Brian Chappelle

Potomac Partners

Title Guaranty Annual Conference:Mortgage Lending in 2009

Back to the Future

Overview

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

marketplace

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

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

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

Impact: Massive Default and Foreclosure Problem

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)

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

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”.

What is going on in Washington?

Look at current events

Impact of the election

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 Mac’s role– Housing and Economic Recovery Act (HERA)

FHA Modernization Hope For Homeowners

Washington’s 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

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

TARP: Key questions

How will price be determined?– Market mechanisms: Auctions/Reverse Auctions– Direct purchases: No bids

Other costs– Warrants: De minimis exception: Sell<$100 million– Executive compensation & golden parachutes

Bottom line: Treasury looking for quick “victories” on Main St. not just Wall St.

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

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 DPA’s Delayed risk-based pricing for at least 1 year

Upcoming HUD Policy Changes

Allowable Closing Cost & Fees Condominium Streamlining Underwriting tightening

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

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

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

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: ????

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”

New Administration’s Focus

Consumer protection– “Cramdowns” seem guaranteed

Predatory lending– Originator compensation– Assignee liability

New mortgage regulatory structure

What does it all mean? Threshold questions

What is the impact of a smaller mortgage market ($1.8 trillion) with 1980’s products & profitability (in which the conventional & government could be as high as 90+% of the marketplace) ?

Do new “economics” justify the risks?

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

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