Mortgage Lending in the Near Term: The Good, the Bad and the Ugly. Douglas Winn President Wilary Winn LLC

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1 Mortgage Lending in the Near Term: The Good, the Bad and the Ugly Douglas Winn President Wilary Winn LLC

2 Agenda Today s Topics 1. Regulatory environment CFPB and Proposed Risk Based Capital rules 2. Expected drop loan origination volume due to recent increase in rates and regulatory changes 3. Credit Unions Advantages

3 Mortgage Market Consumer Financial Protection Bureau Ability to Repay (ATR) and Qualified Mortgage (QM) Rule Effective January 10, 2014 General ATR Standard One must make a reasonable, good faith determination before, or when consummating a covered mortgage loan, that the consumer has a reasonable ability to repay the loan

4 Inclusions and Exclusions Inclusions ATR/QM rule applies to almost all closed ended consumer credit transactions secured by a dwelling including any real property attached to the dwelling. Loans secured by residential structures that contain one to four units Includes condominiums and co ops NOT limited to first liens or to loans on primary residences

5 Inclusions and Exclusions Exclusions Open ended credit plans (HELOCs) Time share plans Reverse mortgages Temporary or bridge loans with terms of 12 months or less (with possible renewal) A construction phase of 12 months or less (with possible renewal) of a construction to permanent loan Consumer credit transactions secured by vacant land

6 ATR Underwriting Factors 1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 2. Current employment status (if you rely on employment income when assessing the consumer s ability to repay) 3. Monthly mortgage payment for this loan. Calculate this using the introductory or fully indexed rate, whichever is higher, and monthly, fully amortizing payments that are substantially equal 4. Monthly payment on any simultaneous loans secured by the same property

7 ATR Underwriting Factors 5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent 6. Debts, alimony, and child support obligations 7. Monthly debt to income ratio or residual income, that is calculated using the total of all of the mortgage and non mortgage obligations listed above, as a ratio of gross monthly income 8. Credit history

8 Who is Exempt from ATR? Community Development Financial Institutions 501(c)(3) nonprofits less than 200 loans of any type per year State Housing Agencies

9 Qualified Mortgage Types of QM General Temporary: sales to Fannie Mae and Freddie Mac until the earlier of January 10, 2021 or exit from conservatorship (includes sales to FHLBs) Small Creditor Small Creditor Balloon Payment

10 General QM Loan Features No more than 30 years No negative amortization or interest only Points and fees limited to 3% Payment underwriting: based on maximum rate in first five years Old fashioned underwriting Back end ratio 43% or less No minimum down payment

11 Temporary QM Loans under Temporary QM status must meet the same requirements as General QM loans regarding prohibitions on risky features, a max loan term of 30 years, and points andfees restrictions. They also must meet at least one of the following requirements: Eligible for purchase by Fannie Mae or Freddie Mac while operating under federal conservatorship or receivership Eligible for FHA insurance Eligible to be insured by the Rural Housing Service Eligible to be guaranteed by the USDA Eligible to be guaranteed by the VA

12 Temporary QM Eligibility for purchase or guarantee by a GSE or insurance or guarantee by an agency can be established by: Valid recommendation from a GSE Automated Underwriting System (AUS) or an AUS that relies on an agency underwriting tool Back end can exceed 43% GSE or agency guidelines contained in official manuals Written agreements between a GSE or agency and the creditor (or direct sponsor or aggregator of the creditor) Individual loan waivers from a GSE or agency

13 Small Creditors Small Creditor Criteria Assets below $2 billion (to be adjusted annually for inflation) at the end of the last calendar year Organization and its affiliates together originated no more than 500 first lien, closed end residential mortgages that are subject to the ATR requirements in the preceding calendar year

14 Small Creditor QM Loans Loan must not be subject to a forward commitment Small Creditor QMs lose QM status if sold or otherwise transferred less than three years after consummation. However, a Small Creditor QM keeps its QM status if it meets one of the following criteria: It is sold more than three years after consummation It is sold to another creditor that meets the criteria regarding number of originations and asset size, at any time It is sold pursuant to a supervisory action or agreement, at any time It is transferred as part of a merger or acquisition of or by the creditor, at any time.

15 Balloon Payment QM Loans There is a two year transition period during which all small creditors can make Balloon Payment QMs, regardless of where the small creditor operates. After the two year period expires, only small creditors that operate predominantly in rural or underserved areas will be able to make Balloon Payment QMs

16 Balloon Payment QM Loans Balloon Payment QM Loan Requirements Loan must have a fixed interest rate and periodic payments (other than the balloon payment) that would fully amortize the loan over 30 years or less Loan must have a term of five years or longer Must determine the consumer will be able to make the scheduled payments other than the balloon payment. Unlike the calculation of balloon loan monthly payments for determining ATR, the Balloon Payment QM calculation excludes the balloon payment even if the loan is a higherpriced loan

17 ATR Requirements with Qualified Mortgages Loan feature limitations ATR Standard No limitations General QM Definition No negative amortization, interestonly, or balloon Agency/GSE QM (Temporary) No negative amortization, interest only, or balloon payments Loan term limit No limitations 30 years 30 years Balloon Payment QM No negative amortization or interest only No more than 30 years, no less than 5 years Small Creditor QM No negative amortization, interestonly, or balloon 30 years Small Creditor Balloon Payment QM (Temporary) No negative amortization or interest only No more than 30 years, no less than 5 years Points & Fees limit No limitations 3% 3% 3% 3% 3% Payment Underwriting Mortgage related obligations Greater or fully indexed or introductory rate Consider and verify Max rate in first 5 years Included in underwriting monthly payment and DTI Income or assets Consider and verify Consider and verify As applicable, per GSE or agency requirements As applicable, per GSE or agency requirements As applicable, per GSE or agency requirements Amortization schedule no more than 30 years Included in underwriting monthly payment and DTI Max rate in first 5 years Included in underwriting monthly payment and DTI Amortization schedule no more than 30 years Included in underwriting monthly payment and DTI Consider and verify Consider and verify Consider and verify Employment status Consider and verify Included in underwriting DTI As applicable, per GSE or agency requirements No specific requirement No specific requirement No specific requirement Simultaneous loans Debt, alimony, child suport Consider and verify Consider and verify Included in underwriting DTI Included in underwriting monthly payment and DTI DTI or Residual Income Consider and verify DTI < 43 % As applicable, per GSE or agency requirements As applicable, per GSE or agency requirements As applicable, per GSE or agency requirements Included in underwriting DTI Included in underwriting DTI Included in underwriting DTI Consider and verify Consider and verify Consider and verify Consider and verify Consider and verify Consider and verify Credit History Consider and verify Included in underwriting DTI As applicable, per GSE or agency requirements No specific requirement No specific requirement No specific requirement

18 Safe Harbor and Rebuttable Presumption Safe Harbor and Rebuttable Presumption for First Lien Residential Mortgages If APR less than Average Prime Offer Rate (APOR) plus 1.5% safe harbor If APR greater than APOR plus 1.5% rebuttable presumption

19 Safe Harbor and Rebuttable Presumption Safe Harbor and Rebuttable Presumption for Subordinate Lien Residential Mortgages If APR less than APOR plus 3.5%% safe harbor If APR greater than APOR plus 3.5% rebuttable presumption

20 Points and Fees Limited to 3% if loan is greater than $100,000 Defined under the Home Ownership and Equity Protection Act (HOEPA) Percentage limits go up for smaller loan sizes

21 Points and Fees Points and Fees Caps for Smaller Loans Loan Amount Percentage Cap of the Total Loan Amount Dollar Amount Cap >= $100,000 3% N/A >= $60,000 and < $100,000 N/A $3,000 >= $20,000 and < $60,000 5% N/A >= $12,500 and < $20,000 N/A $1,000 < $12,500 8% N/A

22 Points and Fees Definitions Finance Charge for the limit, you do not have to include: o Interest Differential o MIPs o Federal or State MIPs Points and Fees include direct or indirect compensation paid to a loan originator does not include employee compensation

23 Points and Fees Definitions Real estate fees generally excluded unless there is compensation or the fee is paid to an affiliate Credit Life and other premiums rolled into loan amount are included Maximum prepayment fee included

24 Rules QRM Qualified Residential Mortgage: o Rule re proposed on Aug 28, 2013 o Relates to securitization and skin in the game RESPA TILA rules effective August 1, 2015 o 1,100 pages Loan Originator Qualification and Compensation o Effective January 10, 2014

25 Loan Originator Qualification and Compensation Fairly broad definition of loan originator Credit Unions Compensation: o Prohibits loan officers compensation from being based on the terms of a transaction o Prohibits loan officers in a transaction from being compensated by both a consumer and another person o Allows certain contributions to certain retirement plans and bonus pools based on mortgage related profits

26 Loan Originator Qualification and Compensation Qualifications: o Loan originators must be licensed o Requires non loan originator employees who are not required to be licensed be trained and pass a criminal background check Requires loan originator identification on loan documents Requires written procedures Restricts the use of mandatory arbitration clauses

27 Effect on Mortgage Brokers Number of Mortgage Brokers ,000 Jan ,000 Mortgage Brokers Percentage of Market % % % Source: NAMB The Association of Mortgage Professionals

28 Effect on Mortgage Brokers

29 2014 Mortgage Originations Forecast Tapering of quantitative easing increase in mortgage rates Drop in refinance activity and potentially decrease in sales velocity o Example $200,000 loan at 3.5% payment is $ o $400,000 loan at 7% interest is $2, nearly 3 times the original payment

30 2014 MBA Mortgage Finance Forecast Housing Measures Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Housing Starts (SAAR, Thous) , ,025 1,050 1,060 1,130 1,170 1,220 1, ,015 1,196 Single Family Two or More Home Sales (SAAR, Thous) Total Exisitng Homes 4,927 5,100 5,323 4,943 4,603 4,788 5,218 5,293 5,374 5,467 5,627 5,805 5,073 4,976 5,568 NewHomes FHFA US House Price Index (YOY % Change) Median Price of Total Existing Homes (Thous $) Median Price of Nw Homes (Thous $) Interest Rates 30 Year Fixed Rate Mortgage (%) Year Treasure Yield (%) Mortgage Originations Total 1 to 4 Family (Bil $) ,755 1,046 1,217 Purchase Refinance , Refinance Share (%) Source: Mortgage Bankers Association May 2014, all data except interest rates are seasonally adjusted

31 Mortgage Servicing CFPB National Servicing Standards Effective January 10, 2014 Exempts small servicers under 5,000 loans

32 Updated Accounting and Regulatory Guide Accounting and Regulatory Guidance for the Mortgage Partnership Finance Program December 2013, Version 4

33 Proposed Levels of Risk Based Capital Net Worth Ratio Risk-Based Capital Ratio* Well Capitalized 7% or above 10.5% or above Conditions Must pass both net worth ratio and risk-based capital ratio Adequately Capitalized 6% to 6.99% 8% to 10.49% Must pass both net worth ratio and risk-based capital ratio Undercapitalized 4% to 5.99% Less than 8% Must pass both net worth ratio and risk-based capital ratio Significantly Undercapitalized 2% to 3.99% N/A Or if undercapitalized at <5% net worth and fails to timely submit or materially implement an approved net worth restoration plan Critically Undercapitalized Less than 2% N/A None * Applies only to credit unions with quarter end assets exceeding $50 million ( complex credit unions

34 Risk Weighting 0% 20% 50% 75% 100% 150% 200% 250% Cash Vault Cash - Cash on Deposit - Cash Equivalents Investments US Gov't Weighted-average life <1 year Weighted -average life > 1 year, but < 3 years Weightedaverage life > 3 years, but < 5 years Corporate Credit Union nonperpetual capital Weightedaverage life > 5 years, but < 10 years - Weighted average life > 10 year - Corporate Credit Union Perpetual Capital Total investment s in CUSOs Other Assets NCUSIF Total outstanding principal amount loaned to CUSOs; Land and building; other fixed assets Mortgage Servicing Assets

35 Risk Weighting Loans 0% 20% 50% 75% 100% 125% 150% 200% Non-delinquent 1st Mortgage Real Estate Loans Other Real Estate and Delinquent Loans Member Business Loans Non-delinquent Other Loans Non-delinquent Student Loans Delinquent Other Loans Other Guaranteed by gov't agency Guaranteed by FHA or VA Guaranteed > 75% by SBA, Dept of Ag, or other gov't agency Total amount < 25% of total assets Total amount > 25%, but < 35% of total assets Credit cards; Auto; STS; etc. (excluding MBLs) Total amount > 35% total assets Delinquent 1st mortgage loans, other real estate <10% of total assets < 15% of assets Non-federally insured Other Real Estate >10%, but < 20% of total assets Other Real Estate > 20% > 15%, but < 25% of assets Credit cards; Auto; STS; etc. (excluding MBLs) > 25% of assets

36 Off Balance Sheet Exposures Over the counter derivative contracts (e.g. mortgage banking derivatives) If less than one year and interest rate risk: 0% risk weight

37 Credit Union Loan and Deposit Analysis Footprint Institutions 819 Credit Unions in California, Nevada, Washington, Oregon, Idaho, Utah, Arizona, and Colorado with less than $10 billion in Assets. Peer Group 6,591 U.S. Credit Unions with less than $10 billion in Assets.

38 Total Deposits 250,000, ,000, ,000, ,000,000 50,000,000

39 Deposit Growth Rates 20% 18% 16% 14% Footprint Inst. 12% 10% 8% Nationwide Peer Group 6% 4% 2% 0%

40 Loan Growth Rates 20% 15% 10% Footprint Inst. 5% Nationwide Peer Group 0% 5% 10%

41 Loans to Deposits % 95.00% 90.00% 85.00% 80.00% Footprint Inst % 70.00% 65.00% Nationwide Peer Group 60.00% 55.00% 50.00%

42 Money Markets Accounts Surge Analysis 70,000,000 60,000,000 50,000,000 40,000,000 Actual Balance 30,000,000 20,000,000 Projected Balance 10,000,000 3/1/ /1/1999 5/1/ /1/2000 7/1/2001 2/1/2002 9/1/2002 4/1/ /1/2003 6/1/2004 1/1/2005 8/1/2005 3/1/ /1/2006 5/1/ /1/2007 7/1/2008 2/1/2009 9/1/2009 4/1/ /1/2010 6/1/2011 1/1/2012 8/1/2012 3/1/ /1/2013

43 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 Regular Shares Surge Analysis Actual Balance Projected Balance 3/1/ /1/19 5/1/ /1/20 7/1/2001 2/1/2002 9/1/2002 4/1/ /1/20 6/1/2004 1/1/2005 8/1/2005 3/1/ /1/20 5/1/ /1/20 7/1/2008 2/1/2009 9/1/2009 4/1/ /1/20 6/1/2011 1/1/2012 8/1/2012 3/1/ /1/20

44 Loan Portfolio Comparison Other Real Estate Loans/Lines of Credit 11% Footprint Institutions Total All Other Loans/Lines of Credit 8% Unsecured Credit Card Loans 6% New Vehicle Loans 10% Other Real Estate Loans/Lines of Credit 11% Nationwide Peer Group Total All Other Loans/Lines of Credit 10% Unsecured Credit Card Loans 6% New Vehicle Loans 12% 1st Mortgage Real Estate Loans/Lines of Credit 44% Used Vehicle Loans 21% 1st Mortgage Real Estate Loans/Lines of Credit 40% Used Vehicle Loans 21%

45 Return on Regulatory Equity 150% Risk Weight Fannie Mae TBA 3.5% Coupon, delivery in June Pricing as of May 28, Yield 3.10% Par coupon 3.50% 50% Risk Weight 30 Year Mortgage FNMA Yield 3.10% Service Fee 0.25% Guarantee Fee 0.50% Total Yield 3.85% 100% Risk Weight Federal Reserve Bulletin E 2 C&I as of February 1, 2014 more than 365 Days 4.90%

46 Return on Regulatory Equity Constant Balance Sheet FNMA TBA First Mortgage Loan C & I Loan Yield Assets Liabilities Return Assets Liabilities Return Assets Liabilities Return FNMA TBA 3.10% $ 100,000 $ 3,100 $ $ First Mortgage Loan 3.85% $ $ 100,000 $ 3,850 $ Member Business Loan 4.90% $ $ $ 100,000 $ 4,900 Deposits 0.66% $ 84,250 $ (556) $ 94,750 $ (625) $ 89,500 $ (591) Required Equity 12.56% $ 15,750 $ (1,978) $ 5,250 $ (659) $ 10,500 $ (1,319) $ 100,000 $ 100,000 $ 566 $ 100,000 $ 100,000 $ 2,565 $ 100,000 $ 100,000 $ 2,991 Potential Balance Sheet FNMA TBA First Mortgage Loan C & I Loan Yield Assets Liabilities Return Assets Liabilities Return Assets Liabilities Return FNMA TBA 3.10% $ 66,667 $ 2,067 $ $ First Mortgage Loan 3.85% $ $ 200,000 $ 7,700 $ Member Business Loan 4.90% $ $ $ 100,000 $ 4,900 Deposits 0.66% $ 56,167 $ (371) $ 189,500 $ (1,251) $ 89,500 $ (591) Required Equity 12.56% $ 10,500 $ (1,319) $ 10,500 $ (1,319) $ 10,500 $ (1,319) $ 66,667 $ 66,667 $ 377 $ 200,000 $ 200,000 $ 5,131 $ 100,000 $ 100,000 $ 2,991

47 Wilary Winn LLC Services and Contact Information Asset Liability Management and Private Label MBS/CMOs : Frank Wilary Mergers and Acquisitions, Fair Value Footnotes, ASC , and TDRs: Brenda Lidke Mortgage Servicing Rights and Mortgage Banking Derivatives: Eric Nokken

48 Wilary Winn LLC Wilary Winn LLC First National Bank Building 332 Minnesota Street, Suite W 1750 St. Paul, MN

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