1GKB’s HousingFinance GroupPublic Finance Headquarters

1400 Wewatta Street, Suite 800 • Denver, CO 80202 • (800) 722-1670

Updates on the HFA Single Family Market

NCSHB ANNUAL CONFERENCE | AUGUST 17, 2015 | Annapolis, Maryland

JIM STRETZSENIOR VICE PRESIDENT | STRETZ@GKBAUM.COM

2GKB’s HousingFinance Group

Provide Lower Rates MRBs Borrow Short, Lend Long Subsidize

Benefits Through Credit Risk Down Payment Assistance Conventional whole loan indentures

PMI exposure Captive PMI Be the Master Servicer

Other Values Service Loans Locally Flexible Delivery

What is an HFA’s Added Value in the Mortgage Market?

What are my payments?

What do I need to close?

3GKB’s HousingFinance Group

The Fed’s Effect on Mortgage Rates

For the month of June 2015, the Fed chased 30% of new GSE mortgage MBS production.

4GKB’s HousingFinance Group

The Fed’s Big Effect on Mortgage Rates Today

• "An increase in Federal Reserve holdings of Treasury securities also lowered the MBS yield. Using this estimate, the level of the MBS yield is about 76 basis points lower if the Federal Reserve holds 22 percent of the available Treasury securities (on June 30, 2013, this was equivalent to about a $1.93 trillion portfolio). At the mean market share for the Federal Reserve’s Treasury security holdings, a $50 billion purchase of Treasury securities would lower the MBS yield by about 2 basis points."

• "Using these estimates, the level of the MBS yields is about 55 basis points lower when the Federal Reserve holds 24 percent of the available MBS securities compared with when it holds nothing at all (on June 30, 2013, this was equivalent to about a $1.21 trillion portfolio). The same estimate suggests that a $50 billion increase in the Federal Reserve’s MBS holdings would result in an increase for the mean market share of Federal Reserve MBS holdings (from 23.8percent) to 24.8 percent and a decrease MBS yields by around 2 basis points."

Source: “How the Federal Reserve’s Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates” Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. December 2014

Mortgage rates today could be

1% to 2% higher without Fed purchasing

30% of new MRB production

The 30 year fixed rate mortgage of 4.25% (as of June 30th, 2013) would have been 5.50% without the Fed’s market influence.

Based on a Fed Study:

5GKB’s HousingFinance Group

Single Family Mortgage Insurance Today

6GKB’s HousingFinance Group

The Mortgage Market Since 2008

7GKB’s HousingFinance Group

Using the Mortgage Market “TBA”

PIPELINE MANAGEMENT

HEDGES MORTGAGE PRODUCTION & SETS

MORTGAGE RATES

MASTER SERVICERU.S. BANK

PURCHASES AND POOLS MORTGAGE LOANS

Loan Proceeds

PROGRAM SPONSOR

LOCAL MORTGAGE LENDERS

ORIGINATES AND CLOSES MORTGAGE LOANS

BORROWER/HOMEBUYER

MBS INVESTORS OR

TBA COUNTERPARTY

MBS Sale

Mortgage Payments

Mortgage Payments

MBS Sale

Loan Sale

CUSTODIANEHOUSINGPLUS

COMPLIANCE + ONLINE RESERVATIONS

8GKB’s HousingFinance Group

Hedging in the TBA Market

Execution

• MRB• Market Execution

Profits

• Use historic pull-through data to optimize hedge strategy Minimize fall-out, if possible

• Encourage early loan delivery

• Use optimal MBS type – GNMA I or GNMA II

• Create “specified pools” desired by investors: CRA investor focused Low Loan Balance (LLB) Mid Loan Balance (MLB) High Loan Balance (HLB)

9GKB’s HousingFinance Group

(1.00)

(0.50)

0.00

0.50

1.00

1.50M

ay-1

3

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Recent Market News

DIFFERENCE IN THE PRICING OF 4% GN I AND GN II

Jan 9, 2015: FHA announces lower annual mortgage insurance premium (MIP) rates. Spreads between GN I and GN II widen and prepayment protection is desired by investors.

10GKB’s HousingFinance Group

MBS Investors Paying Up For Prepayment Protection

• FHA’s lowering annual mortgage insurance rates provided an opportunity. The VALUE of prepayment protection increased substantially.

• One way for an investor to protect against increased prepayments is via loan size. Smaller sized loans are less likely to refinance than larger sized loans due to the relative benefit. The following are some defined categories of specified pools:

– Low Loan Balance (LLB) less than $85,000– Mid Loan Balance (MLB) less than $110,000– High Loan Balance (HLB) less that $150,000

• All of these specified pools have increased in value but the Low Loan Balance (LLB) specified pool has experienced the most dramatic increase.

• Another specified pool type with significant value is a pool created for CRA Investors (financial institutions motivated by Community Reinvestment Act credits).– Note: CRA credit is state specific

MARKET CONDITIONS ARE GREAT FOR CERTAIN SPECIFIED POOLS

11GKB’s HousingFinance Group

Funding Down Payment Beyond Premium Pricing

Increase the amount of Down Payment and Closing Cost Assistance Offered by securitizing 2nd mortgage pools.

More efficient in raising funds than premium bond or TBA funding solutions

Flexible, supported by multiple collateral options Amortizing 2nd mortgages Ginnie Mae MBS Cash Issuer Credit Rating

Various funding options: Taxable or Tax-Exempt Rated or Non-Rated Stand-Alone or Subordinate

Allows an HFA to fund future DPA assistance in the form of 0% 2nd mortgages Deferred 2nd mortgages Amortizing 2nd mortgages

12GKB’s HousingFinance Group

An Alternative Map?

States with active local HFAs using TBA MBS Deliveries include: OH, CA, AZ, TX, OK, KS, LA, FL, GA, MN, NV.

Source: Moody’s Investor Service

13GKB’s HousingFinance Group

Who is Doing What?

U.S. Bank MS – 3rd Party Hedge

U.S. Bank MS – Self Hedge w/ 3rd Party Advice

U.S. Bank MS – Non TBA

Idaho MS – 3rd Party Hedge

Idaho MS – Self Hedge Alabama MS – Self Hedge

Alabama MS – 3rd Party Hedge

Self Servicing – Self Hedge

Multiple Servicers – Non-TBA

Rhode Island

Connecticut

New Jersey

Delaware

Maryland

Washington, D.C.

Self Servicing – Non-TBA

14GKB’s HousingFinance Group

What Are Your Rates?

Conne

cticut

Nebras

ka

Minneso

taIda

ho

Wyoming Iow

a

Mississ

ippi

North C

arolina

Alaska

Colorad

o

Marylan

d

South

Carolina

West Virg

inia

Michiga

n

Washing

ton

Oklaho

ma

Louis

iana

2.000%

2.500%

3.000%

3.500%

4.000%

4.500%

5.000%

5.500%

Gov't Govt w DPA Conv Conv w DPA

15GKB’s HousingFinance Group

2006 2015(estimated)

Whole Loan 30 6

MBS 18 29

Mixed 3 16

MCC 14 33

Changing HFA Strategies

HFA’s switching to (or including) MBS’s are also selling into the cash or TBA market using their balance sheets, “zeros” or TBA as a rate hedge.

16GKB’s HousingFinance Group

Summary

ADDING VALUE

Credit Crisis: 85% of HFA‘s provide Down Payment

Successful Programs: Understand Lenders, and Fill Voids created by

Consolidation, Credit Crisis, and Needs of their Communities

Going Where the Federal Subsidy is – Cash Market Look for opportunities to provide subsidy from Federal

programs, balance sheet and lower costs

17GKB’s HousingFinance Group

This report was prepared from data believed to be reliable but not guaranteed by us without further verification or investigation, and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the entities covered by this report. Opinions expressed are subject to change without notice. George K. Baum & Company may act as a principal for its own account or as agent for another person, in connection with the sale or purchase of any security which is subject in this report.

Disclaimer