Brian Chappelle

1
Title Guaranty Annual ConferenceMortgage
Lending in 2009 Back to the Future

• Brian Chappelle
• Potomac Partners

2
Overview

• Review current mortgage market
• Discuss what is going on in Washington
• Offer ideas about the impact in the marketplace

3
Introduction

• Understanding of importance of housing recovery
  to economy
• Secretary Paulson
• Our markets and our economy will not recover
  until the bulk of the housing correction is
  behind us
• What it means
• Everything and anything is on the table
• Recent events are clear proof

4
What happened to the mortgage industry in 2007?

• Investors lost confidence in the quality of
  mortgages they were buying
• Causes?
• Poor performance of subprime mortgages
• Problems w/ Bear Stearns hedge funds highlighted
  the problem
• Spillover to Alt-A and prime products
• Poor performance of prime w/ piggybacks
• American Home bankruptcy
• Result Private MBS market stopped functioning
  in late July 2007 and still is not working TODAY

5
Impact Massive Default and Foreclosure
Problem

• Defaults and foreclosures are still increasing
• U.S. 9.16 of loans are late or in foreclosure
• 8.82 last quarter
• 6.52 - 2007-2Q
• 30 of all subprime are late or in foreclosure
• ARM loans are performing horribly
• 20 of portfolio
• 11 of prime ARMs are late or in foreclosure
• 40 of subprime are late or in foreclosure

6
What it means?

• This is not a temporary phenomenon
• Credit standards will remain tight for alt-A and
  subprime products
• Regulatory (and possibly legislative tightening)
  will institutionalize market tightening
  underway
• Products designed for sophisticated cannot be
  used to qualify first-time and middle and lower
  income buyers
• Mortgage financing/approval cannot be taken for
  granted
• No more credit score close
• Reputation experience are important (again)

7
Mortgage Market Today

• FHA lending is exploding
• Moving toward 50 market share
• Key questions
• Can FHA handle the volume?
• Is the taxpayer at risk?
• Positive changes to VA program
• Higher guaranty amounts
• Refinances purchases
• GSEs have stopped raising prices
• Immediate benefit of conservatorship

8
Fannie Mae Freddie Mac

• Conservatorship time out with
• government management
• Why did it happen?
• When they were needed most, capital constraints
  hampered them
• Secretary Paulson
• GSE primary mission will now be to proactively
  work to increase the availability of mortgage
  finance.

9
What is going on in Washington?

• Look at current events
• Impact of the election

10
Current Objectives

• Stabilize the U.S. financial system
• TARP is intended to address this problem
• Capital infusion in banks
• Provide a floor for house prices reduce
  housing inventory
• Fannie Mae and Freddie Macs role
• Housing and Economic Recovery Act (HERA)
• FHA Modernization
• Hope For Homeowners

11
Washingtons Priorities

• Focus on demand stimulation now
• Troubled Asset Relief Program
• Implementation of Housing and Economic Recovery
  Act (HERA)
• Additional Stimulus?
• Total reassessment of housing next year
• Making sure this never happens again
• There is plenty of blame to go around

12
Troubled Asset Relief Program (TARP)

• Treasury Secretary has virtually unlimited
  authority to purchase any troubled asset from
  any financial institution
• Troubled asset
• Mortgage or mortgage-related security
• Any financial instrument auto, credit ,etc
• Opportunity Sell any assets (possibly
  properties) into TARP

13
TARP Key questions

• How will price be determined?
• Market mechanisms Auctions/Reverse Auctions
• Direct purchases No bids
• Other costs
• Warrants De minimis exception Selllt100 million
• Executive compensation golden parachutes
• Bottom line Treasury looking for quick
  victories on Main St. not just Wall St.

14
Housing and Economic Recovery Act 2008 (HERA)

• FHA Modernization Bill
• Fannie Mae/Freddie Mac Reform
• New GSE loan limits in high cost areas (up to
  625,500)
• 417,000 is floor cannot go lower
• S.A.F.E. Act
• Tax Credit Interest free loan 7,500
• Hope for Homeowners
• Legislative version of FHASecure

15
FHA Modernization Bill

• Make mortgage limit increases permanent
• Raise floor from 48 to 65 (271,050)
• Same as Stimulus Bill in March
• Increase cash investment to 3.5
• 3.5 must be downpayment (not closing costs)
• Effective for case numbers assigned - 1/1/09
• Terminated seller funded DPAs
• Delayed risk-based pricing for at least 1 year

16
Upcoming HUD Policy Changes

• Allowable Closing Cost Fees
• Condominium Streamlining
• Underwriting tightening

17
Hope For Homeowners

• Legislative version of FHASecure
• Refinance of delinquent borrowers
• Maximum LTV 90 of current value
• Servicer/holder must take haircut
• All existing loans must be extinguished
• Borrower housing expense must be at least 31 in
  March 2008
• TARP made changes

18
SAFE Act

• All loan officers must be registered obtain
  personal identifier
• Background check
• Loan officers in non-depositories must be
  licensed
• Background check, education testing, annual
  recertification

19
RESPA HUD Moving Forward

• New disclosure
• GFE application mortgage application
• Originator compensation
• Fixed at origination between buyer and broker
• Cannot increase prior to settlement
• Closing script will be dropped
• Average cost pricing volume discounts
• Final Rule Expected Shortly
• 12 month implementation period

20
Fannie Mae/Freddie Mac Appraisal Changes per NY
AG Agreement

• Appraiser selection
• Lender must select appraiser
• Who qualifies as lender?
• Mortgage broker cannot select appraiser
• Selection must be outside production area
• Lenders can no longer own appraisal companies
• Strong industry regulator opposition
• Implementation ????

21
What is on the horizon?

• Everything is on the table
• Additional demand stimulation
• Lame duck session creates first opportunity
• Tax credits other affordability initiatives
• 2009 Total reassessment of government role in
  housing
• GSEs role structure
• Regulatory oversight
• Making sure this never happens again

22
New Administrations Focus

• Consumer protection
• Cramdowns seem guaranteed
• Predatory lending
• Originator compensation
• Assignee liability
• New mortgage regulatory structure

23
What does it all mean? Threshold questions

• What is the impact of a smaller mortgage market
  (1.8 trillion) with 1980s products
  profitability (in which the conventional
  government could be as high as 90 of the
  marketplace) ?
• Do new economics justify the risks?

24
Tale of two markets

• Groups relying on market size face problems
• Market shrinkage from over 3 trillion to 1.8
  trillion
• Realtors, builders settlement service providers
• Product specialists mortgage brokers
• Groups specializing in conventional government
  market have opportunities
• Product specialists Mortgage bankers
• Mortgage insurers Fannie/Freddie in a new form

25
What does it all mean?

• Significant product shift is underway
• Government conventional lending are back!
• Alt-A subprime will be specialty products
• Congress/regulators will institutionalize
  investor changes
• Economics of business have changed
• Benefits efficient operations
• Back to the Future
• Knowledge, service infrastructure