©2015 First American Financial Corporation and/or its affiliates. All rights reserved. NYSE: FAF First American Financial Corporation makes no express

©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

First American Financial Corporation makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American Financial Corporation is a parent holding company that does business through its operating subsidiaries. First American and the eagle logo are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates.

The following presentation is for informational purposes only and is not and may not be construed as legal advice. First American Financial Corporation is not a law firm and does not offer legal services of any kind. No third party entity may rely upon anything contained herein when making legal and/or other determinations regarding title practices. You should consult with an attorney prior to embarking upon any specific course of action.

Anything But Normal is Normal

August, 2015

©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

2

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-150

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

Sale Volumes Approaching Normal?New and Existing Sales(SA)

New Home Sales Existing Home Sales RecessionsSource: NAR, US Census Bureau, Federal Reserve Bank of St. Louis, May 2015


3

3000000

3500000

4000000

4500000

5000000

5500000

6000000

6500000

7000000

7500000

Sales Activity Is Below CapacityExisting and Capacity Home Sales ('000s, SAAR)

Recessions Existing Sales Capacity Sales

Source: NAR, FRB St. Louis, First American Calculations, July, 2015


4

0

100

200

300

400

500

600

700

The Value of HomeownershipHomeowner Affordability by Tenure Choice,

(1984=100)

Existing Owner First Time Buyer

Source: Freddie Mac, Census Bureau, 2014


5

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-5

0

5

10

15

20

The Annualized Cost of HousingHousing User Cost, Year-Over-Year Change (%)

Recessions Owners Renters

Source: Freddie Mac, BLS, FHFA, April 2015


First American Economics

Perennial Millennial Renters


7

Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13-4

-3

-2

-1

0

1

2

3

4

5

6The Return of the Renter Household

Household Formation by Occupancy Type (Year-Over-Year Inventory Growth,%)

Recession Rented OwnedSource: Census Bureau, Q2 2015


8

34

36

38

40

42

44

Renting MillennialsHomeownership Rate for Households Under 35

Source: Census Bureau CPS/HVS, 2014


9

Homeownership

Income

Employment

Education

Children

Marriage

0.8

1

1.2

1.4

1.6

Baby BoomersGeneration XMillennials

Over or Under Achieving GenY

Source: Census Bureau, 2013-2014



The Burden of Enlightenment


11

1989 1992 1995 1998 2001 2004 2007 2010 20133,000

8,000

13,000

18,000

23,000

28,000

33,000

The Cost of Higher EducationMedian Education Debt by Attainment, 2013 Dollars

(thousands)

High School Diploma/GED Some College College Graduate Degree

Source: Federal Reserve Board of Governors SCF, 2013


12

1989 1992 1995 1998 2001 2004 2007 2010 201320,000

40,000

60,000

80,000

100,000

120,000

140,000

The Benefit of EducationMedian Income by Attainment, 2013 Dollars (thousands)

High School Diploma/GED Some College College Graduate Degree



13

1992 1995 1998 2001 2004 2007 2010 20136

7

8

9

10

11

12

13

14

15

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Borrow More and Pay More?Average Loan Term (Years) and Payment-to-Income

Ratio

average repayment term Mean P/I (Right Axis) Median P/I (Right Axis)



14

1992 1995 1998 2001 2004 2007 2010 20130%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Pick Your Debt PoisonAverage Monthly Payment to Income Ratios for 25-34

year old

Education Revolving Debt Vehicle




The Restraints of Equity


16

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-15

-10

-5

0

5

10

15

Housing Appreciation Necessarily CoolingHPI, Year-Over-Year Change (%, SA)

Recessions FHFA Purchase Only S&P/Case-Shiller

Source: FHFA, S&P, April 2015


17

Equity Restraint Depends on Where You LivePrice Changes from Peak (2005 to Current, %, Quarter-Over-Quarter SA)



Mortgage Credit “Price”


19

The “Price” of Mortgage Credit

• Risk Free Return- reflection of the economic risk.

• Investor Return- the return investors demand for the risk (not including prepayment and credit) as well as investor (market) confidence

• Prepayment return- required to cover mortgage “call option”. On GSE MBS- combination of investor return and prepayment risk

• Production Costs- Origination, servicing and compliance costs

• Credit Return- return required to cover mortgage “put option” and lender confidence

• Aggregate average or loan specific• GSE “g-fee”plus lender overlays

Risk Free Return

Investor Return

Production Costs

Credit Return

Prepayment Return

Mortgage Credit “Price”

Econ Risk “Price”


20

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-151.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Mortgage Credit Price Less Economic Risk PriceConventional 30Yr Fixed Rate Note Rate Less 10Yr

Treasury Yield (Monthly,%)

Recession Mortgage Spread

Source: Freddie Mac, Federal Reserve, June 2015


21

Expanding “Credit Box” Increases Credit Return Required

Low rate Credit Return(%) High rate

t0

t1

a0

a1

• All else equal, expanding credit moves the credit boundary to the right and increases the observed average.

• Therefore the average observed note rate, all else equal, increases with expanded credit.


22

Lender Confidence- Misrepresentation and Repurchase Risk



Housing Affordability


24

0

100

200

300

400

500

600

700

The Value of HomeownershipHomeowner Affordability by Tenure Choice,

(1984=100)

Existing Owner First Time Buyer

Source: Freddie Mac, Census Bureau, 2014


25

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-5

0

5

10

15

20

The Annualized User Cost of HousingHousing User Cost, Year-Over-Year Change (%)

Recessions Owners Renters

Source: Freddie Mac, BLS, FHFA, April 2015


First American’s

Office of Economic Research

FirstAm.com/Economics

@mflemingecon

Documents

©2015 First American Financial Corporation and/or its affiliates. All rights reserved. NYSE: FAF First American Financial Corporation makes no express