october 21, 2020 mtgage sategy my - fhn financial

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MORTGAGE STRATEGY MONTHLY

FHNFINANCIAL.COM800.456.5460

MORTGAGE STRATEGIESWalt Schmidt, CFA

[email protected]

Alexis Vilimas312.258.5066

[email protected]

Brandon Messing312.258.5057

[email protected]

OCTOBER 21, 2020

Carry and Technicals Both Important p. 2Two seemingly contradictory factors about the current state of affairs in the MBS market should drive investor decision-making for the foreseeable future: 1. carry is king and 2. the market is highly technical. Finding ways to maximize return objectives with these two thoughts in mind will serve investors well. – Walt Schmidt

Revisiting HFA Collateral p. 11Mortgages issued by State Housing Finance Agencies (HFAs) are an example of specialty prepayment collateral that can offer investors superior call protection and stable prepayments. This section presents an updated review of HFA prepayment speeds along two dimensions, incentive and age. – Alexis Vilimas

Market Update p. 21 Month-to-date, 30yr and 15yr coupons mostly underperformed their swap and treasury hedges. CMO spreads are unchanged to 5bps tighter since September. Hybrid spreads and CMO Floater DMs are 0-5 bps tighter, with the exception of Passthru CMOs widening by 3bps. Payups for loan balance specified pools are mixed throughout the coupon stack. Conventional fixed prepayment speeds were slightly faster in September. Faster speeds in the middle coupon stacks led the increase due to an exceptionally low rate environment. Speeds in the Ginnie Mae sector were nearly unchanged.

October 21, 2020 of 24

MORTGAGE STRATEGY MONTHLY | CARRY AND TECHNICALS BOTH IMPORTANT

Executive Summary: Two seemingly contradictory factors about the current state of affairs in the MBS market should drive investor decision-making for the foreseeable future: 1. carry is king and 2. the market is highly technical. Finding ways to maximize return objectives with these two thoughts in mind will serve investors well.

This is the Fed’s market, and we are all just investing in it. Literally. As the Fed buys more MBS paper, so do US domestic banks and foreign investors. (The third-largest investor type, US money managers, has reduced holdings of MBS as of 2Q20 after a strong uptick in holdings in 2019 and 1Q20.)

Figure 1: Bank Holdings of MBS are Skyrocketing

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U.S. Commercial Bank Holdings of Agency MBS

Fed Holdings: $2.31 Trillion

Source: FHN Financial and Bloomberg

Banks and the Fed are essentially tied in term of who owns the most MBS. Together, they control a little more than 60% of the agency MBS market. Add to that the $1.2 trillion held by foreign investors, and more than 75% of the MBS market is accounted for. And foreign investors are adding paper at a rapid clip recently, as well.

Incredible sponsorship by domestic banks.



Figure 2: Foreign Entities Adding MBS as a Yield Enhancement vs. Sovereigns

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Source: FHN Financial and US Treasury Department

For its part, the Fed is buying over $100 billion/month in MBS paper, which represents approximately one third of the gross issuance that is being produced. Along with that, the Fed is adding $40 billion/month in MBS to the balance sheet net of paydowns, which is about the same as was the net supply of MBS in September. By contrast, all banks combined have added – net of paydowns - an average of $25 billion/month since the end of March. The takeaway is simple: despite the impressive growth in investments by the two largest “private” investor types in the MBS sector, this is the Fed’s market.

Since the Fed sets both base cost of funds in the overnight markets and the prices at which securities trade through its open market operations, it has created a unique situation in which technicals AND carry are both paramount in the current environment. Normally, a short-term technical trade would involve some sort of pricing mismatch only, and carry would not be top-of-mind for the investor. But since the Fed is directly affecting BOTH the liability and asset sides of the balance sheet through its Fed Funds and SOMA (System Open Market Account) policies, respectively, both technicals and carry must be considered.

“Field of Dreams” Market

In the case of the Fed and the SOMA portfolio, the MBS market is like the movie, “Field of Dreams”. The tagline from that movie was, “Build it, and they will come.” That is what has been the Fed’s response to the MBS market within the coupon stack since late April. The initial emergency response from the Fed in March was to buy essentially the entire 30yr coupon stack in the form of 2.5s up to 4.5s. By late April, however, that approach was amended to purchase only the “production” coupons, which at the time were 2.5s through 3.5s. The basic policy of buying the production coupons has not changed since, but the actual coupons have changed.

International investors also very involved.



The chart in Figure 3 below displays the gross production of 30yr coupons in the conventional MBS market on a monthly basis so far in 2020. Critically, the chart further displays the breakdown of production by coupon. A clear pattern emerges: as the production of the coupon stack has migrated lower, so has the focus of Fed purchases of MBS.

Figure 3: Fed Purchase Activity Follows Coupon Production in MBS

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Gross Issuance in 2020 | 30yr Conventional MBS by Coupon

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Fed Purchses by Coupon1. 2.5s thru 4.5s2. 2.5s thru 3.5s3. 2.0s thru 3.0s4. 2.0s and 2.5s

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Source: FHN Financial, CPRCDR and NY Fed

The challenge for investors is to translate monthly issuance data in broad strokes to day-to-day investment strategies. That requires a laser-sharp focus on timing and market reactions. The Fed added the 2.0 coupon to the investment quiver on May 11 for the first time. Of even more import was the fact that the Fed discontinued the purchases of UMBS 3.0s with the two-week schedule update that was released on August 13. Immediately, the pricing of the 3.5/3.0 and 3.0/2.5 swaps began to change. The most pronounced move was in the 3.5/3.0 swap, which was trading negative for a few weeks before the Fed dropped 3.0s from its purchase plans.

Fed reaction to coupon production has been efficient.



Figure 4: Changing Fed Coupon Selection Has Large Pricing Impact

The 3.5/3.0 swap has risen from negative 20/32 on August 11 to approximately positive one point currently. That means that the 3.5 coupon is trading 20/32 “rich” on our relative value model. Not much has changed fundamentally for these two coupons relative to each other. They are both well in-the-money and the cheapest-to-deliver for both is the 2019 vintage. The only thing that changed is the “technical” of the Fed. It was buying one before and is no longer buying either.

What about the 3.0/2.5 swap currently? The Fed is buying one (2.5) and not the other (3.0). The 3.0/2.5 swap is now trading very close to parity after trading negative for the better part of September and October. The swap was trading as high as almost two points as late as June when the Fed was fully engaged in buying both coupons.

Market pricing quickly adapts to Fed buying patterns.

Source: FHN Financial and Tradeweb



Figure 5: Is the 2.5 Coupon the Next to Fall off the Fed’s Purchase Mandate?

Source: FHN Financial and Tradeweb

With the 3.0/2.5 swap now trading right around parity, our coupon regression model has the trade at 12/32 cheap. Clearly, the market is starting to anticipate that the Fed will eventually drop the 2.5 coupon, given the recent uptick in the 3.0/2.5 swap. Will it return to two points if/when the Fed stops purchasing the 2.5 coupon? Probably not. The 3.5/3.0 swap looks like it is maxing out at around one point, simply because dollar prices are already very high. On that basis, the 3.0/2.5 swap can probably go to 1.5 points, but it is unlikely to re-enter the two point range as it did in May and June of this year before faster prepayments were in full view. However, there is still much more room for the 3.0/2.5 swap to run as the market anticipates the Fed dropping the 2.5 coupon, likely in favor of the 1.5 coupon.

That begs the question of if/when the Fed will make this transition “down-in-coupon”. We believe the answer is yes, the Fed will transition away from the 2.5 coupon to purchase the 1.5 coupon, along with staying in the 2.0 coupon. And we think this transition will happen during the next two months.

Another look at Figure 3 reveals the reason for this view. There was no discernible production of the 2.0 coupon before April. In that month, however, almost $7 billion of 2.0s was created, followed by almost $22 billion in May. Also, the production of the highest coupon in the Fed’s quiver at the time, 3.5s, had decreased from $8.7 billion in April to $5.3 billion in May. In response to this change in production, the Fed dropped the 3.5 coupon and added the 2.0 coupon in mid-May, while still maintaining purchase operations in the heavily-produced 2.5 and 3.0 coupons.

The 3.0/2.5 swap poised to perform further.



As we mentioned above, the Fed dropped the 3.0 coupon in mid-August as production had dropped to $12.8 billion from over $40 billion in April. Now, the Fed is buying only two coupons: 2.0s and 2.5s. It will continue to buy 2.0s into the foreseeable future as production in that coupon has been greater than $90 billion during the past two months. But production in 2.5s has dropped precipitously from a run-rate of $80-$100 billion from April through August to $47 billion in September.

There are really two questions here: when does the Fed begin to purchase the 1.5 coupon and when does it cease to purchase the 2.5 coupon? It might not happen all at once. The Fed may decide to add 1.5s for a two-week period or two before it drops the 2.5 coupon. Based on past history, the 1.5 coupon is almost large enough for the Fed to consider adding. Around $10 billion was produced in September. If the past production and purchase plans for the 2.0 coupon are a good guide, the Fed may start to add the 1.5 coupon as early as the next schedule release next week, October 28. And it may choose to continue to buy the 2.5 coupon for a period after that, particularly given any potential uncertainties around the election on November 3.

The foregoing includes a number of “what-if’s” about timing and transition. But here are three things we do know:

1. The Fed wants still-lower mortgage rates, or at the very least, it wants to maintain a backdrop in which primary rates will not rise from here.

2. The production of 2.5s is quickly declining and the production of 1.5s, while still nascent, is quickly growing.

3. Any transition away from 2.5s and toward 1.5s by the Fed will have noticeable and almost immediate pricing implications.

The obvious response to this is to go long the 3.0/2.5 swap. But what if the transition does not occur right away? A better way to play this outcome, which may happen over time, is to employ one of our favorite go-to strategies: the coupon barbell. In this case, we advocate going long the 1.5 and 3.0 coupons on the stack and avoiding – or outright shorting for those who can – the 2.0 and 2.5 coupons. The results of such a trade in the TBA market is displayed below.



Figure 6: The Coupon Barbell Essentially “Goes Long” the FedSwap/Switch Analysisas of 10/21/2020

Mtg Par Market Current WA CurrSecurity Collateral Type Price Amount Value WALA WAM Coupon WAC FICO Ln Size LTV

Sell: FNCL 2 11/20 FNCL MBS 30yr 103.00 20,000,000 20,600,000 3 353 2.00 2.96 769 367,707 70.3FNCL 2.5 11/20 FNCL MBS 30yr 104.33 20,000,000 20,865,625 5 351 2.50 3.39 758 349,178 72.0

Buy: FNCL 1.5 11/20 FNCL MBS 30yr 100.88 10,000,000 10,087,500 2 355 1.50 2.54 774 390,682 68.3FNCL 3 11/20 FNCL MBS 30yr 104.44 30,000,000 31,331,250 7 351 3.00 3.84 745 316,741 72.7

Buy Totals: 103.57 40,000,000 41,418,750 6 352 2.63 3.52 752 334,749 71.6Sell Totals: 103.67 40,000,000 41,465,625 4 352 2.25 3.18 763 358,383 71.2Net Effect -0.10 0 -46,875 2 0 0.38 0.35 -11 -23,634 0.5

Mtg Avg Static UST Eff Eff VolSecurity Collateral Type YTM Life Spread OAS Dura Convx Duration* 1yr CPR LT CPR 1mo CPR 3mo CPR

Sell: FNCL 2 11/20 FNCL MBS 30yr 1.19 4.08 62.9 -1.4 3.13 -3.71 5.18 24.0 19.9 5.1 3.6FNCL 2.5 11/20 FNCL MBS 30yr 1.01 3.15 61.1 9.8 1.68 -2.61 2.13 38.1 26.0 40.8 29.5

Buy: FNCL 1.5 11/20 FNCL MBS 30yr 1.33 6.19 47.2 -10.8 5.03 -3.40 7.98 7.9 12.2 0.8 0.1FNCL 3 11/20 FNCL MBS 30yr 1.35 2.95 96.2 54.8 1.71 -1.80 1.42 40.9 27.8 53.0 49.1

Buy Totals: 1.35 3.74 84.2 38.8 2.52 -2.19 3.02 32.9 24.0 40.3 37.2Sell Totals: 1.10 3.61 62.0 4.2 2.40 -3.16 3.64 31.1 23.0 23.1 16.6Net Effect 0.24 0.13 22.2 34.6 0.12 0.97 -0.62 1.8 1.0 17.2 20.5

Mtg Security Collateral Type Forward upsteep upflat up50 base dn50 dnflat dnsteep

Sell: FNCL 2 11/20 FNCL MBS 30yr 1.02 0.44 0.69 -0.06 1.10 1.15 0.87 1.48FNCL 2.5 11/20 FNCL MBS 30yr 0.69 0.75 0.35 0.34 0.66 0.47 0.25 0.95

Buy: FNCL 1.5 11/20 FNCL MBS 30yr 1.11 -0.42 1.02 -0.94 1.53 2.58 2.20 2.03FNCL 3 11/20 FNCL MBS 30yr 0.91 0.88 0.66 0.54 0.94 0.95 0.73 1.20

Buy Totals: 0.96 0.56 0.75 0.18 1.08 1.34 1.08 1.40Sell Totals: 0.85 0.60 0.52 0.14 0.88 0.81 0.56 1.21Net Effect 0.11 -0.03 0.23 0.04 0.20 0.54 0.52 0.19

* Grossed up by a factor of 100.

All analytics performed on the Yield Book using the v21.6 prepayment model.

Total Return analytics assume constant-OAS pricing.

upsteep - 3mo unchanged, 5yr up 25bps, 10yr up 50bps upflat - 3mo up 50bps, 5yr up 25bps, 10yr unchanged

dnflat - 3mo unchanged, 5yr dn 25bps, 10yr dn 50bps dnsteep - 3mo dn 50bps, 5yr dn 25bps, 10yr unchanged

Historical

12mo TRR

YB Projection

Source: FHN Financial, Bloomberg and YieldBook

It should be noted at the outset that we are using the 2020-vintage generics from Bloomberg to represent TBA, because the current “generics” used by YieldBook are simply incorrect. We are using the v21.6 version of the YieldBook prepayment model, however. Contact us for more information on that.

We could not make the trade “duration neutral”, because the 3.0 and 2.5 coupons have the same effective duration in the model. As mentioned above, investors may choose to simply go long the 3.0/2.5 swap, in that case. But we did manage to make this “coupon barbell” essentially price neutral. It shorts equal amounts of the now-Fed-sponsored 2.0s and 2.5s and goes long 25% 1.5s and 75% 3.0s.

The trade results are very impressive. Pick yield, spread, OAS and base case TRR. Also, improve convexity. We term this trade “going long the Fed” for two reasons. First, it produces an asymmetrical positive return profile that protects some downside, but it is more geared toward the base case and falling rates. Lower rates and faster prepays is still the “pain trade” for most investors. Second, it goes “long the Fed” because it shorts one coupon that the Fed will likely drop in the future (i.e. 2.5s) and goes long the lower 1.5 coupon that the Fed may buy in the future.

If the Fed will likely continue to buy 2.0s, why short that coupon, as well? Simple. That coupon is the next one to experience adverse prepayment concerns in the event that primary mortgage rates fall in the 2.50% range or lower. And the current yield, OAS and convexity profiles look a bit expensive at this point, as well, compared to the 1.5/3.0 combo.

Benefits of the “coupon barbell”.



Many investors are not set up to execute such a trade, but it does provide some guidance for other sub-sectors within the mortgage market.

1. Onboard the 1.5 coupon in 10yr, 15yr and 20yr amortization bonds, as well as the 30yr space. Keeping the portfolio as remote as possible from prepayment risk is paramount. Furthermore, investors will not need to match the 1.5 coupon with a higher coupon in those other sectors to keep the duration manageable. That is already being done by the shorter am schedule.

2. If investors are going to go up-in-coupon, they should either go all the way up-in-coupon or find some form of convexity in the middle coupons. Finding cheaper sources of convexity either through burnout in really seasoned bonds or by paying up a reasonable amount for intermediate payup stories is highly recommended. Buying the intermediate coupons in the $103-$105 dollar price range with no form of call protection is not recommended.

Along these lines, one important theme for investors in the current environment has been to onboard less than full-payup forms of call protection. That can be done in many different ways, including seasoning, layering collateral attributes and offsetting loan characteristics. The last of these, offsetting collateral characteristics, has been a popular and effective way to add call protection at reasonable prices.

Figure 7: The Interplay Between Adverse Servicer and Loan Balance in the Data

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S-Curve Analysis by Loan Balance | Loan Level DataLast 3 Months | 30yr Conventional MBS, 6-36 WALA

CTDUniverse150k Max, Quicken150k Max, Complement

Cheapest to Deliver: Nonbank Servicer, LnSz>225k, LTV<75, and FICO>740Source: FHN Financial & CPRCDR

Source: FHN Financial and CPRCDR

Offsetting loan characteristics still provide convexity.



This chart displays the interplay between two offsetting factors: fast servicer and slow loan balance story. Investors know that 150k max paper provides real call protection, but the payups are very high. Investors also know that Quicken is a fast servicer. The combination of the two is faster than non-Quicken, 150k max paper, but it still provides meaningful call protection relative to both the conventional cohort and the cheapest-to-deliver estimate. An example of what this looks like in real life is displayed below.

Instead of executing a coupon barbell as displayed in Figure 6 above, investors may want to remain in the 2.0 coupon along with the Fed but add some call protection for the downside (in rates) risk. In this case, investors may consider 150k max Quicken paper at a payup of just under a half point vs. 150k non-Quicken at around triple the payup of around 50/32. The analysis below looks at a 150k max Quicken pool vs. the 2020-vintage cohort used in the trade in Figure 6 above. As a reminder, that is not a perfect representation of TBA, but it is much closer than the YieldBook generic.

Figure 8: Adverse Servicer + Loan Balance = ValueSwap/Switch Analysisas of 10/21/2020

Mtg Par Market Current WA CurrSecurity Collateral Type Price Amount Value WALA WAM Coupon WAC FICO Ln Size LTV

Sell: FNCL 2 11/20 FNCL MBS 30yr 103.00 20,000,000 20,600,000 3 353 2.00 2.96 769 367,707 70.3Buy: FN BQ5743 FNCL 150k Max Quicken 103.44 20,000,000 20,687,500 1 355 2.00 2.95 763 138,738 62.5Buy Totals: 103.44 20,000,000 20,687,500 1 355 2.00 2.95 763 138,738 62.5Sell Totals: 103.00 20,000,000 20,600,000 3 353 2.00 2.96 769 367,707 70.3Net Effect 0.44 0 87,500 -2 2 0.00 -0.02 -6 -228,969 -7.8

Mtg Avg Static UST Eff Eff VolSecurity Collateral Type YTM Life Spread OAS Dura Convx Duration* 1yr CPR LT CPR 1mo CPR 3mo CPR

Sell: FNCL 2 11/20 FNCL MBS 30yr 1.21 4.17 61.4 -2.5 3.19 -3.72 5.41 23.1 19.5 5.1 3.6Buy: FN BQ5743 FNCL 150k Max Quicken 1.20 4.70 57.5 5.5 4.05 -2.46 5.37 11.3 17.1Buy Totals: 1.20 4.70 57.5 5.5 4.05 -2.46 5.37 11.3 17.1Sell Totals: 1.21 4.17 61.4 -2.5 3.19 -3.72 5.41 23.1 19.5 5.1 3.6Net Effect -0.01 0.53 -3.9 8.0 0.86 1.26 -0.04 -11.8 -2.4

Mtg Security Collateral Type Forward upsteep upflat up50 base dn50 dnflat dnsteep

Sell: FNCL 2 11/20 FNCL MBS 30yr 1.03 0.42 0.72 -0.09 1.13 1.19 0.91 1.52Buy: FN BQ5743 FNCL 150k Max Quicken 0.94 0.08 0.71 -0.45 1.20 1.95 1.52 1.68Buy Totals: 0.94 0.08 0.71 -0.45 1.20 1.95 1.52 1.68Sell Totals: 1.03 0.42 0.72 -0.09 1.13 1.19 0.91 1.52Net Effect -0.10 -0.34 -0.01 -0.36 0.08 0.76 0.61 0.16

* Grossed up by a factor of 100.

All analytics performed on the Yield Book using the v21.6 prepayment model.

Total Return analytics assume constant-OAS pricing.

upsteep - 3mo unchanged, 5yr up 25bps, 10yr up 50bps upflat - 3mo up 50bps, 5yr up 25bps, 10yr unchanged

dnflat - 3mo unchanged, 5yr dn 25bps, 10yr dn 50bps dnsteep - 3mo dn 50bps, 5yr dn 25bps, 10yr unchanged

Historical

12mo TRR

YB Projection

Source: FHN Financial, Bloomberg and YieldBook

Despite the almost half-point payup, the trade is essentially even yield, pick OAS, pick base-case TRR and most important, pick convexity. It is a little skewed toward falling rates, but that fits with our theme of protecting the portfolio against the “worst-case” outcome for most investors. In this way, the investor is not getting the convexity improvement for “free”, but we think the convexity improvement is well worth the modest payup and effective duration extension.

Carry is king while the Fed Funds rate is on hold, but the Fed’s SOMA policies are simultaneously causing technical imbalances that investors can address in the portfolio. As we stated with our two-part takeaway above, these are hardly the only ways that investors can both improve carry and take advantage of technical imbalances in the coupon stack. But the general themes of having a barbelled coupon approach and/or finding subtle ways to improve call protection in the middle coupons are paramount.

Good value in offsetting loan stories.


MORTGAGE STRATEGY MONTHLY | REVISITING HFA COLLATERAL

Mortgages issued by State Housing Finance Agencies (HFAs) are an example of specialty prepayment collateral that can offer investors superior call protection and stable prepayments. This section presents an updated review of HFA prepayment speeds along two dimensions, incentive and age.

We first reviewed HFA collateral in the May edition of the FHN Financial Mortgage Strategy Monthly. The purpose of the piece was to serve as a general introduction to the sector. Five months later, general prepayment risks remain elevated due to exceptionally low rates and refi activity. Investors are therefore seeking protection from fast prepayments in call-protected collateral. The following analysis evaluates the call protection available in HFA-backed loans in two ways. First, the analysis presents the amount of call protection by rate incentive using a set of updated s-curves. Second, the analysis maps the degree of call protection in HFA collateral as loans age, using a newly created set of ageing curves.

State Housing Finance Agencies (HFAs) provide down payment assistance and closing cost assistance to low- and middle-income borrowers in the form of grants, low-cost second liens, and tax credits. Borrowers that take advantage of the programs have limited financing options, resulting in slower prepayments across coupons in HFA pools.

The s-curve in Figure 1 compares prepayment speeds across incentives for loans with 6-36 months of seasoning. Overall, conventional HFA loans prepay 15-20 CPR slower than the universe and 20-35 CPR slower than TBA. Loans that qualify in Ginnie II HFA programs prepay 25-35 CPR slower than the G2 universe.

Figure 1- Speed Comparison by Incentive

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S-Curve Analysis | Last 24 Months30yr Conventional MBS | 6-36 WALA

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CTD (Cheapest to Deliver): Conventional, Nonbank Servicer, LnSz>200k, LTV<75, and FICO>740Conventional HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, and WAG2 HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, WA, and WI


HFA loans prepay significantly slower than the universe across incentives.

https://my.fhnfinancial.com/ref/111890/Pages/p/mortgagestrategy.aspx?ItemId=25067

https://my.fhnfinancial.com/ref/111890/Pages/p/mortgagestrategy.aspx?ItemId=25067



There is not a specific disclosure for HFA loans from the agencies, nor is there a published master list of HFA loans. Instead, market participants can identify HFA collateral using a combination of features and primary servicers. HFA mortgages are all 30yr amortizing, fixed-rate, owner-occupied, third party originated, single state, single family, purchase loans. Some loans are serviced by the local state agency themselves while others have servicing agreements with agencies from other states or mainstream servicers such as Lakeview and US Bank.

Because down payment assistance terms and home price appreciation vary widely across geographies, each state program has a unique prepayment profile. Figure 2 displays the conventional s-curves for HFA collateral by state program utilizing an average of the last 24 factor reports.

Figure 2- Conventional HFA Speeds by State

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S-Curve Analysis | Last 24 Months30yr Conventional MBS | 6-36 WALA

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HFA Average

Cheapest to Deliver: Nonbank Servicer, LnSz>200k, LTV<75, and FICO>740HFA Collateral: Orig LTV 95+

Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), MO (Alabama Housing Finance Authority), NC (Alabama Housing Finance Authority), TX (Idaho Housing and Finance Authority), and WA (Idaho Housing and Finance Authority, Alabama Housing Finance Authority, and Lakeview Mortgage)


The degree of call protection relative to the universe and the TBA cohort varies significantly by state program. Arizona HFA collateral and Washington HFA collateral exhibit the fastest prepayment speeds out of the state HFA programs displayed. According to the FHFA Home Price Index, Arizona had the second highest level of home price appreciation (HPA) in the country between 2019Q2 and 2020Q2 with 9.13% HPA. The state of Washington had the third highest level of HPA in the country, increasing 8.6%, year-over-year. A stronger pace of HPA can push current LTVs lower, in turn qualifying more borrowers for a new mortgage. Interestingly, HFA loans pay significantly slower than standard high LTV loans, which we examine later in this piece.

Each state HFA program has a unique prepayment profile.



Excluding Arizona and Washington, the delineation between the states is apparent beginning in the 75bps incentive bucket. At 75bps of incentive, Delaware HFA prints 7 CPR. With the same amount of incentive, North Carolina and Missouri HFAs print 5-6 CPR while Texas and Indiana HFAs print 1-3 CPR.

The s-curves in Figure 3 display the tremendous amount of call protection available in G2 HFA collateral by state program. Overall, G2 HFA s-curves are flatter than their conventional counterparts. The range of speeds between the state programs is also tighter than in conventional space. Texas and North Carolina display the slowest and flattest s-curves.

Figure 3- G2 HFA Speeds by State

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S-Curve Analysis | Last 24 Months30yr G2 MBS | 6-36 WALA

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HFA Average


Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), MO (Alabama Housing Finance Authority), NC (Alabama Housing Finance Authority), TX (Idaho Housing and Finance Authority), WA (Lakeview, Alabama Housing Finance Authority, and Guild Mortgage), and WI (Wisconsin Housing and Economic Authority)


In the May publication, we suggested that G2 HFA borrowers may be particularly vulnerable to COVID-19 related delinquency for two reasons. One, low FICO is a primary driver of delinquency in Ginnie MBS and moderately seasoned HFA borrowers have average credit scores 10-20 points lower than non-HFA borrowers. Second, HFA borrowers likely have lower incomes. According to the National Council of State Housing Agencies’ 2016 Annual Report, 72% of all HFA mortgages went to borrowers earning less than their area’s median income (AMI). The median borrower income for HFA loans was just under $50,000. Lower income jobs have been impacted the most by the pandemic.

Texas and North Carolina display the slowest and flattest s-curve.



There is now evidence that many HFA borrowers have been more impacted by the pandemic than the general universe of Ginnie borrowers, as we predicted. Figure 4 shows the increase in 30D+ delinquencies for HFA collateral versus the rest of the universe between March and September. The category 30D+% includes all loans that are at least 30 days delinquent or more. Each month some loans will cure while others will roll into more serious delinquency. If more loans remain delinquent than the number of loans that cure or are bought out, the delinquency category increases.

Figure 4- Delinquencies since March

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Time Series Analysis | 30D+ Delinquency30yr G2 MBS | 6-36 WALA

AZ HFA

DE HFA

IN HFA

MO HFA

NC HFA

TX HFA

WA HFA

WI HFA

Universe

HFA Collateral: Orig LTV 95+Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), MO (Alabama Housing Finance Authority), NC (Alabama Housing Finance Authority), TX (Idaho Housing and Finance Authority), WA (Lakeview, Alabama Housing Finance Authority, and Guild Mortgage), and WI (Wisconsin Housing and Economic Authority)


Three trends stand out. Missouri, North Carolina, and Wisconsin HFAs have reported delinquencies in line with the universe this year. Texas, Delaware, and Washington have reported increasing delinquencies each month that are significantly higher than the universe. For example, nearly 30% of the outstanding balance in Texas HFA is in 30D+ delinquency, twice as high as the universe. However, Texas HFA started at a higher level of delinquency than the universe so the rate of change between Texas and the universe is actually relatively close.

Most interesting and perhaps most useful for investors interested in HFA collateral is the delinquency changes exhibited by Indiana and Arizona HFAs. Delinquencies in both HFAs increased between March and May but then trended downward starting in June due to buyouts. Figure 5 is a time series of prepayments since March. The solid line shows the total reported prepayment (CPR) each month. The dotted line is the buyout rate (CBR), or the involuntary component of prepayment. Arizona and Indiana HFAs cleared out their delinquency pipeline at the first opportunity.

G2 HFA delinquencies are trending higher than the universe.



Figure 5- Speeds by Prepayment Component

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Time Series Analysis by State HFA Program 30yr G2 MBS | 6-36 WALA

AZ CPR

AZ CBR

IN CPR

IN CBR

DE CPR

DE CBR

TX CPR

TX CBR

HFA Collateral: Orig LTV 95+Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), TX (Idaho Housing and Finance Authority)


In Ginnie space, servicers can buy loans out of pools at any time after they go delinquent for three months, whether or not the loan is still in forbearance. A Ginnie servicer may decide to buyout the loan as soon as a borrower misses three payments if the cost of funding the buyout is less than the projected P&I advances and/or the servicer believes the loan will re-perform and therefore make a profit when they re-pool the loan.

Buyout timing and magnitude are uncertain but that factor could partially offset the exceptionally slow voluntary prepayments in G2 HFA collateral, reducing some of the convexity benefit. Specifically, geographies with a backlog of delinquent loans, such as Texas and Delaware, will experience elevated prepayments when those loans are bought out of the pools.

A review of HFA collateral using ageing curves displays the degree of call protection in HFA collateral as the loans age. Figure 6 is an ageing curve that shows the speeds for loans with 50-150bps of rate incentive during the past two years.

Some HFA programs are actively clearing out delinquencies at the first opportunity.



Figure 6- Speed Comparison by Age

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WALA

A-Curve Analysis | Last 24 Months30yr Conventional MBS | 50-150bps Incentive

CTDConventional UniverseConventional HFAG2 UniverseG2 HFA

CTD (Cheapest to Deliver): Conventional, Nonbank Servicer, LnSz>200k, LTV<75, and FICO>740Conventional HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, and WAG2 HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, WA, and WI


Conventional and G2 HFA loans with at least 50bps of incentive ramp slowly to 12 CPR over the first 16 months. Following the first 16 months, conventional HFA speeds continue to ramp up slowly each month until the end of the first four years. After four years, conventional HFAs print speeds close to the universe. After the first 16 months, G2 HFA speeds plateau between 12-16 CPR until month 40. After month 40, G2 HFA speeds increase slightly before plateauing again near 20 CPR. Seasoned G2 HFA loans maintain their convexity advantage, printing speeds 10 CPR slower than the universe.

State-specific HFA ageing curves are a useful tool for developing prepayment vectors for cusip-level security analysis. Figures 7 and 8 display the degree of call protection in each by state HFA program as the loans age.

G2 HFA has the slowest prepayment profile as loans age.



Figure 7- Conventional HFA Speeds by Age

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AZ HFA

DE HFA

IN HFA

MO HFA

NC HFA

TX HFA

WA HFA

HFA Average


Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), MO (Alabama Housing Finance Authority), NC (Alabama Housing Finance Authority), TX (Idaho Housing and Finance Authority), and WA (Idaho Housing and Finance Authority, Alabama Housing Finance Authority, and Lakeview Mortgage)


In conventional space, the states follow one of three general patterns. Arizona ramps to 50 CPR over the first 30 months and remains near 40 CPR thereafter. Washington ramps from to 30 CPR over the first 30 months and remains at 30 CPR thereafter. All other states displayed ramp to 10 CPR over the first 16 months, remain at 10 CPR until month 30, ramp from 10 CPR to 20 CPR until month 40, and remain near 20 CPR thereafter.

The ageing curves are more condensed in Ginnie paper than in conventional but there are four discernable paths. Arizona ramps to 28 CPR over the first 10 months and remain between 20-25 CPR thereafter. Washington ramps to 8 CPR over the first 16 months before stepping up sharply to nearly 30 CPR, where it then remains. Delaware and Wisconsin follow a similar path to each other, ramping to 10 CPR over the first 16 months and plateauing there. Missouri, North Carolina, and Texas slowly ramp over the first two years and plateau near 10 CPR.

There is a wide range of WALA ramps in conventional by state HFA programs.



Figure 8- G2 HFA Speeds by Age

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A-Curve Analysis | Last 24 Months30yr G2 MBS | 50-150bps Incentive

Universe

AZ HFA

DE HFA

IN HFA

MO HFA

NC HFA

TX HFA

WA HFA

WI HFA

HFA Average

HFA Collateral: Orig LTV 95+Primary State Servicers: AZ (US Bank), DE (Lakeview), IN (US Bank), MO (Alabama Housing Finance Authority), NC (Alabama Housing Finance Authority), TX (Idaho Housing and Finance Authority), WA (Lakeview, Alabama Housing Finance Authority, and Guild Mortgage), and WI (Wisconsin Housing and Economic Authority)


How does HFA collateral compare to other call protected collateral? HFA collateral is not as readily available as other prepay stories, but bonds backed by HFA collateral offer very stable cashflows and attractive value. The ageing curve in Figure 9 displays how HFA loans compare to loans with common call protection characteristics. For single security analysis, it is best to use the state-level HFA data. However, the weighted average HFA s-curve reveals the general patterns.

For the first year, HFA prepayments print the slowest speeds of the stories, under 10 CPR. Speeds continue to ramp between month 12 and month 24 at a similar rate, printing speeds similar to 110k Max, investor properties, and 100% NY pools. After the first two years, HFA prepayments compare most closely to low FICO pools, plateauing between 25-30 CPR. After four years, the call protection in HFA collateral expires, printing speeds in line with the universe.

Speed differences between state programs as loans age are smaller in G2 HFA collateral.



Figure 9- Conventional HFA vs. Common Call Protected Collateral

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High LTV 95+

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100% NY

0-85k

CTD (Cheapest to Deliver): Conventional, Nonbank Servicer, LnSz>200k, LTV<75, and FICO>740Conventional HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, and WA


In Ginnie space, the HFA WALA ramp is the slowest and flattest out of the stories displayed for the first four years. Speeds ramp to 12 CPR over the first 16 months and slowly increase to nearly 20 CPR by the end of four years. It maintains its call protection advantage, closely tracking low loan balance pools after the first four years. Call protection in convexity stories such as loan balance and 100% NY collateral will remain valuable. When available, specialty collateral stories, like HFA, should also be considered.

HFA collateral has one of the best convexity profiles during the first two years.



Figure 10- G2 HFA vs. Common Call Protected Collateral

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A-Curve Analysis | Last 24 Months30yr G2 MBS | 50-150bps Incentive

Universe

86-110k

HFA

100% NY

0-85k

G2 HFA: Orig LTV 95+, Weighted Average 3mo CPR for AZ, DE, IN, MO, NC, TX, WA, and WISource: FHN Financial and CPRCDR

In summary, geographic-specific analysis is critical for HFA collateral as down payment assistance terms and home price appreciation can vary widely across the country. In addition to this analysis, please see the current FHN Financial Monthly HFA Prepayment Report for a complete view of HFA prepayment history by state, coupon, and seasoning. Below are the key points from this analysis:

�� There is significant call protection in moderately seasoned HFA collateral, conventional and Ginnie, across all incentive buckets.

�� G2 HFA has been impacted more than the universe by Covid-19 due to lower FICOs and income.

�� State programs with a backlog of delinquencies, especially Texas, Delaware, and Washington HFAs have more buyout risk in the near term.

�� For conventional loans with at least 50bps of rate incentive, HFA programs exhibit significant call protection for the first two years and moderate call protection until the end of year four. After four years, conventional HFAs print speeds close to the universe.

�� G2 HFA collateral with rate incentive maintains significant call protection for the first four years and remains ~10 CPR slower than the universe thereafter.

G2 HFA collateral maintains its convexity advantage as loans age.


MORTGAGE STRATEGY MONTHLY | MARKET UPDATE

Z-Score* Week MTD YTD High Low Avg

Prices

30 Year 1.5 100.97 1.8 0.39 0.28 0.28 100.97 100.53 100.742.0 103.22 0.4 0.22 (0.11) 0.94 103.75 102.28 103.102.5 104.56 0.9 0.06 (0.27) 5.64 105.39 98.42 102.383.0 104.61 0.5 0.08 (0.11) 3.17 106.06 100.83 103.733.5 105.45 0.8 (0.03) 0.08 4.02 106.11 101.50 104.374.0 106.53 0.9 (0.20) (0.09) 3.66 106.94 103.19 105.49

15 Year 1.5 102.13 -0.5 (0.05) (0.11) 0.39 102.75 101.73 102.232.0 103.75 0.9 (0.05) (0.08) 5.02 104.28 98.33 101.762.5 104.09 0.5 (0.03) (0.28) 3.16 105.25 100.47 103.193.0 104.88 0.6 0.09 (0.13) 2.36 105.64 101.66 104.063.5 105.78 1.2 0.17 (0.06) 1.97 106.13 103.36 104.814.0 106.14 1.0 (0.20) (0.36) 1.64 107.00 104.19 105.354.5 105.27 0.9 0.64 0.98 2.45 106.50 102.31 104.24

20 Year 2.0 103.47 0.3 0.25 (0.05) 0.31 103.86 103.08 103.382.5 104.84 0.9 0.13 (0.17) 2.70 105.59 99.63 102.97

3 105.05 0.5 0.08 0.11 1.13 106.31 101.92 104.273.5 105.52 0.6 (0.03) (0.17) 0.72 106.42 103.53 104.994.0 106.59 0.7 (0.20) (0.16) 0.48 107.03 104.25 105.994.5 108.03 0.7 (0.22) (0.25) 1.11 108.69 105.09 107.315.0 109.66 1.1 (0.06) 0.11 1.84 109.94 106.02 108.35

I-Spreads (UST)

30 Year 2.0 51.0 0.0 (3.6) 4.5 86.3 75.9 4.9 51.02.5 22.3 -0.9 0.2 14.1 57.6 149.0 (46.1) 59.23.0 58.0 -0.8 (6.5) (0.8) 34.7 158.0 18.8 74.63.5 61.6 -1.3 (0.1) (3.8) 1.7 195.4 57.6 87.64.0 54.6 -1.4 1.1 (0.0) -4.4 200.5 47.4 86.74.5 50.2 -1.2 5.5 6.5 -9.2 212.1 38.7 79.45.0 68.3 -0.7 2.1 (0.9) -8.8 191.4 53.2 83.2

15 Year 2.0 9.8 -1.1 3.6 2.6 21.2 159.2 (25.2) 35.32.5 32.2 -0.3 (4.7) 4.4 26.8 151.9 (4.1) 37.73.0 43.7 -0.3 (1.9) 6.4 -7.2 178.6 32.8 48.43.5 41.4 -0.8 (5.1) 0.7 -32.0 175.3 27.4 56.24.0 29.2 -1.0 (10.5) (1.6) -7.0 148.1 25.5 48.1

Mortgage Rates

Conforming 30 Year 3.04 -1.5 0.01 (0.05) (0.82) 4.12 2.98 3.4815 Year 2.57 -1.5 0.02 0.02 (0.84) 3.44 2.45 2.965x1 Hybrid 3.08 -1.2 (0.04) 0.17 (0.41) 4.24 2.89 3.44

Borrower Activity

MBA Refinance Index 3,621 0.4 8 274 1,762 6,419 1,375 3,272MBA Purchase Index 305 0.7 (7) (16) 55 327 186 279

Z-Score (12mo):Green 1.0 standard deviation low price or high yield/spreadYellow MeanRed 1.0 standard deviation high price or low yield/spread

52 Week

52 Week

Primary Market

MBS Snapshot

Change 52 Week

October 20, 2020



Z-Score Week MTD YTD High Low Avg

PACs

30 Year 2 yr 57 -0.3 0 (5) 15 108 39 633 yr 60 -0.4 0 (5) 12 114 45 684 yr 65 -0.6 0 (5) 5 126 57 775 yr 70 -0.7 0 (5) 3 133 64 837 yr 80 -0.4 0 0 10 136 67 8810 yr 100 -0.4 0 0 13 153 84 106


Sequentials



ARM (Z-spreads)

5x1 2/2/5 2.00 42 -1.2 0 (5) (12) 124 42 712.50 48 -1.2 0 (5) (12) 130 48 773.00 52 -1.2 0 (5) (12) 134 52 813.50 57 -1.2 0 (5) (11) 138 57 85

7x1 5/2/5 2.00 50 -1.2 0 (5) (12) 132 50 792.50 56 -1.2 0 (5) (12) 138 56 853.00 79 -0.8 0 (5) 1 148 74 973.50 86 -0.8 0 (5) 0 156 82 105

10x1 5/2/5 2.00 60 -1.3 0 (5) (20) 150 60 952.50 74 -1.2 0 (5) (12) 156 74 1033.00 79 -1.2 0 (5) (12) 161 79 1083.50 84 -1.1 0 (5) (9) 163 84 110

* YTM** Spreads calculated to 15 CPB.

CMO Floater (Discount Margins)

Passthru 6.5 Cap 28 -1.4 0 3 (13) 70 23 427.0 Cap 28 -1.3 0 3 (9) 70 23 42

Support 5.0 Cap 75 -1.4 0 0 (40) 125 75 915.5 Cap 70 -1.4 0 0 (35) 120 70 866.0 Cap 65 -1.4 0 0 (30) 115 65 81

CMO Spreads

October 20, 2020

Change 52 Week



Z-Score Week MTD YTD High Low AvgCMBS Spreads

New Issue 3y 38 -1.0 (2) (11) (5) 175 38 835y 73 -0.7 (2) (12) 1 190 62 1037y 87 -0.7 2 1 0 200 73 11210y 90 -0.7 2 2 (5) 225 79 119

ACMBS

Fixed (N-Spread) 7y 35 -1.0 (1) 0 (12) 100 34 4810y 37 -1.1 (1) (1) (16) 115 36 53

Floating (DM) 7y 30 -1.5 (1) 2 (21) 70 28 4410y 33 -1.5 (1) 3 (24) 80 30 50

RMBS 2.0

AAA CC Price Drop 15yr (72.00) (99.61) 0.00 0.00 (71.50) (0.50) (2.25) (1.38)30yr (56.00) (74.45) 0.00 0.00 (55.06) (0.94) (2.75) (1.84)

Sprd to Swaps Front SEQ 110 n/a n/a n/a n/a n/a n/a n/a

Agencies

Bullets 2y 2.3 -0.5 (0.3) (0.5) 0.6 19.1 (0.5) 4.53y 4.8 -0.6 0.1 (1.8) 0.1 25.9 2.0 7.85y 15.3 0.2 0.1 (0.6) 12.2 31.3 3.1 13.810y 29.9 -0.2 (0.5) (1.8) 8.2 63.8 19.4 31.7

Callables 5NC1 23.0 -1.2 (2.2) (3.8) (5.9) 95.8 23.0 39.47NC1 30.8 -1.3 (5.5) (5.1) (11.8) 111.7 30.8 52.510NC1 55.2 -1.1 2.2 0.2 (14.5) 134.1 53.0 76.315NC1 65.3 -1.3 1.1 (8.0) (16.4) 159.2 64.2 92.8

Week MTD YTD High Low Avg

Static

Price 106.70 0.5 (0.05) (0.19) 2.29 107.43 103.30 106.11Coupon 3.29 -2.3 0.00 (0.07) (0.29) 3.61 3.29 3.49Yield 0.73 -1.0 (0.03) 0.03 (1.74) 2.84 0.53 1.48WAL 2.78 -1.0 (0.05) 0.02 (2.07) 6.25 2.65 3.68

Option-Adjusted

Effective Duration 1.37 -0.8 0.01 0.08 (1.68) 3.86 1.15 1.92Effective Convexity -0.42 0.8 0.09 (0.17) 1.34 -0.02 -2.03 -0.95LOAS (bps) 20 -1.1 0.75 (2.62) (17.33) 153 14 40

Mix

30YR 89.3% -2.5 0.0% -0.1% -0.6% 90.0% 89.3% 89.8%15YR 10.7% 2.5 0.0% 0.1% 0.6% 10.7% 10.0% 10.2%

5 Day -0.01%10 Day -0.09%MTD -0.18%QTD 0.01%YTD 3.44%12 Month 4.22%

Source: MTGINDEX data from the Yield Book.

Nominal Return

MBS Index

Change 52 Week

Alternative Markets

Change 52 Week

October 20, 2020


This material was produced by an FHN Financial Strategist and is not considered research and is not a product of any research department. Strategists may provide information to investors as well as to FHN Financial’s trading desk. The trading desk may trade as principal in the products discussed in this material. Strategists may have consulted with the trading desk while preparing this material, and the trading desk may have accumulated positions in the securities or related derivatives products that are the subject of this material. Strategists receive compensation which may be based in part on the quality of their analysis, FHN Financial revenues, trading revenues, and competitive factors.

Some data in this report may be derived from information provided by CPR & CDR Technologies, Inc. Neither CPR & CDR Technologies, Inc. nor any of its directors, employees, or agents accept any liability for any loss or damage arising out of the use of all or any part of this report.

Although this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results, and changes in any assumptions may have a material effect on projected results. Ratings on all securities are subject to change.

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FHN Financial, through First Horizon Bank or its affiliates, offers investment products and services. Investment products are not FDIC insured, have no bank guarantee, and may lose value.

MORTGAGE STRATEGY MONTHLY

as of 10/20/2020 Change

Payup 1-Month Carry B/E Libor Effective EffectiveCoupon Specification (ticks) Price WAC WALA Proj CPR ^ 1mo 3mo (ticks) Months YTM WAL OAS Duration Convexity

3.0 TBA (Cheapest to Deliver) 104.609 3.70 48 29.4 4.9 5.7 0.33 1.33 3.02 61.96 1.94 -1.143.0 LLB 85k 217.0 111.391 3.51 48 11.1 7.4 7.5 -0.16 n/a 0.97 6.02 10.60 4.48 -0.883.0 MLB 110k 191.0 110.578 3.58 50 13.0 6.7 7.3 -0.06 n/a 0.93 5.47 8.98 3.78 -1.153.0 HLB 150k 157.0 109.516 3.51 49 15.5 5.9 6.8 -0.11 n/a 0.79 4.56 0.76 2.44 -1.583.0 175k Max 131.0 108.703 3.66 52 17.7 5.7 6.6 -0.02 n/a 0.75 4.08 1.51 2.01 -1.373.0 200k Max 99.0 107.703 3.67 51 20.0 4.9 6.0 0.14 n/a 0.85 3.81 13.68 1.92 -1.303.0 New Wala 34.0 105.672 4.10 23 43.8 0.1 0.0 -1.33 n/a 0.52 2.41 4.96 1.06 0.183.0 20yr 8.0 104.859 3.61 50 24.1 5.1 5.6 -0.02 n/a 1.29 3.07 72.11 2.12 -0.593.0 Conv. Jumbo (CK) -34.0 103.547 3.77 51 43.3 3.8 4.0 0.49 n/a 1.14 2.08 63.20 1.51 -0.583.0 100% Investor 88.0 107.359 3.92 54 18.5 4.9 4.9 0.54 417.1 0.75 3.46 11.51 1.28 -1.37

3.5 TBA (Cheapest to Deliver) 105.453 4.07 37 33.8 7.3 8.0 -0.25 1.52 3.04 85.16 1.82 -0.693.5 LLB 85k 254.0 113.391 4.02 39 13.9 6.5 7.2 0.10 723.6 0.91 5.51 9.27 3.63 -0.913.5 MLB 110k 226.0 112.516 4.05 42 14.7 6.9 7.4 0.10 653.2 0.83 4.97 5.50 2.85 -1.063.5 HLB 150k 176.0 110.953 4.03 34 20.3 6.3 7.0 0.27 343.8 0.72 4.16 1.87 1.74 -0.883.5 175k Max 144.0 109.953 3.96 53 21.1 6.1 6.5 0.28 273.2 0.78 3.87 13.05 1.69 -0.843.5 200k Max 115.0 109.047 3.95 37 24.7 3.5 4.9 0.46 163.4 0.72 3.44 13.07 1.06 -0.613.5 New Wala 40.0 106.703 4.57 21 60.4 2.7 2.7 -4.79 n/a -0.71 1.62 -73.37 -0.30 2.593.5 20yr 1.0 105.484 3.99 45 28.8 5.5 6.2 -0.98 n/a 1.44 2.89 91.23 1.91 -0.243.5 100% Investor 91.0 108.297 4.18 54 37.2 5.6 6.3 0.49 123.6 0.59 2.99 10.03 0.80 0.05

4.0 TBA (Cheapest to Deliver) 106.531 4.48 32 34.2 6.6 7.1 -0.83 1.61 3.00 101.14 1.70 -0.324.0 LLB 85k 284.0 115.406 4.40 39 16.0 8.4 8.7 -0.07 375.7 0.84 5.17 7.63 3.15 -0.754.0 MLB 110k 243.0 114.125 4.39 37 17.8 7.4 8.3 -0.04 310.3 0.76 4.60 5.17 2.24 -0.824.0 HLB 150k 162.0 111.594 4.43 42 24.3 7.2 7.9 -0.45 429.7 0.82 3.86 19.42 1.62 -0.394.0 175k Max 148.0 111.156 4.38 53 22.3 7.0 7.7 -0.17 226.0 0.86 3.76 28.73 1.66 -0.374.0 200k Max 116.0 110.156 4.39 40 30.1 5.0 5.6 -1.04 n/a 0.56 3.09 11.82 0.81 0.194.0 New Wala 32.0 107.531 4.91 23 39.5 3.6 3.4 -0.64 175.8 0.65 2.37 27.59 1.42 0.704.0 100% Investor 77.0 108.938 4.64 44 35.1 7.2 7.5 -0.95 n/a 0.51 2.68 18.47 0.53 0.73

4.5 TBA (Cheapest to Deliver) 107.969 5.14 18 37.7 9.8 10.0 -1.14 1.30 2.70 84.34 1.24 0.344.5 LLB 85k 292.0 117.094 4.94 37 15.2 8.1 9.1 -0.24 323.4 1.04 5.31 29.70 3.31 -0.604.5 MLB 110k 235.0 115.313 4.88 45 21.1 9.2 9.4 -0.91 1,026.2 0.90 4.52 24.36 2.25 -0.524.5 HLB 150k 141.0 112.375 4.94 44 22.6 8.3 9.3 -0.41 193.2 1.25 4.12 63.24 2.08 -0.404.5 175k Max 124.0 111.844 4.84 57 21.7 8.0 9.0 -0.48 186.5 1.20 3.86 65.49 2.06 -0.134.5 200k Max 98.0 111.031 4.88 41 30.2 12.8 4.6 -1.41 n/a 0.92 3.27 47.43 1.52 0.334.5 100% Investor 62.0 109.906 4.85 54 25.9 8.8 9.4 -0.54 103.5 1.29 3.33 84.07 1.44 0.13

^ Source: FHN Financial, Yieldbook

Specified Pool Carry and Breakevens

Cohort Hist. CPR

october 21, 2020 mtgage sategy my - fhn financial

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