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Single Family Guaranty Business
Facing Strategic Crossroads
June 27, 2005
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As of 6/22/2005
~FannieMae
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1. Is the housing market overheated?
2. Are consumer changes in preference for
adjustable rate vs. fixed rate mortgages cyclical
or secular?
3. Does Fannie Mae have a role/responsibility to
stabilize the housing market?
4. Does Fannie Mae have an obligation to protect
consumers?
Confidential - Highly Restricted
As of 6/22/2005
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~FannieMae
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The risk in the environment has accelerated
dramatically.
• Proliferation of higher risk alternative mortgage products
"TI
~·
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• Growing concern about housing bubbles
• Growing concerns about borrowers taking on increased
risks and higher debt
• Aggressive risk layering
Confidential - Highly Restricted
As of 6/22/2005
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~FannieMae
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Growth in adjustable rate mortgages (ARMs)
continues at an aggressive pace.
• Extensive menu of alternatives I options
"TI
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• Increasing affordability concerns
• Emphasis on lowest possible payment
• Home being utilized more like an ATM
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Our competitive advantages today are in fixed rate mortgages.
Confidential - Highly Restricted
As of 6/22/2005
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~FannieMae
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We are at a strategic crossroad ....
We face two stark choices:
1. Stay the Course
2. Meet the Market Where the Market Is
Confidential - Highly Restricted
As of 6/22/2005
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~FannieMae
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Stay the Course
• Maintain our strong credit discipline
• Protect the quality of our book
• Intensify our public voice on concerns
• Refrain from offering specific guidelines
• Preserve capital
• Test cyclical vs. secular
Confidential- Highly Restricted
As of 6/22/2005
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~FannieMae
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Alternatively, we could seek to ....
Meet the Market Where the Market Is
• Meet current consumer and customer demands
~
• Participate in volume and revenue opportunity I current
growth areas
• Accept higher risk and higher volatility of earnings
Confidential- Highly Restricted
As of 6/22/2005
7
~FannieMae
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Possible Implications
Stay the Course
Meet the Market
• Lower volumes I
revenues
• Slower book growth
• Continued market share
decline
• Lower earnings
• Impact on key customer
relationship
• Higher volume I
revenues
• Faster book growth
• Slow down decline in
market share
• Higher credit losses
• Increased exposure to
unknown risks
• Potential increased
earnings volatility
Confidential- Highly Restricted
As of 6/22/2005
8
~ FannieMae
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Significant obstacles block our ability to
pursue a ''Meet the Market'' strategy.
• Lack of capabilities and infrastructure
• Lack of knowledge of the credit risks
• Lack of willingness to compete with the market on price
• Lack of a value proposition for subprime
• Lack of a conduit capacity and Regulatory concerns
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~FannieMae
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Realistically, we are not in a position to "Meet the
Market" today.
Therefore, we recommend that we:
IIIII
Pursue a "Stay the Course" strategy and test whether current
market changes are cyclical vs. secular:
-
Advocate public position
Be selectively opportunistic in pursuing business
See if consumer sentiment changes with flatter yield curve
While we:
IIIII
Dedicate resources and funding to "underground" efforts to:
-
Develop a subprime infrastructure
Develop modeling capabilities for alternative markets
Develop a conduit capability
Is there an opportunity to drive the market back to the 30-year FRM?
Confidential- Highly Restricted
As of 6/22/2005
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~FannieMae
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If we do not seriously invest in these "underground"
type efforts and the market changes prove to be
secular, we risk:
• Becoming a niche player
• Becoming less of a market leader
• Becoming less relevant to the secondary market
Confidential- Highly Restricted
As of 6/22/2005
11
~FannieMae
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Confidential Proprietary Business Information
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Single Family Performance
•
Corporate Objective Goals Scorecard
Monthly Progress Report - May 2005
Maintain leadership and retain
or grow our key accounts
Address key competitive issues
and maintain 30o/o MOO share
Implement products and
exceed target book growth of
1.75°/o
Increase participation in
subprime
Use technology tools for
process improvement and
delivery preference
Achieve the HUD goals
Lead the market in minority
lending and achieve targets
Confidential- Highly Restricted
As of 6/22/2005
\l
• Satisfactory progress with customer
retention. Holding our own against FRE
\l
• Leakage to subprime and private label
continues. We lack a value proposition to
stem the tide in today's market
•
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• Book growth negative year-to-date. Negative
growth is expected for the full year
• Continue to work on value proposition and
proposal to enter the subprime flow market
• On track
• On track
• Loss of market share to subprime, interest
only, option ARMS, attracting mission
borrowers relative to our "core" products
14
~FannieMae
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Single Family Performance
2005 Divisional Goals ($Bil)
Lender Channel
$383.2
Investor Channel
• Volume through May totaled $188 billion and was $11
billion (5.5%) behind plan
-
100.0
Dedicated Channel
16.0
Total Business Volume
$499.2
Book Growth
1.75o/o
Gross Charged Fee
27.3 bps
Credit Losses
$198 mil
Full year estimate: $491 billion (Q2 forecast)
• YTD book growth (estimated): minus 1.7 percent
-
Full year estimate: minus 0.6 percent
• YTD gross charge fee vs. plan: 26.2 bps vs. 26.8 bps
• YTD credit losses vs. plan: $95.5 million vs. $55.1 million
-
Current full year estimate (6/05): $253 million
Incluszve ofeBusmess.
2005 HOUSING GOALS
MAY 2005
YTD
ACTUAL
52.0%
55.5°/o
22.0%
37.0%
2005 SF PMM Sub Goal
Low Mod (Affordable)
45.0%
Special Affordable
17.0%
Underserved
32.0%
2005 MINORITY LEN>ING GOALS
African American
5.4%
Hispanic
11.6%
24.7%
Total Minority
26.7°/o
41.3°/o
Low Mod (Affordable)
Special Affordable
Underserved
Confidential- Highly Restricted
As of 6/22/2005
45.48°/o
18.92°/o
32.49°/o
5.51 °/o
10.99°/o
23.78°/o
• On the housing goals front we
remain ahead of targets against all
goal categories
• Our minority lending results through
May are behind goal for Hispanic
(1 0.99°/o) and total minority
(23.78°/o)
15
~FannieMae
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We continue to lose goals rich products to private label
Private Label Market Shares of M BS Issuance
11
Much of the leakage to the private label
market is from products with high
minority concentrations
11
The two product lines that are driving
the majority of leakage to private label
are Alt-A and Subprime
11
In 2004, these product lines scored
high relative to Fannie Mae's core
products
Alt A: 30°/o total minority score
- Subprime: 52°/o total minority score
60% - , - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
20%
10%
11
In addition, much of the Option ARM
production is securitized in the private
label market
Option ARMs: 37°/o estimated total
minority score
0%
2002
2003
1q2004 2q2004
3q2004 4q2004
I• Other* D Alt A •
1q2005
Subprime
Apr-05
May-05
I
*Other includes Option Arms
Confidential- Highly Restricted
As of 6/22/2005
16
~FannieMae
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Even with tough competition and widening MBS/PC price spreads, Fannie Mae has
still maintained share levels versus Freddie Mac in the historical range (55°/o - 60o/o)
Fannie vs. Freddie
Entire Securities Market
2002
2000
2001
2002
2003
2004
2003
1q2004 2q2004 3q2004 4q2004
1q2005 Apr-05
May-05
11 Private Label 0 Fannie Mae Ill Freddie Mac 0 GNMA
2005 YTD
MBS/PC Price Spreads
11
Despite Fannie/Freddie price spreads being at
high levels during the past 6 months, the
Fannie/Freddie share has remained in the
historical range
11
However, both GSE's continue to see
significant share loss to the private label
market
8.0 ..........- - - . . . , . . . . . . - - - - - - - - - - - - - - - - - - .
6.0
4.0
-t-T.lrt--------'""'7'--:---;;----;iil:-.;;;:t.'-;/lr.l
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0.0
-2.0
-4.0
-6.0
Jan-03 Apr-03 Jul-03
Oct-03 Jan-04 Apr-04 Jul-04
-30year
Confidential - Highly Restricted
As of 6/22/2005
Oct-04 Jan-05 Apr-05
-Theoretical Value
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17
~FannieMae
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Our competitive advantages in our core competencies continue to erode
1 YEAR AGO .... ODe==/ TODAY ....
tn Credit risk management
• Our insular view prevents us from taking credit
risks in areas unfamiliar to us.
c::
• Our capital advantage has been lost to
collateralized debt obligation issuers and hedge
funds. Basel II will further erode our advantage.
Cl)
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• Our pricing is uncompetitive. According to our
models, market participants today are not
pricing legitimately for risks.
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Customized value approach
• We don't have a value proposition to compete in
today's market (lack of conduit capability).
Liquidity premium
• Premium still exists with respect to our 30-year
TBA security; No liquidity premium for non-fixed
rate product.
0
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• DU/DO remain the leading automated
underwriting systems in the market. Continued
investment is required to ensure we do not lose
our competitive advantages in this area.
0 DU/DO Technology
Confidential- Highly Restricted
As of 6/22/2005
18
~FannieMae
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Our public position on risk concerns has been gaining momentum
5/3/05
Tom Lund
-- MBA Secondary
Remarks captured
in numerous articles.
5/16/05
6/1105
OCC & Fed
-- Issue guidance letters
-- Feds warn lenders
6/9/05
OFHEO
-- Releases home price data
-- Expresses concerns
Greenspan
-- Froth/Bubble
:································································r························· .........................
# of Articles:
#of Articles:
.:Articles of Interest
(Jan - April)
: Source: Google
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...=·
...:•
:•
••
•
..:•
.:••
.:•
:•
Housing Bubble
Interest Only
Housing Affordability Concerns
Greenspan and Housing Concerns
OFHEO and Housing Concerns
OCC and Housing Concerns
Option ARMs
•
:
I
(May- June 22. 2005)
932
315
86
187
12
18
1,248
1,213
746
598
28
17
20
10
~-···••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••L•••••••••••••••••••······'••••••••••••••••••••••••··
Since early May, we estimate that over 3,500 articles have appeared in various publications on the topics listed above.
This compares with an estimated 1,200 articles on these topics in the four months prior.
Confidential- Highly Restricted
As of 6/22/2005
19
~FannieMae
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Our customer's and other market participant's attitudes towards
layered featured products varies across a broad spectrum
•
Cautious
Slower to Move
Production Focused
Longer Term View
Reluctant Follower
Meet the Market
Constrained
Tighter Credit Box
Move Fast
Wells
Chase
CHL
Citi
PHH
WaMu
ABN
First Horizon
World
Suntrust
BofA
Green point
Wachovia
GMAC
Indy Mac
HSBC
Flagstar
Street Aggregators
USAA
OSB
Independent Mtg Bankers
Irwin
Builder Mtg Corps
Brokers
Community Banks
Realtors
Credit Unions
Subprime Originators
Confidential- Highly Restricted
As of 6/22/2005
20
~FannieMae
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The market outlook for the year continues to change, driven by lower
than expected interest rates and other market dynamics
•
2005
Plan
Q2 2005
Forecast
30-Year FRM
6.00°/o
5.64°/o
FRM-ARM Spread
1.35°/o
1.22o/o
SF Mortgage Originations ($Bil)
2,146
2,671
Refinance Share (0/o of volume)
39.5°/o
47.4%
ARM Share
29.2°/o
31.4o/o
SF 1st Lien MOO ($Bil)
7,704
7,923
SF 1st Lien MOO Growth
8.3o/o
9.8°/o
FNM HPI (0/o change from year ago)
3.4°/o
6.5o/o
Fannie Mae 2005 Plan and 02 2005 Forecast
Confidential- Highly Restricted
As of 6/22/2005
21
~FannieMae
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Private Label Trends
Mortgage-Backed Securities Issuance
Volume
Mortgage-Backed Securities Issuance
Share
1,400
60%
1,200
50%
1,000
• Fannie
800
600
o Freddie
30%
400
o Private Label
20%
·~ce~
Freddie
~Private
Label
10%
200
0
$in BN
~Fannie
40%
2002
2003
2004
0%
$in BN
2005
YTD
2002
2003
2004
2005
YTD
• Private label market continues to be a significant source of liquidity to lenders. $401
billion of private label securities have been issued in 2005 through May.
• In 2004, Private Label volume surpassed Fannie Mae volume for the first time, with
total Private Label issuance of $809 billion versus Fannie Mae issuance of $537 billion.
• Fannie Mae is still the largest single issuer of MBS. Freddie Mac was the second
largest issuer with $358 billion, and Countrywide ranked third at $114.5 billion.
Confidential- Highly Restricted
As of 6/22/2005
23
~FannieMae
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•
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Private Label Trends
250
$BN
200
•other
0 Seconds
DHELOC
150
D Prime Fixed
•Prime ARM
•Alt-A
Private Label MBS: Product Trends
• Subprime
100
50
Ol:Ql 01:Q2 Ol:Q3 Ol:Q4 02:Ql 02:Q2 02:Q3 02:Q4 03:Ql 03:Q2 03:Q3 03:Q4 04:Ql 04:Q2 04:Q3 04:Q4 05:Ql
Source: Corporate Development, Inside MBS & ABS
11
Growth in PL has been driven by increases in:
-
Subprime
Alt-A
ARM production
11
Common theme across these products: housing affordability and flexible guidelines
Confidential - Highly Restricted
As of 6/22/2005
24
~FannieMae
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•
•
Private Label Trends - Wall Street Presence
• Wall Street firms playing an increasingly large role as aggregators of
mortgage product.
• Wall Street share of private label issuance has doubled in the past
three years (as of 2004 year-end).
• Many Wall Street players are pursuing vertical integration to develop
consistent source of product:
- Lehman originated $43B in Correspondent and Broker originations
in 2004.
- Bear Stearns launched a Broker division in early 2005.
- Firms making significant front end technology investments,
including developing proprietary AU systems.
Confidential- Highly Restricted
As of 6/22/2005
25
~FannieMae
•
•
Wall Street Issuance Trends - Cyclical or Secular?
35.0%
900.0
• Total Issuance (left axis)
-%Wall Street (right axis)
800.0
1986:
REMIC tax
rules enable
issuance of
multi-class
MBS
30.0%
700.0
Liquidity crises in
market - Russian
debt crisis, LTCM,
Y2K liquidity crunch
600.0
20.0%
500.0
400.0
25.0%
New England
real estate
market slump
300.0
Growth of AltA product;
agencies not yet
participating
15.0%
10.0%
200.0
5.0%
100.0
0.0%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
• 1999-2001- Wall Street presence in Private Label Issuance declines during (a) the consolidation of many subprime lenders, and (b) the increased
presence of the Agencies in the Alt-A market.
• 2002-2005- Wall Street participation increases measurably; and the street indicates that they are intent on having a lasting presence.
• "They all want to be like Lehman Brothers ... Lehman has a huge pipeline and everyone's coveting it." - Subprime Lender
• CSFB has ambitious 2005 goals and is positioning itself to continue integrating downstream - exploring acquiring a servicer in 2005. (5/05 CSFB 9th Private Label Issuers Conference)
~
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• Morgan Stanley is seeking "to build a brand and a reputation" for their securitization program and to show that they are "not just an opportunistic
bond shop." (4/05- Origination News)
• On Bear's new broker platform:"Our pitch [is] that the broker's getting capital market execution because he's dealing direct with Wall Street."
Confidential - Highly Restricted
As of 6/22/2005
26
~FannieMae
•
•
Private Label Trends - Products and Risk Appetite
111
Primary market originations of products outside Fannie Mae's traditional risk appetite are
on the rise. This means lenders have to turn to aggregators I private label as an outlet.
%Private Label MBS Issuance: Total Collateral Trends
%Private Label MBS Issuance: Total Collateral Trends
70.0
60.0
50.0
60.0
--------------------~
-IO%
-Hybrid ARM%
~
.......... Conforming %
50.0
-NegAM%
40.0
40.0
30.0
30.0
20.0
20.0
10.0
10.0
1996 1997 1998 1999 2000 200 I 2002 2003 2004
1996 1997 1998 1999 2000 200 I 2002 2003 2004
Source: UBS Mortgage Research: Market Strategist, May 31, 2005
• Strong growth of innovative products (Interest Only ARMs, "Pay Option" ARMs)
• Steady growth in share of Private Label market with conforming loan balances
Confidential- Highly Restricted
As of 6/22/2005
27
~FannieMae
•
•
Private Label Trends - Products and Risk Appetite
• Private label securities increasingly include a significant amount of
conforming balance product. Reasons include:
- Our tough anti-predatory lending guidelines preclude us from taking
certain loans
- Our risk appetite is tighter than the market's, especially regarding IO's
and Option ARMs
- Pricing I All-in execution
- "Spillover" effect - lenders may prefer to sell product all in one place for
convenience or execution reasons
- Difficulty of hedging spread risk on ARMs: Many smaller lenders need
best efforts flow execution and servicing released bids, which we don't
offer with Alt-A and 10
Confidential- Highly Restricted
As of 6/22/2005
28
~FannieMae
•
•
Private Label Trends - Products and Risk Appetite
Private Label Securities Collateral Characteristics
Deals Issued April2004- Jan 2005
Prime Fixed &
Prime ARM Deals
--> These two categories represented 27% ofall private label securitizations in 2004
$ UPB
(BB)
/o
Investor Cashout
%CA
%
Low/No
Doc
%10
%Option
ARM
733
0.6%
69.1
85.6
2%
22%
48%
48%
48%
13%
215,269
728
1.1%
73.3
92.5
7%
22%
26%
42%
73%
6%
Within FM Risk Appetite
20.0
17%
214,355
732
0.2%
73.1
92.4
7%
2%
25%
40%
79%
0%
Outside FM Risk Appetite
2.1
2%
225,742
683
10%
75.5
94.1
12%
42%
37%
55%
13%
60%
--> This category represented 20% ofall private label securitizations in 2004
%Total Avg Loan
UPB
Size
WA
FICO
%FICO
< 620
WALTV
WA
CLTV
%
Investor
%
Cashout
%CA
0
/o
Low/No
Doc
%IO
%Option
ARM
109.3
100%
252,548
711
1.2%
74.8
93.3
18%
30%
45%
67%
51%
12%
63.1
58%
182,392
710
1.5%
76.4
95.6
24%
28%
32%
63%
48%
11%
Within FM Risk Appetite
39.6
36%
181,273
723
0.6%
75.7
95.8
24%
21%
31%
56%
60%
0%
Outside FM Risk Appetite
23.5
22%
184,307
688
3.2%
77.5
95.3
24%
40%
34%
75%
28%
28%
Conforming Balance
00
00
-.l
0\
'-0
0
/o
433,987
Total Collateral
0
0
0
0
19%
(BB)
a
WA
CLTV
100%
$ UPB
I~
%FICO
< 620
WALTV
22.1
Alt-A Deals
~
WA
FICO
116.1
Total Collateral
Conforming Balance
n.0
%Total Avg Loan
UPB
Size
Notes:
Data Source: Loan Performance database.
"Prime FRM" "Prime ARM" and" Alt-A" deal classifications are defined by the issuer as reflected in LP database.
"FM Current Risk Appetite" reflects typical FM eligiblity criteria on bulk deal business for an average customer.
Loans without reported FICO scores were excluded from the data set.
All loans are in first lien position; W A CLTV =weighted average combined LTVoffirst lien plus any subordinate lien(s)
Confidential - Highly Restricted
As of 6/22/2005
29
~FannieMae
•
•
•
Fannie Mae vs. Market View: 10 & Option ARM
Countrywide Recent Bid Profile
Interest Only and Option ARMs
Collateral Profile
10 ARM (Std Ml)
Pay Option ARM (Std Ml)
WAC
6.00
1.60
WAM
359
359
LTV
FICO
79.5
75.8
727
721
ACI
622
626
%Low Doc
79.6
65.1
Fannie Mae vs. Rating Agencies
IOARM
AA Sizing (Fannie Stress)
B Sizing (Expected Loss)
S&P
3.7
0.4
FM
7.5
1.8
FM
8.5
2.2
Pay Option ARM
S&P- Old S&P- New
6.7
5.5
0.8
0.6
Fannie Mae vs. Ml Companies
Fannie Mae Value of CE
Ml Cost forCE
Ml Execution Benefit
Enhancement Le\.els
IOARM
31.3
18.7
12.6
Pay Option ARM
44.1
28.9
15.2
2.35%stop-lo ss. 0.55%deductible 3 .S5%s top-loss. 0.65% deductible
Market Pricing
Competiti\.e Gfee (Charge Fee)
Gross Model Fee (includes CE cost)
GAP
With Credit
Enhancement
Pay Option
10
55.0
54.0
54.5
63.4
-8.4
-0.5
No Credit
Enhancement
10
Pay Option
54.0
55.0
105.9
110.2
-51.9
-55.2
Notes:
A\.erage ln\.estor Channel charge fee for 10 product is 49 bps
Pay Option charge fees reflect recent Countrywide bids 'liS. private label market.
Freddie Mac recently offered WAMU a mid-30's gfee for high quality Option ARMs
Confidential - Highly Restricted
As of 6/22/2005
30
•
Fannie Mae's view of risk is
significantly different than
other market participants
• S&P recently came out with
more punitive criteria for
Option ARMs
• Ml companies price the
expected and stress loss
levels differently than
Fannie Mae
• We need to obtain credit
enhancement on the entire
loan pool in order to achieve
relatively gap neutral model
fees
~FannieMae
•
•
•
Fannie Mae vs. Market View: Subprime
Countrywide Recent Bid Profile
Subprime Market
Collateral Profile
ARM (Charter Ml}
WAC
WAM
7.1
359
LTV
78.3
FICO
ACI
604
561
DTI
41.1
• Our view of risk for subprime
product is more in line with
Rating Agencies
Fannie Mae v.s. Rating Agencies
Subprime
S&P
FM
AA Sizing (Fannie Stress)
B Sizing (ExpectedLoss)
12.6
2.0
12.0
3.1
• Ml companies price the
expected and stress loss
levels differently than Fannie
Mae
Fannie Mae v.s. Ml Company
Subprime with Deep CE
Fannie Mae Value of CE
Ml Cost forCE
Ml Execution Benefit
Enhancement Levels
176.0
101.0
75.0
• Our execution still significantly
off current market levels market competitive g-fees
would result in significant
negative gap, even with credit
enhancement
15.0% stop-loss, 1.50% deductible,
Charter P timary
Competitive Alternatives
Subprime
Competitive Gfee
Gross Model Fee
GAP
(includes CE cost)
Confidential - Highly Restricted
As of 6/22/2005
With Deep CE
With Charter Min
Ml Only
130.0
195.0
-65.0
130.0
277.0
-147.0
31
~FannieMae
•
•
•
Private Label Trends- Products and Risk Appetite
II
This trend is increasingly costing us business with our largest customer:
Share of Countrywide's Total
Monthly Mortgage Fundings
Share of Countrywide's Prime Conventional
Monthly Mortgage Fundings
Acquired by Fannie_M
___ a_e
- 110% --------------- 100%
90%
)~
80%
fV
~/
~I
70%
I'
60%
1\
..,"TI
:::l
~.
(])
..,~
(])
100%
-----------··---~
I\
~""Y"'\
50%
40%
30%
20%
10%
0%
1Fann1e Mae a.;:quisllions ofcunvenllonal, f1rsl-ben mortgages fmm Counti)'Wido::
\
v
AI\
I
'""""
I
a sltare ofCountryv.ille fundings ofpmne,conventional,firsl-hen mortgages
+--------------------------------~
+-----------------~~----------------~
70%
+------~~~~~~--~--~hF~~----------~
60%
+------~-----~~r7------~----------~
++~~~~-------------------1~~~-+-----~
40%
+-----------------------------T-~---~
30%+---------------------------------~~~
-~\
liS
90%
80%
50%
I
\
______ ------~~q_l!iree!_!l_yf..!!!.!!i~-~'!.~-------··-·--··--···----
3
20%
+------------------------------------~
10%
+------------------------------------~
Fannie Mae acquiSitions of mortgages from Countl)WKI.e as a share ofCountrywide mortgage fundings
~
n.0
a
l:;o
0
0
0
00
00
-.l
-.l
N
Confidential- Highly Restricted
As of 6/22/2005
32
~FannieMae
•
•
Private Label Trends - Products and Risk Appetite
Countrywide Loan Production
Ql-2005
$ in millions
PRODUCT
30FRM
15FRM
FRM ALT-A
AMORTIZING ARM ALT-A
INTEREST ONLY ARM
PAY OPTION ARM
TOTAL PRODUCTION
Total Countrywide
Loan Production
$11,218
2,985
4,340
600
2,811
6,889
$28,843
%Total
Production
$ UPB Sold to
Fannie
38.9%
10.3%
15.0%
2.1%
9.7%
23.9%
100.0%
$5,354
2,379
646
403
1,920
47.7%
79.7%
14.9%
67.2%
68.3%
-
0.00/o
37.1%
$10,702
Notes:
Pay Option ARM Drill Down
Potential Eligibility Criteria
Pay Option
Total UPB
0
/o Investor
% Cashout
% Single-Family
%Full Doc
%with Subordinate Liens
wa Debt Ratio
wa FICO
waMTMLTV
CreditWorks Model Fee
Gross Model if Credit Enhanced
Est Market Price (Charge Fee)
Confidential- Highly Restricted
As of 6/22/2005
%Sold to
Fannie
Tight Eligibility
Bucket
$2,412
22.1
38.9
79.8
46.1
21.2
35.4
744.1
70.7
76
52
25
Broader
Eligibility Bucket
Not Eligible
$5,670
21.6
41.8
79.7
36.1
23.3
35.6
721.4
73.1
101
62
50
$1,219
30.3
44.1
69.3
33.6
27.6
45.0
669.1
78.3
219
nla
55
33
•
Does not include subprime, second, or
government loans.
•
Eligibility buckets reflect potential offering to
Countrywide for Option ARM product under a
forward commitment.
•
Tight eligibility bucket could be extended to other
lenders on a bulk basis.
•
"Not Eligible" category on Option ARMs reflects
loans outside our credit risk appetite and/or
borrower appropriateness framework.
•
Debt ratio (back ratio) estimated from a onemonth sample and only includes Full Doc loans.
•
Countrywide data file did not include loans sold
to Freddie; figures are grossed up assuming a
20% FR share based on Q1 actuals.
~FannieMae
•
•
•
Interest Only I Option ARMs Dominate Prime & Alt-A Private Label Deals
10/ Option ARM Share of Private Label Deals
100 ~-----------------------------------------------------------------------.
80
-+-Alt-A
---i?i1-
PRIM E
60
..,"TI
:::l
~.
(])
..,~
---tr- Sub-Prime
%
40
(])
20
Source: UBS Mortgage Research 6-7-05 Mortgage Strategist
Confidential- Highly Restricted
As of 6/22/2005
34
~FannieMae
•
•
Many of the current products in the market today provide for a low
payment with increased payment shock over time
II
I
I
I
Loan Type
I
Start
Rate
P & I Payment
(Initial)
P & I Payment
(First
Adjustment)
P & I Payment
(Maximum
Adjustment)
Qualifying Max.
Loan Amount
1.00°/o
$125
$876
$1,912
$285,714
5.00°/o
5.13°/o
$625
$641
$904
$992
$1,436
$1,376
$300,000
$292,683
4.25°/o
$738
$826
$916
$254,096
6.00°/o
$750
$1,266
$1,266
$250,000
6.13°/o
$766
$911
$911
$244,898
:'-71. :'1 0A
0
$799
$799
$799
$234,571
5.00°/o
$805
$900
$1,252
$232,852
5.63°/o
$863
$863
$863
$217,143
i
i
I
I
I
i
I
I
i
I
I
I
I
I
I
!
I
I
!
Option ARM
(w/ Neg.
Amortization)
3/110 ARM
5/110 ARM
30-Yr.
Fixed Rate
(w/ 2/1 buydown)
30-Yr. 10
Fixed Rate
5/3010
(35-Yr.)
40-Yr.
Fixed Rate
5/1 ARM
30-Yr.
Fixed Rate
(Approve)
•
Assumptions: a) $150K loan amount. b) Start Rates based on posted lender pricing. Rates at adjustment assume
current index value for the loan type. Option ARM teaser rate of 1% on 10 fixed for one year, then moves to 5.25% until
first rate adjustment. c) Qualifying max loan amount for all loan types assumes the borrower made $60K and utilizes a
25% qualifying ratio. d) Option ARM qualifying rate of 5.25%. All other loan types qualified at starting payment rate.
Confidential- Highly Restricted
As of 6/22/2005
35
~FannieMae
•
•
•
Subprime Market Trends
• Market is evolving into a product continuum
($ in Millions)
111
111
Trends towards integration of prime and subprime players:
-
New Century/RBC Acquisition in May 2005
-
Countrywide #1 issuer of subprime and AltA; #3 issuer in Prime ARM securities in 2004
-
Ameriquest making significant marketing efforts aimed at broad customer base
-
To date, we have not seen any players integrate platform and sales process
Profit margins in subprime shrinking but are still significantly higher than for prime
mortgages
Confidential - Highly Restricted
As of 6/22/2005
36
~FannieMae
•
•
•
Subprime Market Trends
Key Drivers of Growth in Subprime:
• Broker driven sales process:
- Subprime generates higher margins and more approvals
• Greater flexibility results in borrower ability to qualify for larger loan:
- Calculation of income (subprime more flexible on income sources)
- Higher debt ratios
- Appraisal values (subprime typically exhibits higher appraisal bias)
• Mortgage Insurance Avoidance:
- Subprime lenders moving up the credit spectrum results in higher LTV's
- For marginal borrowers, a subprime loan often costs less than a conventional loan once the Ml payment is
factored in
• Ability of lenders to transfer risk to capital markets I monetize entire cash flow stream:
- Strong COO demand for subordinate bonds means lenders have a steady investor source for riskiest
credit
- Ability to sell off residual cash flows in form of Net Interest Margin (NIM) bonds means lenders can realize
more proceeds upfront and reduce exposure to future income fluctuations
Confidential- Highly Restricted
As of 6/22/2005
37
~FannieMae
•
•
•
I
~I
-c
c:
ca
.....tn(.)
ca
fn
c:
(I)
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c:
0
0
.....
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i
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ca
.r:.
ca
Fannie Mae
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(I)
(I)
'-
0
u.
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·'D.
I
Confidential Proprietary Business Information
Produced Pursuant to House Rules
Q,J
~
~
·s
=
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FM-COGR 00088778
•
•
Home Price Growth Remains Strong
US Housing Market continues with its
recent trend:
Annualized HP Growth from TBRTI* up to 2005Ql
Region
Last 1 yr
Last 2 yrs
4.7%
6.4%
6.6%
6.8%
10.9%
14.6%
22.5%
22.7%
22.8%
14.6%
West South Central
West North Central
East South Central
East North Central
New England
Middle Atlantic
Mountain
South Atlantic
Pacific
us
Last 5 yrs
3.7%
6.3%
5.3%
5.9%
10.9%
13.9%
16.8%
17.7%
21.3%
12.7%
• High growth rate and high dispersion
across geographic locations
3.4%
7.3%
3.7%
5.4%
12.3o/o
12.3%
9.4%
11.8%
15.5%
9.9%
• Some observed slowing of growth
rates (Southern CA, Las Vegas), but
most remain above long-term trend
Home price growth has significantly
outpaced income growth:
• Affordability is at historical
lows in some markets
*TB-RTI: A new home price index estimation methodology
that uses data only from purchase transactions.
US Income Growth vs. Home Price Growth
16%~----~----_,----------------------------------------------~--------
--US Median Household Income (1976Q1 - 2004Q3)
~
~
Confidential - Highly Restri~tedB
As of 6/22/2005
"'"'
e
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g"'
.,;
...
e"'
.,;
Ul
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.,;
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.,;
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.,;
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.,;
....
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N
0
0
0
g
N
0
0
e
.,
0
0
...
g
N
0
0
...
e
~FannieMae
•
•
•
Local Market Focus - 1/0 Share
• Many of the MSAs that experienced a high annuaiiO share increase (in excess of 13%) were MSAs that also
experienced high home price growth (in excess of 19%) in the last year.
Increase in Interest-Only (10) Share Vs. HP Growth
among top 1 00 MSAs
45.0%
-------------------------------------------~-----------------------------------------------------.
40.0%
------------------------------------~------
•
+Reno-Sparks, NV
35.0%
--------------------------------------~----
----------------~~~~~~~"_:(~A--------------------------------------
30.0%
--------------------------~--------------
~"i;nla B;;.aba-;.a-::-s~nta-M-;ria:-G~t;t~t~CA------------ ·S~r-;.~e~t:; ~Arde~-Ar:ade-=R~;e~tk.CA-----------
25.0%
20.0%
15.0%
10.0%
5.0%
•
•
.
_____________________________ ! ________ • ___ _
• •
••
•
-------------------·--------------.--------
• •
•
------------------•-----.-.--.-----------~
•
•
.• •
~ra!~:~;::::~:~.:n~~:n~::t;;~~)ntarin, CA
+
+Mode~ to.
.
+Phoenix-Mesa-Scottsdale, AZ
+Virginia Beach-Nnrfolk-Newport News. VA-NC
-
CA
-- - - - - -
Washingto!.Arlington-Alexandria, DC-VA-MD-WV
- - - - -.- VaiTe.~).=-FairficTd:-cA-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
+Los Angeles-Long Beach-Santa Ana. CA
_- -~ T~c~(:_n._A?:, .. __
""7- _ -:.-- - - __ - - - - - - - _- - - __ - - - _ - - - - _ - - - - _ - - - __ - - - - _ - -
•
--------.------------------------·----------------------------
~-~
-----~-------~-------------.--------------
•
•
• •• •
••
--------~------~---------------.---------••• • •
• • •
•
• • ••
• •
0.0%
0.0%
•
5.0%
10.0%
15.0%
20.0%
•
25.0%
30.0%
Increase in 10 Share based on Private Label Security Data (2003Q4 to 2004Q4)
~
n.0
a
l:;o
0
0
0
00
00
-.l
00
0
Source: Private Label Purchase Loan Dataset (Economics and Mortgage Market Analysis) & Credit Finance
Confidential- Highly Restricted
As of 6/22/2005
40
~FannieMae
•
•
•
Local Market Focus - Investor Share
• During the last year, many of the MSAs that experienced a high annual increase in investor share (in excess of 4%)
were MSAs that also experienced high home price growth (in excess of 15%).
Increase in Investor Share vs. HP Growth
among top 100 MSAs
38%
a
0
33%
M
0
0
N
..,
"TI
:::l
~.
(])
..,~
(])
• Las Vegas, NV
+Riverside, CA
28%
Lc
E
~
i=
0::I
a
23%
'"'~'
•
18%
(I)
•
Ill
.s::.
13%
l
2
(!)
~
•
8%
••
::I:
•..
3%
....
••
-2%
~
• •
• Oakland, CA
•
Aliladelphia, PA
Baltirmre, MD
•
oemx,
A"-
••
thole US..
•
•
•
....
••
•
•
•
.•
•
....
•
• • •
4%
6%
8%
10%
Increase in Investor Share based on Purchase-only PCC data (from 2003Q4 to 2004Q4)
Confidential - Highly Restricted
As of 6/22/2005
......
•
2%
l:;o
00
00
-.l
00
vemura, '--"
••Orange County,
CA
•Miani, FL
•
••
t •• •
n.0
0
0
0
•
•
0%
~
lUll,-,_
•
••
•
•
D.
a
-ou.-"
•
••
"C
C'CI
• San Diego, CA
+Norfolk, VA
+Washington, DC-MD-VA-WV
III
1- 0~
r:::: 0
0 N
.c
Angeles-Long Beach, CA • Sacramento, CA
Source: Purchase only PCC data (Economics and Mortgage Market Analysis) & Credit Finance
41
~ FannieMae
..
'
•
•
•
High home price growth tends to reduce credit losses
Forecasted Credit Losses Under Alternative
National Home Price Growth Scenarios
(without Make-whole Revenues)
--~~~----~----
$550 Million
$500
I
r~-~-~~~-~--~~----·-------------------~----------~-~--------~--------~------·---···------·--·-·--·-----~~----J
I
0% Home Price Growth
$450
~~-----~----··-~
l
$400
----------~-----~=---~=~..-.-----
!
. "'1
---------------·-= "'"'lI
I
$350
$300
3.2% Home Price Growth
$250
r-----·~-----------~:.....------------------------------------·-j
$200
$150
$100
8% Home Price Growth
$50
$0
02
2005
02
2006
02
2008
02
2007
02
2009
Source: 2005Q2 Loss Forecast Model (LFM) production runs.
All loss figures are as of default date and include charge-off, foreclosed property expense, and foregone interest.
Fannie Mae
Confidential- Highly Restricted
As of 6/22/2005
Proprietary and Confidential
42
~FannieMae
.
''
~
•
•
Credit losses on new ARM products would vary under different
economic scenarios
Losses were forecast on new ARMs in three different economic scenarios:
1.
Corporate Forecast: House prices up 3-4% annually, interest rates up 1% in 1st 5-years
2.
Housing Recession in overpriced regions, interest rates increase 1.1% in 1st 5-years
3.
Housing Recession in overpriced regions, interest rates increase 5% in 1st 5-years
Loss Forecast (net of Ml) on New ARM Products
Present Value discounted at 1.25o/o I qtr
350 .--------------------------------------------------------------4
300 - ----------------------------------------------------------------------------- -250 -
-----------------------------------------------------------------~------
200 - -----------------------------------------------------------------
-----
180 bps rev :muE {PV)
150
100
--------------------------94~~~¥}----
50
80 bps revenue {PV)
---
---
o~n~~~~n~~~~~~~
Economic \....
1
2
3 ..) \....
1
2
3 ..) \....
1
2
3 ..)
See nario -------..y.-------__.. ---------..y--------' ...____________y---------10 (Purchase)
Confidential- Highly Restricted
As of 6/22/2005
Neg Am (Purchase)
43
Subprime (2/28)
~FannieMae
•
•
•
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FM-COGR 00088784
l
J
.,
•
•
Emerging Products: Market View and Fannie Mae Participation
2003
Low & No
Prime Conventional Conforming
2nd
10
Home
ARMs'
ARM
Doc
Share ofSVolume)
Share of $Volume)
Share of$ Volume)
Share of$Volume)
18.2%
16.7%
6.5%
5.1%
Investor
Share of$Volume)
NA·
Subprime
80.6%
42.8%
7.2%
1.3%
9.1%
Alt-A
44.0%
65.0%
18.1%
3.9%
25.1%
FNM Participation
13.9%
8.5%
5.5%
5.5%
% FNM Participation via lnv. Chan
28.7%
77.7%
26.2%
9.0%
.....
1.1% ....
47.7%·
In 2003, 10 ARMs
accounted for just
1.1% ofFNM's
purchase money
mortgage acquisitions.
In 2004, they
accounted for 7.6%
2004
Low & No
2nd
10
ARMs
ARM
Doc
Investor
Home
Share of$Volume)
Share of$Volume)
Share of$Volume)
Share of$Volume)
Prime Conventional Conforming
30.8%
22.3%
8.1%
6.5%
Subprime
88.1%
44.8%
7.5%
1.5%
23.9%
Alt-A
71.1%
57.6%
18.2%
4.7%
50.3%
FNM Participation
24.9%
10.1%
5.6%
7.0%
7.6%
% FNM Participation via lnv. Chan
33.6%
80.6%
40.9%
14.8%
71.7%·
Share of$Volume)
NA·
......
.....
Source: Economics and Mortgage Market Analysis using Loan Performance.
~
n.0
a
l:;o
0
0
0
00
00
-.l
00
Vl
•Shares of ARMs, Investor and Low Doc products have increased from 2003 to 2004 as measured by purchase money mortgage originations.
- FNM product shares of ARM, I/0, Low Doc are trailing behind market share.
- Investor Channel is driving 1/0 and Low Doc volume.
• Alt A and Subprime are more concentrated in these products.
Confidential- Highly Restricted
As of 6/22/2005
45
~FannieMae
.
'
~
•
•
Product Definitions
•
Interest Only- A mortgage in which the borrower makes monthly payments for a specified period that cover only
the interest due on the loan. During the Interest Only period, the outstanding principal balance of the loan does
not decline. After the initial interest only period, the monthly payment is increased to an amount sufficient to fully
amortize the outstanding balance over the remaining term of the loan.
•
Hybrid ARM- A mortgage loan that has an initial fixed rate period, after which the mortgage loan converts to an
adjustable rate. An example of a Hybrid ARM is a 2/28 mortgage loan. This is a 30 year adjustable mortgage
program, except that the first interest rate adjustment does not occur until 2 years into the loan. Once the loan
converts to an ARM, the interest rate adjusts periodically (typically monthly, semi-annually or annually) based on
a particular interest rate index (e.g., LIBOR, 1-Yr Treasury).
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Negative Amortization Adjustable-Rate Mortgage (Neg Am)- An adjustable rate mortgage that provides for a
fixed monthly payment even if the interest rate on the loan changes. Typically, the interest rate on a neg am loan
adjust monthly, while the payment stays fixed for a year. If the interest rate increases in a given month such that
the monthly payment is insufficient to cover both principal and interest then due, the interest shortage is added to
the unpaid principal balance of the mortgage to create "negative" amortization. Most neg am loans have a cap
on the maximum amount that can be added to the loan balance over the life of the loan.
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Option ARM- An adjustable rate mortgage that gives the borrower various payment options each month. In a
typical Option ARM, borrowers have the option to make a minimum payment, which could result in negative
amortization if the minimum payment is not enough to cover interest due (similar to the minimum payment on a
credit card). They also have the option to make interest-only payments or fully amortizing payments. The
expanded payment options give the borrower more leeway to qualify for a mortgage. The 12 month Treasury
Average (MTA) is the most common index used with option ARM loans; however, some lenders also offer
LIBOR, the 1-Year Treasury Bill, and the 11 1h District Cost of Funds (COFI) as indices.
Confidential- Highly Restricted
As of 6/22/2005
46
~FannieMae
@FedFRASER