Mike Awadis
Senior Vice President
FirstSouthwest Company
1620 26th Street, Suite 230 South
Santa Monica, CA 90404
Phone: 310.401.8060
Email: mike.awadis@firstsw.com
Single-Family Financing Essentials, Part 2:
Securing the Best Price
NCSHA 2014 HFA Institute
Washington, DC
January 15, 2015
Disclaimer
This presentation is intended for educational and informational purposes only and does not constitute legal or
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product.
Information provided in this presentation was obtained from sources that are believed to be reliable; however, it is not
guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to
any attorney or advisor in any particular circumstances. The statements within constitute FirstSouthwest’s views as of
the date of the report and are subject to change without notice. This presentation represents historical information only
and is not an indication of future performance.
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Contents
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Market Recap
TBAs Underperform in the Rally
Mortgage Activity on the Rise
Specified pools
HFA CRA Partnerships
HFA TBA Production Trends
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Market Recap
• Dollar up
• Stock Market Up – despite the recent correction
• Yields way down
– 10-year Treasury near term lows hitting below 1.80%
– 30-year Treasury at an all time low hit 2.40%
• Oil way down and pointing lower as a result of the economic slowdown in
Asia, Europe and the stronger dollar
• US economy strong – despite the disappointing retail sales announced
yesterday
• It’s all up to the US Consumer – the last bastion of economic growth
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TBAs Underperforms
• Last week’s Administration announcement related to the FHA MIP
reduction was not well received by MBS investors
– Fear of acceleration in prepayments
– Evidenced by the BU/BD grids published earlier this month by Fannie
– Analysts estimate 6-9 CPR impact at the 4% coupon (1% in price). The 4%
coupon has been the worst performer
• TBAs have underperformed in virtually every session this month compared
to the benchmark 10 year Treasury
– Liquidity only shows in the longer slower duration assets -- 3 and 3.5 coupon
• Ginnie/Fannie swaps sold off drastically on the news
– 4% coupon Ginnie MBS was the worst performer
• Given where rolls are trading 4% MBS is priced at 21 CPR (less than 4.5
year average life)
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TBAs Underperform – Spread GN2 4s vs 10 Year
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TBAs Underperform – Spread GN2/FN 4.0
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TBAs Underperform – Spread GN2 4.0/3.5
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Mortgage Activity On the Rise
• Last week mortgage applications spike – biggest gain in 6 years
• According to the Mortgage Bankers Association weekly survey
– Total volume increased 49.1% over previous week on seasonally adjusted
basis
– Refinance applications up 66%
– Conventional applications up 71%
– Purchase activity up 24%
• National average 30 year mortgage rate is now 3.89%
• It’s a perfect storm -- 97% LTV announcement by Fannie, the reduction in
MIP by FHA and the market rally is fueling the activity
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Specified Pools – HFA Loan Pay-ups
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A smaller but significant portion of agency MBS trade outside of the TBA
market
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Known as “Specified Pool”
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Factors impacting pricing for specified pools today
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The identity of the securities to be traded is specified at the time of trading
Some of these pools are typically not eligible for TBA trading
Backed by loans with more favorable prepayment characteristics – allowing
them to achieve higher prices
Supply demand technicals and the volume of available MBS – GN1/GN2 swap
Interest rate environment – less demand in a rising rate market
CRA buyers make up a significant portion of the “specified” pool market
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Benefits of HFA/Bank CRA Partnerships
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HFA gets a forward dollar commitment at a specified spread to market
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Allows the HFA to price the pay-up into the daily rate setting process
making programs more competitive
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Benefits buyer by allowing them to lock-in the cost of acquiring CRA
investments
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Allows buyer to specify the type, location and characteristics of collateral to
be purchased
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Potentially helps banks get a more favorable CRA rating in their periodic
exams with regulators
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HFA TBA Programs Continue to Grow – Despite Volatility
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Since July 2012 representing 10 state HFAs and over $3.7 billion in locks
CY 2014 locks of $2.0 billion
Average daily locks are up over 50% in the last 12 months
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Best Practices – What Have We Learned
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Expand your product menu include multiple DPA and rate options
The primary driver of HFA volume is still the need for DPA
Statistics show DPA does not have to be a grant to have a successful program
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Jr lien DPA can be a significant source of residual income for an HFA
Manage your pull-thru rate by optimizing lock terms
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Don’t give lenders more time than they need to close and sell the loans
This will keep your rate more competitive with market
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Make your program as lender friendly as possible – eliminate unnecessary forms
and streamline the approval process
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Marketing, marketing, marketing – online, newsletters
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Develop a robust email marketing campaign with your lenders and realtors
Make sure lenders understand the HFA Preferred 97 benefits compared to standard
Rate does matter – keep interest spreads tight with market
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Maintain flexibility in your gain-on-sale margins. A “set it and forget it”
approach is less effective than maintaining a tighter spread to market
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Agency TBA MBS Market
Appendix
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TBA (Mortgage-Backed) Securities Market
• Mortgage-backed securities (MBS) -- debt obligations
• The most common form of MBS are pass-through certificates
• MBS are highly liquid -- particularly those backed by agency guarantees
• Most mortgages in the US are securitized through the agency MBS market
• This trading convention significantly improves agency MBS liquidity – leading to
lower mortgage rates for households
• The key distinguishing feature of agency MBS is they carry a form of government
guarantee – explicit (Ginnie Mae) or implied (Fannie and Freddie)
• Other distinguishing feature is the existence of liquid forward market for trading
• “TBAs” or “To Be Announced” are a form of future contracts
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TBA (Mortgage-Backed) Securities Market – continued
• Vast majority of MBS trading (over 90%) occurs in the forward market – TBA Market
• Seller and buyer agree to a sale price without identifying the specific pool numbers
• Six basic characteristics -- issuer, maturity, coupon rate, price, par amount and
settlement date are agreed upon
• Pools guaranteed by Ginnie Mae (a federal government agency), Fannie Mae or
Freddie Mac (GSEs) can be allocated to TBA transactions
• The goal of the TBA market was to create liquidity
• A hedging tool – with settlement dates up to nine months out -- allows lenders to
“lock in” sale prices for loans
 The use of dollar rolls allows the seller to extend hedges
• Drivers of market activity are broker dealers
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TBA (Mortgage-Backed) Securities Market – continued
• TBA trading occurs electronically on an over-the-counter basis
 Two platforms, DealerWeb (interdealer trades) and TradeWeb (customer trades)
 Trades can take place via telephone, fax or e-mail – not common
• Securities Industry and Financial Markets Association (SIFMA) has specific rules
regarding what constitutes TBA eligible deliveries also knows as “good delivery”
• Only mortgages meeting certain size and credit quality criteria “conforming
mortgages” are eligible for inclusion
• Sheer aggregate size and the homogenous nature of agency MBS contribute
significantly to liquidity – compared to corporate bonds or munis
• TBA Market is the largest debt market in the world outside of US Treasuries
• Virtually every primary broker/dealer on the street and in the world makes a market
in TBA MBS
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TBA (Mortgage-Backed) Securities Market – continued
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TBA Market is made possible largely because agency MBS are exempt from the
registration requirement of the Securities Act of 1933
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Although not required, agencies do publicly disclose information about the
composition of each pool
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Similar to Treasury futures, TBAs trade on a “cheapest-to-deliver” basis
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On a forty-eight-hour day, the seller selects which MBS in its inventory will be
delivered to the buyer at settlement
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In practice, most TBA trades do not ultimately lead to a transfer of physical MBS

In most cases the seller will either unwind or “roll” an outstanding trade
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Liquidity
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TBA Program Benefits When Compared to MRB
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Provides a no risk forward commitment mortgage program with no costs of
issuance, negative arbitrage and legal expenses (outsourced)
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Produces a significantly lower mortgage rate when compared with Pass-Thru and
traditional MRB structures – including using zeros
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Fund down payment and closing cost assistance without using HFA funds
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It can be used as a tool to accumulate MBS for future bond transactions
Flexibility to adjust rates as the market moves -- no yield implications
Affords HFAs the option to pay higher lender compensation
Can be used to provide financing for non-first time homebuyers
Program is more lender friendly -- less paperwork for the lender
Can be combined with MCCs thus creating a lower effective mortgage rate
Gives HFAs the option of offering refinances
Significantly more profitable for HFAs than tradition MRBs and Pass-Thru structures
both on present value and ongoing basis
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Either “Pass-thru” or “Traditional MRB” structures
HFA has the option to repurchase its MBS at prevailing TBA levels
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Disadvantages
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Because it does not require explicit authority to issue bonds or relies on volume cap,
other entities can offer competing programs
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Cal Rural Home Mortgage Finance Authority (CHF) operates a statewide
program in California – in light of its power to only operate on 32 rural counties
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National Homebuyers Fund – a nonprofit subsidiary of CHF – operates
statewide programs is 24 other states
No ongoing issuer fee income, the HFA’s income is made up of gain-on-sale and
residual income when the DPA or the second mortgage is repaid
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Specified Pools – HFA Loan Pay-ups
•
A smaller but significant portion of agency MBS trade outside of the TBA market
•
Known as “Specified Pool”
 The identity of the securities to be traded is specified at the time of trading
 Some of these pools are typically not eligible for TBA trading
 Backed by loans with more favorable prepayment characteristics – allowing them
to achieve higher prices
•
Factors impacting pricing for specified pools today
 Supply demand technicals and the volume of available MBS – GN1/GN2 swap
 Interest rate environment – less demand in a rising rate market
•
CRA buyers and FHLB make up a significant portion of the “specified” pool market
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TBA Market Snapshot
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Pricing Example
30YR FIXED RATE GOVERNMENT MORTGAGE
60 Day Rate
Lock
11/6/2014
12/22/2014
1/5/2015
1/21/2015
Yes
0 points
0 points
ASSUMPTIONS
Initial Rate Lock Date
Rate Lock Expiration Date
Latest Lender Loan Sale to Master Servicer Date
Latest GNMA Security (MBS) Settlement Date
Servicing release premium included in rate lock price?
Gain built into rate lock price
Lender fees built into rate lock price
30YR FIXED RATE GOVERNMENT MORTGAGE
Gross
Rate (%)
3.750
3.875
4.000
4.125
4.250
4.375
4.500
4.625
4.750
4.875
5.000
5.125
5.250
Servicing Guarantee
MBS
GNMA
Fee (%)
Fee (%) Coupon (%) Type
0.190
0.060
3.500
GN2
0.315
0.060
3.500
GN2
0.440
0.060
3.500
GN1
0.565
0.060
3.500
GN2
0.190
0.060
4.000
GN2
0.315
0.060
4.000
GN2
0.440
0.060
4.000
GN1
0.565
0.060
4.000
GN2
0.190
0.060
4.500
GN2
0.315
0.060
4.500
GN2
0.440
0.060
4.500
GN1
0.565
0.060
4.500
GN2
0.190
0.060
5.000
GN2
SRP
0.380
0.880
1.390
1.800
0.380
0.880
1.390
1.800
0.380
0.880
1.390
1.800
0.380
60 Day Rate 60 Day Servicing
Lock
Released Price DPA (%)
103.26563
103.64563
3.500
103.26563
104.14563
3.500
103.26953
104.65953
3.500
103.26563
105.06563
3.500
105.76953
106.14953
3.500
105.76953
106.64953
3.500
105.83203
107.22203
3.500
105.76953
107.56953
3.500
108.12109
108.50109
3.500
108.12109
109.00109
3.500
108.21094
109.60094
3.500
108.12109
109.92109
3.500
109.21094
109.59094
3.500
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Lender
Fee (%) HFA P&L (%)
2.500
(2.35438)
2.500
(1.85438)
2.500
(1.34047)
2.500
(0.93438)
2.500
0.14953
2.500
0.64953
2.500
1.22203
2.500
1.56953
2.500
2.50109
2.500
3.00109
2.500
3.60094
2.500
3.92109
2.500
3.59094