State of the Mortgage Market Phoenix CAPITAL CMLA Luncheon January - - PowerPoint PPT Presentation

Phoenix CAPITAL

Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com

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State of the Mortgage Market

CMLA Luncheon January 7th , 2016

Seth Sprague, CMB, Senior Vice President ssprague@phnxcap.com

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Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com

The he Pho hoeni nix famil ily of

• f compan

panies has as nearl rly 200 200 clie lients an and is is led ed by by Pho hoeni nix Capi apital al, In

• Inc. (“P

“PCI”) ”) Since its founding in 1996, PCI has grown into a market leading mortgage banking advisor that specializes in mortgage servicing rights (MSRs). PCI helps its clients succeed by forming tailored origination, best execution, asset management and buy- & sell-side strategies with an emphasis on superior market performance. PCI's seasoned management team offers an unmatched understanding of the mortgage servicing asset and market. Since inception, PCI has managed over a trillion dollars in UPB (in inclu ludin ing appr approximat ately $700 700 bill illio ion si since 2013 2013) representing several hundred successfully completed MSR transactions, consisting

• f bulk, flow, co-issue, and other forward commitment transaction structures. PCI

CI is is Gin innie ie Mae’s ’s exclu lusiv ive MSR SR adv advisor an and par partners clo losely ly wit ith Fanni nnie Mae, e, Freddi ddie Mac, c, the he MBA, A, the he FDIC IC an and other er key ey ind ndus ustry lea eader ers. PCI is complemented by Phoenix Analytic Services (“PAS”), which specializes in the MSR valuation and accounting management; acquisition analysis of MSR portfolios and mortgage banks; and other services such as Capitalization analysis, Hold/Sell analysis, and consulting on the overall management of the MSR asset. In In 20 2014 14 alo lone, PA PAS perf rform rmed more re than an 700 00 in indiv ivid idual MSR SR valu luatio ions on portfolios ranging in size from hundreds of billions in unpaid principal balance to portfolios of under $100 million. The Phoenix family is completed by Phoenix Asset Management, an REO outsource company, Phoenix Collateral Advisors, a servicing oversight and compliance firm, and Phoenix Whole Loan Solutions (fka Steel Mountain Capital).

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Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com

The Phoenix Family of Companies continues to be the industry leading MSR advisory firm as it offers comprehensive solutions for its client base: Phoenix Capital, Inc. Phoenix Capital has exclusively managed over $700 billion in successful MSR transactions since 2013 alone, spanning Fannie Mae, Freddie Mac, Ginnie Mae and Private Investor MSRs across bulk, flow and other transaction structures Phoenix Analytic Services, Inc. Provides MSR valuations and analytics including customized economic valuations and SRP grids in addition to full MSR Accounting outsourcing Phoenix Collateral Advisors, LLC With the hiring of John Burnett as President of PCA in the Fall of 2013, provides servicer surveillance and advisory services for both large and small servicers and monitoring sub-servicers Phoenix Asset Management, LLC Provides REO, Short Sales and component outsourcing for its clients Phoenix Whole Loan Solutions, LLC (fka Steel Mountain Loan Trading, LLC) Provides whole loan trading solutions for its clients and expert testimony services

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What the Experts Thought Would Happen in 2015

“If you can lock in a 30 year rate below 4.5% in 2015, do it…” “The current interest rate party is over, it could be gone for good” “85% of all industry experts predicted mortgage rates would rise to 5.0 range in 2014…… mortgage rates climbing modestly in 2015 to put rates in the 4.5% to 4.75% range (by year end)” “Trying to predict the exact change in the 30 year fixed mortgage rate is not always accurate….feels like rates will likely climb to 5% and possibly 5.5%”

Source: Tim Lucas Article 11/24/2014 “2015 Mortgage Rate Predictions from 3 Industry Experts”

MBA 12/15/14 Forecast Q1 2015 Q2 2015 Q3 2015 Q4 2015 30 Year Fixed Rate Mortgage 4.4 4.6 5.0 5.1 Total Origination Volume (Billions) $271 $328 $318 $272

Source: MBA Mortgage Finance Forecast December 15, 2014

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2014 and 2015 Actual Mortgage Rates (from Bank Rate)

3.70 3.80 3.90 4.00 4.10 4.20 4.30 4.40 4.50 4.60 4.70

Bank Rate (Two Year History) 30 Year Mortgage Rates

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2015 Actual Mortgage Rates (from Bank Rate)

3.70 3.85 4.00 4.15 4.30 12/31/2014 1/31/2015 2/28/2015 3/31/2015 4/30/2015 5/31/2015 6/30/2015 7/31/2015 8/31/2015 9/30/2015 10/31/2015 11/30/2015

Bank Rate 30 Year Fixed Mortgage Rate

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MBA Independent Mortgage Bankers

• Production profit remained higher than expected throughout the first three quarters of 2015 (versus the end of

2014 predictions)

• Net cost to originate continues to increase along with personnel expense (per loan)
• Costs have remained in elevated in the mortgage system (origination and servicing)

Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q4 2013 Average Production Volume $614 million $657 million $473 million $417 million $367 million Average Production Profit 55 bps 67 bps 60 bps 32 bps 9 bps Purchase Share Estimate 70% 62% 51% 65% 47% Average Loan Size 241,942 244,350 $242,791 $233,655 Average Loan Production Expense $7,080 $6,984 $7,195 $7,000 $6,959 Net Cost to Originate $5,549 $5,372 $5,597 $5,238 $5,171 Personnel expenses (per loan) $4,674 $4,632 $4,675 $4,428 $4,385 All business lines Profitability 86% 92% 88% 74% 58%

Source: Mortgage Bankers Association Independent Mortgage Bankers and mortgage subsidiaries of chartered banks Quarterly Performance Report Net cost to originate includes all production expenses and commissions, minus all fee income but excludes the secondary marketing gains, MSR or SRP value and warehouse interest margin

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2015 – Year of TRID

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TRID

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TRID

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TRID Headlines (Source MBA Website)

• WASHINGTON, D.C. (October 7, 2015) - Mortgage applications increased 25.5 percent from one

week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending October 2, 2015. "The number of applications for purchase and refinance mortgages soared last week due both to renewed rate volatility and as many applications were filed prior to the TILA-RESPA regulatory change. The average loan size of applications in the weekly survey increased by 6.9 percent, driven by a 12.1 percent increase in the average size of refinances," said Lynn Fisher, MBA's Vice President of Research and Economics.

• WASHINGTON, D.C. (October 14, 2015) - Mortgage applications decreased 27.6 percent from one

week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending October 9, 2015. "Application volume plummeted last week in the wake of the implementation of the new TILA-RESPA integrated disclosures, which caused lenders to significantly revamp their business processes, and as a result dramatically slowed the pace of activity. The prior week's results evidently pulled forward much of the volume that would have more naturally taken place into this week. Purchase volume for the week was below last year's pace, the first year over year decrease since February 2015, while refinance volume dropped sharply even with little change in mortgage rates," said Mike Fratantoni, MBA's Chief Economist.

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MBA Chart of the Week

Source: MBA Website

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Total Mortgage Originations

• 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Est) 2016 (Est) 2017 (Est) 2018 (Est) (Billions)

MBA Mortgage One to Four Family Originations Source MBA (In Billions)

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Large Originators

• Annualized 2015

volume is up 30.3 % from 2014 levels

• Overall volume

is down from 2012 and 2013 (on a percentage

• f total
• riginations)

(In Billions) 2012 Total 2013 Total 2014 Total Q1 2015 Q2 2015 Q3 2015 2015 Annualized Wells Fargo 524.0 351.0 175.0 49.0 62.0 55.0 Chase 180.8 165.5 78.0 24.7 29.3 29.9 US Bank 84.5 63.2 35.1 10.9 13.4 14.0 BB&T 33.1 31.6 17.4 4.0 5.5 5.0 Fifth Third 25.1 22.3 7.5 1.8 2.5 2.3 Flagstar 53.6 37.5 24.6 7.3 8.4 7.9 PHH 55.6 52.4 36.0 9.4 12.1 10.3 Bank of America 75.1 82.9 43.3 13.7 16.0 13.7 CITI 58.5 58.0 25.2 7.0 8.8 7.5 PNC 15.2 15.1 9.5 2.6 2.9 2.7 SunTrust 32.0 29.9 16.4 5.1 6.5 6.2 SubTotal 1,003.1 797.2 399.9 117.1 144.3 134.0 527.1 SubTotal 1,137.4 909.3 468.0 135.5 167.4 154.5 609.8 30.3% Year over Year Change

• 20.1%
• 48.5%

MBA Total Originations 2,044.0 1,844.9 1,261.0 330.0 395.0 Percentage 55.6% 49.3% 37.1% 41.1% 42.4%

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Large Originators (continued)

• Overall percentage of originations has increased with largest percentage changes coming from Chase, SunTrust

and US Bank since the first quarter of 2014

Company Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q3 2015 to Q2 2015 Change in Billions Q3 2015 to Q3 2014 Change in Billions Q3 2015 to Q2 2015 Percentage Volume Change Q3 2015 to Q3 2014 Percentage Volume Change Chase 17 17 21 23 25 29 30 0.6 8.7 2.0% 41.0% SunTrust 3 4 5 5 5 6 6 (0.3) 1.6

• 4.9%

36.4% US Bank 6 8 10 10 11 13 14 0.6 3.6 4.4% 34.3% Bank of America 9 11 12 12 14 16 14 (2.3) 2.0

• 14.1%

16.9% Wells Fargo 36 47 48 44 49 62 55 (7.0) 7.0

• 11.3%

14.6% Flagstar 5 6 7 7 7 8 8 (0.6) 0.7

• 6.8%

9.6% Fifth Third 2 2 2 2 2 3 2 (0.2) 0.2

• 8.0%

9.5% CITI 5 6 7 7 7 9 8 (1.3) 0.4

• 14.8%

5.6% PHH 7 9 10 9 9 12 10 (1.7) 0.5

• 14.4%

4.6% PNC 2 3 3 2 3 3 3 (0.2) 0.1

• 6.9%

3.8% BB&T 4 5 5 4 4 5 5 (0.5) 0.0

• 9.1%

0.0% Subtotal 96 118 130 124 136 167 154 (12.9) 24.7

• 7.7%

19.1% MBA Estimate Total Originations 275 335 340 311 330 395 Percentage of total 35% 35% 38% 40% 41% 42%

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Report Origination Margins

• The three entities with the largest change (increase) in production year over year also show the largest decline in

reported origination margin

• Entities can include repurchase reserves into above margin calculations making a quarter to quarter analysis

more difficult

Reported Margin in BPS Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q3 2015 to Q2 2015 Change in BPs Q3 2015 to Q3 2014 Change in BPs Q3 2015 to Q2 2015 Percentage Change Q3 2015 to Q3 2014 Percentage Change Bank of America 107 208 107 40 223 172 163 (9.0) 55.2

• 5.3%

51.3% Flagstar 101 91 74 78 146 109 93 (15.7) 19.1

• 14.4%

25.9% Fifth Third 241 210 162 212 244 172 200 28.0 38.1 16.3% 23.5% BB&T 195 183 214 329 273 236 222 (14.4) 8.0

• 6.1%

3.7% Wells Fargo 161 141 182 180 206 188 175 (13.0) (7.0)

• 6.9%
• 3.8%

PHH 69 86 70 68 87 71 67 (4.5) (3.1)

• 6.3%
• 4.4%

SunTrust 138 127 99 129 162 117 94 (23.2) (5.5)

• 19.8%
• 5.5%

US Bank 117 125 133 119 157 120 102 (18.7) (31.0)

• 15.5%
• 23.4%

Chase 71 80 62 80 59 58 43 (14.1) (19.0)

• 24.5%
• 30.4%

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Originations (Another View)

• Impac and Penny Mac have the largest percentage increase in originations year over year
• Above population has also grown steadily the volume of originations over past seven quarters

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q3 2015 to Q2 2015 Change in Billions Q3 2015 to Q3 2014 Change in Billions Q3 2015 to Q2 2015 Percentage Volume Change Q3 2015 to Q3 2014 Percentage Volume Change Impac Mortgage 0.3 0.5 0.9 1.1 2.3 2.6 2.3 (0.3) 1.4

• 11.6%

149.4% Penny Mac 4.8 8.1 8.1 7.3 8.0 11.9 14.4 2.5 6.3 21.0% 78.7% Citizens 0.6 0.9 1.0 1.1 1.2 1.5 1.6 0.0 0.5 2.5% 53.3% HomeStreet 0.7 1.1 1.3 1.3 1.6 2.0 1.9 (0.1) 0.6

• 4.4%

49.4% Fidelity Bank (Lions) 0.3 0.6 0.5 0.5 0.6 0.8 0.7 (0.1) 0.2

• 10.8%

31.2% Huntington 0.7 1.0 1.0 0.9 1.0 1.5 1.3 (0.2) 0.3

• 13.4%

26.3% Walter/GreenTree 3.5 4.4 5.6 5.0 5.5 7.2 6.9 (0.4) 1.3

• 5.0%

22.6% Nationstar 4.7 4.4 4.1 3.6 4.2 4.8 4.9 0.1 0.8 2.1% 19.5% BOK (Funded for Sale) 0.7 1.1 1.4 1.3 1.6 1.8 1.6 (0.2) 0.2

• 11.7%

15.8% Regions 1.0 1.3 1.3 1.2 1.3 1.6 1.4 (0.2) 0.1

• 11.3%

10.6% Everbank 1.7 2.2 2.3 2.2 2.4 2.7 2.3 (0.4) (0.0)

• 15.7%
• 0.4%

Stonegate 2.4 3.3 3.5 3.4 2.8 3.4 3.5 0.0 (0.1) 1.3%

• 1.5%

Subtotal 21.5 28.8 31.0 28.8 32.4 41.9 42.7 0.8 11.7 2.0% 37.7% MBA Estimate Total Originations 275 335 340 311 330 395 Percentage 7.8% 8.6% 9.1% 9.3% 9.8% 10.6%

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IMB Net Production Income (bps) and Purchase Share

20 33 66 58 82 107 120 107 86 75 38 9 (8) 46 42 32 60 67 52

50% 64% 55% 43% 42% 48% 43% 39% 40% 52% 67% 69% 68% 74% 72% 65% 51% 62% 69% Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 (Prel) Net Production Income (bps) Purchase Share (% based on $ Volume) Source: MBA’s Quarterly Mortgage Bankers Performance Report, www.mba.org/performancereport

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IMB Production Revenues and Expenses (bps)

363 372 368 362 255 311 301 310

$100 $200 $300 $400 $500 $600 $700 200 250 300 350 400

Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 (Prel) $ Millions Basis Points Production Revenues (bps) Fully-Loaded Production Expenses (bps) Avg Firm Quarterly Production Volume ($Ms) Source: MBA’s Quarterly Mortgage Bankers Performance Report, www.mba.org/performancereport

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IMB Fully-Loaded Production Expenses ($ per loan)

Source: MBA’s Quarterly Mortgage Bankers Performance Report, www.mba.org/performancereport

5,837 5,644 5,315 5,118 5,292 5,128 5,163 5,603 5,779 5,818 6,368 6,959 8,025 6,932 6,769 7,000 7,195 6,984 7,127 $100 $200 $300 $400 $500 $600 $700 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 (Prel)

$ Millions $ per Loan

Fully-Loaded Production Expenses ($ per loan) Avg Firm Quarterly Production Volume ($Ms)

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Regulatory Oversight

The mortgage servicing regulatory and oversight is a very complex matrix; at the top of oversight matrix is the Consumer Financial Protection Bureau (“CFPB”)

• Direct supervisory authority of all banks with more than $10 billion in assets
• Direct supervisory authority of all non-banks, engaged in the residential mortgage markets
• Authority to prohibit “UDAAP” (unfair, deceptive or abusive acts or practices) in conjunction with financial

products and services (including the origination and servicing of mortgages)

• Since inception of CFPB (from the Dodd – Frank Wall Street Reform and Consumer Protection Act), mortgage

has been in the spotlight

• Particular area of focus are consumers harmed during the transferring of loan servicing and that

servicing transfers occur without any input from the consumer

Source: The Changing Dynamics of the Mortgage Servicing Landscape published by the MBA June 2015

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CFPB Complaint Database

• As of the December 28th, 2015

more than 54,750 complaints were filed with the CFPB related to mortgage servicing

• More than 495 companies

have received a mortgage servicing complaint

• 317 of the companies

received 5 or less complaints

Company Count Percentage Cumulative Percentage Ocwen 7,877 14.4% 14.4% Bank of America 7,537 13.8% 28.1% Wells Fargo 5,679 10.4% 38.5% Nationstar Mortgage 4,882 8.9% 47.4% JPMorgan Chase 4,097 7.5% 54.9% Ditech Financial LLC 3,936 7.2% 62.1% Citibank 2,064 3.8% 65.9% HSBC 1,298 2.4% 68.2% U.S. Bancorp 1,107 2.0% 70.2% Seterus 1,085 2.0% 72.2% PNC Bank 1,028 1.9% 74.1% Select Portfolio Servicing, Inc 869 1.6% 75.7% SunTrust Bank 676 1.2% 76.9% M&T Bank 614 1.1% 78.0% Specialized Loan Servicing LLC 499 0.9% 79.0% PHH Mortgage 494 0.9% 79.9% Bayview Loan Servicing, LLC 455 0.8% 80.7% Flagstar Bank 453 0.8% 81.5% Caliber Home Loans, Inc 421 0.8% 82.3% Citizens Financial Group, Inc. 379 0.7% 83.0% Fifth Third Bank 352 0.6% 83.6% Carrington Mortgage 336 0.6% 84.2% PennyMac Loan Services, LLC 325 0.6% 84.8%

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131 99 73 80 51 63

(100) (50)

• 50

100 150 200 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H2015

Large Banks Mid-Size Banks Large Independents Mid-Size Independents

Peer Groups: Cost to Create Servicing Rights (bps)

Benefit Cost

Source: PGR: MBA and STRATMOR Peer Group Roundtables, www.mba.org/pgr

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Retained Servicing as % of $ originations (2014)

98% 75% 63% 24%

Large Banks Large Independents Mid Size Banks Mid Size Independents

Source: PGR: MBA and STRATMOR Peer Group Roundtables, www.mba.org/pgr

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72 65 63 69 78 80 68 63 55 55 58 89 96 121 164 205 171 164

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H2015

Direct Servicing Costs 90+ Delinquency Rate, All loans

Direct Servicing Costs ($ per loan)

Source: MBA’s Servicing Operations Study and Forum, Prime Servicers. www.mba.org/sosf, PGR (1H2015)

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Servicing Balances

• Over the past several years, banks have decreased the notional amount of servicing held, however this can be a

function of a number of factors including working through delinquencies

• Non Bank servicers generally have increased their investment in servicing

IN BILLIONS - MSR Portfolio Only Q3 2013 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 UPB Change Q3 2015 to Q2 2015 Percentage Change Q3 2015 to Q3 2014 UPB Percentage Change Q3 2015 to Q3 2013 UPB Percentage Change Two Harbors 46 45 44 43 48 12.4% 5.7% #DIV/0! Stonegate 10 18 18 17 17 18 5.4% 2.7% 88% Penny Mac 23 32 34 35 37 40 7.5% 23.7% 75% Nationstar 301 319 334 343 353 355 0.3% 11.2% 18% HomeStreet 11 11 11 12 13 14 9.9% 34.7% 26% Walter / GreenTree 173 183 193 193 207 207 0.4% 13.3% 20% SunTrust 109 109 116 115 118 122 3.1% 11.8% 12% M and T Bank 22 22 22 25 24 24 (0.4%) 7.6% 8% BB&T 84 90 90 89 89 90 1.4% 0.6% 8% PNC 115 111 108 113 115 122 5.4% 9.9% 6% Huntington 15 16 16 16 16 16 1.4% 2.2% 5% US Bank 227 225 225 225 225 227 0.7% 1.0% 0% Regions 28 27 27 27 27 26 (1.6%)

• 2.7%
• 7%

Wells Fargo 1,494 1,430 1,405 1,374 1,344 1,323 (1.6%)

• 7.5%
• 11%

Fifth Third 69 67 65 64 62 60 (3.2%)

• 10.4%
• 13%

Chase 831 766 752 724 723 703 (2.9%)

• 8.3%
• 15%

PHH 131 120 113 109 105 102 (2.7%)

• 15.0%
• 22%

NYCB 21 22 22 23 24 22 (8.0%)

• 2.2%

1% HSBC 28 24 23 22 21 20 (4.6%)

• 15.7%
• 28%

CITI 287 229 219 212 204 199 (2.5%)

• 13.1%
• 31%

Everbank 53 42 41 39 35 35 (0.4%)

• 16.7%
• 34%

Bank of America 616 491 474 459 409 391 (4.4%)

• 20.4%
• 37%

Flagstar 74 26 25 27 28 26 (5.0%)

• 0.3%
• 65%

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2015 has brought about changes in the MSR market:

• Greater balance existed between buyers and sellers
• Number of bids per transaction have dropped from approximately 10 to anywhere from 2 to 3 to 5 to 7

depending upon type of transaction

• Several Private Equity (“PE”) buyers have retrenched pricing and/or attempted to exit via entity sales
• Liquidity is present but overall deal success rate has declined from 2014 levels
• Realistic pricing expectations are imperative
• Buyer demand is more dependent on structure (flow vs bulk), counterparty risk, investor profile, deal size,

and loan-level attributes

• Overall volatility of interest rates has impacted values negatively including a significant rate drop in

January and a significant rise in rates in May/June followed by another significant rate drop in August, September, & October

• Values have become more tenuous due to heightened rate volatility and transaction supply
• A wider dispersion of bid levels across all MSRs deal classes
• Pricing analysis is getting more and more granular (and complex)

MSR Market Overview 2015

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MSR Bank Buyers

Bank buyers once dominated the MSR market and then disappeared almost completely, however more Banks are now interested in purchasing MSRs in both the bulk and flow markets.

• MSRs represent one of the few “fee” incomes left for banks
• With the cost of service increasing significantly over the past several years; one opportunity to the lower

servicing cost per unit is to increase the volume of current servicing

• Due to expected higher interest rates in the future, Banks can earn higher escrow earnings in the future
• Banks once again view the cross-sell opportunity from their servicing portfolios as a positive long term

cash flow stream

• Banks have reduced their production capacity and buying servicing in the MSR market represents a quick

way to maintain servicing scale

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Summary Observations for Sellers of MSRs

The MSR market remains active, however a successful trade is not guaranteed:

• Type of Transaction: Understanding the benefits and risks of co-issue/flow versus bulk transactions and

integration within a long-term MSR strategy

• Sale selection process: Particularly relevant for bulks, understanding the risks of what is to be sold versus

excluded (retained) is critical. Investor/guarantor approvals are also important to understand

• Market Conditions: Buy side demand is not consistent. Understanding buyer appetite and strategies as

well as how to slot deals in the market became more critical in 2015

• Data: The data requirements vary across buyers and understanding the impact on the overall price and

execution is critical

• Bid Analysis: The difference between the gross and net price is the initial layer of the analysis but within a

co-issue, a number of additional factors must be included in order to determine the best execution

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Summary Observations for Holders of MSRs

The MSR asset continues to attract headlines and garner additional scrutiny:

• Valuation process: As a result of an active MSR market, the demand for valuations (often multiple

valuations) by auditors and regulators to ensure values are calibrated appropriately to the most recent market activity has increased substantially

• Managing the MSR asset: In addition to greater emphasis on the valuation process, the overall

management of the MSR asset and documentation of assumptions, oversight and valuation process including vendor management

• Servicing Compliance: Active monitoring including an annual audit of the sub servicer is required and

must be performed on a periodic basis to ensure initial and on going compliance with servicing standards

• Data: Quality of images and completeness of files along with managing the document custodian are

important to reduce risk of losses from repurchase requests

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Historical MSR Pricing - Conventional

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Historical MSR Pricing - Government

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2016 Rates (MBA Forecast)

Q1 2015 Q2 2015 Q3 2015 Q4 2015 12/15/2014 30 Year Fixed Rate 4.4 4.6 5.0 5.1 Actual Rates (Per 12/18/2015 Forecast) 3.7 3.8 4.0 3.9 Variance .7 .8 1.0 1.2 Q1 2016 Q2 2016 Q3 2016 Q4 2016 12/18/2015 30 Year Fixed Rate 4.2 4.4 4.6 4.8 10 Year Treasury Rate 2.3 2.5 2.7 2.9 Rates were forecasted to increase to over 5% in 2015 (yet ended the year around 4%) Rates are again forecasted to rise in 2016, to almost 5% by year end

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2016 Originations (MBA Forecast)

Q1 2015 Q2 2015 Q3 2015 Q4 2015 12/15/2014 Mortgage Originations Forecast $271 $328 $318 $272 Actual Originations (Per 12/18/2015 Forecast) $330 $395 $381 $360 Variance $59 $67 $63 $88 Q1 2016 Q2 2016 Q3 2016 Q4 2016 12/18/2015 Mortgage Originations $293 $360 $355 $312 Refinance Percentage 40 31 27 29 Total originations forecast was $1.189 trillion, actual originations estimated at $1.466 trillion for 2015 (23% higher) Total forecast is $1.32 trillion in 2016, versus estimated origination of $1.466 trillion in 2015 (10% lower)

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Freddie Mac’s Housing Predictions for 2016

• “Expect the 30-year fixed-rate mortgage to average below 4.5% for 2016 on an annualized basis”
• “Gradually higher mortgage interest rates will present an affordability challenge, but expect a strengthening

labor market and pent-up demand to carry 2015's home sales momentum into 2016”

• “Expect house price growth to moderate a bit to 4.4% in 2016 driven in part by the reduction in homebuyer

affordability and reduced demand as a result of Fed tightening”

• “Housing activity will grow in 2016 despite monetary tightening. Expect total housing starts to increase 16%

year-over-year and total home sales to increase 3%”

• “While home purchases will increase next year, higher interest rates will reduce the refinance volume pushing
• verall mortgage originations lower in 2016 than in 2015”

Source: Sean Becketti, Freddie Mac’s Chief Economist. Housing Wire “Here are Freddie Macs Five Housing Predictions for 2016”.

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2016 and beyond

• Expiration of HARP (at the end of 2016)
• FHFA’s release of 2016 scorecard for Fannie Mae and Freddie Mac with emphasis on expanding mortgage credit
• Release 1.0 of the Single Security Initiative Common Securitization Solutions
• Freddie Mac will start to use the Common Securitization Platform
• No actual securities will be issued under this Phase
• CFPB review and oversight emphasis in 2016 will be on….
• Alterative Service Fee Structure will be re-visited
• Potential change to the 25 bps servicing strip?
• Servicing compensation for delinquent servicing?

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Bold Predictions

• Even a stable rate environment of thirty year fixed mortgage rates hovering around 4% will create a more

challenging refinance market and likely cause increased origination margin pressure

• Mortgage rates will need to drop in the 3.5% range to create a another significant refinance wave
• Areas where potential refinance activity can occur (without a drop in interest rates)
• Cash out refinances
• Home equity originations
• Ginnie Mae to conventional refinances could occur with improving HPIs (and borrower credit improving)
• M&A activity across the mortgage space will increase as smaller companies struggle with the potential of

elevated origination costs, compliance costs and declining margins and volumes

• The willingness of large national and regional banks to participate in the Correspondent channel could have a

dramatic impact in 2016 on profit margins

• Demand to sell mortgage servicing rights will continue, hopefully buy side demand remains stable

Private & Confidential

Phoenix Capital, Inc. | 999 Eighteenth St Suite 1400 | Denver, CO 80202 | 303.892.7070 | www.phnxcap.com

Contact Information:

Seth Sprague, CMB Senior Vice President (303) 539-7236 ssprague@phnxcap.com

Private & Confidential

39

Appendix: FHFA Minimum Financial Requirements

Issued on May 21st, 2015 with an effective date of December 31, 2015

• Minimum Net Worth – All Servicers
• Base of $2.5 million plus 25 bps of the unpaid principal balance for total loans serviced
• Minimum Capital Ratio – Non Depositories
• Tangible Net Worth / Total Assets greater than or equal to 6%
• Minimum Liquidity - Non Depositories
• 3.5 bps of total Agency (FNMA, FHLMC and GNMA) plus
• Incremental Non Depositories Liquidity for Higher Non Performing Portfolios
• Incremental 200 bps multiplied by the sum of the seriously delinquent loans (over 90 days) of total

nonperforming Agency Servicing (in excess of 6% of the total Agency servicing UPB)

Private & Confidential

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Appendix: Ginnie Mae Issuer Net Worth and Liquidity Requirements

Issued in October of 2014, Ginnie Mae increased the minimum net worth and liquid asset requirements for Single Family Issuers effective January 1st 2015

• Minimum Net Worth
• Adjusted net worth requirement from $2.5 million plus 20 bps of the Issuers outstanding Single

Family obligations to $2.5 million plus 35 bps of Issuers outstanding Single Family obligations

• Minimum Liquidity
• Minimum liquid assets requirement of 20% of required net worth will be charged to greater of $1

million or 10 bps Issuer’s outstanding Single Family obligations

• Issuers with more than one Program Minimum Net Work and Liquidity
• Must meet minimum adjusted net worth and liquid asset requirements equal to or greater than the

sum of the minimum requirements for all program types Issuer is approved to participate (as opposed to the highest program requirement)