S. 1217 Housing Finance Model

1. S. 1217 Housing Finance Model Comparing the Current Market Structure with Alternatives Available Under Corker-Warner S. 1217: “The Housing Finance Reform and Taxpayer Protection Act”

2. Current GSE Housing Finance Structure Very Little Capital Despite the implied (and now explicit) government backstop, no reserve exists to protect taxpayers against loss if the economy faces another recession and loan delinquencies rise again. Bond Guarantors (Fannie and Freddie) Fannie and Freddie take on the entire credit risk for roughly 2/3rd of all loans made in the U.S. today. (much of the remaining 1/3rd is taken on by FHA) All private credit risk takers are currently priced out of the market. Private Mortgage Insurers Loan level insurance acquired by lenders Homebuyers Loan Level Insurance Bond Insurance Down payment Fannie MBS (Separate TBAs) Fannie insured loans delivered into Fannie Mae TBAs MBS Holders (Rates Investor) Get a slightly different MBS depending on Fannie or Freddie Issuers (Fannie and Freddie) The GSE’s buy loans from originators, aggregate them, and create MBS each using their own systems. Lenders/ Originators Commercial banks, Credit unions, Mortgage brokers, Savings & Loan MBS Loans Freddie MBS (Separate TBAs) Freddie insured loans delivered into Freddie TBAs. Challenge now is the wide spread between Fannie and Freddie TBA MBS Creates MBS MBS Holders (Rates Investor) Get a slightly different MBS depending on Fannie or Freddie MBS Servicing Rights can be sold or retained by originator Servicers

3. S.1217 Housing Finance Structure Private Credit Risk Takers Bond Guarantors (Multiple) Private Sector credit enhancers. Guarantee timely P&I on entire bond. May be monolineinsurers, hedge funds, REITS, others. Legacy technology and data of GSEs may be sold to new guarantors, others to compete Capital Markets Hedging Guarantors can hedge credit risk with instruments such as credit-linked notes, CDS, or other risk-transfer trades so long as FMIC approves of the hedge structures Mortgage Insurance Fund (MIF) In FMIC, builds up through g’fees to 2.5% of outstanding guaranteed mortgage principle. Private Mortgage Insurers Loan level insurance acquired by lenders Homebuyers Down payment Federal Mortgage Insurance Corporation (FMIC) Provides 100% full faith & credit guarantee. Approves servicers, PMIs, Issuers, Bond Guarantors. Oversees FHLBs. Loan Level Insurance Bond Insurance Lenders/ Originators Commercial banks, Credit unions, Mortgage brokers, Savings & Loan Common Securitization (One Platform) Overseen by FMIC. Central platform which delivers securities to TBA Market. Provides disclosures. Remits payments to investors. Creates one, single MBS and open to all participants to allow competition. Private Issuers (Multiple) Buy loans from originators, aggregates them, holds them up to 6 months. Issuers will include private Mutual for small lenders, and the FHLB System may create a mutual. Legacy technology of GSEs may be sold to create new issuers, others to compete Loans Creates MBS Catastrophic Backstop Insurance MBS Holders (Rates Investor) Get a common, single MBS regardless of issuer Delivers MBS Servicing Rights can be sold or retained by originator FMIC replaces FHFA and approves private sector entities. Creates a Mutual Securitization Company for use by small originators. Oversees Federal Home Loan Banks. Oversees MIF as a catastrophic backstop fund. Fannie and Freddie are replaced by private sector issuers and bond guarantors. Issuers buy mortgages from originators, aggregate loans and create standard mortgage-backed securities (MBS) which are then issued through the Common Securitization Platform (CSP) and sold to Rates Investors. Legacy technology and infrastructure of Fannie and Freddie sold to new participants to minimize/eliminate technology and operational disruption for originators. Bond Guarantors guarantee timely P&I payment on securities and hold a capital base of 10% of outstanding risk. In a $5 trillion mortgage market, this means $500 billion in losses could be absorbed by the private sector before the Mortgage Insurance Fund is utilizedby FMIC. FMIC provides backstop guarantee of timely payment of MBS principal and interest to Rates Investors in the event Issuer fails to pay Investors, in return for a fee deposited in the Mortgage Insurance Fund administered by FMIC. Servicers

4. S.1217: Alternative Capital Markets Execution Private Credit Risk Takers Credit Linked Note or Structured Arrangements As an alternative to the use of bond guarantors to guarantee timely payment of P&I on FMIC-backed MBS, issuers could put together structured transactions as a means of credit enhancement. So long as the credit enhancement is at least 10% of the deal (for example a credit-linked note of 10 cents on the dollar or 10% subordination on a senior-sub CMO), the MBS can received a FMIC full faith and credit guarantee on the senior bond Mortgage Insurance Fund (MIF) In FMIC, builds up through g’fees to 2.5% of outstanding guaranteed mortgage principle. Private Mortgage Insurers Loan level insurance acquired by lenders Homebuyers Down payment Federal Mortgage Insurance Corporation (FMIC) Provides 100% full faith & credit guarantee. Approves servicers, PMIs, Issuers, Bond Guarantors. Oversees FHLBs. Loan Level Insurance Capital Markets Credit Enhancement Lenders/ Originators Commercial banks, Credit unions, Mortgage brokers, Savings & Loan Common Securitization Platform Overseen by FMIC. Central platform which delivers securities to TBA Market. Provides disclosures. Remits payments to investors. Creates one, single MBS and open to all participants to allow competition. Private Issuers (Multiple) Buy loans from originators, aggregates them, holds them up to 6 months. Issuers will include private Mutual for small lenders, and the FHLB System may create a mutual. Legacy technology of GSEs may be sold to create new issuers, others to compete Loans Creates MBS Catastrophic Backstop Insurance MBS Holders (Rates Investor) Get a common MBS regardless of issuer Delivers MBS Servicing Rights can be sold or retained by originator Servicers