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• • Single Family Guaranty Business Facing Strategic Crossroads June 27, 2005 ~ n.0 a l:;o 0 0 0 00 00 -.l +...... Confidential - Highly Restricted As of 6/22/2005 ~FannieMae • • • 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 2 ~FannieMae • • • The risk in the environment has accelerated dramatically. • Proliferation of higher risk alternative mortgage products "TI ~· ~ • 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 3 ~FannieMae '1:1(1 0 8 §"~ §.g 2'§: • - ~ '1:1 Sl:::l"C8 ~ ~. s~ ::r::~" 0~ .: IJ:j i!6 ~ 8' s· ~i I Growth in adjustable rate mortgages (ARMs) continues at an aggressive pace. • Extensive menu of alternatives I options "TI ~· ~ • Increasing affordability concerns • Emphasis on lowest possible payment • Home being utilized more like an ATM ~ n.0 a l:;o 0 0 0 00 00 -.l ++- Our competitive advantages today are in fixed rate mortgages. Confidential - Highly Restricted As of 6/22/2005 4 ~FannieMae • • • 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 5 ~FannieMae • • • 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 6 ~FannieMae • • • 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 • • • 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 • • • 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 ~ n.0 a l:;o 0 0 0 00 00 -.l +- '-0 Confidential- Highly Restricted As of 6/22/2005 9 ~FannieMae • • • 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 10 ~FannieMae • • • 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 ,. • • I I I Confidential Proprietary Business Information Produced Pursuant to House Rules c:::: ·- 0 tn tn :::J (.) tn ·c E ca 1- CD .. c:::: CD E CD C) ns r: ns :!: Fannie Mae ~ ~ ·s~ ..... N ~= rii! "'0 () .....Q) ..... ·;:: en Q) 0:: ~ 0> ..c ILO ,g Q)c.o -N ro·- N +-'N c:_ "'0 '<='Q c: o en (.)<( FM-COGR 00088752 • • • I ~I -c c: ca .....fn(.) ca u. ~ - ·-E cu LL C) Cl) - c: ·UJ I Confidential Proprietary Business Information Produced Pursuant to House Rules tn c: 0 .....ca ·c:CD tn .c 0 -c c: ca CD u c: ca E 1.. 0 CD 't: a. '1- -ca J: ..... tn s... ·LL Fannie Mae ~ ca ·s~ ""'" M = ~ ri Q) "0 Q) ·c en t5 0:: >. O'l .c. ILO ,g Q)(.O -roN ·N -c:::_ N o en ;go c::: ()<( FM-COGR 00088753 • • 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 • • • • • • 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 • • • 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 • • • 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 • • • 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 2.0 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 I 17 ~FannieMae . • ' • • 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) ·-u Capital advantage "TI ;::.; :::l ~. (]) .... Low cost producer Cl) • Our pricing is uncompetitive. According to our models, market participants today are not pricing legitimately for risks. Cl) ~ ;::.; (]) E 0 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 Q) a... 0 • 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 • • • 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 • • ...=· ...:• :• •• • ..:• .:•• .:• :• 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 • • 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 • • 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 • • • I ~I -c s:::: ca tn ..... (.) tn -c t: G) s... ..., 1G) s... ~ ns :E G) .c E ·-c. s... LL en ca ~ -c ca C) G) ·-s:::: CIJ Fannie Mae a. ·-s...> ns ...,G) ...J .c ns G) ca t: ::s ·E- - LL I Confidential Proprietary Business Information Produced Pursuant to House Rules 0) Q) ~ =s Q) ·s N N ~= ~ Q) "0 0::: Q) ( /) ·c u -~ ..c ILD ,g -N ca:;:. N C::N 0 (/) (.)<( 0 'E -o<O a>- ·-FM-COGR 00088762 • • • 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 . ' • • • 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 • • • 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) ~ n.0 a l:;o 0 0 0 00 00 -.l 0\ 0\ • 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) '- CJ c: 0 0 ..... ·-c ~ 0 i u. ->. (!) -c c: ca .r:. ca Fannie Mae J: 0 E (I) (I) '- 0 u. c:: ·tn C) - ·E (1) CJ ·'D. I Confidential Proprietary Business Information Produced Pursuant to House Rules Q,J ~ ~ ·s = ~ ('I) co Ri! Q) "0 t5 ·c Q) (/) +" Ol 0::: >:E 18 ILO Q)- -N ro·- N CN -oC.O 0 (/) 'Eo (.)<( 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 "'N g"' .,; ... e"' .,; Ul g"' .,; "'"' e .,; co g"' .,; e"'"' 39 .,; g"' .,; e"' N .,; ... g"' ;; "' B Ul .,; .... g"' .,; co e"' 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 • • • -- .... ca ca c -c c: ca I U) &: ...0 ··....&: ·CD (.) ...c :::::1 -c ... (.) U) .... LL ~ - ·E ca LL C) Cl) - c: ·en Fannie Mae w E CD C') ·... &: C') D.. 0 ... -c :::::1 (.) U) ... ca &: 0 D.. ca -c I Confidential Proprietary Business Information Produced Pursuant to House Rules 0> ~ ·s ~ "';t "';t ~= ~ Q) "0 Q) rn 'i:: t5 0:: ~ .c. ,g Ill) Q)co -N ro·N N c_ "0 o rn '<='Q c (.)<( 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). • 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. • 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