Federal Home Loan Bank of Chicago

1
Best Execution

• Federal Home Loan Bank of Chicago
• Comparing MPF Pricing to Other Alternatives
• January 17, 2008

Page 1
2

Best Execution

• After an institution has committed to
• making residential mortgage
• loans it has two choices
• Hold the loans
• Sell the loans
• This presentation focuses on evaluating the
• economics of the sales alternatives

Page 2
3
Best Execution

• Q How do I maximize my return on a loan sale?
• A Perform a best execution analysis

Page 3
4
Mortgage Servicing Rights
Best Execution

• Best execution analysis
• To whom do I sell?
• What is my true economic sales price?
• Cash today plus expected future cash flow

Page 4
5
Mortgage Servicing Rights
Best Execution

• To whom do I sell?
• FHLB
• Fannie Mae
• Freddie Mac
• Correspondent

Page 5
6
Best Execution

• What are the true economics?
• Upfront cash
• Cash price
• Loan level additions / deductions
• Servicing released premium (SRP)
• Future cash flow (expressed in present value)
• Value of retained servicing
• Value of credit enhancement fee (MPF program)
• Value of credit enhancement obligation (MPF
  program)
• Estimate of SRP recapture

Slide 6
7
Best Execution

• Upfront Cash Pricing Components
• Interest rate
• Lock length
• Type of commitment mandatory versus best
  efforts
• Other adjustments

Slide 7
8
Best Execution
Best Execution

• Upfront Cash
• Pricing Comparison
• December 31, 2007

Slide 8
9
Mortgage Servicing Rights
Best Execution

• Common mistakes in performing a
• best execution analysis
• Ignoring future cash flows
• Servicing retained vs. servicing released
• Credit enhancement fees
• Float value
• Not adjusting for lock period day differences
• Ignoring transaction fees and loan sale price
  deductions

Page 9
10
Best Execution

• Mandatory Versus Best Efforts
• Better price
• More control
• More risk fallout risk estimation of fallout

Slide 10
11
Best Execution

• Factors affecting fallout
• Market interest rates
• Type of origination
• Length of lock
• Purpose of loan
• Type of loan
• Processing status of loan

Slide 11
12
Best Execution

• Mandatory versus Best Efforts Break-Even Analysis

Slide 12
13
Secondary Marketing
Best Execution

• Use position mark-to-market reports to manage
  mandatory positions

Page 13
14
Best Execution

• Future cash flow retained
• servicing valuation components
• Servicing fee percentage varies by investor and
  type of loan
• Ancillary income
• Expected loan life prepayment
• Payment and prepayment float
• Discount rate
• Costs to service market costs
• Delinquency rate and foreclosure losses
  recourse versus non-recourse

Page 14
15
Best Execution
Best Execution

• Servicing Fee Receivable Yield Curve

Slide 15
16
Best Execution

• Remittance methods
• Actual / Actual
• Scheduled / Scheduled
• Combination
• Value of Float

Page 16
17
Mortgage Servicing Rights
Best Execution

• MPF Basics

Slide 17
18
Best Execution

• Future cash flow - MPF
• credit enhancement fee
• Paid to member for assuming credit risk (credit
  obligation) on mortgage defaults
• Determined by the quality of the loans at the
  pool level, the MPF program selected and the
  performance of the loans
• Sensitive to prepayments

Page 18
19
Best Execution

• Future cash flow - credit enhancement obligation
  variables
• Cumulative prepayment rate (CPR)
• Cumulative default rate (CDR)
• Severity of actual losses
• First loss account
• Obligation cap

Page 19
20
Best Execution

• Future cash flows

Slide 20
21
Best Execution

• Future cash flows

Slide 21
22
Best Execution
Best Execution

• CE Fee Receivable Yield Curve

Slide 22
23
Best Execution
Best Execution

• Best Execution

Slide 23
24
Best Execution

• Background on Wilary Winn LLC
• Wilary Winn provides independent, fee-based
  advice to financial intermediaries, including
  banks, credit unions, finance companies, and
  mortgage bankers.
• Our services include assessments and valuation of
  complex financial assets, including mortgage
  servicing rights and credit enhancement fees
  receivable, as well as the development and
  implementation of interest rate risk management
  programs.

Page 24
25
Best Execution

• Wilary Winn LLC
• First National Bank Building
• 332 Minnesota Street, Suite W-2062
• St. Paul, MN 55101
• 651-224-1200
• Douglas Winn dwinn_at_wilwinn.com
• Eric Nokken enokken_at_wilwinn.com

Page 25