4 Webinars, 4 Perspectives

Implications of Dodd-Frank Act

PART 1: ANTI-STEERING & LOAN OFFICER COMPENSATION

PART 2: IMPACT TO HEDGING

December 14

PART 3: IMPLICATIONS FOR DOCUMENT COMPLIANCE

December 16

PART 4: IMPACT TO YOUR LOS

December 21

Ask Questions

2

Implications of Dodd-Frank Act

Part 2: Impact to Hedging

December 14, 2010

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Compass Analytics provides valuation, best execution, and hedging solutions to mortgage capital markets participants:  

Rob KesselCompass Analytics, LLC

San Francisco, CA

415-462-7500

rkessel@compass-analytics.com

•  Pipeline, Servicing Rights (MSRs) and Whole Loan Analytics

• Advisory, Outsourced and Licensed (Hosted and Client-Install) Options

•  Servicing Retain/Release Rich/Cheap Analysis and Consultation

•  Mandatory Rate Sheet Pricing Feeds

•  Delivery, Intra-Day, Loan-Level Best Execution

•  Company Cash Flows including Net Profit, Future Cash Flows and Balance Sheet and Profit/Cash Shocks

•  Interactive Pooling, Commitment Management, Hedging and Trading Tools

Dodd-Frank Context for Hedging (from Hedger’s Perspective)

• Interpretation/Best Practices in Flux

• Rate Sheet (and Technology) Considerations

• Pullthrough (and Analytics) Considerations

• Performance Measurement Considerations

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Rate Sheet Considerations

• Secondary Creates Client-Facing Rate Sheet w/Originator’s Margins

• Lender’s Margins may Vary (e.g. Brokers, Branches, LO’s)

• Need Same Originator Profit Margin by Product/Terms

• Borrower or Lender (not both) pay Originator

• Brokers Must Show Borrowers Multiple Lenders/Options

• Opportunity to Centralize Locking?

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Pullthrough Considerations

• Operational: • Originator Proof of Compliance (as required by investor)• Initial Transition Hiccups

• Different Pullthrough by Different Originator Profit Margin?• See Example

• Impact on Renegotiation Process/Frequency?• “Change in Terms cannot benefit originator…”

• Historical Pullthrough/Performance Drives Varying Originator Margins

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Pullthrough/Originator Profit Margin Example

• Wholesale Lender ABC buys (locks) loans from Brokers A & B:• Lender ABC will buy a FN30 4.625% Note Rate at 101.50 which includes a

profit margin for ABC of 1.00%.• Assume ABC requires same profit margin for Brokers A & B.• Broker A has requested rate sheets/pricing from ABC that includes a profit

margin for Broker A at 1.5%.• Broker B has requested rate sheets/pricing from ABC that includes a profit

margin for Broker A at 1.25%.

• Broker LO’s provide pricing to borrower(s):• Broker A offers 4.625% @ par (100.00)• Broker B offers 4.625% @ .25 rebate to borrower (100.25)

• Should Broker A lock have lower pullthrough than Broker B lock?• Yes - Broker A offers worse terms than Broker B• No – Pullthrough driven more by originator performance

Performance Measurement Considerations

• Originator Performance Measurement Has Always Been Critical for Hedgers:

• Hedging Value Proposition:

Mandatory-BE Price Spread

- Hedge Cost

= Net Hedging Gains• Hedge Cost is a Function of Pullthrough (Originator) Performance• Originators Profitability:

Realized Profit Margins on Closed Loans

- Hedge Cost on Unclosed and Closed Loans

= Net Originator Profitability

• With new Regs, Performance Measurement Becomes Even More Important:

• Support for Varying Originator Margins• Ongoing Support for Originator Margin Changes

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Hedger’s Checklist

• Pricing/Technology to Facilitate Rate Sheet Pricing:• Mandatory Pricing• Ability to Respond Quickly to Market and to Post Pricing to Pricing Engine• Ability to Vary Lender Margins (by Originator)• Ability to Implement Originators Desired Profit Margin

• Pullthrough Capabilities:• Pullthrough by Originator• Establish Appropriate Secondary Cost

• Historical Hedge Cost/Pullthrough Monitoring/Measurement• Policies/Practices to Review & Update Lender Originator Margins• Outstanding Topics to Monitor:

• Loan Attribute-Based Lender Margin Adjustments?• Investor’s Interpretations

Question & Answer

11

Implications of Dodd-Frank Act

Part 2: Impact to Hedging

December 14, 2010

4 Webinars, 4 Perspectives

Implications of Dodd-Frank Act

PART 1: ANTI-STEERING & LOAN OFFICER COMPENSATION

PART 2: IMPACT TO HEDGING

December 14

PART 3: IMPLICATIONS FOR DOCUMENT COMPLIANCE

December 16

PART 4: IMPACT TO YOUR LOS

December 21