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4 Webinars, 4 Perspectives Implications of Dodd-Frank Act

4 Webinars, 4 Perspectives Implications of Dodd-Frank Act. PART 1: ANTI-STEERING & LOAN OFFICER COMPENSATION. PART 2: IMPACT TO HEDGING December 14. PART 3: IMPLICATIONS FOR DOCUMENT COMPLIANCE December 16. PART 4: IMPACT TO YOUR LOS December 21. Ask Questions.

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4 Webinars, 4 Perspectives Implications of Dodd-Frank Act

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  1. 4 Webinars, 4 Perspectives • Implications of Dodd-Frank Act • PART 1: • ANTI-STEERING & LOAN OFFICER COMPENSATION • PART 2: • IMPACT TO HEDGING • December 14 • PART 3: • IMPLICATIONS FOR DOCUMENT COMPLIANCE • December 16 • PART 4: • IMPACT TO YOUR LOS • December 21

  2. Ask Questions

  3. Implications of Dodd-Frank Act • Part 2: Impact to Hedging • December 14, 2010

  4. Rob Kessel Compass Analytics, LLC San Francisco, CA 415-462-7500 rkessel@compass-analytics.com • Compass Analytics provides valuation, best execution, and hedging solutions to mortgage capital markets participants:  •   Pipeline, Servicing Rights (MSRs) and Whole Loan Analytics • Advisory, Outsourced and Licensed (Hosted and Client-Install) Options •   Servicing Retain/Release Rich/Cheap Analysis and Consultation •   Mandatory Rate Sheet Pricing Feeds •   Delivery, Intra-Day, Loan-Level Best Execution •   Company Cash Flows including Net Profit, Future Cash Flows and Balance Sheet and Profit/Cash Shocks •   Interactive Pooling, Commitment Management, Hedging and Trading Tools

  5. Dodd-Frank Context for Hedging (from Hedger’s Perspective) • Interpretation/Best Practices in Flux • Rate Sheet (and Technology) Considerations • Pullthrough (and Analytics) Considerations • Performance Measurement Considerations

  6. Rate Sheet Considerations • Secondary Creates Client-Facing Rate Sheet w/Originator’s Margins • Lender’s Margins may Vary (e.g. Brokers, Branches, LO’s) • Need Same Originator Profit Margin by Product/Terms • Borrower or Lender (not both) pay Originator • Brokers Must Show Borrowers Multiple Lenders/Options • Opportunity to Centralize Locking?

  7. Pullthrough Considerations • Operational: • Originator Proof of Compliance (as required by investor) • Initial Transition Hiccups • Different Pullthrough by Different Originator Profit Margin? • See Example • Impact on Renegotiation Process/Frequency? • “Change in Terms cannot benefit originator…” • Historical Pullthrough/Performance Drives Varying Originator Margins

  8. Pullthrough/Originator Profit Margin Example • Wholesale Lender ABC buys (locks) loans from Brokers A & B: • Lender ABC will buy a FN30 4.625% Note Rate at 101.50 which includes a profit margin for ABC of 1.00%. • Assume ABC requires same profit margin for Brokers A & B. • Broker A has requested rate sheets/pricing from ABC that includes a profit margin for Broker A at 1.5%. • Broker B has requested rate sheets/pricing from ABC that includes a profit margin for Broker A at 1.25%. • Broker LO’s provide pricing to borrower(s): • Broker A offers 4.625% @ par (100.00) • Broker B offers 4.625% @ .25 rebate to borrower (100.25) • Should Broker A lock have lower pullthrough than Broker B lock? • Yes - Broker A offers worse terms than Broker B • No – Pullthrough driven more by originator performance

  9. Performance Measurement Considerations • Originator Performance Measurement Has Always Been Critical for Hedgers: • Hedging Value Proposition: • Mandatory-BE Price Spread • - Hedge Cost • = Net Hedging Gains • Hedge Cost is a Function of Pullthrough (Originator) Performance • Originators Profitability: • Realized Profit Margins on Closed Loans • - Hedge Cost on Unclosed and Closed Loans • = Net Originator Profitability • With new Regs, Performance Measurement Becomes Even More Important: • Support for Varying Originator Margins • Ongoing Support for Originator Margin Changes

  10. Hedger’s Checklist • Pricing/Technology to Facilitate Rate Sheet Pricing: • Mandatory Pricing • Ability to Respond Quickly to Market and to Post Pricing to Pricing Engine • Ability to Vary Lender Margins (by Originator) • Ability to Implement Originators Desired Profit Margin • Pullthrough Capabilities: • Pullthrough by Originator • Establish Appropriate Secondary Cost • Historical Hedge Cost/Pullthrough Monitoring/Measurement • Policies/Practices to Review & Update Lender Originator Margins • Outstanding Topics to Monitor: • Loan Attribute-Based Lender Margin Adjustments? • Investor’s Interpretations

  11. Question & Answer

  12. Implications of Dodd-Frank Act • Part 2: Impact to Hedging • December 14, 2010

  13. 4 Webinars, 4 Perspectives • Implications of Dodd-Frank Act • PART 1: • ANTI-STEERING & LOAN OFFICER COMPENSATION • PART 2: • IMPACT TO HEDGING • December 14 • PART 3: • IMPLICATIONS FOR DOCUMENT COMPLIANCE • December 16 • PART 4: • IMPACT TO YOUR LOS • December 21

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