Mortgage Market Update: Impact of Washington

1. Mortgage Market Update:Impact of Washington Brian Chappelle Potomac Partners

2. Overview • Washington affects the mortgage business in three ways: • Regulations • Access to credit • Consumer protection • Enforcement • New Entrant: CFPB • Role of government in housing • What will be impact of its improving financial condition?

3. Introduction • Current Washington environment • Plays to strength of lenders that know how to follow rules • Emphasis on infrastructure • Knowledge and customer service are even more important today • What It Means: • You can’t flick a switch and be a lender/originator • Preapproval process will continue to be critical

4. Current Environment: Reasons for Optimism • WSJ headline: “Home Sales Power Optimism” • Home prices are rising/delinquencies have peaked • Press coverage more favorable • Government is worried about “access to credit” • Policymakers appear to understand • CFPB Director Cordray: Credit is “achingly tight” • President’s State of the Union Address • “too many families with solid credit who want to buy a home are being rejected”

5. What has been the impact? • Fed Governor Duke’s recent speeches – • Purchase mortgages “hit their lowest level since the early 1990s” • Borrowers w/ credit scores between 620 & 680 have fallen 90% since 2007 • Borrowers under 40 are 50% of early 2000s • Cash transactions – now 30% • Private sector has returned to the housing market, just not to the mortgage market • Some in Washington “understand” that policies can have unintended consequences

6. 1) Regulations: Overview • Government “sees” two fundamental missions • Ensure “access to credit” • New rules (Ability to Repay in particular) recognized this issue • Optimism about upcoming rules • Qualified Residential Mortgage • Protect the consumer from abusive practices • Loan originator compensation • Ability to repay rule • 3% cap on fees • NAR is supporting a legislative solution

7. 2) Enforcement • Good News: • Mortgage repurchase/indemnification risk appears to be subsiding • Government has made positive “overtures” in recognition of “access to credit” issue • Penalty should fit the crime • Challenges: • Department of Justice/Inspector General investigations

8. Systemic violation is key concern • Systemic violations • Procedural errors lead to significant penalties • Servicing Settlements – • Fed/State AGs - $25 billion for 5 banks • Fed/OCC - $8.5 billion • Increased costs of servicing • FHA settlements: Approaching $1 billion • Failure to self-report errors • Costs are more than financial • Reputation/”headline risk” • Market “costs” • Everyone is worried they could be “next”

9. New Entrant: Consumer Financial Protection Bureau (CFPB) • CFPB is examining nonbanks • New experience for nonbanks • Waiting for first round of findings • CFPB also oversees enforcement of mortgage laws • Recent RESPA enforcement action

10. CFPB Enforcement Action: Joint Venture • Facts: Builder & lender formed a mortgage brokerage • The joint venture did not advertise to the public. • There was no origination business outside of referrals of the builder. • The lender conducted all of the processing, underwriting and closing functions for the joint venture. • All origination activities of the joint venture were performed by a single employee of the lender . • The joint venture had no office space.  

11. 3) Role of Government in Housing • “Heavyweight” debate was expected this year • Both R & D’s want to reduce gov’t role • NAR is taking a leading role • Good news: Improving market conditions • Home prices are increasing • CoreLogic = 12.2% Year over Year – May 2013 • Lower defaults and foreclosures • Better financial performance of Fannie/Freddie • GSE reform still unlikely until market stabilizes • Will time heal wounds? • FHA appears to be the immediate “target”

12. FHA: It is all about its finances • FY 2012 Actuarial Review • Projects how portfolio (as of September 30th – 7.7 million loans) will perform over next 30 years • Based on credit quality & performance to date • Relies on estimates about home prices & other factors • Estimated FHA has negative value of $13.48B • Administration’s Budget updated estimate of FHA’s economic value in April 2013 • $17 billion improvement in the forward mortgage program • Projected to have $4.3 billion after paying claims • Reverse program is the problem

13. FHA Performance Data Keeps Getting Better • Portfolio improvement is encouraging • Total delinquency rate (14.46%) has improved 364 bps (20%) from peak in December 2009 • Total DQ rate has improved 226 bps this year • Seriously delinquent (S/D) rate (8.45%) has improved 147 bps from its peak in January 2012 • S/D rate has improved 95 bps this year • 30 & 60 day rates have also improved

14. What will Congress do? • Congress has held five hearings • Expect House to pass “tough” bill • FHA critics want to reduce FHA’s role • Mortgage limits • Downpayments • Borrower restrictions: • First-time homebuyers • Income restrictions • Impact of FHA’s improving performance & market conditions?

15. Summary • Economy & housing numbers continue to improve • Positive environment for housing • Washington issues • Government “appreciates” connection between more rules & less loans to families that need help • What will government do to address “access to credit” issue? • Knowledge & customer service remain critical • Plays to strength of lenders that know how to follow rules • Pre-approval process continues to be critical