Brian Chappelle

1
Title Guaranty Annual ConferenceMortgage
Lending in 2010

• Brian Chappelle
• Potomac Partners

2
Introduction

• Good News
• Treasury Secretary Geithner -
• Were not going to make the mistake many
  countries made in the past of putting the brakes
  on too early (Business Week November 2nd)
• What it means
• Effort will be made to keep rates down
• Tax credit? Temporary mortgage limits?
• Bad News
• Washington thinks mortgage system is broken

3
Overview

• Significant changes are inevitable
• Washington policymakers want to make sure this
  never happens again.
• Everyone on the hot seat (regulators
  industry)
• New changing rules will be a way of life for
  the mortgage industry over the next few years
• Opportunity for those who can
• Adjust to changes
• Follow rules
• Understand FHA/VA/Fannie/Freddie Products

4
Problem starts with mortgage delinquencies
foreclosures

• Defaults and foreclosures are still increasing
  2nd Quarter 2009
• U.S. 13.54 of loans are late or in foreclosure
• 9.16 - 2008-Q2
• 40 of all subprime are late or in foreclosure
• 17 of FHA are late or in foreclosure
• 9 of prime loans are late or in foreclosure
• ARM loans are performing horribly
• 21 of prime ARMs are late or in foreclosure
• 52 of subprime ARMs are late or in foreclosure

5
Washingtons View of Causes

• Adverse steering
• Current Comp Provides incentives to mislead
• Product, interest rate or loan amount
• Disclosure alone is not effective
• Products too complicated borrowers are confused
• No Skin in the game
• Unlevel-playing field
• To compete over time, banks and thrifts and
  their affiliates came to offer the same risky
  products as their less regulated competitors and
  relaxed their standards for underwriting and
  sales. Michael Barr, Assistant Secretary of
  Treasury

6
Washingtons Solutions

• Change all originator compensation
• Fed proposal Limit to flat fee or hourly rate
• Promote plain vanilla products
• Increased liability for other loans/ duty of
  care
• Simplify disclosure
• Fed - Develop more comprehensive APR
• Use reasonableness test for enforcement
• Skin in the game
• Higher net worth risk retention

7
Significant changes are coming!

• First wave of compliance changes
• MDIA SAFE Act
• RESPA (new GFE HUD-1 1/1/10)
• Proposed Fed changes late 2010?
• Change compensation more comprehensive APR
• New legislation?
• Consumer Financial Protection Agency (CFPA)
• Title and mortgage insurance excluded in House
  bill
• Expect CFPA legislation in 2010
• RESPA-TILA merged
• What else? States?

8
SAFE Act

• All loan officers must be registered obtain
  personal identifier
• Background check
• Loan officers in non-depositories must be
  licensed
• Background check, education testing, annual
  recertification

9
RESPA HUD Is Moving Forward

• Rule effective January 1st
• New disclosures
• GFE HUD-1
• Originator compensation
• Fixed at origination between borrower and loan
  originator
• Cannot increase prior to settlement
• 10 tolerance for most settlement services
• Borrower selected providers exempt from 10
• Deregulation of FHA origination fee

10
State of Mortgage Market

• Major business themes of 2009
• Capital is King
• Warehouse funds servicing outlets
• More concentration
• Reduced competition
• Government conventional market
• FHAs role will continue to grow for near future
• Fannie Mae Freddie Mac
• No decisions until late 2010 -2011
• Credit overlays are a way of life

11
FHA Expect Sweeping Changes

• FHA Change has already begun
• New Leadership Team Industry Experience
• Dave Stevens - FHA Commissioner
• Vicki Bott Single Family Deputy Assistant
  Secretary
• Bob Ryan - Chief Risk Officer
• Focus on enforcement
• Started u/w changes (Streamlines) HVCC

12
FHA Current Agenda

• FHA FY 2009 audit is expected soon
• Capital ratio 1.6 (est.)
• House price decline vs. improved loan quality
• 2008 audit proj. .96 decline 2009 8
  decline
• FHA is going to be tough on crime
• Neighborhood Watch early default data
• Credit Watch for Wholesalers
• Other changes are receiving a fresh look
• Condo change Allowable fees

13
What is on the horizon at FHA?

• Expect FHA to adopt GSE principles
• FHA lender eligibility Eliminate broker
  approval?
• Change declining markets policy
• Target refinance performance
• Tighten TOTAL Scorecard
• Develop AUS
• Administrative improvements
• Risk-based pricing is unlikely

14
Summary

• Reregulation of mortgage industry seems
  inevitable
• Washington thinks mortgage system is broken
• FHA will remain an important financing source
• Sweeping changes are virtually guaranteed
• Still going Back to the future
• More rules are inevitable
• Opportunities for those who can adjust