Mortgages, Ginnie Mae & the TBA Market

1. Mortgages, Ginnie Mae & the TBA Market Ted Tozer Real Estate Broker Conference August 8, 2013

2. Ginnie Mae Overview: Who We Are • Government National Mortgage Association (GNMA or Ginnie Mae) • Established as a corporation within HUD by the Housing & Urban Development Act of 1968* • Effectively split from Fannie Mae, which was created in 1938 in response to the Great Depression • Mission is to expand affordable housing by linking global capital markets to the U.S. housing finance markets *HUD Act [12 USC § 1716b]

3. Ginnie Mae Overview: What We Do • Guarantee Mortgage-Backed Securities (MBS), which raise funding for virtually all loans insured or guaranteed by U.S. Government agencies (FHA, VA & USDA Rural Housing) • GinnieMae does not originate loans or issue MBS • Private lending institutions issue MBS • Facilitate the financing of a variety of products: • Single-family: forward & reverse mortgages, manufactured homes • Multifamily: construction & permanent loans, hospitals, nursing homes, assisted living facilities • Over $1.4 trillion in outstanding MBS guaranteed • FHA loans back about 75% of outstanding MBS • In 2012 about half of all purchase mortgages were financed through Ginnie Mae MBS

4. Ginnie Mae MBS Outstanding Relative to GSEs MBS outstanding in billions May 2013: $2,763B May 2013: $1,601B May 2013: $1,406B Sources: Fannie Mae and Freddie Mac Monthly Reports; Ginnie Mae data includes HECMs

5. U.S. Mortgage Market • U.S. mortgage market is comprised of two segments: • Primary market is made up of the borrower and lender/Issuer • Secondary market is made up of the lender/Issuer and investor • The secondary market enables lenders to sell the loans they originate to a third party • Lenders transfer loans off balance sheet & transfer risk that borrower will default • Lenders transfer risk that interest rates will rise to investors • Lenders use proceeds to make new mortgage loans available 

6. TBA Market Overview • To-Be-Announced (TBA) market was created in 1970s to support Ginnie Mae securitization & financing of government insured loans • Virtually all government insured mortgages are sold into the TBA market – sold as part of MBS guaranteed by Ginnie Mae, Fannie Mae & Freddie Mac • Facilitates forward trading of mortgages (delivery can take over three months, on average takes two months) • Enables lenders to lock in rate for loan originations prior to actually originating loans • Most liquid & important secondary mortgage market • System provides broad & stable capital availability for potential homebuyers throughout the U.S. • TBA securities have U.S. Government guaranty, which facilitates scale of market & fungibility of securities

7. TBA Volume Traded Daily

8. Stylized TBA Transaction Example – Day 1

9. Stylized TBA Transaction Example – Day 2 thru Settlement, 13weeks later

10. FHA Loan in the Securitization Process 60-90 days Borrower finds home they’d like to buy Borrower goes to FHA-approved lender to obtain mortgage Lender had already pre-sold the mortgage & locked in a rate; See slide 7, “Mon. 9AM” Borrower’s application is processed & mortgage closes Once mortgage is closed & delivered, servicing of the loan begins Lender pools loan & delivers MBS to investors; See slide 8, “Settlement Date” Borrower makes monthly payment to lender/servicer who forwards it to investors

11. Securitization Bifurcates Risk Credit Enhancer & Issuer Credit Risk Lender’s Inherent Risks Interest Rate Risk MBS Investor Credit Risk & Interest Rate Risk

12. Government Exposure to Mortgages • The U.S. Government has had a significant role in the mortgage market going back at least 30 years

13. Our Guaranty Matters – it Provides Safety & Liquidity • Ginnie Mae provides a U.S. Government guaranty on the monthly payment of MBS to investors • Government guaranty qualifies mortgages for the TBA market & attracts capital from throughout the world to invest in U.S. mortgages • Guaranty makes investment in U.S.-backed mortgages exceptionally safe & provides liquidity to them • Guaranty assures investors they will get paid regardless of loan performance or servicer performance • Guaranty homogenizes mortgages & lender/servicers so they are indistinguishable to investors • Homogenization of mortgages & lender/servicers enables investment in enormous blocks of mortgages • $280.4 billion in daily TBA MBS trading in 2012 • TBA market would not exist without government guaranteed MBS

14. Scope of Mortgage Market & Government Involvement • Total U.S. outstanding mortgage debt is currently at almost $10 trillion • Outstanding mortgage debt is roughly equivalent to total value of assets on banks’ balance sheets • In 2012, only about 10% of mortgages were kept on banks’ balance sheets • If all banks did was invest in mortgage loans, they would barely be able to fund all mortgages in market, i.e., banks would not fund auto loans, credit card loans, etc. • Government-backed securitization is necessary to maintain current volume available & preserve the 30-year fixed rate mortgage