e-mails of fannie and freddie executives as posted on the house oversight committee site

8/14/2019 E-Mails of Fannie and Freddie Executives as Posted on the House Oversight Committee Site

1/70

ll

F

i

.,-._,,t

Single Family Guaranty Business

o

Facing Strategc GrossroadsJune 27,2005

Confidential - Highly RestrictedAs ot 612212005

I

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2/70

R'

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o1.2.

ls the housngAre consumeradjustable rateor secular?3. Does Fanne Mae have a role/responsibility to rstabilize the housng mar[


3/70

iI

The risk in the environment has accelerateddramatically.r Proliferation of higher risk alternative mortgage productsr Growing concern about housing bubblesr Qrowing concerns about borrowers taking on increasedrisks and higher debt' Aggressive risk layering

Confidential - Highly RestrictedAs of 612212005 3 -!ll FannieiVlaeilI


4/70

1l

iI

O

Growth in adjustable rate mortgages (ARMs)continues at an aggressive pace. Extensive menu of alternatives / options. I ncreasing affordability concernsn fmphasis on towest possible paymentr llome being utilized more like an ATM

o

Confidential - Highly RestrictedAs of 612212005Our competitive advantages today are in fixed rate mortgages. 'uud

o

4 --l EannieIaeIrii


5/70

F+Dr;

aI

oWe are at a strategc crossroad....We face two stark choices:1 . Stay the Course2. Meet the Market Where the Market ls

o

Confdential - Highly RestrictedAs of 612212005

o

5

,

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6/70

LJ'

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iI

Stay the Gourser Maintain our strong credit discipliner Protect the quality of our bookr Intensify our public voice on concernsr Refrain from offering specific guidelinesr Preserve capitalr Test cyclical vs. secular

Confidentiat - Highly RestrictedAs o16l22l2QO5 6 t


7/70

i'I'l

Alternatvefy, we could seek to r.Meet the Market Where the Market Isr Meet current consumer and customer demandsr Participate in volume and revenue opportunity I currentgrowth areas :I Accept higher risk and higher volatility of earnings

Confidential - Highly RestrictedAs of 612212005 7

l

I'llt,t'lll{$l?il

I

_=l FannieMae,i

r


8/70

a Possible lmplcatonsStay the GourseI Lower volumes /revenuesr Slower book growthr Continued market sharedecliner Lower earningsr lmpact on key customerrelationship

Confidential - Highly RestrictedAs of 612212005

Meet the Marketr lJigher volume /revenuesI Faster book growthr $low down decline inmarket sharer Higher credit lossesr Increased exposure tounknown risksr Potential increasedearnings volatility

I

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9/70

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iI

Significant obstacles block ou r ablity topursue a "Meet the Market" strategy.r Lack of capabilities and infrastructurer Lack of knowledge of the credit risksr Lack of willingness to compete with the market on pricer Lack of a value proposition for subprimer Lack of a conduit capacity and Regulatory concerns

Confidential - H ighly RestrictedAs of 612212005 I

Irllt1,,ii 'j''i{rJT IJ

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lr"tttriee


10/70

D(

Realisticallyn we are not in a position to "Meet theMarket" today.Therefore, we recommend that we:r Pursue a "Stay the Course" strategy and test whether currentmarket changes are cyclical vs. secular:Advocate public positionBe selectlvely opportunistic in pursuing businessSee if consumer sentiment changes with flatter yield curveWhile we:E Dedicate resources and funding to "underground" efforts to:Develop a subprime infrastructure

Confidential - Highly RestrictedAs ot 612212005ls there an opportunity to drive the market back to the 30-year FRM?

Develop modeling capabilities for alternative marketsDevelop a conduit capability

10 ,_r!{ Fanniel}faeII


11/70

C)

='-

olf we do not seriously invest in these 'nunderground"type efforts and the rnarket changes prove to besecular, we risk:r Becoming a niche playerr Becoming less of a rnarket leaderr Becoming less relevant to the secondary market

Confidential - Highly RestrictedAs of 6122120O5 11

I,fr;1''"i,,J

:ln,I

--i Fannieillaeittrt

r


12/70

oF!

P,'

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Management Team Discussion

Confidential - Highly RestrictedAs of 612212OO5

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13/70

t-l

o oSingle Family Facts and Data

First Half Performance and Obseruations

Confidential - Highly RestrictedAs ot 612212OO5

o

13

l

ir'1'lrl:11i.l{lli'';f

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14/70

!r

io'-

Single Family PerformanceCorporate Objective Goals ScorecardMonthly Progress Report - May 2005Maintain leadership and retainor grow our key accountsAddress key competitive issuesand maintain 30% MDO sharelmplement products andexceed target book growth of1.75%Increase participation insubprimeUse technology tools forprocess improvement anddelivery preference

Y

Achieve the HUD goals

V

Lead the market in minoritylending and achieve targetsConfidential - Highly RestrictedAs of 612212O05

Satisfactory progress with customerretention. Holding our own against FRELeakage to subprime and private labelcontinues. We lack a value proposition to;stem the tide in today's marketBook growth negative year-to-date. Negativegrowth is expected for the full year fContinue to work on value proposition andproosal to enter the subprime flow market

oooo

r On tracko on track ' {rlrp,,ILoss of market share to subprime, interesgif Ionly, option ARMS, attracting mission J"'lborrowers relative to our "core" products r

^lll FannieMaeI,ii

14


15/70

i

-

oSingle Family Performance

2005 Divisional Goals ($Bl)Lender ChannelInlestor ChannelDedicated ChannelTotal Business Volume $499.2Book GrowthGross Charged FeeCredit Losses

$383.2100.016.0

o

low Mod (Affordablel2005 HOUSIIre GOA|-SSpecial AffordableUnderseved

Volume through May totaled $188 billion and was $11billion (5.5%) behind planFull year estimate: $491 billion (Q2 forecast)

YTD book growth (estimated): minus 1.7 percentFull year estimate: minus 0.6 percentYTD gross charge fee vs. plan: 26.2 bps vs. 26.8 bpsYTD credit losses vs. plan: $95.5 million vs. $S5.1 millionCurrent full year estimate (6/05): $ZSS million

1.75%27.3 bps$198 mil

Low Mod (Affordable)2OO5 SF PMM Sub @alSpecial AffordableUnderserved2OO5 MIIU)RITY LEtITre @ALSAfrican AmericanConfidential - Highly RestrictedAs ot 612212OO5

Hispanicfotal Mnorty

MAY 2OO5YTDACTUAL52.Oo/o22.Oo/o37.Oo/o45.Oo/o

55.5olo

L7.Oo/o

26.7olo

32.Oo/o

4I.3o/o45.48o/o

5.4o/o

o

71.60/o

L8.92o/o

24.7o/o

32.49o/o

On the housing goals front wereman ahead of targets against allgoal categoriesOur minority lending results throughMay are behind goal for Hispanic(10.99%) and total minority(23.78%).51Yo7O.99o/o23.78o/o

l5 --l EanreiVfaeiI{


16/70

t

We continue to lose goals rich products to private labelr Much of the leakage to the private labelmarket is from products with highm i nority concentrationsr The two product lines that are drivingthe majority of leakage to private labelare Alt-A and SubprimeI In 2004, these product lines scoredhigh relative to Fannie Mae's coreproductsAlt A: 3oo/o total minority scoreSubprime: 52o/o total minority scorer ln addition, much of the Option ARMproduction is securitized in the privatelabel marketOption ARMs: 37% estimated totalminority score


Private Label Market Shares of MBS lssuance

2002 2003 1q2004 2q2004 3q20M 4q20o4 1q2OO5 Apr-05* Other includes Option Arms

16 nutrtrieMae


17/70

i

EYgn ryitll toug.h competition and widening MBS/PC price spreads, Fannie Mae hasstill maintained share levels versus Freddie Mac in the histrical rnge (55% - 60%)7Oo/o

65o/o

60%55o/o

5Oo/o

Fannie vs. Freddie

2000 200'1 2002 2003 2oO4 20o5YTDMBS/PC Price Spreads

Jn-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jut-04 Oct-04 Jn-05 Apr-os

Confidential - Highly RestrictedAs of 612212OO5

100o/o80%600/o40o/o2o/o

0o/o

Entire Securities Market

-30 year -fsesfical value

2OO2 2003 1q2004 2q20A4 3q2004 4q2004 1q2005 Ap05 fttay-Os

r Despite Fannie/Freddie price spreads being athigh levels during the past 6 months, theFannie/Freddie share has remained in thehistorical range

I Pri\iate Label tr Fannie |\ae Froddie t\4ac E GNli/A

However, both GSE's contnue to seesignificant share loss to the private labelmarket17 l n"t nieMae


18/70

1 a5

Our competitive advantages in our core competencies continue to erode1 YEAR AGO.... [t--\ TODAy....__vZ

o.9(Jco+,octEo(Jo-oo

Credit risk managementCapital advantageLow cost producerCustomized value approachLiquidity premiumDU/DO Technology

Confidential - Highly RestrictedAs ot 612212OO5

Our insular view prevents us from taking creditrisks in areas unfamiliar to us.Our capital advantage has been lost tocollateralized debt obligation issuers and hedgefunds. Basel ll will further erode our advantage.Our pricing is uncompetitive. According to ourmodels, market participants today are not tpricing legitimately tor risks. iWe don't have a value proposition to compete intoday's market (lack of conduit capability).Premium still exists with respect to our 3O-yearTBA security; No liquidity premium for non-fixedrate produci. iDU/DO remain the leading automated ' Iunderwriting systems in the market. Continuedt,{investment is required to ensure we do not losd,iour competitive advantages in this area. liii*

r

18 l f"ttoiellfae


19/70

R Our public position on risk concerns has been gaining momentum

Tom Lund-- MBA SecondaryRemarks capturedin numerous articles.iii'i'i;'t;""""""""""""""""!"'i,'riil'"i"'# rii''i! fr"" --A"dD i lirav - une zz. eoor !Source: Google ri' Housing Bubble i gSZ ! f ,248 { :i. lnteresionry i il ! ,' ,21s '::. Housing Affordabitity Concerns i' g6 i l+O i::' Greenspan and Housing concerns i rcz ! unt i:i' oFHEo and Housing concerns i ,, I za I i!:. occ and Housing Concerns i ,' t i lz , ti:' optionARMs i ,o ! ,o t{hf, .?......o....a......aa........aaaaaara.a....a.aa.o......aaaaaaaa..1..a.aaaa.a....aaaaa...a.11aa.aaaaaaa.aaaaaaa.....1{fofSince earty May, we estimate that over 3,500 articles have appeared in various publications on the topics lste6 aove]ffidThis compares with an estimated 1,20O articles on these topics in the four months prior. I

OCC & Fed-- Issue guidance letters-- Feds warn lenders


OFHEO Greenspan-- Releases home price data - Froth/Bubble-- Expresses concems

l9 l


20/70

1 at

Our customer's and other rnarket participant's attitudes towardslayered featured products varies across a broad spectrumGautious

Longer Term ViewGonstrained

Welfsct

ABNSuntrust

WachoviaHSBCUSAAlrwin

Community BanksGredit Unions

oSlower to Move

Reluctant FollowerTighter Gredit Box

I

1


ChasePHH

First HorizonBofA

GMAC :Flagstar

osBBuilder Mtg Corps

Production FocusedMeet the Market

Move Fast

o

CHLWaMuWorld

GreenpointIndy Mac

Street AggregatorsIndependent Mtg BankersBrokers

RealtorsSubprime Originators

20f

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i,


21/70

'

i5

The market outlook for the year continues to change, driven by lowerthan expected interest rates and other market dynmics

3O-Year FRMFRM-ARM SpreadSF Mortgage Originations ($Bil)Refinance Share (% of rolume)ARM ShareSF 1st Lien MDO ($AitSF 1st Lien MDO GrowthFNM HPI (% change from year ago)Fannie Mae 2005 Plan and Q2 2005 Forecast

Confidential * Highly RestrictedAs of 6122120O5

200Plan6.00%1.35%

2 2005Forecast

2,14639.5%29.2%

5.64%1.22%

7,7048.3%

2,67147.4%31.4%

21

7,9239.8%

lf'rt nieNfae


22/70

-

o aSingle Family Facts and Data

Private Label and Subprime Market Trends

Confidential - Highly RestrictedAs of 6l22l2Os

o

22

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23/70

-

Private Label TrendsMortgage-Backed Securities lssuanceVolume

1,400'1,200't,000

800600400200o$lnBN

:Private label market continues to be a significant source of liquidity to lenders. $401billion of prlvate label securities have been issued in 2005 through May.ln2OO4, Private Label volume surpassed Fannie Mae volume for the first time, with Itotal Private Label issuance of $809 billion versus Fannie Mae issuance of $S37 billion.Fannie Mae is still the largest single issuer of MBS. Freddie Mac was the secondlargest issuerwith $358 billion, and Countrywide ranked third at $1 14.5 billion.


Mortgage-Backed Securities lssuanceShare60%50%4O/o30o/o20o/o10o/oo%

(F-\- fi-+ ./\^

g in BN 2OO2 2003 2004 2005YTD

23

i,l,irry

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24/70

x/

Private Label Trends$BNt OtherE SecondsD HEI-OCff Prirne Fb


25/70

5

Private Label Trends - Wall Street Presencer Wall Street flrms playing an increasingly large role as aggregators ofmortgage product.r Wall Street share of private label issuance has doubled in the pastthree years (as of 2004 year-end).r Many Wall Street players are pursuing vertical integration to developconsistent source of product:Lehman originated $438 in Correspondent and Broker originationsin 2004.Bear stearns launched a Broker divison'in earry 2005.Firms making significant front end technology investments,

including developing proprietary AU systems.

Confidential - Highly RestrictedAs of 612212005 25 l E*rr,,i.M*"Ii


26/70

-

Wall Street lssuance Trends - Cyclical or Secular?900.0

500.0400.0300.0200.0100.0

1987 1988 1989 1990 l99t 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004. 1999-2001 - Wall Street presence in Private Label lssuance declines during (a) the consolidation of many subprime lenders, and (b) the increasedpresence of the Agencies in the Alt-A market.' 20O2-2OO5 - 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 i I. CSFB has ambitious 2005 goals and is positioning itself to continue integrating downstream - exploring acquiring a servicer in 2005. (5/05 - .1CSFB gth Private Label lssuers Conference) iill. Morgan Stanley is seeking "to build a brand and a reputation" for their securitization program and to show that they are "not just an opportunistTibond shop." (4/05 - Origination News) f. 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 RestrictedAs of 612212005

Liquidity crises inmarket - Russiandebtcrisis, LTCM,Y2K liquidity crunch

35.00/o

30.0%25.0%20.Oo/o

75.Oo/o

t0.o%s.0%0.0%

26 l FanniEM

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ae


27/70

-

Private Label rrends - Products and Risk AppetiteI Primary market originations of products outsideon the rise. This means lenders have to turn to70.060.05 0.040.030.020.010.0

%oPrivate Label MBS Issuance: Total Collateral Trends

-HybridARM %-NegAM %

1996 1997 1998 1999 2000 2001 2002 2003 2004Source: UBS Mortgage Research: Market Sfrafegrsl May 31 , 2005

Fannie Mae's traditional risk appette areaggregators / private label as an outlet.

Confidential - Hghly RestrictedAs of 6l22l2Os

60.050.040.030.020.010.0

' strong growth of innovative products (lnterest only ARMs ,"pay option" ARMs)' Steady growth in share of Private Label market with conforming loan balances

%oPrivate Label MBS Issuance: Total Collateral Trends

1996 1997 1998 1999 2000 2001 2002 2003 2oo4

27 r=#:{ EannieMaeI


28/70

XJa.

Private Label Trends - Products and Risk Appetiter Private label securities increasingly include a significant amount ofconforming balance product. Reasons include:- Our tough anti-predatory lending guidelines preclude us from takingcertain loans- Our risk appetite is tighter than the market's, especially regarding lO'sand Option ARMs

Pricing / All-in execution- "spillover" effect - lenders may prefer to:sell product all in one place forconvenience or execution reasonsDifficulty of hedging spread risk on ARMs: Many smaller lenders needbest efforts flow execution and servicing released bids, which we don'toffer with Alt-A and lO


*{i,rry

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29/70

o

Private Label Trends - Products and Risk AppetitePrivate Label Sec urities Collateral CharacteristicsDeals Issued April 2004 - Jan 2005Prime Fixed &Prime ARM Deals

Total CollateralConfomino Ralance

Within FM Risk AppetiteOutsrlCe FM Risk Aooetite

-> lhese two categories represented 27% ofall private label securtzations in 2004$ UPB(BB)

Alt-A Deals

% TotalUPBl16.l

lotal Collateral

22 .l

lonforming Balance

200

{vg LoanSizet00%

Within FM Risk Anoetite

l9%

Outside FM Risk Aooetite

-> This category reptesented 2!o ofall private label secutizations ln 2004

4?1 SR?

17o/"

Notes:Data Source: Loan Perforrnance database."Prine FRM" "Prr ARM" and "Al4" dealclassifications are defined by the issuer as reflected in Lp database."FM Onent Risk Appetite" reflects typical FM eligiblity criteria on bulk deal business for an averge cusromer.lans without rported FICO scores were e;cluded fiom the data set.All loans are in fist lien position; WA CLTV: wehted avemge combined LTVof fust lien plus any subordinate lien(s)

WAFICO215269

20/"

S UPBIBB)

214355225.742

% FICO< 620/JJ


YoToaalUPBr09.:

728

63

I3Z0.6o/n

q6

61?

WA LTV

{vg LoanSizel(n0/^

1.1%

23.:

0.2%

sP0/^)st \4R

69

36%

WACLTV

l0o/o

.l

2),o/"

WAFICO

t 5.3

t82 392181273

"Inyes tor

l R4 1n7

R56

75.5

% FICO< 620

9)5

7ll

974

7lc

./oCashout

94.1

777

1.2YoWA LTV

688

10/"

I .so/Q

7o/n

0.6%

))o/^

t2%

3.201

WACLTV

o/" CA)70/"

74.

%LoVItloDoc

164

2V"4).o/"

48o/"

75.'7

o/oInvestor

77.5

93.3

26%

95

25%

.(95.t

770/^

48%

,/"Cashout

l8o/o

o/o lO

95.3

42%

24%

40%

7o OptionARM

?ao/"

LRo/"

ss%

30%

24o/n

770/"

o/o C^

28%

790/"

21%

o/oLoWfloDoc

t 6oAt3%

301

40%

4So/"7).o/"

OV.

7lo/^

6lo/"

34%

o/o lO6?oa56%

o/o OptionARM

75o/o

51%48%60%)Ro/^

l20ll10loo^280/

--{


30/70

'E

I

Fannie Mae vs. Market View: lO & Option ARMGountrywide Recent Bid ProfileInterest Only and Option ARMs

Fannie Mae vs. Ratinq Agenciesd Mr)ARM

AA Sizing (Fannie srress)B Sizinq tExDeced Lss)Fannie Mae vs. Ml GompaniesFannie Mae Value of CEMl Cost for CEMl Execution BenefitEnhancement Lerels

1.60 359 75.8 721

Market Pricing

FM IO ARM7.5't.8

(mpetrtr\, (ilee (unarge Fee)GrOss Model Fee (inctudes cEcost)GAP

S&P

Notes:Arerage Inwstor Channel charge fee for lO product s 49 bpsPay Option charge es reflect recent Countrywide bids le. priwte label market.Freddie Mac recently offered WAMU a mid-3O's gfee for high quality Option ARMsConfidential - Highly RestrictedAs of 612212O05 30

3.70.4

IO ARM

FM

31.3't8.7't2.635Yo s lo Dlo ss - 0.55%deductiblc

8.52.2

Pav Ootion ARMs&P - otd5.50.6

wrln req|lEnhancement

Pay (,p$on AKM

S&P - New

t(J54.054.5-0.5

44."128.9't5.2I.85ol.sto pJo s s.0.65% deductibl

6.70.8

PAV ()DOnc5.u63.4-8.4

NO greqrtEnhancementIU54.0105.9-51.9

Fannie Mae's view of risk issignificantly different than Iother market participantsS&P recently came out withmore punitve criteria for Option ARMsMl companies price theexpected and stress losslevels differently thanFannie Mae iWe need to obtain credit : genhancement on the entirei 4,loan pool in order to achievlrelatively gap neutral modeli{$fees JIid

Pay Option55.0110.2-55.2

-q{ EannieMaeir


31/70

ts

Fannie Mae vs. Market View: SubprimeGountrywide Recent Bid ProfileSubprime MarketCollateral ProfileFannie Mae v.s. Ratinq AqenciesMl) 7.1 359 78.3

AA SiZing (Fannie Srress)B Szing (Expected Loss)Fannie Mae v.s. MlGompanv

AC

Fannie Mae Value of CEMl Cost for CEMl Execution BenefitEnhancement LerlsC o mpetitive Altern atives

LTV

FM Subprime12.03.1

Ftco

Competitiw GfeeGrOSS Model Fee 1in"rud". CE cost)GAP

Subprme with Deep CE

s&P


176.0101.075.015.0% s top-los s, 150% deductlble,Charter P rinary

12.62.0

DTI

With Deep CE

Our view of risk for subprimeproduct is more in lne withRating Agencies IMl companies price theexpected and stress losslevels differently than FanniefMae 'Our execution still significantlyoff current market levels -market competitive g-feeswould result in significant rnegative gap, even with credit

130.0195.0-65.0

Subprime With Charter MinMl Only130.0277.0-147.0

31

enhancement

iillj

F-{ FannieilIae;rl

1i


32/70

i

Private Label Trends - Products and Risk Appetiter This trend is increasingly costing us business with our largest customer:

1 10o/o100%90%807o70o/o60o/o50o/"40Yo30Yo20o/o10%o%

Shae of Countrywlde's Prlme ConventlonalMonthly Mortgage Fundngs

,i":::::*"i:*:*:)i"'*:**:i,fi:::'*":Y. ,ii::.f:::*:".1'j:.1.*.:T'**.e!*s'"q'**f,"

Confidential - Highly RestrictedAs ot 6122120O5

100%90%80%70%60%50%40%30%2oo/o10o/o0%

Share of Countrywide's TotalMonthly Mortgage Fundlngs

32 l n*tttti"Mae


33/70

iI

Private Label rrends - Products and Risk AppetiteCountrywide Loan ProductionQr-200s$ in millionsPRODUCT30 FRMT5 FRMFRM ALT-AAMORTIZNG ARM ALT-AINTEREST ONLYARMPAYOPTION ARMTOTAL PRODUCTTONPay Option ARM Drill DovmPotential

Total CountryrvideLoan Production

Pay OptionTotal UPB7o Investor7o Cashout

$l r218

7o Sinele-Familv

Critea

2 9R5

7o Full Doc

%o TotalProduction4740

70 with Subordinate Lienswa Debt Ratio

6002.81I

wa FICO

6.RRS

wa MTMLTV

s2 R41

Confidential - Highly RestrictedAs of 6l22l2QO5CreditWorks Model Fee

38.9o/n

Tight EligibilityBucket

Gross Model if Credit Enhance

$ {JPB Sold toFannielO.3o/"

Est Market Price (Charge Fee

l5-Oo/"2.lo/"9.7o/o

23.901100_(P/"

s5 154

s) 41)BroaderElieibilitv Bucket

).7't9

7o Sold toFannie

22.1

&f;

38.9

403

7q1

t.920

46 1

d

st0.702

21.2

47.7o/n

)

s5.670

15

19 10/"

744 1

14 go/"

21.6

70.7

Not Elisible4t.8

676R ao/"

)o/"

79.7

16

36.r

oo/"

52

27.7

!7 -lo/"

)5

$1.219

Notes:

35.6721.4

1n1

Does not include subprime, second, orgovernment loans.Eligibility buckets reflect potential offering toCountrride for Option ARM product under afonvard commitment.Tight eligibility bucket coutd be extended to btnerlenders on a bulk basis.

,"Not Eligible" category on Option ARMs reflecfsloans outside our credit risk appetite and/or , 4,borrowerappropriatenessframework ,$ljDebt ratio (back ratio) estimated from a onel{i,month sample and only includes Full Doc loalrilO.Countrywide data file did not include loans sol{to Freddie; figures are grossed up assuming a20% FR share based on Q1 actuals.

73.1

44 1

r0l

6S11?

62

t7

50

{o66S I73,7

33

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ti


34/70

Interest Only / Option ARMs Dominate Prime & Alt-A Private Label DealslO/ Option ARM Share of Private Label Deals

sr*s """- of,o oofn .""- 9"f ',

?.Jr{ry

l nutroieMae

5-+

9"s sr$ ..-" 9"* rf ""-. 9.sSource: UBS Mortgage Research 6-7-05 Mortgage Strategist

1008060

% 4020

0

34Confidential - Highly RestrictedAs of 612212005l


35/70

d

-

Many of the current products in the market today provide for a lowpayment with increased payment shock over timeIi Loan Typei Option ARM(w/ Neg.Amortization3/1 rO RM5/1 IO ARl'l3O-Yr.Fixed Ratewl 2ll buvdown

StaRate P & I Payment(Initial)1.00%

30-Yr. IOFixed Rate

5.00%

s/30 ro(35-Yr.)

5.130/o

40-Yr.Fixed Rate

$12s

4.25o/o

P & I Payment(FirstAdiustment)

s/l ARM

$625

30-Yr.Fixed Rate(Aporove)

6.40%

$641

Assumptions: a) $150K loan amount. b) Start Rates based on posted lender pricing. Rates at adjustment assumecurrent index value for the loan type. Option ARM teaser rate of 1o/o on lO fixed for one year, then moves to 5.2S% untilfirst rate adjustment. c) Qualifying max loan amount for all loan types assumes the borrower made $60K and utilizes a25o/o Qualifying ratio. d) Option ARM qualifying rate of 5.25%. Allother loan types qualified at starting payment rate.

6,130/o

Confidential - Highly RestrictedAs of 612212Q05

$738

5.750/o

$876

P & I Payment(MaximumAdjustment)

$7s0

5.00%

$904

s766

$992

5.63%

$799

$826

$80s

$1,912

$1,266

Qualifying Max.Loan Amount

$863

$1,436

QOf r'U/I

$1.376

$799

s916

$900

$285,714

$1,266

$863

$300,000$292,683 l

$911$799

$254,096

$1.252

35

$250,000 I

$863

$244,898$234,571$232,852 i$217.143 l

,l

l n'"ru.ieN"[ae;r

lTt' '$

I


36/70

5

Subprime Market Trendsr Market is evolving into a product continuum

($ in Millions)

t Trends towards integration of prime and subprime players:New Century/RBC Acquisition in May 2005 :'Countrywide #1 issuer of subprime and Alt A; #3 issuer in Prime ARM securites in 20Q4Ameriquest making significant marketing efforts aimed at broad customer baseTo date, we have not seen any players integrate platform and sales processI Profit margins in subprime shrinking but are still significantly higher than for primemortgages

Confidential - Highly RestrictedAs o 612212OO5 36

I

''lt1,$,j

iird$,rilt,if

l nnt lriel-tlaer


37/70

'o

-ai

Subprime Market TrendsKev Driver$ of Growth in Subprime:I 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 flexibre on income sources)- Higher debt ratios- Appraisal values (subprime typically exhibits higher appraisal bias)r 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 isfactored inI Ability of lenders to transfer risk to capital markets / monetize entire cash flow stream:- Strong CDO demand for subordinate bonds means lenders have a steady investor source for riskiestcredit- Ability to sell off residual cash flows in form of Net Interest Margin (NlM) bonds means lenders can realizemore proceeds upfront and reduce exposure to future income fluctuations

Confidential - Highly RestrictedAs of 6l22l201s 37 Flrl Fannieilfae!.ir1i


38/70


39/70

a)'

Home Price Growth Remains StrongWest South CentralWest North Centraltrast South CentralEast l{orth CentralNew EnglandMiddle AtlanticMountainSouth AtlanticPacific

Region A.nnuallze(l lll, (-irowth lrorn'l lJ-RTI* up to 2OO5Ql

US+TB-RTI: A newhome price index estimation methodologythat Lses d^ta only from purchase transactions.

Last 1 yr Last 2 yrs Last 5 yrs4.7o/o 3-7o/o 3.4o/"6.40/" 6.30/o 7.3o/o6.60/o 5.3o/o 3.7o/o6.80/" 5-9o/o 5.4o/ol0.9o/o IO.9o/o 12.30/"14.60/o 13.9o/o 12.3o/o22.5o/o 16.80/o 9.4o/o22.7Yo 17.7o/o 1l.8o/o22.8o/o 2l-3o/o 15.5o/o14.60/o 12.7o/o 9.9o/o

$33Confidential-HighlyRestritteds eAs of 612212005

US Housing Market continues with itsrecent trend:. High growth rate and high dispersonacross geographic locations. Some observed slowing of growthrates (Southern CA, Las Vegas), butmost remain above long-term trendHome prce growth has significantlyoutpaced income growth:. Affordability is at historicallows in some markets

US lncome Growth vs. Home Price Growth* US Median Household Income (f 976Ql -2O04Qg)- US Home Price Index from TB-RTI (l976Qf - 2005el)

E8e898e89 39 l PrtroieNflae


40/70

.

-

Local Market Focus - l/O ShareMany of the MSAs that experienced a high annual lO share increase (in excess of 13%l were MSAs that alsoexperienced high home price growth (in excess of 19%) in the last year,

gRoEEo'tr5rs

45.Oo/o4Q.Oo/o35.OVo30.OVo25.OVo20.Oo/o15.Oo/o10.oo/o

5.Oo/oO.Oo/o

Increase in lnterest-Only (lO) Share Vs. HP Growthamong top IOO MSAs

O,Qo/o 5.Oo/o 1O.Qo/o 15.Oo/o 2O.Oo/" 25.Oo/oIncrease ln lO Share based on Prvato Label Securty Data (2OO3Q4 to 2OO4G4)Source: Private Label Puchase Loan Dataset (Economcs and Mortgage Market Analysis) & Credit Finance


:fi.l r'"ooieMae

,iii'


41/70

a

Local Market Focus - Investor ShareDuring_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 (inxcess of 1s%).

380/

33%28%23%(,oR 18%13o/o

8o/o

3o/o

-2%

otCrtoo(\Eotr,Ic0troItott,.!ltEooo.

lncrease in Investor Share vs. HP Growthamong top 100 MSAs

lncrease in Investor Share based on Purchase-only PCG data (from 2003e4 to 2004e4)COnfidgntial - Highly ReStfiCted sourc: Purchase only Pcc data (Economcs and Mortgags Markst Anaryss) & credir FinanceAs or 612212005 41

aRverside, CAAngeles-Long Beach, CA

aWashington, DCMariFt-----------;.-a OrangeMari, FL

ao' aa t^oa

ole US

20/o 4% 6% 8% 10%i

#,lilliiu

f"ttrrie$ae


42/70

I-

F

High home prce growth tends to reduce credit losses

$550$500$450$400$350$300$250$200$150$100

$50$0

Forecasted Credit Losses Under AlternativeNational Home Price Growth Scenarios

0

ut Make-whole Revenue

Fannie Mae Proprietary and Confi.dentialConfidential - Highly RestrictedAs of 612212005 42

Source: 2005Q2 Loss Forecast Model (LFM) production runs.All loss figures are as ofdefault date and include charge-off, foreclosed property expense, and foregone interest.

8% Home Price Growth

Fqtl FannieMaeI


43/70

t

r" oCredit losses on new ARMeconomic scenarosLosses were forecast on new ARMs in three different economic scenarios:1. Corporate Forecast: House prices up 3-4o/o annually, interest rates up 1o/o in 1st S-years2. Housing Recession in overpriced regions, interest rates increase 1 .1 To tn 1st S-years3. Housing Recession in overpriced regions, interest rates increase 5% in 1st S-years

oproducts would vary under different


o

43

:.jrfir/

I

ln"ttt ieU,faer

ii


44/70

(D

Yt't

o oSingle Family Facts and Data

Emergng Products and Product Definitions


I

1,1'ril:l'irdqJTtfl

f

-{ Fannie{fae,Ilt


45/70

r-')

a

oEmerging Products: Market View and Fannie Mae Participation

Prime Conrentional ConformingSubprimeAIt-AFNM Participation% FNM Particpation via Inv. Chan

o

Prime Conrentional Conform ingSubprimeAIt-A

hre o f S Vo lumc

FNM Participation% FNM Participation via Inv. Ghansource: Economics and Mortgage Market Analysis using Loan performance.

hre o f $ Vo lame

'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/o, Low Doc are trailing behind market share.- Investor Channel is driving I/O and Low Doc volume.

2003

'16.7o/o42.8%65,0%

Confidential - Highly RestrictedAs or 612212OO5

hsre of $Volum

.AIt A and Subprime are more concentrated in these products.

fSVohme

2ndHome

hre of $Volumc)

30.8o/o88.1o/o71.1o/o

hsrc ofSVolumG)

2004

o

Sbre of:S

hare of$Volume)

Sbre of SVoluEc Sle of SVolumc

In 2003, IO ARMsaccounted foqjustl.l% of FNIf/'spurchase moheymortgage acquisitions.In 2004, theyaccounted or7.6Vo

45 -_l EannieilIae!lir


46/70

;

aI

Product DefinitionsInterest Only - A mortgage in which the borrower makes monthly payments for a specified period that cover onlythe interest due on the loan. During the Interest Only period, the outstanding principal balance of the loan doesnot decline. After the initial interest only period, the monthly payment is increased to an amount sufficient to fullyamortize the outstanding balance over the remaining term of the loan.Hybrid ARM - A mortgage loan that has an initialfixed rate period, after which the mortgage loan converts to anadjustable rate. An example of a Hybrid ARM is a2128 mortgage loan. Ths is a 30 year adjustable mortgageprogram, except that the first interest rate adjustment does not occur until 2 years nto the loan. Once the loanconverts to an ARM, the interest rate adjusts periodically (pically monthly, semi-annually or annually) based on Ia particular interest rate index (e.9., LIBOR, 1-Yr Treasury).Negative Amortization Adjustable-Rate Mortgage (Neg Am) - An adjustable rate mortgage that provides for afixed monthly payment even if the interest rate on the loan changes. Typically, the interest rate on a neg am loan fadjust monthly, while the payment stays fixed for a year. lf 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 tothe unpaid principal balance of the mortgage to create "negative" amortization. Most neg am loans have a capon the maximum amount that can be added to the loan balance over the life of the loan.r Option ARM - An adjustable rate mortgage that gives the borrower various payment options each month. In atypical Option ARM, borrowers have the option to make a minimum payment, which could result in negative Iamortization 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 fexpanded payment options give the borrower more leeway to qualify for a mortgage. The 12 month Treasury ,1Average (MTA) is the most common index used with option ARM loans; however, some lenders "iro otf"i- ' l,f liLIBOR, the 1-Year Treasury Bill, and the 1 1th District Cost of Funds (COFI) as indices. 1!'ulifri'''d

Confdential - Highly RestrictedAs of 612212OO5 46 --l Eannieilfaei

1i


47/70

frr:llen:cSi.ltrtIhvidAAnrkmislYo&ordry, St4nb t, fuO4 9: AiNf*toMryc: No lmo/l{o rrc*tr ffsqg.

l'tGAr lst rrclt's rilr,mseagoat nrw$g I mentioncd rhat I hqlta6cd 8y 9n nconslusim on is rot fro a rprntftn dt pcrspectv' I tlcril$ rrtragt yn rqq-uo Trie, hC Sc r-crpffiibili !o.bi:.g {"-ryt-e$ffiildr* pol*to or g'iq-to maeo drylsso, [srty r pfeskc n* wtr il rnent tili*'t opposed thi pott. I sd thd my j ls tor'dL *t t" p* at fttt ro rino'6 ifturgl*'wc t .T FB rryw* ghao brrsn ''nrnim rigk I rhfuk of:thi luer comparle tu;;ffiB .*t -in. wmtr wnt Dik to.ksovt if '8t he c, rprcvc of ts* is. t*$*i*itl b gn*,ruy rcmqsfiffi' I ft'fdn't btil;i-;ili *ith *t-rydug*r' tlc'au' ryyr as pqrctiqPltn*ruc ys ro rflw tht fgct tha! busilsstrcaliti my diGlBF.i&9 U{nrylIi**t-r", Gir** ruihryreqilim ltuinkIwqldursitfor6o,frc it riJ; td;*",!tqt cdirmpirrins entuing. Qt $ we'vetecn n ttri! ons for $om$ rne t lhink I $l$'rySk s sgt 8s I is6sb'oqt$l**. In writng ii t acnrally fcltmorc liks I uns lte. Lf,s:lhDA

teMey9107/2oiJ4 06:43F-vlTo: David A

'vAAnt*stiSom:hrl,CtdtcoNfrD$fru troPnEArY

0c:Suiccr: Re: No IncqnXo essa$m$) uqtgneesWow.Thie ssng a i wrs*irc; t snr nd,gtr whst ys nre ing ro;rrrrtdt:"J i*tO t ". qpect y to wait mtl we had mde r decisio*-,r,Ciain*Cui* *i,.M fetnt an,ovanight rclo cn ilrr &cii'I will cr[ yal md di*r rhi wa rve bst br'o r chmco'Irdts:l*'lYfUrd Ssiu& Oponriun aodFuregCc*nilcd tmerufon r|d Elrccsion&,I1.,Fu:!Cc[:T

7n|3


48/70

glfitffiA o{:41PMTo: f,Xctcc: Did ASubjt NobcmdNo,

Ckt D-$srttSIM(ir8|Seq

Tl prBo*o.of is +nai:is'to.dommsimy rcconnmddim rcgt NAffi*i"., f*u cqrre to y cqflctruiur $tr snrdying .dq ft.stt ry ti"krOs-a cmparirg n6t wht orns rirk nnarer in ttrc in&uy. MibMryand ob Tsir a; wkrg to get i3 isnc bcfsc yal frmlly in thc ncrrfinrc.RosncadeionFrcddic bf shqld withdrcw frl tho NINA mkcr !t !ol ! practicrble. olrrp...r* ittt mrrta is incosiimt with nisim.centcred comprny rndhcdc$ 3oo nuc rcptuion risk for o ffrm.BcgrondIhc NINA mq'tgsgc w8s cfcrtod wor 20 ycerr 6g0 l Yry o'f srving bonoworsw ncoruistefiifoonne,p*rn* (rclon, tho self employed, c.) but Wmgcrldrt pro-files and doumpyirl$, In addrtion, E fS sen'cd banowem*m.-tfu wUuru".n t**i,,-in nm s'.rt rrp- rcir incurlc' T* {93 ^oKr ncrrge prorcts and undcrwiti:tg ryqgs.qolval' rnartng *l--*--. Eort''en'ic ;mrtm. Spe'ificsllyrFrddielada.t-gntospecrqmoffiff.tttlrd undenuitinc sr,,iscs btti|o mgnizF tt incsno rssletssne- f defttt ttt-s prwocilhtt8t nrd consqltly' trditioilgrdrti"c r*nd hgqrd rrpplp to incqms fdis we cd. Othcr mcr.rgrgero6r$s. sctt as stcted iffione/ststed 'g!Et (SISA) mqtgffps, ro36 fhg;"*dttd borrowrswho di&'twrfl robc hrstcd witlr p'rovidingthoirinccrc.fire HINA prgCt ws ars bsing so,ld rod*y dffsfg eb$ttlid in the nichc itr l'oc fo ;dlr. TodfsNINA spp{rs tctf8i bsowerc wo wqild hvefuitt-s,"1fring fs a ruffitg8 if ilpir fi nncial pq we adcqualdydisolqGd. To bg,svidrUSeof tts i ttrc t ylar dslnqufl&y tffi o{lrher na{rgr, *i r-'. loro tro l37E dipnding 1q,"lTdt. '$Ic -o|ji frniity cmtnor-rs'i*T of NIN, lost fi lw irnd fornd ra *eedy -t***ltr .f *" d* o ryo,t* wa drcpee fryq c no, This m8 16 '"borrwtrwit$t-tt*rtg,uodit -- pnq$ylssdsqtd]tctdders'ind-; {**iftg Fu!u*, CIr'uudff*liry ty'Ff uqt s$dit dd tu*g,"rr"r *tffi fotblG, becresc hsyc iuio tte ***cn bono'sr io btcte 0f dcf$ilt. Tyislly, bdcflitt bqrovr cd bdh iqrcr minimrm iamircrfHr Borrov rhcc, by d.finiliqr, NINA Estf;di-t-tSrsr$r i r., aigi*.r cr dvit tq'.o-'whh wcrhrr 'rtttorodly'iddlfusfgsrof dF l'ocrowrrr o 6r rplicrim'As rditbo.l pftm ni rhcse trlutgi3 is tl* it eppcars ey rretrttttt*dy rrscd l'are Hiipinics' * q9*4 ff.Ut"t*l"*;"td nc terv of prcdory l-drywi thir pm&cl.is gd' In .o,ity. "f-ftrd. tingofrly hans wcc ade ugispnico. Tbis;;o.|r * I p;. d c t typc to*ar wa nuds ttnl vlcm l$rnqdfe

co{nDffllr ttc,ftrl^rY Pn(na


49/70

ThG HMDA e4 pnrnr. nri_. pi^ctre with 16% dm inoonc duncatlio lcns .. -:=-:=3,** - s:_-,i:*agdng tolfrpnica, vcnrr tflo f rad cofamiag norlggs.EnlftU g}{flV- mgkct wnrld bc ditrcutt rnd'crpor$vq,'brt ren;is also nosnnfv. Ccrrnly lco@ rradd silieizG lB b arwitrurral mightaifict **imnins oi *p uusicss. Ftsddis,,c lqdd dlo sd 10 trygS2,5 o so nitt n gttutt pon, Fins. Sncam{lgltsrniffitydch, it will nrlc it wen oqs diffi olt nrrch the pivrto mtct lwsl ofmnig rn undcrrcrved ntgrgo proraiot.On th dl*f, hs, what bat wey to hghitht dr lsrloc of misson th towelk ewry r pfpffnltUgct$fftsrlt hrt p g|trvcl 11'6 0rG yitlgro crvo? ltrht hterrly-to ilg$ight'tfc-pnlem g.ith linking rcassocsnt dor prcge hitriog d6 ffnfA'ffi In ny jrdgnong mchingfhc nacdr prolcfiqr Uunererve rnd minuity bqron'esvill rcrire urto engago in nrrta pecrices tht arc st od& witb qr clnrfer if it reqiresus to mrlrc a mrlra in NINA mortgges.

CO|.|fIDS,I|AL t PrOPffitArW Fr e5


50/70

From:Sent:To:Subject:

Mudd, Daniel H.Tuesday, July 17, 2007 6:57 ANIDallavecchia, nrcoRE: Budget 2008 and sfiategic investnents

Mv eoerieise,is that email.is not a very good ve,tue ft[. convesatiol; ve.4$ne, ornqtOl1ti1{S If fo.u fa iciu'hdvq b$eolt:t lnilf;ta,liitrpc,r unlessyou real wqntmc to bee ongio ry'me&aFs-ftiryouto vorPetrs'*ad,tbe srepcr-trf yo* fe*l the precqs,isn;iffikd;;-; *1r or;Gi"phd" nil hourlersplffo.you Tam notawsre thttybuhrbsouhtto do so on this toPic.If flrere is any dto ifi lhs ropauy ,.yu .as 1;wni9r rcrsoo, who is supposed to a able tE e ihe toP'risls and gods of tbe compaoy 'ffq rcl piw tq; let mc know, you rvill hsv it---,to or"1"'"riqr.". giri nott nagotia for your group or against any other' And ofcourse" you may say anythng you,believe to" tn ", ui;i iiroe r,o-*oy*g thBoard or anyr+hcrerejsa And I believe it isiniacouate,foryou to suggcst anyonu epresscd u,"*trt tute are enoughno.ulresfrrri'onlo do everything necessary for theplan. Resources are. tigt. Everyone has cuts.

Please come and see me today face to face'

Tbis e-mail and its attachments are confidential and solely for the innded addressee(s). Do notshare or use thern without Fsnnie

Mae'sapproval.Ifreceivedinerror,oontactthescnderanddeletetbem.

---Original Message----From ; Dallavecchia, EnricoSent: Mooday, JrnY 16,2007 l0:15 PMTo: Mud4 Daniel H :Subject: Budget 2008 and shategic investmenlsDan, see the ernail below to Mke.In iinrtsheu,I.qgi1gy'.upset as I bad to shnd at lheBoard-meeti{g1?.dsy,rq.hq$lh*.1'rveb.4V-1rh9.*lt^*d lhe money to obange ourcurtuc-:a+druppsry*k,s;;i:itiiliiria"t


51/70

please tell your direots (Mike, and Rob) to spare me the story about 'this is orly the first cut, it is a proposal, tell us what you need byall means'. I went through mny cost cutting and I did many too, I have been in some of the most politicized companies in banking Ididcutthroathmergetelltheartosparemetbestory,theyalreadylostmuch.ofmyrespecttheydon]!.Yp!.e.g.+lg:!For the two of us we need a heart to hesrt conversation when we ^o ,Ooodrr. I am sruiyou have not ffigt", o,approved them and that you rvould never hand me a budgel cut, even minimal, without sitting own with me and disoussing what Ithink is necessary to ruo CRO aqd risk ingeneral for the company.tn fhe meantime I ask that you make swe we stsy wy ctear from the oomments made today about having thrc budget sd the wilt toexecute this strategic plan, because the last think I want is to be frced to say that I disagree and embarass you in front of the Board.

Erico Dallavecchia!F---- Original Message-----From: Dallavecohia, EnriooSe,nt: Monday, July 16, 2007 09'.33 PM Eastem Standard TimeTo; Williams, Michael (COO)Subjeot RE:

Mike, I got no say and no input in building of the budget I was given. And I can only assume lha those that built it wereknowledgeable of the build up state of CRO and of the fact thal last year CRO took a 25pct headcount reduction, when fhe companyavererage l0pct (and I am not even counting Andy Leonard reductions or those done in Single Family, all work that we took toinctease eff,roiency),Doing the budget for nxt year offmy forecal and with a lpct furtber reduction in budget is at best being ill informed or maybe I sdueto malice. I firrd it offesive to my intelligence and thatof my staffThe company has one of the weakest contol proce sses I ever witness in my career. We have barely started to work on it, we tooksipificant costs out of the company while during our job and we still gbt a 16pct reduotion this year?Tbis tells me that people donjt care about ihe function or fhey don't get it. I st tighf today at the Board meeting whr representationswere made afler some Board members asked about the fimding of the new strategy that we have it. This is inconsistent wilh the cuts Idid last year and theouts I am asked to make. And we have not even address taking more credit risk.I can't let the Boad think that CRO is showered with money, not with what we spent this year and certainly not with what I have gotas.budget for next year. This is even before we consider what needs to be done to take more oredit risk. What do you think it is goingto be, adding 3 people in CRO and run up a fee billions of revenues?This company really doesr't get it, we are not even cunent and we are already back to the old days of scraping on contols and peoplecan oan set up proper controls to reduce expenses.And giving me a number to ask for pushback it is treating me liike a child or a second class citizen.I cannot convey in writing my disappoinEnent on this whole situation, I expected better from this company. This is a very sad day.

ErioDllavecchs---Ori ginal Message---From: Williams, Mchael (COO)Seot: Monday, July 16, 2007 09:0l PMEastern Stondard Time

Confi dential Propriery Business InformationProduced hrsuant to House Rules Fannie Mae FM-COG:R-00l56l48


52/70

To: Dallavecchia"EicoSubject:--=.---: :- **Enrico: --n"'--:*--

you should assume that the team built lhe budget targets off of your cunent forecst. Given the importanc,e of the CRO function, wewould eryect you to push back and tell us whde you-need to be uext year. lbe teaq abselt your inputs, is (or can) only makeaszumptins bout wirat makes sense to'you given your currynt rate of qprd. SJeve (ad e team) shared your cncerLs with me andI have-said that I would expect we will need to up thc number but Enioo should opine.Separately, this does not include any "initiative" money that you need for 2008.Mike

This e-mail and its attachments ae confidential and solely for the innded addressee(s). Do not share or use them without FosnieMae's approval. If received in error, contaot the serider ad delete lhem.

Confidential Proprietary Brsiness InformationProdrced Pursrantto House Rules Fannie lvlae FM-COGR_OO156149


53/70

hr$r:TSrDltfrdd,Id H -,.."-E.::-.;-grodr, Oot 129, 21l5 lZ:A*7tlIhllvoarlE: Shpno

thb is riolF sef Ed if e fde re rryporrivO we (yul ud l) wif c brm ld.DciclMndd-iellrenge--c; Ddlvcccig EnrieoScat: Sfrsy, Olttobcr: 2S, m6 ot:39 FM Edcr Stmdd TineTo: rtd4DnicHSuliect sprineDq, I bcve sriqs pobleo wilb rhe oonol po*r uorud srim lbits',Je hricss 5{i6qs iD trms of ruBg rp huiro nrrch fosrer ths wh wotd be cosisnt with thG S5bo limit forycr od weigf*S,rypa k*s th4 t* mmths .b d; f.rto Fr".'diog mc to occ m1, c*rrrod auhori$ to dotsminc linits wilht,duifirig shtiouhips wilh cttdoG.Tbisism,[ddftb.rp4|eoffppn$or Chseded (atp limit orcasecn oom{rtirn nddbt b imrentioo), and ai,ffrpr:1"1i-i,fqt tfi,nrcj o t ry s*rpri.e bns wttbut bling compl'eld lb s$' hsiticss initiive.Thc ir r prtlern cocrg of iordete egnrd for te ooofol procsc.We md to tslk on Monday.

EoricoDdlrveshiFuieM

I-Origfurt Mcssrgp--Fn: Lwb,RosrtScr: Fddry, October 27, 2006 03:55 PM E*sEr Srrddd TiuFTo: Miru, tlol; Lmd, Thas A; Ddlcvdris, E6ico; Iobs' P@dc $rrry, Mll AIhS: RE: REQUESTlHl ToL. !o tell rswhc tbtdir oLg todoc,mlfcd wilhtodry'r creub'R.

Ibcdestrsoiernlos*rsgsym!trruoeiwdndy,fis:trrusatrdwitzeoodtdohlnd rck'lyf5{9{{|ltraeefr"C;.nn"t*til*,.o,n*gd,orsrtoeu*cag h#,isfqs*inwithorrperaix*nof Fruie}frc:"psr""6dinthdrbviaaasouyfatcprporaeoediathrocssrigmff'M{)&dntrlttrotbosclod !s ry rl* prty 0f usod for my otbr pxpooc rttout cms d Fs{: ffry. IIVnt tw: rcelvod Lt Ecsry8p m{1,- orry L, rur-rfi"i i" *"", ;L". Cdc'! e66 yor sfsn, dto1' uy lsp&s of thcsr, ud cffi sr-

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Fu:lr+SdSot: Frthy, tubct 27, 2W 3: PMTo: Lai, Bsq Lrd, Tbn A lhlhooi, Fioo; Johq,clg sn, bll A*sdierr: nE(JEsTAX,We trd r Sprr call c ChEs ro deoircr s:il wh* it w G'hm wntcd md wc worild wcrt b att pt lo dolivr.Thg,e is $(D-S$omm trye of cuEot pfoSio ooning Mdst. Tht is tb dsd they reol wmt rs !o look d Ed lell til ifwe hrve genrl ryetile [vi an inedir dut bid] by CO lodsy' md bid ne,rt wee&'Scp*fy, Uy hye strt ovf, 8 S3.6bn trye of scasoned prper, that to tho ir lcsr pirrity, but we am invited to pict lbot fsroala if we'd likeT6 +foil of the limit meno we wote calty mly envisiod thc incnotl S6ft00nm to ge to the proposed $7to. \lte bovebeta givea rhe go-lhsd, I beliove to p'roceod u a dcal'by*al ba.ds.Howwer, lbere wss slso some direclioa ot Alignment to prrsre goals.Tbs, tte grskxr is: knowing the,re dre other mn-Chase deals like cmbg, shatl we mw proceed with ltrc $600-SE0hn on tbe** O.at-tyud pnorochlS WELL AS e seltiotr [of roughty obqt $7f]nm-t.2$,l om lhe $.6bo, mly theforma?SlThc des,trooio moil mcssage you hve reoeived od y filer trmsmitted with it asg mfidtil , d ole fg $e inteodcd oddtsscc(s)'s deathn. Uo not divutg, copy, for*s( or u* tbe contents, sttebmeirts, q infqmetion witb,on pemissttn of Foie M.."..ri- *orained in th! neg ir ptouO solely for lhe prrpo Sstcd is the Esagc or its atlscmlJ(s) md mrst trot bdircloecd to my third prty a useO ior my oter prupose withotitoo*nt of Foie Mre. If you hve eoaived this mersr maoy ts Aqittcd uiith it in enor, pteese Oete rten from yorn sy*e,m, deOroy my hr aopies of them, nd aoolcl tf,e sder.

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5.

lmplementation PlanWe plan to implement the required changes to our processes and policies in an accelerated manner

F(D

.

Credit models in placeCMS credit model implementation approvedGalibrate models (house price path)I mplement pre-purchase analytics formUpdate PLS Risk PolicyTape cracking process in place

Step

Economic Capital Framework in place

tl\o

Work with dealers to create the structures we wantUse OfficeTiger for surveillanceLoan level due diligence executed on selected dealUpdate proceduresUpdate surveillance metrics for Watch ListHire additional GMS staffldentify_ P_SA begt practices

Target DateWorking with CRO

CompleteBefore first deal

Upon NBI approvalComplete

Before first deal Upon first dealBefore first deal

One of first deals

Confidential - Internal Distribution

One of first dealsJune 30June 30

In preparation for BBBTBD

Ii*'1 ,;l,iiiJ'lr! 1l 'lJlirl

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Confi dcntial Proprietary Business InformationProduccd Pursuant to House Rules

.--*_: _:::=,:*New Busness Initative r.rr r.n, euestio n nairePurchase of Sub Prime Pl-S rated AA and A

'Why is the buslness ntiatve being undertaken? (Describe the Initatve, key obJectives and how lt,fits into the Business' strateglc plan.)Capital Markets is seeking to invest in private labcl securities @LS) rated A and A (i.e. between AA+ andA-) and backed by sub prime conforming loans. Capita Markets wishes to prudently participate in thismarket as an extension of Fannie Mae's mission to brirg liquidity to the mortgage marke! to supponlaffordable housing, and to profit frcm atactive retums when available. Recent spread widening in the subprime market bas made investments in these securities especially atractive fom a risk/return perspective.Furtlrermore, as a result of fhe widening spreads, credit srandards appoar to be returning to tbcsecior,making the bonds safer.This New Business lnitiative (NBI) is the fint phase of a trvo-phase process, The second phase will entail,iwesting in sub prime PLS down to the BBB level. Capital MaftetJwill decide on the appropriate time o

submit the second phase for approval as an NBI.1tis NBI is a key part of both the corporation's and Capital lr4aketis sategic plans of becomingsopiist.icated investors in lower-rated tranches (below AAA) of strucfured,securities as well as in sub primecollateral. As the company becomes experienced in managing the risk of these lower-rated tanches andlcollateral, we will oarn commensuralely higher returns. As a rezult of the well publicised subprimeslukeout, the investor base for this product has dried up. CDOs, which were once the most aggressive bid,have qgne away. Thus, thjs NBI directly supports one of Fannie Mae's corpofate objectives tirii year togrow the business while at the same time it zupports fhe company's mission to provide liquidity io tlsmarket.CaPital Maftets considers this to be a C,orponte NBI because the company has nol previously invested inPLS securities at the AA and A lcvel (although it has at the AAA level), Moving in this diretion increasesthe level of credit risk and sub prime exposure that we face as a cotnpany. Capil Markets wants to ensureIlut there is adequate support, approval and oversight from across th company as we move in thisdirection.W-hat are he maJor credlt, market, operatlonal, or other rlsks associated wlth the proposedbusiness initlatlve? (eualitatively assess the significance of these risks to the success of theinitiative and performance of the business.)Credit riskInvestments in lower-rated tranches generally are correlated witb a higher probabil ofdowngrade orcredil losses. Howeler, we believe that by performing pre-purchase due diligence and credit anatysis wecan mitigate the clrance of downgrade or losss.r We plan to employ Farnie Mae's credit nrodels and expertise in this space to select investmenlsthat either do not experience losses or are priced so as to compenste for any losses.. Furthermore, rve recogaize that these securities are complex financial insfruments wilh structuredcash flow nles which can be affecled by servicer practices. 'We plan to work more closely tanrrye have in the pt with servicers of these PLS in order to mitigate losses post-purchase. :

. Ve also plan to draw upon resources in other parts of Fanie Mae, such as the AutomatedValuation Model and Servicing Scorecard developed by the Single Family business, and whereappropdate use them in the evaluation process for these secuities.r In addition, we plan to employ the services of third party pre-purchase due ditigence antVorbond' surveillance providers when appropriate in order to enhance our own due dilgence process.r There is also sisnificant credi with buyine PLS of an orisinator who is

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bffiruptq. Thse pools are mor likely to contain fraud, We will be selective in choosing well-capitalized counterparties.Market riskTtrese securities are general less liquid than AAA securities, but a liquid secondary naket does exist'We will limit ttp size of the PLS pordolio rted below AAA so as to nol reduce the overall liquidity ofFannie Mae's PLS portfolio.Operational riskkrthe past we have not performed the type ofloan level drligence we are proposing for purchases belowAAA. As a consoquence, we rvill likely encounter some challenges in establishing our due diligenceprocsses,Other challenges nny include: Securities witl have to be consEucted by the dealer community in order to meet Famie Mae'sconforming loan requirements. lt is not certain fbat tlre dealers will do so.. There may also be accounting ilems as well as housing goals issues lo be resolved, Execuling and maruging these investments requfues an extensive, ongoing coordination acrossmultiple business units.Ttre business units involved in pricing the securities ard managing the risk will continue to wot< closelythrough bothformal and informal relationships in order to execute effectively. Committees such as theCredii Rist Conunittee ard tl Private Label Advisory Team will continue to ptovide forunrs forcoordination and oversight of the activities related to this pordolio. Wo will also develop PSAs tlut willcontain inilustry best practices proven to mitigate opentional risk. .What ls the rfsk/return strategy assoclated wlth the proposed business lnltltive?Capilal Markets and Business Analytics and Decisiors (BAD) are join-tly develoqing a_r9hlm o1 . .ecnomic capital framework to assess risk ard return for irwesting in subprime PLS rated belo* 4A*f'Due to the nture of the capital stnrcfure of the A and bonds, w anticipate that regulatory capital willbe higher ftran economic capital for these PLS, implying a higher return on econornic capital tlun the AAAzubprime PLS and most other invesrent oppoftunities available to Fannie Mae.

Does the exlstlng management and organlzatlonal lnfrastructure supPolt the proposed businessinitlatlve and required operatlons? (lf not/lf not now, describe the changes required and the plansto address the gaps.)The techrical skills and lools are liugely in place to suppo the proposed NBI. With the implementation ofthe Capital Markets Strategy (CMS) PLS Prepurchase Analytics Process (including a form to be completedby the CTvIS PLS team), the required analytics are already in place. We believe tlnt the current surveillancepiocers is sufficientforPLS rated down to A (but not forPLS ratedbelow A), The largest operationalissue with respect. to assessing the risk is that the cMS PLS leam does not cunently have access 10 anyorporate-apptoved implementation of BA&D's credit risk models, CMS PLS will seek temporaryapproval lrm ttrc Model Validation team of Market Risk Ovenight to irnplement for their own purposes aversion ofthe approved credit risk models.Wlll exlsting (credlt, market, operatlonal) policles, standards, tolerances and procedures provldesufflclent guldance for the management of the rlsks assoclated wth the proposed businessto address the

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Confi dential Proprietary Business InformationProduced Pursuant to House Rulcs

The Private Label Advisory Team (PLAT) requests to CRO as part of this NBI process tat the PrivatcLabel Securilies Risk Policy be updated to allow for purchases of PLS below AAA. Furtlermore, the teamrequests dut wc introduce a PLS puruhase limit of $3 biltion in new acquisitions through /ay 31, 2008 fosub prime securities raled behryeen AA+ and A-.Wlll the exlstlng systems/technology nfrastructure effectively support the proposed buslnessInltlatlve? (lf not/if not now, describe the key requirements and the plans to address the gaps.)Yes, with the aforementioned caveat tat the CMS PLS leam does not have access to the corporate-approved implementations of BA&D's credit models andtlut CMS PLS will have to implement aversionof the approved credit risk models for the pupose of evaluating sub prime pLS.Are there any reputatlon rsk issues, laws and/or regulations affectlng the proposed buslnessinitiative that pose special concerns?There are possibly some reputation risk issues related to investing in sub prirne, but Fannie Mae already hasmade a decision to participate in this market and to manage tlre related reputtion risk. We currently haveapproxim4tely $4 billion of zub prime PLS securities in our porfolio, so investing below AAA rvouldonly mean tht Farurie Mae is participating in another portion of he security structurc.The Housing Goals Steering Committee is cunently considerin$ how these securities will count towardsregulatory housing goals as detemrined by Farurie Mae's mission rgutator, the Department of Housing andUan Development (HUD).Do we understand the approprate accountng, financlal reportlng, and tax treatmentfor thlsbuslness initiative, and do we have the ablllty to xecute those requirements (including anyimpact on the allowance for loan losses, as appropriate)?Yes. The accounting, frnancial reporting, and tax treanent for these securities is simitar (ifnot identical)to the tatment for AAA-rted securities. We will notif Impairment Aocounting tlut Capital Marketsintends to begin making investments in these securities, While we anticipate no immediate impact, wenevertheless lvant Impairment Accounting to be aware of the higher credit risk of the securities.

What speclflc llmlts, constraints and revlew polnts should be associated with the proposedbusiness initiative?Capital Markets rquests a PLS purclrase limit of $3 billion in new acquisitions through May 31, 2008 forsub prime securities rated betlyeen AA+ and A-. The PLAT will repof quarterty to the Credit RiskCommittee (as part of the regularly scheduled Private Label Securities U$ate) the sratus of PLS purchasesbelow AAA. Capital Markets will noti$r the VP - Credit Risk Oversight, Capital Markets for thefirst fewprtrcluses of PLS rated below AAA. The VP - Credit Risk Ovenight" Capital Makets cunently attendsthe bi-weekly PLAT meeting, at wbich Capital Markets apprises the PLAT of dwelopments in ihis secto.We anticipate that the VP - Credit Risk Ovenight, Capital Markets will provide clos and extensiveoversigbt of tls NBLllow the

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of buslness and rlsk management requlrements that have been deflned In this assessment - e.9.,organlzatlonal Infnstructure, pollcles/procedures and technology/processes? (Describe the keyrequirements of and the plan to implement the monitoring/reporting process.)Capital Marke will appoint a project manager to track implementation of following items:Business and risk management Tracking and reporting of size of portlolio rated below A.r Tracking and rcporting of losscs on the PLS porolio,O rga n i z al i o n a I i nfr astnt cta r e. Appointment of individuat(s) 1o perform AAA to A pre-purchase analytics.. Appoinuncnt of individual(s) to perform AAA to A surveillance.Policies Colnpletion of policy changes.Technologi/processes. Approval for implementation of credit models.r Implementation of pre-purchass anatics form. Completion ofprocedures documenting the pre-purchase process.What ls the exlt strategyfor lhls proposed buslness lnitiative if, after monitoring, it appears thatthe risks are no longer acceptable to the company or the buslness Initiative does not meet returnor other business expectaiions, and what are the approprlate criteria to determine if we shouldexlt?Capital Markets nly at any time choose to cease purchasing fhese securities and,/or conducl. sales ofpurchased securities.

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Confi dential Proprietary Business InformationProduced Pursuant to House Rules

New Business Initiative Checklist

Page 1 of4

Ramon de Gastro DateSVP - Gapltal Markets Mortgage Assets(lnltlatlve Leader)

'Yes r:jN9, []

're$ iiNo,,iravld Gussmann Date

VP - Gapltat Makets Strategy{lnltlatlve Leader).rdr. r{+ ir;ii-* --.L--i,'Yes, NO Jeter Niculescu Date

EVP - Gapital lllarkets(Buslress Unit Head)lGeplft Mlr*ftf s tu$sYas :lrNb' r,tlll Qulnn Date

SVP - Gapltal Makets Strategy(Buslness Unlt Rlsk Offlcer){FLT Votlns : ftllensr} Yef t:.Ni ,t:teven Shen DatsVP - Gapltal Markets lUlortgage Assets,(f LAf Votne lllenpriYds Noi uln Ghung DateDlrector - Gapital Mzrkets Strategy, PLS

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Yes rNoo Note: Contact person is Sara Feder.Paul Weech DateVP - Houslng Goals

Yes DNo Note: Contact

person is Tarun Chopra.tlar* Wlner DateSVP - Buslness Analysls and Declslons(Buslness Analysis and Decisionsl

Yes trNoncott Lesmes Dale

SVP - Deputr Geneal GounsetlLeoallYes tNotrill Senhauser Date

SVP - Ghlef Gompliance Officer(Gompllance and EthlcslYes t-.1Nononte Shapiro Date

SVP, Gapital Markels/GR0 Technologylfechnoton: BU TechnolonvlYes f,No t:rfan Gobb Date

SVP, Enterprlse Systems Management

Rich McGhee DateSVP, Gorporate SystemsCopy OnlyNo signoffrequ ired

Note: Slgnature not required because thls initiativedoes not aff'ect administrative systems (PeopleSoft, HRfelated systems, etc.)Yes Nonuiz de Toledo Date

SVP and GAO, TochnologyYes No r-rcott Blackley Date

SVP and GFO - Gapital Markets{Ghief Financial Offlce Yes i.l

No i.treg Kozlch DateSVP - Accountng Operatons

Conf dential Proprietary Business InformationProduced Fursuant to House Rules

New Business Initiative CheclIist

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New Business Initiative Checldist * __T * --*:.:--Yes DNoreg Rarnsey Date

VP - Accountlng PollcyYes DNonohn Glbson Date

VP - Polcy, Gommunlcatlons(Gorporate GommunicatlonslYes r.rNotrharon Ganayan DateDlrector, Government RelationslGovornment & Industrv. Relatlons ... .. .......

Mary Doyle llatoSVP - FlnanceYes !NoDYes tNotrarolno Herron DateVP, SOX Strategy E ExecutlonYes nNonarla Schuttz DateVP, MBS Program OfflceYes nNonesia Bates Moss Date

VP - SF Gornterparty Risk ManagementIPLAI Votlns MemberlJon Roman ''.. ...

.,!.:.irf,.ir;**!d_j.r;+.1#.Date

VP - Gounterparr Risk Overslght(Goroorate GounlerDartv Rlsk OversEht

Yes No t:Yes nNo L-r

Note: Contact persons are Robert Bowes and BenPerlman.Mike Shaw DateSVP - Gredit Risk OversightlGredt Rlsk Oveslght, Loss Allowance

Confi dential Proprietary Business InformationProduced Pursuant to House Rules

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Gllnton Lively DateSVP - Market Rlsk Oversght(Market Rlsk Overslght Model Over3ight and

Yes trNo! Note: Contact

person is Scott Chastain.

Davld Sykes DateVP - Model Review(Maket Rsk Over3qht. Model Ov61sqht

Yes DNo t-l

Angela lsaac DateSVP - Operatlonal Risk Oversight

Yes No tJ

Note: Contact person is TBD.

Copy OnlyNo signoffrequredBetsy Ashburn DatsGhlef Audit Executlve

Mary Lou Ghrlsty DateSVP - Investor Relatlonsllnvestor Relatlons)

Copy OnlyNo signoffrequ ired

Notd:' o ntact pers on is Catherine Constantinou,

Yes LlNounrlco Dallavecchia DateEVP - Chlef Risk ftffcerlGhlel Rlsk OfflcerlYes ilNo I.Jarolyn Groobey/Mercy Jmenez DateSVP - Gorporate StrategylOfflce of Goroorate Strateovl.

New Business fntiatve Checklist

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ffi git *ni:SJ*rsrChanges to Private Label Securities Risk Policy for New Business Initiative"Purchases of Sub Prime MBS rated AA and Art

Added to Rcsponsibilities for SVP - Capital Markets Mortgage Assets, or designce:r.....Fsr.P.l*s.rald...!srv.AA.a".r.-e-i-v...ap.pro.val,.fi.qm..sl.;..api.tal.-M.a;.kf.r.sr"a.r.scy-eJ.dsigr....f..qrs.p.gr.Ia.s.

Added ro Responsibilites for SVP - Capitat Markets Strategr, or designee::,.....F.s,r.PL-S..{alp.d..e.!c,:v-AAA,.p9.rf-o.rn.4.p..:}ur...hgse..reyi t1.a.n.d,rCiI.aary.srs.-o.f.flp..P.I.$.,..r'.....Esr.PI$.ratd.slsry"4A",p.-o.y.id.a.m.e..m-o_.tp._thc..SYP.=.._ap_itar-.M.a*p._M.prtgAss$.-o.r-d.psigle. .p-fsr.E.-sns-r. HLe..il-hdica-ti..qe.w.h-tler.-apital..M.ap-.ts Strtg.cyaDp'r.9y.s..sr.cslinss..l..pp.rc..h....,

Changes to Tolerance nnd Limits:

PRWATE LABEL SECURITIES }OLICY. **".-j::*ie-#_--

Formattcd: Bullets and

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s'\{tw.ffit Fh.slsg:e PRIVATE I,ABEL SECURII]ES POLICY".. --:;*Ailded 1o Cbange Contml Log:

Confdential & Proprisfary - Confidonlial 'freatrnont Requested by Fannio Mae

e-mails of fannie and freddie executives as posted on the house oversight committee site

Documents