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Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC 1 of 17

The Future of the GSEs?The Future of the GSEs?GIOA Conference GIOA Conference

Las Vegas - March 25, 2010Las Vegas - March 25, 2010

Jim DeMasi, CFAManaging Director & Chief Fixed Income

StrategistStifel, Nicolaus & Company, Incorporated.

Refer to page 17 of this report for Stifel Nicolaus

Fixed Income Capital Markets disclosures and analyst certifications.

Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC



Active GSE Debt Issuers Active GSE Debt Issuers

Federal Home Loan Bank System (FHLB) Federal Home Loan Bank System (FHLB) Consists of 12 regional banks; Extends credit to owner-members to support Consists of 12 regional banks; Extends credit to owner-members to support

mortgage lending. mortgage lending.

Fannie Mae (FNM) Fannie Mae (FNM) Federally chartered, privately owned corporation that promotes secondary market Federally chartered, privately owned corporation that promotes secondary market

for conventional mortgages. for conventional mortgages.

Freddie Mac (FRE)Freddie Mac (FRE) Federally chartered, privately owned corporation that promotes secondary market Federally chartered, privately owned corporation that promotes secondary market

for conventional mortgages.for conventional mortgages.

Federal Farm Credit System (FFCB)Federal Farm Credit System (FFCB) Nationwide system of banks and associations that provides credit to farmers, rural Nationwide system of banks and associations that provides credit to farmers, rural

homeowners, and agricultural and rural cooperatives. homeowners, and agricultural and rural cooperatives.

Tennessee Valley Authority (TVA)Tennessee Valley Authority (TVA) Wholly owned corporation of the US government established in 1933 to develop Wholly owned corporation of the US government established in 1933 to develop

the resources of the Tennessee Valley region for economic and national defense the resources of the Tennessee Valley region for economic and national defense purposes. purposes.

Federal Agricultural Mortgage Corp (Farmer Mac) Federal Agricultural Mortgage Corp (Farmer Mac) Established as an institution of the Farm Credit System in 1987, Farmer Mac Established as an institution of the Farm Credit System in 1987, Farmer Mac

provides a secondary market for agricultural and rural utility loans. provides a secondary market for agricultural and rural utility loans.



GSE Debt Outstanding GSE Debt Outstanding

Largest Issuers

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

FFCB Fannie Mae Freddie Mac FHLB

in billions $

Smaller Issuers

$0

$5

$10

$15

$20

$25

$30

TVA Farmer Mac

in billions $

Source: GSEs as of 3/15/2010.



Recent Developments Recent Developments

US Treasury US Treasury granted granted emergency emergency authority to authority to provide financial provide financial assistance to assistance to GSEs. GSEs.

Fannie and Fannie and Freddie Freddie announce $200B announce $200B delinquent loan delinquent loan buyout program.buyout program.

Federal Housing Federal Housing Finance Agency Finance Agency (FHFA) created to (FHFA) created to regulate Fannie, regulate Fannie, Freddie, and Freddie, and FHLB. FHLB.

Fannie and Fannie and Freddie placed Freddie placed into into conservatorship conservatorship by FHFA.by FHFA.

Senior Preferred Senior Preferred Stock Purchase Stock Purchase Agreement Agreement (SPSPA) (SPSPA) established by established by US Treasury. US Treasury.

Federal Reserve Federal Reserve announces announces program to buy program to buy $200 billion in GSE $200 billion in GSE senior debt and senior debt and $1.25 trillion in $1.25 trillion in GSE mortgage-GSE mortgage-backed securities. backed securities.

US Treasury US Treasury extends and extends and amends amends SPSPA. SPSPA.

Cumulative Cumulative investments by investments by the Federal the Federal Reserve: $171 Reserve: $171 billion in GSE billion in GSE debt and $1.2 debt and $1.2 trillion in GSE trillion in GSE MBS. MBS.

Cumulative Cumulative preferred stock preferred stock investments by investments by US Treasury total US Treasury total $128B as of $128B as of 3/15/10. 3/15/10.

Obama Obama administration administration 2011 budget 2011 budget proposal fails to proposal fails to address GSE address GSE reform. reform.

July 2008

September 2008

March2009

December 2009

February 2010

March 2010



Conservatorship Provisions Conservatorship Provisions

US Treasury is permitted to make unlimited US Treasury is permitted to make unlimited investments in FNM and FRE senior preferred stock investments in FNM and FRE senior preferred stock through 12/31/12 to maintain positive net worth in through 12/31/12 to maintain positive net worth in GSEs. After year-end 2012, maximum investment is GSEs. After year-end 2012, maximum investment is limited to $200B per agency. limited to $200B per agency.

Senior preferred stock held by US Treasury carries a Senior preferred stock held by US Treasury carries a 10% annual dividend, payable quarterly. 10% annual dividend, payable quarterly.

Payment of quarterly commitment fee to US Treasury Payment of quarterly commitment fee to US Treasury for support provided under SPSPA has been delayed for support provided under SPSPA has been delayed until first quarter 2011. until first quarter 2011.

Retained portfolio limits are set at $810B per agency Retained portfolio limits are set at $810B per agency as of 12/31/10. After 2010, the portfolio limits will be as of 12/31/10. After 2010, the portfolio limits will be set at 90% of the previous year’s cap. set at 90% of the previous year’s cap.



GSE Debt and MBS Spreads GSE Debt and MBS Spreads 5 year Benchmark Agency

0

40

80

120

160

200

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Source: Stifel Nicolaus Agency Trading Desk as of 3/12/2010.

2 NC 1 Callable Agency

0

30

60

90

120

150

180



2 year Benchmark Agency

0

40

80

120

160

200



Agency MBS Spreads

0

40

80

120

160

200


Source: Merrill Lynch Indices as of 3/12/2010.



Conservatorship and Fed Bond PurchasesConservatorship and Fed Bond Purchases Have Kept Mortgage Rates Low Have Kept Mortgage Rates Low

Average 30-Year Mortgage Rates

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

J un-98 J un-99 J un-00 J un-01 J un-02 J un-03 J un-04 J un-05 J un-06 J un-07 J un-08 J un-09

Source: Bloomberg Finance LP. as of 3/12/2010.



GSE Reform: GSE Reform: Public Policy Issues Public Policy Issues

To what extent should housing be subsidized by the To what extent should housing be subsidized by the federal government? federal government?

If subsidies are appropriate, what form should they If subsidies are appropriate, what form should they take?take?

What role should the government play in mortgage What role should the government play in mortgage lending?lending?

Should securitization continue to supply the bulk of Should securitization continue to supply the bulk of the funding for mortgage lending in the US?the funding for mortgage lending in the US?

How can the policy mistakes of the past be corrected How can the policy mistakes of the past be corrected without unduly restricting the availability of mortgage without unduly restricting the availability of mortgage credit?credit?

Should GSE reform be extended beyond FNM and FRE?Should GSE reform be extended beyond FNM and FRE?



GSE Reform: GSE Reform: Possible Approaches Possible Approaches

NationalizationNationalization Fold the GSEs into the federal Fold the GSEs into the federal

government, like the FHA, VA, and government, like the FHA, VA, and GNMA. GNMA.

PrivatizationPrivatization Reconstitute the GSEs as private Reconstitute the GSEs as private

companies with no government support companies with no government support or replace the GSEs with alternative or replace the GSEs with alternative approaches to mortgage finance. approaches to mortgage finance.

Hybrid ModelHybrid Model Combine private ownership with some Combine private ownership with some

level of government support or backing.level of government support or backing.



GSE Reform: GSE Reform: Nationalization Nationalization

Eliminates Eliminates uncertainty for uncertainty for

investorsinvestors

Pros:Pros: Cons:Cons:

Lowers funding Lowers funding costs for GSEscosts for GSEs

Reduces mortgage Reduces mortgage rates for consumersrates for consumers

Subjects GSEs to Subjects GSEs to political influencepolitical influence

Increases the Increases the national debtnational debt

Raises the risk of Raises the risk of future bailoutsfuture bailouts



GSE Reform:GSE Reform: Privatization Privatization

Expands choices for Expands choices for consumers consumers

Pros:Pros: Cons:Cons:

Allocates capital Allocates capital more efficientlymore efficiently

Reduces taxpayer Reduces taxpayer liabilityliability

Contracts credit Contracts credit availability for lower availability for lower

income borrowersincome borrowers

Requires extensive Requires extensive transition from status transition from status

quoquo

Results in higher Results in higher mortgage rates, tighter mortgage rates, tighter underwriting standardsunderwriting standards



GSE Reform: GSE Reform: Good Bank/Bad Bank Model Good Bank/Bad Bank Model

Retained portfolios and legacy guarantees could be placed Retained portfolios and legacy guarantees could be placed into receivership and wound down over time (bad bank). into receivership and wound down over time (bad bank).

FNM and FRE could be combined and given responsibility for FNM and FRE could be combined and given responsibility for mortgage guaranty business on a going forward basis (good mortgage guaranty business on a going forward basis (good bank). bank).

ADVANTAGES: ADVANTAGES:

Frees GSEs of legacy Frees GSEs of legacy problems to focus on new problems to focus on new businessbusiness

Preserves historical role Preserves historical role of GSEs in secondary of GSEs in secondary mortgage marketmortgage market

Provides a possible Provides a possible gateway to future gateway to future privatizationprivatization

DISADVANTAGES:DISADVANTAGES:

Creates potential Creates potential confusion among investorsconfusion among investors

Results in dislocation in Results in dislocation in both the primary and both the primary and secondary marketssecondary markets

Poses administrative and Poses administrative and management challenges, management challenges, particularly within “bad particularly within “bad bank” bank”



GSE Reform: GSE Reform: Public Utility Model Public Utility Model

Retain private ownership structure, but Retain private ownership structure, but with increased government oversight over with increased government oversight over pricing, products, and operations. pricing, products, and operations.


Maintains continuity Maintains continuity in mortgage marketsin mortgage markets

Ensures consistent Ensures consistent regulation of regulation of mortgage pricing and mortgage pricing and termsterms


Reduces free market Reduces free market competition and competition and innovationinnovation

Retains strong Retains strong government influence government influence over mortgage lending over mortgage lending



GSE Reform: GSE Reform: Cooperative Model Cooperative Model Use FHLB System as a model for restructuring FNM and Use FHLB System as a model for restructuring FNM and

FRE. Lenders that sell mortgages to GSE would be FRE. Lenders that sell mortgages to GSE would be required to hold stock in proportion to their sales required to hold stock in proportion to their sales activity. activity.


Aligns financial Aligns financial incentives of lenders incentives of lenders with GSEswith GSEs

Replicates model that Replicates model that survived economic survived economic downturn without downturn without external government external government supportsupport


Complicates timely Complicates timely decision makingdecision making

Conveys effective Conveys effective control to largest control to largest lenders lenders



GSE Reform: GSE Reform: Credit Guarantor Credit Guarantor Model Model

Replace the GSEs with multiple credit Replace the GSEs with multiple credit guarantor entities. Securities issued by guarantor entities. Securities issued by guarantor entities would be backed by a guarantor entities would be backed by a government insurance fund. government insurance fund.


Utilizes private sector Utilizes private sector expertise for risk-based expertise for risk-based pricingpricing

Provides catastrophic Provides catastrophic insurance against insurance against another mortgage another mortgage meltdownmeltdown


Raises questions Raises questions about the extent of about the extent of the government’s the government’s liability liability

Exposes taxpayers to Exposes taxpayers to ongoing riskongoing risk



ConclusionsConclusions GSE reform is a politically contentious issue, with no obvious GSE reform is a politically contentious issue, with no obvious

solution for garnering bi-partisan support. In 2010, it faces the solution for garnering bi-partisan support. In 2010, it faces the additional challenges of a crowded legislative agenda and mid-additional challenges of a crowded legislative agenda and mid-term Congressional elections. term Congressional elections.

FNM and FRE will likely remain in conservatorship throughout FNM and FRE will likely remain in conservatorship throughout 2010 and possibly for many more years to come. 2010 and possibly for many more years to come.

Debt securities and MBS issued by FNM and FRE will likely Debt securities and MBS issued by FNM and FRE will likely continue to be protected by the “effective” guarantee of US continue to be protected by the “effective” guarantee of US government regardless of the ultimate outcome of GSE reform. government regardless of the ultimate outcome of GSE reform.

Given the dominant role of the GSEs in the US mortgage Given the dominant role of the GSEs in the US mortgage market, and the severe dislocations that could result from their market, and the severe dislocations that could result from their absence, drastic changes such as full privatization are highly absence, drastic changes such as full privatization are highly unlikely.unlikely.

A cooperative model, patterned after the FHLB System, may be A cooperative model, patterned after the FHLB System, may be the most viable alternative for reaching a politically acceptable the most viable alternative for reaching a politically acceptable compromise. compromise.



Additional information is available upon request.

For Distribution to Institutional Investors Only.

Stifel, Nicolaus & Company, Incorporated makes a market in the aforementioned securities as at the date of issuance of this research report noted at the top of page 1 of this report.

Stifel, Nicolaus & Company, Incorporated has managed or co-managed a public debt offering for FannieMae, Freddie Mac, the FHLB and/or the FCCB within the past 12 months.

Stifel, Nicolaus & Company, Incorporated has received compensation in the past twelve months, or expects to receive compensation in the next three months, for investment banking services from one or more of the borrowers mentioned in this report.

The Fixed Income Capital Markets trading area of Stifel, Nicolaus & Company Incorporated owns debt securities of the borrower or borrowers mentioned in this report.

The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel, Nicolaus & Company, Incorporated and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel Nicolaus or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to “private customers” in the European Economic Area or to anyone in Canada other than a “Designated Institution”. Stifel Nicolaus and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein. Securities identified herein are subject to availability and changes in price. Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon.

Readers of this report should assume that Stifel Nicolaus or one of its affiliates is seeking or will seek investment banking and/or other business relationships with the issuer or issuers, or borrower or borrowers, mentioned in this report. Stifel Nicolaus’ Fixed Income Capital Markets research and strategy analysts (“FICM Analysts”) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel Nicolaus report), nor are FICM Analysts supervised by Stifel Nicolaus investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel Nicolaus (which includes investment banking) and Stifel Nicolaus’ Fixed Income Capital Markets. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel Nicolaus financial advisor or salesperson.

I, Jim DeMasi, certify that the views expressed in this presentation accurately reflect my personal views about the subject securities or issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this presentation.

© 2010 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202. All rights reserved.

Fixed Income Capital Markets DisclosuresFixed Income Capital Markets Disclosures

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