1,069 -2,474 -9,867 -12,306 -12,995
Draw on Treasury -16,200 -59,900 -39,962 -17,631 -4,011 ←?
Adjustment from FAS 166/167 -3,000
Cumulative draw -16,200 -76,100 -119,062 -136,693 -140,703
Maximum PSPA draw -100,000 -200,000 -242,962 -260,593 -264,603
Cushion against PSPA -83,800 -123,900 -123,900 -123,900 -123,900
___________________________
21
OUTLOOK CONFERENCE
Options for Housing Finance

Choices – Clean Break or Improving the OUTLOOK CONFERENCE
Current Model?
• Nationalization – Going down the GNMA path
• Privatization
• Private label securitization
• Covered bonds
• Improving the current model

• Re-constituting FNM / FRE with stronger regulation
• Making the loans safer and keeping the current model
• Public utility
• Co-operative structure – the MBA proposal
___________________________
Source: Barclays Capital.
23
Only the Government Has the Ability to OUTLOOK CONFERENCE
Act Countercyclically
• FNM / FRE underwriting has tightened dramatically; In 2009, avg. FICO up from historical avg. of 720
to 760+; Avg. OLTV now < 70%
• GNMA has rapidly gained market share, now 30–40% of new origination; bulk of GNMA loans are
95% LTV+
Avg FICO Score for GSE Originations Has Skyrocketed SF Mortgage Originations – Market Share
770 80%
760 70% Conventional

750 60%
740 50%
730 40% Subprime/Alt-A/HEL

GNMA
30%
720
20% Jumbo
710
10%
700
Sep-03 Sep-05 Sep-07 Sep-09 0%
Origination Month 2001 2002 2003 2004 2005 2006 2007 2008 2009
FHLMC FNMA YTD
___________________________
Source: Barclays Capital, Inside MBS.
24
OUTLOOK CONFERENCE
Going Down the GNMA Path?
• Nationalization before portfolio wind down is problematic for debt ceiling limits
• Projected deficits in 2010–15 will already require a politically risky increase in the borrowing limit
• As the debt-to-GDP ratio approaches 100%, sovereign ratings downgrades become a real risk
Debt Ceiling Is a Factor ($trn) Rising Debt Threatens AAA Status

18 110%
% of GDP
16 100%
14 90%
12 80%
10 70% CBO projection (adj.)
8 60%
6 50%
53% as of Sep-09
4 40%
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 30%
96 98 00 02 04 06 08 10 12 Sep-06 Sep-09 Sep-12 Sep-15 Sep-18
Debt Subject to Limit Plus FNM/FRE Limit Public debt Plus FNM/FRE
___________________________
25
OUTLOOK CONFERENCE
Government Programs Invite Moral Hazard
• FHA losses could exceed $100bn …
• … as less than prime borrowers have gravitated to the FHA program
FHA Delinquencies Are Sparking ... ... Memories of Sub-Prime

Cum 90+ day delinquency
20% 90 Severity
80 (3m Avg)
16% 70
60
12%
50
8% 40
30
4% 20
10
0%
0
1 5 9 13 17 21 25 29 33 37 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90
Loan Age
2000 2003 2005
2006 2007 2008 2009
___________________________ 2H06 1H07 2H07
26
OUTLOOK CONFERENCE
FHA Likely to Bear Significant Losses
• The maximum premium earned ~$3.5/100 face
• Given the weaker credit of borrowers, losses are highly sensitive to HPA
Original Losses (%) Max Cumulative Losses ($bn) Income
Vintage Balance ($bn) Base +5 HPA -5 HPA Premium (%) Base +5 HPA -5 HPA ($)
2003 174 4% 4% 5% 3.5% 8 7 8 6
2004 84 6% 6% 7% 3.5% 5 5 6 3
2005 67 11% 10% 12% 3.5% 8 6 8 2
2006 68 13% 11% 14% 3.5% 9 7 10 2
2007 87 18% 14% 20% 3.5% 16 12 18 3
2008 242 16% 9% 19% 3.5% 38 22 45 8
2009 391 15% 5% 21% 3.5% 57 21 81 14
1,112 13% 7% 16% 141 80 175 39
___________________________
27
OUTLOOK CONFERENCE
Private Label and Covered Bond Alternatives
• Private label market – can come to a standstill in crises, as in 2009
• Principal-agent issues, rating agency role under scrutiny
• Pro-cyclical, with no incentive to provide credit to targeted groups
• Covered bonds as an alternative

• FNM / FRE / GNMA securitization efficient for conforming collateral – provides
capital relief
• FHLB advances entrenched for whole loan financing
• Funding levels and haircuts need to be attractive to bank issuers
• Hard to expand market absent legislative framework
• May provide small source of alternative funding for largest lenders
___________________________
28
OUTLOOK CONFERENCE
Can Covered Bonds Displace Advances?
Funding Sources for New Mortgages How Are US Residential Mortgages Financed?
Other, 581, GSEs, 439,
Off Balance Sheet On Balance Sheet
ABS pools, 5% 4%
1525, 14%
Direct sales of whole loans Deposits
Private label securitization Unsecured debt

GSE pools,
Other bank
5214, 49%
funds, 2396,
GSE securitization FHLB 22%
FHLB
FHA / GNMA Covered bonds advances,
Total =
$10,786bn
631, 6%
Issuer Incentive – Either Funding Cost or Haircut Must Be Lower

12m 2y 3y 5y
Treasury 0.29 0.80 1.32 2.28
Agency 0.39 0.88 1.51 2.54
Advance 0.52 1.29 1.97 3.01
Unsecured 1.25 1.85 2.46 3.39
___________________________
Source: Barclays Capital, Federal Reserve.
Note: RHS figure as of 12/31/09.
29
OUTLOOK CONFERENCE
Improving the Current Model – Public Utility?
• Public utility
• Is the mortgage business a natural monopoly? Not so, based on the 2004–06 experience
• Can a rate-setting board truly determine the fee to offset the implied subsidy?
• What ROE is needed to invite private capital?
• Many countries have gone in the other direction, privatizing inefficient utilities
• Co-operative structure – The MBA proposal

• Lenders would post a part of loan-sale proceeds as collateral, refundable over time
• Co-op would determine pricing and credit standards, with strong federal regulation
• Small members could get neglected – with 8,000 members, consensus is not easy
• Government catastrophe insurance still needed to ensure secondary market

liquidity and counter-cyclicality. But can the government price this risk adequately?
___________________________
30
OUTLOOK CONFERENCE
Designing a Safer System Is Paramount
• House Financial Services Committee Chairman Frank on the future of the GSEs:
• “It is also the case in going forward, as we restructure housing finance, we will
make sure that there are no implicit guarantees, hints, suggestions, or winks
and nods. We will be explicit about what is and is not an obligation of the federal
government.”
• “It is not clear that there is going to be an entity about which there would be that
ambiguity.”
• “We’re not remaking Fannie and Freddie. We’re going to start from scratch and
do housing finance.”
31
GSES Lowered Lending OUTLOOK CONFERENCE
Standards to Retain Market Share
• Standards in non-agency origination started to loosen in 2002, allowing private label
originators to win GSE market share
• In response to the competition, FNM / FRE relaxed lending standards to sustain volumes
Non-Agency Standards Loosened from 2002 … … and the Agencies Followed the Market Lower
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2001 2002 2003 2004 2005 2006 2007 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4
<80 LTV 80-90 LTV 90+ LTV 80 and less LTV 80.1 - 90 LTV 90+ LTV
___________________________
32
Retained Portfolio Migrated OUTLOOK CONFERENCE
to Non-Agency MBS
GSEs Increased Credit Risk Profile ... Taking Advantage of Cheap Funding Levels
1,800 GSE retained portfolios, $bn 10 bp
1,600 5
1,400 0
-5
1,200
-10
1,000
-15
800
-20
600
-25
400 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
200 Agency MBS LOAS 5y Agency ASW

0
1999 2001 2003 2005 2007 2009 … and Tightening Non-Agency Spreads
40 Before Ju n 2007
Agency Non-agency Loans
35
• GSE participation, endorsed by Congress and regulators, 30

legitimized the sector, allowing it to grow larger than it
25
might have otherwise become.
20
• By funding at L-10bp and being allowed 40x leverage,
the GSEs’ hurdle rate for buying non-agency MBS (at 15
e.g., L+30bp) was non-economic; but it improved the 10

efficiency of private label securitization Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Subprim e G SE PT Spread (bp)
___________________________
33
Improving the Current Model – OUTLOOK CONFERENCE
Make Loans Safer
• Close to 90% of origination is to borrowers with FICO >750/OLTV <75; in 2006, this was
just 2%
• Credit costs for 2009 cohort will be 25–30 cents even in a dire HPA scenario, relative to
income of 100 cents
New Origination Is Pristine Estimated Losses Across Credit / HPA
Bad Average Good Bad Average Good
Origination FICO <690 & FICO >750 & FICO <690 & FICO >750 &
Year OLTV >85 All Other OLTV <75 Total OLTV >85 All Other OLTV <75 Total
Issuance Composition -15 HPA 1159 134 30 51
2006 15% 84% 2% 100% -10 HPA 912 105 23 40
2009 1% 12% 87% 100% -5 HPA 694 79 18 30
0 HPA 405 46 10 17
G-Fee and Other Income (cents / $ 100 face, Current PV)
5 HPA 175 19 4 7
2006 100 100 100 100
10 HPA 26 6 1 2
2009 300 150 100 108
15 HPA 12 3 1 1
___________________________
34
Solving a Debt Induced Crisis with More OUTLOOK CONFERENCE
Leverage?
Overall Debt Continues to Rise Because of Low Savings Rate Means Greater Reliance on
Increasing Government Debt External Funding
120% Household debt/GDP (LHS) 260% 14 Personal Saving Rate (SA, %)

Federal debt/GDP (LHS) 240% 12
100%
Total nonfinancial debt/GDP (RHS)
220% 10
80%
200%
8
60% 180%
6
160%
40% 4
140%
20% 2
120%
0
0% 100%
1952 1963 1975 1986 1998 2009
1952 1963 1975 1986 1998 2009
___________________________
Source: Barclays Capital, Haver Analytics.
35
OUTLOOK CONFERENCE
US Fiscal Metrics on an Unsustainable Path
120% 30%
FY-2019, 98%
100% 25%
80% 20%
FY-2009, 53%
60% 15%
40% 10%
20% 5%
0% 0%
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Debt Held by Public / GDP, % Interest Cost/Revenues, RHS %
• Financeability – Ability to raise debt

• Affordability? – Interest costs relative to federal revenues
• Reversibility?? – Political will to impose credible plan for fiscal discipline
___________________________
Source: CBO, Barclays Capital. CBO Baseline has been adjusted using its own estimate of the president's policies (as of June 2009) and
assuming that appropriations grow @GDP instead of inflation. Interest cost has been forecast assuming that the forward path is realized and
the Treasury gradually terms out debt.
36
OUTLOOK CONFERENCE
Timeline of Evolution in GSEs
• 1932: FHLB System created as part of the New Deal
• 1938: FHA, established four years earlier, creates a national mortgage association (FNMA) to purchase and sell
mortgages
• 1948: Fannie Mae chartered with the power to buy and sell loans insured by FHA and VA
• 1954: Fannie Mae reorganized into a mixed-ownership corporation, with the Federal government and mortgage
originators being the owners (a cooperative) – at this time, the charter was revised to specifically provide
liquidity in the mortgage market, and support the mortgage market in case of a threat to the stability of the
economy
• 1968: Fannie Mae split into two: the new Fannie Mae became a private shareholder-owned entity with a Federal
charter, overseen by HUD, whereas Ginnie Mae became the guarantor of FHA and VA loans and remained
within HUD
• 1970: Freddie Mac created to develop a secondary market for conventional mortgage loans and become a source
of competition for Fannie Mae
• 1981: Fannie Mae first issues MBS
• 1989: Freddie Mac became a publicly traded, shareholder owned corporation; FHLB oversight transferred to the
Federal Home Loan Bank Board
• 1992: OFHEO is created within HUD to monitor the safety and soundness of Fannie Mae and Freddie Mac – at this
time, numeric affordable housing goals were also set for FNMA / FHLMC
• 2000: FNMA / FHLMC begin buying subprime and Alt-A mortgages
• 2003–4: OFHEO discovers improper accounting practices at FNMA / FHLMC
• 2008: FHFA established as the successor to OFHEO and the FHLB Board, retaining the mission oversight and
goals of the two former regulatory bodies – shortly thereafter, FNMA / FHLMC were placed into
conservatorship by FHFA
• 2020: TBD?
___________________________
Source: GAO, Barclays Capital.
37
OUTLOOK CONFERENCE
OUTLOOK CONFERENCE
Non-Agency Securitization – What Will It Take?

Sandeep Bordia
March 22, 2010

OUTLOOK CONFERENCE
To Summarize So Far …
• Government support was, and will remain vital for housing market in coming years
• Any viable near-term solution to housing finance will require status quo on GSEs
• This raises the following questions

• Is there room for private players in the current environment?
• What areas is the private market more likely to support?
• What effect will proposed regulations have on private label securitizations?
40
Agencies Have Cornered the Top OUTLOOK CONFERENCE
End of the Market
• GSEs constitute 92% of recent high-quality originations
Share of >740 FICO, <75LTV Originations by Investor Type

2007 Vintage 2009 Vintage
Portfolio Portfolio
12% 8%
Securitized
21%
GSE
67%
GSE
92%
___________________________
Source: Inside MBS & ABS, First American Core Logic, Barclays Capital.
41
OUTLOOK CONFERENCE
… While FHA Dominates the Bottom
• Lower quality loans are almost exclusively being originated by FHA
• GNMA issuance has spiked as non-agency subprime issuance has died out
Share of <675 FICO, >75 LTV Loans

2007 Vintage 2009 Vintage
GSE
GNMA
5% Portfolio
13%
11%
GSE
42%
Securitized
34%
GNMA
Portfolio
84%
11%
___________________________
42
Private Originations Were Only OUTLOOK CONFERENCE
9% of Market
• Large chunk of these fall outside agency loan limits
Share of 2009 Originations Most Portfolio Loans Non-Conforming

80% 100%
80%
60%
60%
40%
40%
20%
20%
0% 0%
GSE GNMA Portfolio 2005 2006 2007 2008 2009
Non-Conforming Conforming
___________________________
Note: Conforming limits are according to 2009 MSA level agency limits.
43
… And Concentrated in Pristine OUTLOOK CONFERENCE
Quality Loans
• Average FICO score of new originations have been rising
• Banks are comfortable holding these super clean loans on their books
FICO Scores Have Risen on Portfolio … And LTVs Have Fallen

60% 100%
50% 80%
40%
60%
30%
40%
20%
10% 20%
0% 0%
495–645 645–705 705–765 >765 2005 2006 2007 2008 2009
2005 2009 <45 45–65 65–80 >80
___________________________
Source: First American Core Logic, Barclays Capital.
44
The Problem – GSE Execution Much OUTLOOK CONFERENCE
Superior to Non-Agency Securitization
• Private market does not want to be in the lower credit space
• For better credits, conforming loans are being originated at 5–5.25% WAC
• Typical non-agency structure requires 93-7 structure, this is still 100bps short for
securitization to make economic sense
Yield: 5%
Super Senior (93%)
Overall Yield:
5.7%
Servicing Collateral Pool
fee: 25bps WAC = 5.95%
Mezzanine (7%)
Yield: 15%
___________________________
45
What Can Bring Non-Agency OUTLOOK CONFERENCE
Securitizations Back?
• Agency MBS widening – can it make non-agency securitizations more attractive?
• We expect 20–30bps widening – will not be enough
• Significant dial back on GSE underwriting guidelines; is it likely?

• Not in the short run
• Will originators look to diversify exit options?

• Limited need
• Therefore, near-term focus will mostly be on pristine quality loans above GSE
loan limits
46
OUTLOOK CONFERENCE
Sizing Near-Term Private Market
• Non-conforming loans were only 4.5% of the market, or about 80 billion
in originations
• Banks willing to hold these at rates significantly lower than private market
securitizations
Share of Non-Conforming Loans Across Time

100%
80%
60%
40%
20%
0%
2005 2006 2007 2008 2009
___________________________ Non-Conforming Conforming
Note: Conforming limits according 2009 MSA level agency limits.
47
Medium Term Outlook for OUTLOOK CONFERENCE
Securitizations
• Private market will be uncomfortable with FHA quality loans
• Some potential in 75–85 LTV bucket if MIP requirements change and a strong
recovery ensues
• Possibly greater competition to GSEs in better quality originations

• Non-government guarantee solution in long run may make these viable
• But the first target is likely to be bigger balance loans

• No credible case for government to be in that market
• Agency loan limits are artificially higher
48
OUTLOOK CONFERENCE
Risk-Based Pricing from GNMA
• GNMA insurance premia do not change as LTVs rise - incentivizes borrowers to take out loans with
maximum possible LTVs
• The last two years have seen a rise in >95 LTV share, at the cost of 75–80 LTV bucket
• Higher base rates and introduction of risk-based pricing could make private market more competitive
on loans in the 75-85 LTV bucket – would require a strong recovery
GNMA Rates for Purchase Loans Share of >95 LTV Loans Has Risen
50%
LTV <= 95 LTV > 95
40%
Up-Front MIP 1.75% 1.75% 30%
20%
Running MIP 0.5% 0.55% 10%
0%
2005 2006 2007 2008 2009
<55 55–75 75–80 80–95 >95
___________________________
Source: FHA, First American Core Logic, Barclays Capital.
49
Non-Government Guarantee Solution OUTLOOK CONFERENCE
for GSEs
• Historically, Jumbos traded 25–30bps back of agencies
• Convexity difference accounted for 10bps; government guarantee and better
liquidity arguably made up the rest
• Value of guarantee much more in uncertain times
• Non-government guarantee solution will make the private pie much bigger –
amount securitized will depend on capital requirements / funding levels
50
OUTLOOK CONFERENCE
Bigger Balance Will Be the First Target
• GSE loans limits tied to home price appreciation but do not go down when home prices
drop – Stimulus Act artificially raised limits
• According to loan-size limit formula based on HPA, agency limits should
be 385k
• No likelihood of near-term change but may decrease in the medium / long term
Loan Limit Across Time
800,000
729,000
600,000
400,000
275,000 417,000
359,650 386,500
322,700
200,000
0
2001 2003 2005 2007 2009
Agency Loan Limit Agency Loan Limit (Accd to MIRS)
___________________________
Source: FHFA, Barclays Capital.
51
Agency Loan Limit Normalization OUTLOOK CONFERENCE
Results in Another 15% Market Share
• If GSE loan limits were to drop to 417k, a potential 250–300bn could find their way
into non-agencies
• Most of these are >740 FICO, <80 LTV
Share of GSE Loans >417k Most Are >740 FICO, <80 LTV
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
>417k <417k Others loans >417k >740 FICO + <80LTV
___________________________
Source: First American Core Logic, Barclays Capital.
52
Some Other Pieces Need to OUTLOOK CONFERENCE
Fall in Place
What drove non-agency securitization in the past?
Offloading Risk
/ Better Capital • Banks used securitized vehicles to completely offload risk
Treatment
Investor
Demand / • Bullish investors drove funding levels lower
Funding
53
Banks Can’t Offload Risk Due to OUTLOOK CONFERENCE
Regulations
Then
• Historically, banks were able to sell almost of their risk through securitization
• Rep and warranty related repurchase risk was considered low
Now
• Proposed senate finance bill mandates that originator / securitizer retain 5% of
pool – banks will have exposure to underlying collateral risk
• New FDIC proposals mandate 12-month seasoning before a loan is securitized –
in the interim, banks will carry this risk on their books
• Cannot ignore rep and warranty risks
54
Greater Contingent Liabilities from Rep OUTLOOK CONFERENCE
and Warranties
• Unclear if issue for non-agencies so far
• Most likely an issue for both GSE and non-GSE originations – push originators to
produce very high-quality loans only
Rep and Warranty Repurchases Repurchases by Loan Owner
(bn) Owner 2009 Repurchases
20
Freddie Mac $4.1bn
15 Fannie Mae $10–15bn(est)
MI Companies ?
10
Monolines ?
5 Non-Agencies ?
0 Total $35.3bn
'08 '08 '08 '08 '09 '09 '09 '09
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
___________________________
Source: Freddie Mac, NIC, Barclays Capital.
55
Capital Requirements Likely to OUTLOOK CONFERENCE
Be Higher
Then
• Securitized vehicles were kept off balance sheets – no capital requirements
• Capital requirements for parts that could not be sold were low
Now
• FAS 166–167 changes require consolidation of SPV if originator has “controlling
and economic interest”
• Banks may have to hold capital against entire collateral pool at 50% risk weighting
• Assuming 10% capital ratio, implies 5% capital requirement
56
OUTLOOK CONFERENCE
Bankruptcy Remoteness Critical
• With FAS 166–167, bankruptcy remoteness of securitizations has entered a
grey area
• It appears that FDIC would retain the ability to repudiate the contracts transferring
the assets – need more clarity on what this means
• Proposal in present form, could be a serious impediment for securitization
• Interim safe harbor expires on Sep. 30, 2010
57
Regulation Will Drive Risk Retention OUTLOOK CONFERENCE
and Capital Requirement
Proposed Regulations and Their Effects
Key Provisions Status Likelihood Effects
Optional Almost certain.
two-quarter Possible Capital
SPVs come back on
FAS 166–167 balance sheet
implementation workarounds requirements
delay on capital exist, but are increase
requirements difficult
12-month seasoning
FDIC has received
required before
comments on Considerable Question mark over
FDIC Safe- securitization, loan
proposal; few more changes likely bankruptcy isolation
Harbor Rule level reporting,
months before any before enactment of SPVs
stronger rep and
decision
warranties
Up to 5% risk
Recently introduced
retention, regulator Common ground Increases risk
Senate in the Senate,
may decrease between this and retention for
Finance Bill requirements based
legislative approval
FDIC? originators
required
on collateral
58
OUTLOOK CONFERENCE
Funding Levels Are Also Much Higher
Then
• Investor demand, significant risk appetite and rating agency acceptance drove
funding levels lower
Now
• Little chance of increased investor interest in the short term – even if risk appetite
were to return, would be concentrated in super-clean prime loans
• To ensure wide participation among investors, rating agencies need to regain
credibility
• High rating agency loss assumptions would keep enhancement levels high,
increasing funding rate
• Robust economic recovery and improving housing can eventually drive funding
lower but unlikely to happen in near term
59
Putting Loans in Agency Pools OUTLOOK CONFERENCE
Remains the Most Attractive Option
What Are the Options for a Bank?
Capital Funding Type of
Requirement Economic Risk Levels Funding
None. Likely to
remain the same
Rep and Warranty Agency basis
GSE under Senate bill, if Term funding
claims remains tight
regulators create
exemptions
High, 50% risk

Portfolio 100% economic risk Deposits, very low Floating
weight, ~5% capital
New proposals
Based on FAS
mandate 5% Secondary market,
Securitization 166–167, could be Term funding
retention, Rep and very high at present
similar to portfolio
Warranties
60
OUTLOOK CONFERENCE
Conclusions
• Some potential securitization in 2010 but volumes will be limited
• Bigger balance better-quality loans likely the first target in medium run
• Proposed regulatory changes will be the wild card – quick resolution unlikely
• For now, GSE and portfolio execution likely to be preferred
61
OUTLOOK CONFERENCE
Disclaimer
OUTLOOK CONFERENCE
Disclaimer
Analyst Certifications
We, V. S. Srinivasan, Rajiv Setia, Sandeep Bordia, hereby certify (1) that the views expressed in this research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
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Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to
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63
OUTLOOK CONFERENCE
Disclaimer (continued)
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2010 SECURITIZED PRODUCTS

Can the Government Exit the Housing Market?

March 22, 2002

• The extent of government support of the housing market

• Supported demand for housing by

Collateral Strats GNMA vs. GSE – 2009 Purchase Originations

• Treasury / Fed and the GSEs own almost 2.3

Foreclosure to REO Roll Rate REO Flow Rates

Alt-A Prime Subprime REO Outflux REO Influx

Shadow Inventory Build-Up

Real-Estate Owned Foreclosure 90+

Re-Defaults Across Payment Reduction

2.5 0.5 0.2

Existing Home Sales Have Stabilized Affordability Index Looks Attractive

GSEs – The Long and Winding Road

FRE Net Income FNM Net Income

Credit Provisions to Keep Rising Cumulative Treasury Draws Mount

Provision for credit losses -29,809 -72,626 -45,000 -20,000 -5,000

Net income -58,707 -72,022 -30,094 -5,326 8,985

Options for Housing Finance

• Improving the current model

760 70% Conventional

730 40% Subprime/Alt-A/HEL

Debt Ceiling Is a Factor ($trn) Rising Debt Threatens AAA Status

FHA Delinquencies Are Sparking ... ... Memories of Sub-Prime

• Covered bonds as an alternative

Private label securitization Unsecured debt

Issuer Incentive – Either Funding Cost or Haircut Must Be Lower

• Co-operative structure – The MBA proposal

• Government catastrophe insurance still needed to ensure secondary market

200 Agency MBS LOAS 5y Agency ASW

• GSE participation, endorsed by Congress and regulators, 30

e.g., L+30bp) was non-economic; but it improved the 10

Issuance Composition -15 HPA 1159 134 30 51

2006 15% 84% 2% 100% -10 HPA 912 105 23 40

2009 1% 12% 87% 100% -5 HPA 694 79 18 30

120% Household debt/GDP (LHS) 260% 14 Personal Saving Rate (SA, %)

Debt Held by Public / GDP, % Interest Cost/Revenues, RHS %

• Financeability – Ability to raise debt

Non-Agency Securitization – What Will It Take?

March 22, 2010

• This raises the following questions

Share of >740 FICO, <75LTV Originations by Investor Type

Share of <675 FICO, >75 LTV Loans

Share of 2009 Originations Most Portfolio Loans Non-Conforming

FICO Scores Have Risen on Portfolio … And LTVs Have Fallen

• Significant dial back on GSE underwriting guidelines; is it likely?

• Will originators look to diversify exit options?

Share of Non-Conforming Loans Across Time

• Possibly greater competition to GSEs in better quality originations

• But the first target is likely to be bigger balance loans

Up-Front MIP 1.75% 1.75% 30%

Running MIP 0.5% 0.55% 10%

15 Fannie Mae $10–15bn(est)

• Proposal in present form, could be a serious impediment for securitization

• Interim safe harbor expires on Sep. 30, 2010

High, 50% risk

• For now, GSE and portfolio execution likely to be preferred

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