HUD NSP3 Accessing Credit-Permanent Mortgage Financing · that means you're also competing as you're trying to sell houses with other, either distressed sales, such as short sales

HUD NSP3 Accessing Credit-Permanent Mortgage Financing Kent Buhl: And now to introduce the panelist and the topic, here's Rob Grossinger, vice president of the National Community Foreclosure Response Initiative with Enterprise Community Partners. Welcome, Rob. Rob Grossinger: Thank you, Kent. And welcome, everyone for joining today to talk about access to credit, the myths and realities that many of you are facing out there in the community, especially the NSP1 grantees who have finished up a lot of their acquisition and rehab work and are now looking at trying to market those properties and wondering what happened to all the homebuyers. What is the current status of credit, what are processes that you can undertake to have better relationships with your lending partners is all wrapped up in this session today. I want to introduce our three panelists: Tom O'Neal from Bank of America, LaDonna Reeves from Chase Bank and Mike Dawson from Freddie Mac. Each will bring a different perspective to the discussion, but let me just say that all of them are battle tested in answering questions. All of them, especially Tom and LaDonna have been through the recent clinics that many of you may have attended around the country and there are no questions you can't ask. There is no issues they're not willing to address within the purview of their expertise. And please, remember that the goal of this is to really get down and drill down into what's going on for these two major lenders and a secondary market, Freddie Mac, with respect to the current state of the credit market for mortgage lending. I will say, the one area that none of them can address, and especially Mike, is the future of the GSEs. So you can ask the questions, I'll simply respond saying, "We have no idea." So let's just leave that off for another -- if we ever do understand the future of the GSEs Mike will be the first that wants to know and then we'll try and do something that can explain that to all of the NSP grantees that are part of our network. So with that said, let me get into setting the tone just a little bit and then we'll turn it over to our experts. And what I'm hoping for is the ball from Kent so I can actually forward the -- Kent Buhl: You've got the ball there. Rob Grossinger: I've got an ineffective ball. Kent Buhl: Okay. Let me try that, does that help? Rob Grossinger: Yes. It does. So again, we're going to examine some trends in the mortgage origination system. We'll get some myths that we keep hearing out there in the market and try and address those with realities and most importantly, for all of you on this webinar a long question and answer session to let you really vet the issues you're seeing in your market and see if LaDonna, Tom and Mike can be helpful in shedding some light on what you're seeing out there. So I have a couple slides I want to touch on for you, which are fairly -- none of these are going to rock your boat in the sense that you know all of this, but it's nice sometimes to just see it altogether. This is still a very good time to be a homebuyer. Mortgage rates still remain at very, very low rates.

HUD NSP3 Accessing Credit-Permanent Mortgage Financing

There is a huge, as you can see in the next slide, surplus of properties out on the market, which is a double-edged sword for you as NSP developers, because it's a great time for homebuyers, but that means you're also competing as you're trying to sell houses with other, either distressed sales, such as short sales or foreclosure sales outside of your NSP work or just the normal home sale market. So again, this clearly indicates it's a great time for homebuyers to get in the market, but it does indicate it has that double edge sword. We are continuing to see home prices decline in different parts of the U.S. as some of you may have read recently. The projections for continued decline in certain markets range from 2 percent to 20 percent, depending on the market that again, is a double edge sword. For homebuyers, that means prices will continue to be low, if not lower, which allows more affordability, but for NSP sellers it means there's a hesitancy on the part of buyers, because they think if they wait longer housing prices may continue to go down. So with any trend in the housing market there's always two sides to that story. Obviously, rates for lending, affordability are at both lows and highs. So mortgage rates are at all time lows, the affordability index is at an all time high, which again, gives you some sense of what's going on in the market. I think this last slide that I'm going to talk about is absolutely enlightening about the current state of mortgage lending. In 2006, it would've been sort of the height of mortgage lending, 55 percent of the loans that were sold off into the secondary market were sold off to private label owners, private label investors. Those were what all of you know as the mortgage-backed securities and collateral debt obligations that were not held by either the GSEs or Ginnie Mae, but were being held by Wall Street in some form or another, whether it was Goldman Sachs, Bear Stearns or even any of the big financial institutions that held in their trading desks, private label mortgage-backed securities. So 55 percent of the secondary market was held by the private sector. Now, the private sector is 2 percent. And Freddie Mac and Fannie Mae are 70 percent of the secondary market; Ginnie Mae is 28 percent. And for those of you that are tracking HMDA data, FHA is one of the largest -- if not, the largest -- lender right now in terms of mortgage lending. So you've seen a complete shift in who is handling this volume. And I think for us, as those interested in selling homes and revitalizing communities and getting homebuyers to come into revitalizing communities it does give us an opportunity to talk to the secondary market which is interested in policy as well as profit. And I mean, policy in a broad, broad sense. It gives us an opportunity to have those discussions. And I think for all of us in the world of NSP and not just the NSP program, but neighborhood revitalization as a whole, it does present some opportunities. But that's a very dramatic shift in the market. So what do we hear out in the market? We hear nobody will lend in declining markets. We hear that FHA is the only option and that there's no private lending going on. We hear that the PMI companies are not active at all with first time homebuyers, that lenders, such as you'll hear from LaDonna and from Tom will not originate mortgages if you as an NSP grantee create a soft

2


second program with your funds. And finally, that everything is just too complicated when there's federal money involved. I think all of those myths can be debunked today to some extent. I think your questions will help us do that as well, but it's also embedded within LaDonna and Tom's presentation. So again, I urge you to be as vocal as you can, either with typing in your questions or calling in, because this webinar is only as effective as it is in terms of bringing you the information you need and answering your questions. So I encourage you all to be active in that regard. So with that said, I think it's time to turn over to Tom O'Neal, senior vice president with Affordable Housing Programs for Bank of America. And Tom? Tom O'Neal: Thanks, Rob. I'm going to go through a brief [inaudible] here, but let me just talk about it in broad terms and what I hope to provide you today is a discussion of some of the issues that we as a lender or any lender has where we're dealing with subsidy liens, subordinate liens that are by definition a community second program, Fannie Mae terminology, [inaudible], and where we've run into some issues. And a lot of this is really related to how your lien is structured, whether it fits the guidelines of the GSEs or HUD. We ran into some issues with communication with the lender. And if you're using your subsidy as a reduced purchase price where it's not hard money for down payment or closing costs, but rather you're subsidizing the purchase price of the property. And then simply, some of the nuances of lending where rehab is involved and that's where we've also run into some issues. So moving to my first slide, I'm going to talk about an overview of secondary financing. I'll try to keep it as specific as I can with neighborhood stabilization, but really, it crosses over into almost any form of soft second through a housing agency or nonprofit. If an NSP program is structured for lenders to originate a first mortgage with a concurrent close of the agency's second, we have specific responsibilities that we need to follow within the bank here. Of course, we're looking to ensure that our first mortgages are eligible for sale in the secondary market. So we need to follow closely things regarding FHA guidance. For consistency in terminology you'll hear me use the term "community second," but in reference to our [inaudible] from Freddie, at Freddie, they will look at them as "affordable seconds." Either way, we're referring to the soft seconds from the housing agencies or nonprofits. Nationwide, Bank of America has approved over 1,800 of these programs for use in conjunction with one of our first mortgages, 170 of these have been done in conjunction with NSP money. So we're very active with our review of the programs that are out there today. Now again, there are some issues and that's the purpose of this discussion, but absolutely, we want to be involved with you on your NSP funding and how you structure your programs. Any of these programs, however, just are [inaudible] secondary market guidelines, and that's something that I'll try to touch on as we go through this.

3


On the conventional side -- and just to give some basics -- the combined loan to buy is 105 percent or to a level that covers all of the eligible costs on an FHA loan. The subsidy provider generally places their own restrictions on borrow eligibility. The lender is not concerned with those restrictions, even though you're bound to certain eligibility requirements with the NSP program itself, but if there are other restrictions placed that's up to the agency and second loan provider. Common restrictions are income limits, purchase price, first-time buyer -- which isn't applicable here -- but in almost all cases there are restrictions. The community second programs or affordable seconds can be structured in many different ways from our perspective. They can have zero interest or a very low interest rate; they could have shared appreciation in lieu of interest. The payment can be deferred for the first several years or no payment at all for the entire term of the loan. The loan becomes due upon sale of the property or change in occupancy or they could be forgiven over time, either partially or fully. Agency guidelines on the conventional side, I won't go through all these, but some of the key requirements of Fannie, Freddie and HUD are outlined here when you create your second lien and the terms of the second lien. Recently, I was involved in a discussion with one NSP recipient about the structure of their program and the comment they made was that it's not their requirement or not their responsibility to ensure that they structure -- you know, the reason we were meeting was because Bank of America couldn't work with their program and it's simply because they didn't structure it in a way that a lender like us or most lenders could work with their programs. So I would strongly encourage that both you and/or your legal counsel that develops your lien documents become well aware of what the agency guidelines are for a soft second or subordinate loan. FHA guidelines are outlined here as well. It is a little bit more pointed. They require that the lien be in the name of the subsidy provider. So whoever the recipient is, the lien documents for the second lien have to be in that name. You cannot put the lien in the name of a nonprofit if you are working with a nonprofit that's administering the program unless that nonprofit is an instrumentality of government; so in other words, it's created or overseen by the housing agency. If the subordinate lien has resale restrictions that are imposed on the borrower -- and virtually all of the NSPs that I've come across do have lien restrictions -- those restrictions under FHA requirements must terminate the available foreclosure or deed in lieu, and that language has to be very specific. We've come across quite a few programs where that is not the case and that makes it ineligible for the first mortgage that's insured by FHA. And VA is the most lenient. They basically require that the lenders simply confirm that the veteran benefits in the program and although they don't have specific approval requirements if the program is provided through a government entity we just need to warrant that the benefits have the veteran benefits in the program. Just as an overview, whether it's Bank of America or another lender, we're going to want to review that subsidy for assurance against the guidelines that I mentioned previously under Fannie, Freddie or HUD. To do that, we would like a program description with the outline of the

4


eligibility, what the problems are, the income, purchase price limits in writing and maximum assistance, the financial terms of the subsidy and so forth, contact information for who we need to reach out to should we have questions or to coordinate a closing and then copies of the legal documents and if you need a trust in mortgage. Some NSP recipients in creating their program require the lender to execute a participation agreement with them. At Bank of America we're not opposed to that, though I have come across circumstances where some of the reps and warrants we're being asked to make are simply not workable for us. So I will also take care with that and make sure you're communicating with your lenders. Some of the common questions that come up and what are some of the causes for a community second on NSP is to be declined. Again, sometimes it just boils down to the structure of the program, whether it meets the agency guidelines. For example, there could be shared appreciation, but it might exceed what HUD or Fannie or Freddie would allow. As I mentioned, a participation agreement may have some provisions that the first mortgage lender can't, whether they want to or not, simply can't rep and warrant to [inaudible] funding of the concurrent loans that's incompatible with our systems. A good point, and then the last bullet point's on rehab. That's where we run into an awful lot of our problems with NSP. We've seen some programs structured where the NSP recipient wants to be very much involved in the disbursement of the funds for rehab once the property is acquired. So it'll be purchased in its current condition and then rehabbed, which forces the first mortgage lender into a rehab first mortgage, such as an FHA two- or three-pay. That can pose obstacles. Some lenders don't offer a two- or three-pay program. For those that do, we have seen where there's just a lack of understanding of what we could work with when it comes to the control of the escrow. Bank of America's position on this is that our understanding of HUD guidelines is that the escrow has to be administered by the first mortgage lender. So we caution you when it comes to oversight of the repair work that's needed to make sure that you're communicating with your first mortgage lender, and it's understood how that needs to be done. Can the agency fund the rehab and complete the disbursement fee? It depends on the extent of the rehab and when it will be completed. Obviously, if you're getting into health and safety issues, that's going to have to be completed prior to the close of the first mortgage, or again, the first mortgage lender must use the rehab products, such as two- or three-pay. And again, as I mentioned, we must administer these before we have disbursement. You can even put the funds into an account and allow the lender to manage the rehab. That will be very lender-specific. There are system complications that make that difficult for some lenders. Some lenders that fund, say, a two- or three-pay loan and only seek funds from the NSP recipients as a positive into their escrow as they service that rehab account, once again, if they're having questions about that disbursement process, if there's rehab, that will keep them postponing, it seems to me that they would put the lender [inaudible]. If the agency does not own the property, they can certainly manage the completion of non-health and safety issues, such as carpet, painting, landscape and so forth first, and then work can be

5


done after closing. So if it's really minor work not impacting health and safety and that you want to include some of this with the property and use some of the funds, that will work. Again, just into health and safety being a requirement being completed prior to close, it's likely the contractor will need to agree to be paid until close of escrow. It may be that you will need to record the second mortgage concurrently with the first closing. The amount of the second may include funds disbursed to contractors as well as down payment and closing costs. Some of the solutions that we've seen that seem to work best, and first of all, when you're heading into the situation where you have rehab, or you want to incorporate your subsidy to include rehab, allow the first mortgage lender to have a rehab power to build it into their loan. That's really the easiest way for the first mortgage lender to do so. Use the NSP money, but as opposed to using it for rehab, use it simply as a buy-down to the down payment requirement. So fund the larger down payments up front, disburse it for that, lower the first mortgage on the house and then let the lender set aside the funds that are required for rehab. Of course, you can always fund down payment and closing funds systems, and that's the cleanest way that we've participated so far with many of the NSP recipients. And that's it. I don't know, Rob, if you want to hold questions until the end. Rob Grossinger: Yeah. I think we will. Thanks very much, Tom. I would like to stress for everyone a couple things. We just eliminated four of the five myths on your sheet listening to Tom's presentation. Clearly, Bank of America -- and I know you'll hear from LaDonna in a minute -- but Chase, and for those of you that were at the clinics, you heard this also from Wells, they are lending. They are approving programs in NSP communities, which many of them are thought of as declining markets. They clearly are not FHA. So that means that FHA is not the only option available for permanent fixed-rate mortgages. Clearly, they are originating mortgages with public soft seconds, and it may be complicated, and it may be not, but it's being done. So it's not too complicated. I think I want to stress for everyone on the call that Chase, Wells, Bank of America, Fannie Mae and Freddie Mac all participated in the five clinics that HUD held, all at their own expense. All gave up a couple days of their time to come to those clinics for all of you, to help all of you better understand how to access mortgage lending, how to access them for help for mortgage lending. So if they're that committed to be able to spend their time with all of us, I really want to stress for all of you to call them as you begin to use soft second programs or any type of down payment program. Whether it's an existing program that you're already running using HOME or CDBG or some other pot of money or a new NSP program, the folks that you're hearing from, Tom and his boss, Dottie Sheffick [ph], at Bank of America, and LaDonna and her boss, Denise Smith [ph], at Chase, and the people that are participating from Wells-Fargo are really there to help. Call them. Work through these issues ahead of time so that you're not coming into something where all of a sudden, you realize that there's an out-of-compliance piece to your program, and nobody can lend, not because they don't want to, but because there's no secondary market for them to sell the mortgage to.

6


So their numbers are all on this webinar. Their numbers were all handed out at the clinic. They really do want to hear from you, and it's much better for them, and it's much better for you to address these issues up front or even during your process than at closing or near closing, when you realize you have a problem. So thanks again, Tom. I'd like to turn it back over to LaDonna Reeves with multicultural, affordable lending at Chase Bank. And LaDonna has participated in the clinics, and now we get to have her here on this webinar. LaDonna Reeves: Thanks, Rob. Good afternoon, everyone, and I really appreciate you guys taking the time to log in. I really think this is very critical, informative information that we're giving today. So before I even start my part of the presentation, the first thing I want to say is ditto to everything my colleague Tom from Bank of America just spent his time talking about. It's very critical that everybody understands that a lot of us, specifically your Bank of America, Chase, Wells, we're all in the same boat when it's trying to make sure that as we structure financing for our borrowers and our customers and your constituents, that these things are prevented and structured so that they can be layered onto loans. I think you're going to find, guys, that when it comes to things like this, we are all playing very well in the sandbox together. So again, ditto to everything Tom said around how we're looking for that language, what are certain things that become challenges and stumbling blocks. So please do, as Rob reiterated, reach out to all of us if you're just developing an NSP [inaudible] or anything like that. We are more than willing to get our experts from any of the lenders that you want to work with to sit down and actually look at how you're structuring, look at the language, let you know what are challenges for us and what are things that we can do. So that being said, once we do get past those challenges around how the seconds are structured, what is the language in them, can we layer them onto various products, we've still got to address other challenges in the market. And so I just wanted to talk to you briefly about what some of those things were, because they're challenges for you as you work with your constituents, and they're also challenges for us as we try to work with your borrowers. So first of all, there's generally three challenges that we're going to face, credit, because we know we've got FHA, but we know there's some tightening in the market. A lot of people have got to come up with more money down, larger down payments. More have got to come from their own funds. And then also, property conditions. So as we look at those things, what is the first challenge? Credit score challenges. Most banks, Chase included, often put overlays on their credit score threshold. So for Chase, for instance, it's 620. So how do we address working with a nonprofit and our other partners around getting those credit scores up to levels that are acceptable from a mortgage financing standpoint? One, we've worked very closely with all of you guys who are consumer credit counseling agencies, who provide budget and credit counseling to their constituents so that they can understand what those thresholds are and really help their constituents address how they need to get to a level that is financeable or ready to be financeable. So I know you guys do budget training and things like that. I know that my partner Bank of America, we, as well as Wells, all support Neighbor Works Training Institute, where you can send your counselors so that they understand how to do things to help support this issue, classes

7


such as maximizing credit. So we do things like that to kind of support you guys to help you work with people to improve credit scores. The next biggest challenge we face is down payment and asset challenges. Now that we know with the current markets and with some other things, MI companies don't go as high as they used to from a loan and value standpoint in terms of issuing MI certs. And when they do, even with community seconds and secondary financing from NSPs and things like that and other grants, we often do need higher credit scores. So again, we talk about how we address the higher credit score issue. But the other things we do is we look for funding, such as DEH programs or employer workforce housing initiatives. We work with our bond and HFAs across the country that offer down payment assistance programs. We work with nonprofits who are managing these second community mortgage products that help us help borrowers bridge that gap. So again, this is great, because, because you guys are working with NSP funds, the counseling is required. It's going to be really critical that we work together as partners to make sure that A, people are aware of the resources that are out there and available for them. So we are working with the counseling agencies, and that we work internally to make sure that our staff is trained and able and ready so that when a borrower walks in, and they want to work with a Chase or a Bank of America or a Wells, that originator has the ability to say to that borrower, "You know what? It looks like you qualify for X." We can make that referral to our nonprofit partner. Property condition challenges. One, we know not all banks offer rehabilitation product, but when we do, we know that that can be a stressful transaction for a lot of first-time homebuyers. So where you guys really have a niche is that most NSP programs are being used to actually rehab those properties and get them ready for resale. So then that kind of takes that stress off the borrower and gives the borrower a property that we know has been really done well. A consumer can be able to walk into that and be assured that it's been done in a quality way so that when that person gets in their home, there should be no surprises, no financial stress around something breaking down or going wrong. So we do look for opportunities to work with nonprofits who do quality rehabilitation before they sell those homes, who help enhance all their constituents during that process. And then finally, we try, all of the banks, to offer affordable products. Obviously, FHA and VA are great. Why? One, they already require a lower down payment. Two, they give us some flexibility around the types of down payment that are available, from gifts and other assets, specifically community seconds and other types of grant programs. Chase has Dream Maker, but Wells and Bank of America, some of our other partners also have their own in-house products that they make available for first-time homebuyers or low or moderate-income buyers. We work with Fannie and Freddie. We do the My Community and Home Possible. And then we also work with our state bond programs, which again, offer a plethora of these other products overlaid with the down payment assistance that they offer through their bond programs with a very affordable rate.

8


So we look to try to get as many programs as we can to make available to make financing available to those specific markets. And then, Tom went through the things, these are the things that we would need to actually get a down payment assistance program approved. Tom went through it. So I'm not going to read it to you guys, but if you do, again, if you're not sure what you need, just please reach out to your partner at Bank of America, at Chase, at Wells and just talk to us about what those documents are that we require, who we need to give them to so that those grants can be approved for use and that financial institution. And then, again, detail program challenges. Tom talked about that. He actually went into even more detail, but again, we do. We look for language that usually does something around inclusionary loaning or resale restrictions, and those are the things that tend to be the issues that we try to work with and resolve with you. So if you're on the call, you can always reach out to me. My information, cell phone and e-mail are out there in the deck that Rob and those guys are providing. I'm also, as well, listed at my peers who exist across the country. So if you want to reach out to one of them, because they're serving your market directly, do feel free to reach out to them, as well. Rob Grossinger: Thanks, LaDonna. Thank you very much. Before we turn it over to Mike, I wanted to just stress one thing that LaDonna said, and for all of you, I've heard from a number of NSP grantees that when they finished some of their homes and went their homebuyer list that was given to them by their homebuyer counseling partners, and there might be 50 people on the waiting list for them to talk to, one of them qualified, or two of them qualified. One of the things that the financial institutions on the call today and others are always willing to do, and that's part of what LaDonna's shop and Tom's shop do, is to create partnerships with home buying counseling groups out there so that they are better equipped, those counseling organizations, to adjust to the new credit environment so that they understand better how to prequalify people in a way that's consistent with the current credit market. I mean, there's no question. I think one of the initial questions that was asked quite a while ago was, "Well, has [inaudible] came out? So what is the new environment? How do the home buying counselors that you so desperately need to work with supervise you with homebuyers, how are they in synch with the lenders?" Lenders will help you do that. They reach out all the time to homebuyer counseling groups. They provide straight-up training to them. In many cases, they're supported with grant funds by the lenders. So please, think about if you're finding a very large non-qualification rate from the homebuyer counseling groups that you're working with, encourage them, if you lead them by the hand, to partner up with some of those large financial institutions who can do the type of training to get them to where their prequalification process is consistent with today's credit environment. So I'd like to now turn it over to Mike Dawson, who is from Freddie Mac. He's the vice president of single-family affordable lending and deal and contract management. He wins the prize for having the longest title of anyone on the webinar. Mike?

9


Mike Dawson: Thanks, Rob. I'll be looking forward to collecting that prize pretty soon. But welcome, everyone, and thanks for the opportunity this afternoon or this morning, depending where you are, to give you an overview of what he have going on at Freddie Mac. And as you all recall, that Freddie Mac does not lend directly. We work with Chase and B of A and others to establish what we hope to be consistent programs and provide liquidity and stability in the mortgage markets. And so again, we provide a number of resources on our website and through the various colleagues that we have across affordable lending and other areas in the company to make sure, again, we provide the information and tools necessary to allow us to provide one of our mandated missions here at Freddie Mac. So as you can see, just a quick overview of some of our activities in the markets over the last couple of years, so since 2009, we have funded over $850 billion of mortgage loans in the nation, serving about 4 million borrowers. And roughly 45 percent of those purchases over the last couple of years have been to low- and moderate-income buyers. So again, our programs, while broad and in a lot of cases specific to in affordable lending community have been and have touched kind of all segments of the United States housing market. And as we saw kind of in the myth number one that Rob has spoken to, do we lend in declining markets? We have been lending in all markets. And by the numbers you see here, I think that's proof positive that has been the case. Well, certainly, the credit guidelines have changed over time, and appropriately so. We are still very active in this space. And what has been kind of dominant in the market over this time, too, is that the recent [inaudible] activity has allowed about 3 million families to refinance their existing mortgages, saving roughly $6 billion in interest payments. Included in that number, too, whether it be both purchase or refinance or primarily in the purchase markets, you see they finance about 270,000, and probably shy of that, first-time homebuyers. And we'll talk, too, about some of the products in more detail here in a minute, but we do provide avenues and opportunities in that space. And in 2010 alone, we funded approximately 390,000 low-income borrower mortgages. And we've defined those kind of at or below the 80 percent of the median area income. And again, this is a nationwide type of figure. The one thing, we also support, and again, this is an activity jointly with Fannie Mae, we are supporting the U.S. Treasury's Housing Finance Initiative. This initiative was created back at the end of 2009, and U.S. Treasury set aside roughly $11.7 billion for single-family borrowers through the housing finance agencies, again, both state and local, to allow them to originate mortgages and for Freddie Mac and Fannie Mae to purchase those mortgages with the primary goal of unlocking and stabilizing the housing finance agency origination processes. As you recall, back in 2007, 2008, that market essentially locked up. The primary activity of housing finance agencies in providing funding to borrowers was through the bond markets. And the mechanisms that they were using at that time, they ran into a bit of a liquidity issue, and by providing not only the cash to originate new mortgages, we provided liquidity and credit support to existing bonds on the market. So again, both Freddie and Fannie

10


jointly administer this program. Approximately $3.2 billion of those moneys have been used through 2010, so that about $8 billion remains to be allocated, actually to be used in that origination process. And the way the rate-setting process has been worked out with the U.S. Treasury, the housing finance agencies are going to have somewhat of a competitive 2011. We are in the process of providing an update to this program. We should have something available mid-March to late March here that'll reaffirm, basically, and show where we've done with the program to date and what needs to be done to work through the remaining allocations, as it were, through the end of the year. So the point being here is that there is a fairly ample supply of cash that's already been set aside for the housing finance agencies and available for first-time homebuyers and available for, obviously, permanent financing for the communities out there. So moving to kind of the Freddie Mac affordable offerings, and at the high level, the 30-year fixed-rate mortgage, as many of you know, is the hallmark and cornerstone of the U.S. market. And over the years, the trading of 30-year fixed-rate mortgages in the form of a securitized product, in this case, the Freddie Mac Gold PC, is probably if not the second most liquid securities in the form on NDS in the market. And our approach of broad-based, consistent products in the market allow for funding better interest rates in this product, because there is an exit through the securitization markets that's traded globally. And this is a key theme I want to keep putting out there is that we look to consistency in our origination or actually purchase practices to ensure that the liquidity and the pricing characteristics of the mortgages themselves that go into the securities remain, again, as the most -- well, I'm searching for a word here. As providing the most liquid type of execution available. And so we guard the 30-year mortgage, guard the securitization markets very closely to ensure there's always the best execution possible there. The specific programs around affordable offerings, we have the Home Possible product, which I'll delve into here shortly, along with affordable seconds and down payment assistance programs and guidance around those that would fit into some of our purchase programs. And again, all of these materials with the marketing material-specific product information is available on freddiemac.com in the single-family tab on the homepage there. As I mentioned, on the next slide here, the Home Possible offering, minimum-responsible, low-down payment mortgage option for first-time homebuyers and low- and moderate-income buyers. It tends to fit the borrower profile, again, of the first-time home borrower, families in underserved areas, new immigrants in very low- and low- to moderate-income borrowers. Now, recognizing, of course, that I guess what you would say, FHA is the best execution at this time, given some of the down payment features that they have relative to some of our offerings, but again, our desire here is just to make sure everybody is aware of other permanent financing options and the programs and availability of those programs and the literature around those programs that we make available. The key features, I think many of you have seen this before. Again, there's fixed-rate products. There is arm-based based products, those 51 and 71-type products within there. There are

11


manufactured homes eligibility within there, of course, but with certain limitations within there, and there's maximum TLCZ and LTZ requirements in there. So it would always be the benefits to the borrower is that, particularly with a fixed-rate product, you know what the monthly payment is. That is not going to change in a fixed-rate mortgage product that's offered within here. [inaudible] closing costs and funding options within there, and there, of course, are some limitations, one of those being the no-cash-out refinancing. And again, on the Home Possible, we do have a lot more detail on the website that provides other benefits and potential restrictions within there. So I would encourage you to take a look at those, also. On our affordable second program, while we won't buy the second, we do provide guidance on what we would allow in purchasing the underlying mortgage share. And you know, again, the borrower profile would interest those who would use the program like this. Who would need them? The borrower who would need some type of flexibility on the secondary financing, would then, potentially a low- to moderate-income borrower. It is available through our automated underwriting system. There is allowance for multiple affordable seconds, but of course, with some limitations or limitations around proto-LTZ and LTZ characteristics within there. And again, it sets the framework that will allow some flexibility on secondary or second-sale financing to provide down payment assistance and other assistance within that category. The last item here is that the combination of down payment and closing cost assistance, we do provide sources of information on our website that gives you some idea of other options out there that would be allowable in some of our first mortgage purchase programs. And we do have a wealth of resources out there. They're not only for Freddie Mac resources but point you in the direction of some other thoughts around closing costs and down payment assistance. So the other category -- I shouldn't say "category." The other thing that Freddie Mac has been involved in and providing information on and has been active in many communities is the purchase market. Obviously, the markets still remain to be very fragile here, and what we want to do, again, ensure that there is broad-based knowledge and broad-based opportunity for first-time homebuyers and other purchasers in the market, primarily in the form of information. And as I mentioned earlier, primarily in the form of linking opportunities that Freddie Mac is involved in, such as the HFA initiative, to ensure those that are eligible borrowers can provide the financing opportunities out there. And again, while Freddie Mac does provide financing in those cases, we are involved in other activities that support other types of permanent financing. So we continue to be active in that space. And the last slide here on purchase market financing, it just gives you a look at some of the available material out on our website. But again, thank you for your time today, and I look forward to any questions or thoughts you may have. And again, I am Mike Dawson, and I think my contact information is available in these slides back here. But thank you very much. Rob Grossinger: Thank you, Mike, and thanks to all of our presenters. I'd like to just re-emphasize one thing, Mike, that for those of you that don't have very close relationships with your state housing finance authorities or have not worked with them on single-family financing, they are a source, again, for financing, especially in mortgage lending in this regard. And as

12


Mike said, they were in effect shut down when the bond market collapsed for a couple years, but they now have a source of financing from the GSEs. They have stepped up and started to take more activity under their wing in this area, and don't just think of them as multi-family rental housing financers or low-income housing tax credit allocators. They are a source for you to talk about. Especially where you're seeing issues of the lack of liquidity for certain neighborhoods or certain activities, go have some conversations with them. They're a great resource to talk about this issue. And we're going to go into the question-and-answer session. What I'd like to do is kick it off with one question and then turn it to over to Kent to moderate everybody else's questions. But the question I have, and for lack of a more sophisticated way of saying it, appraisals are driving everybody nuts. So, LaDonna, Tom, Mike, what is going on? From your standpoint, what do you see as issues with respect to appraisals? And let's start with LaDonna, just to put it in order. But I'd like to hear from each one of you. LaDonna Reeves: Well, if I'm going to put the appraisal issue, I think, into context of what we're talking about today, I think it's just around making sure that the appraisers that we work with understand layered financing themselves. Chase has done some real outreach and training through some of our partners in terms of their appraisers that we work with just around making sure they themselves even understand how -- because these contracts can get very detailed, very convoluted. So when they go in, and they come up to these affordable developments and things, are they're seeing net purchase prices at [inaudible], and they're seeing the market level at that, and trying to get them to understand, "Okay. You can't go with the net purchase price," if they actually are using this grant, and it's going to be recorded as a lien. So now it's blowing the CLTV out of the water. So also, when appraisers are coming out, guys, and they are coming into developments, they're coming in for their appointment to do the inspection on the property, make sure when -- you know, we're giving them a copy of the sales contract. As lenders, loan officers cannot talk to appraisers. We are now regulated. We can't have those conversations. We can't talk to them. You can't. When they're coming out, make sure you're clear, "Here is our development." This is how it works. This is our NSP grant that we're using. This has to be recorded as a lien. This purchase price is really us, and then the net, they're using this as down payment. You've got to have that comfortable conversation, and that's why I said it really starts up-front, working with the bank around how this is really going to look for your borrower when they come in and apply for a loan based on how this grant is structured, so that you actually have the knowledge and savvy when that appraiser comes and inspects that property to say, "Yeah. No. This is our grant. This is how it works. This is a recordable lien. You know, so we'll lead the purchase prices up, and that's at the market level. And this is going to get up here." You need to be able to have that conversation very confidently. So hopefully, I kind of answered your question, Rob.

13


Rob Grossinger: You started. Let's see what Tom has to say. Tom O'Neal: Well, first of all, I agree with LaDonna, and the only thing I would add is one of the things that -- probably a couple areas that have been the most problematic from an appraisal standpoint. With the appraisers wrapping arms around subsidized sale prices and resale restrictions, there's growling out there now, at least from the conventional five, that states that appraisers are to comment and appraise one way when the resale restrictions terminate, and another way when the resale restriction survivie foreclure. That has been a big problem for appraisers who often aren't aware that the restriction even exists. Our purchase prices through NSP is that the appraisers are challenged to find something comparable in the Marvel. And some of the subsidies have been huge. Like I said with the guy we saw, he paid a sales price of $90,000 on a property that had been in the market of $200,000-dollar homes, and the appraiser really struggled with coming up with comps to fit. So it's really been an education in the office for appraisers, as well, and how they need to look at these properties. I would always ask the appraiser to give me both a subsidized and nonsubsidized value of the property so we could work with that, but there's just literally a degree of confusion as to how they assess those properties. Rob Grossinger: Mike, anything to add? Mike Dawson: No. I think LaDonna and Thomas stated it well. I mean, by charter, Freddie Mac cannot purchase any loan that has greater than 80 percent loan-to-value without some form of credit enhancement, whether it be structured or mortgage insurance. So appraisers are obviously near and dear to all of our hearts here. But we do recognize the challenges, particularly in rural markets around appraisals. So as we work closely with Tom and LaDonna and others to ensure we've got the right practices around policies and procedures around it to take into account various markets and various challenges within there. We hope to work with them and others to kind of fit those challenges into our purchase programs. Rob Grossinger: So would it be safe to say, Tom and LaDonna, that if an NSP grantee were to contact you as they were getting their program underway, you could help them with the dialogue they would need to have with the appraiser to get the appraiser as educated as possible before the appraiser goes out and looks at the property? Is that something that you help your partners with? Tom O'Neal: Yes. And we also try to instruct all of our originators to get very much involved in that up front so that the required information is given to the appraiser right when the order is placed. So there's no delays, and their requests to re-assess the property once additional information is known. LaDonna Reeves: Correct. Correct to what Tom just said, Rob. Rob Grossinger: Great, great, great. Kent, can I turn this back to you to moderate Q&A?

14


Kent Buhl: Surely. And well, we've got a number of questions lined up. So Brian Watkins [ph] has been standing by very patiently. He's got a couple questions, one about combined loan value and another about mortgage insurance. Where are you calling from, Brian? Q: Thank you guys so much. I'm calling from Detroit, Michigan City of Detroit Planning and Development Department, and I've heard a lot of valuable information in seeing each way [inaudible] involved in NSP 1, 2 and 3, or as it stands free in the work. But the biggest question I'd like to ask you is I just got two or three questions, but the biggest one is the underpaid MI. Number one, is it a thing of the past? And are there new programs for an underpaid MI that code this with NSP-funded notes? And to piggyback on that, I guess the LTV thing is things which are appropriate with respect to the coupling of these funds. As with FHA, the 105 percent, is that 105, you said, beyond the FHA max, or what would that practically represent? From my [inaudible] view, that would probably two separate questions, if I can frame them in that way. Tom O'Neal: This is Tom. The question again on the 105 percent, could you repeat that? Q: Yeah. With respect to the 105 percent LTV, can the [inaudible] CLTV go beyond the FHA max, in this case the maximum the FHA financed amount in the state of Michigan? Tom O'Neal: You know, the 105 percent that I referenced in my presentation was the ceiling on a conventional loan. FHA words their requirement a little differently. Basically, some photo of your liens cannot exceed the acquisition cost of the property. But whether it's rehab work through a government agency that is part of the liens, the amount of cost -- the total amount of those liens or total amount of acquisition costs can exceed the appraised value. And there is no cap. We've done a fair amount of work with different housing agencies where technically, we had a CLTV of over 150, 160 percent, and it really was a situation where the amount of rehab work wasn't realized in the value of the property, at least initially. So FHA is a little different. There can be no cash back to the borrower, but so long as rehab is involved, some of the liens can exceed 100 percent of the acquisition cost and can definitely exceed the value of the property. Q: Thank you. Rob Grossinger: Could you repeat the first part of your question, because this is Rob, and I'm not sure I exactly understood what you were asking about the first part. I thought you said PMI, but I wasn't sure. Q: Yeah. The question about lender-paid PMI or MIP, which was appropriate some years ago, 2005, 2006 on conventional notes. If the lender pays mortgage insurance is a thing of the past, and if it's not, are there any lender-paid MI programs that coexist with NSP-funded notes? Tom O'Neal: Yeah. From Bank of America's perspective, I'm not real close to that, but I believe we have discontinued our lender-paid MI program. LaDonna Reeves: And currently at Chase, we have no lender-paid MI options on those products that are eligible, where we can structure the community second on them, which are those affordable products. We don't have lender-paid MI options on those currently.

15


Rob Grossinger: Could you guys briefly talk about your view of what's happening in the private mortgage insurance world? LaDonna Reeves: And you know, Rob, before anybody addresses that, I'm sorry, Kent. I feel bad. People have asked me questions, but for some reason, my chat feature for me to respond isn't turned on. So if there is someone who has a specific question, Chase question, if you want to e-mail me after the presentation, that's fine. I don't want people to think I was ignoring them. Okay. So I'm sorry, Rob. Now go ahead and repeat your question. Rob Grossinger: Well, at least you'll answer mine. From a PMI perspective, private mortgage insurance, the environment, how do you all see it right now playing out? I mean specifically for the distressed markets that a number of our NSP grantees are working in. What's the environment from your viewpoint? LaDonna Reeves: Well, I was going to say from Chase's viewpoint, and I would think Tom might see it the same, we have less declining markets than we had before. So I see that as getting better. I think they're starting to look at different programs differently, specifically on those affordable products that are tied to a housing finance agency bond loan. So I think it's coming slowly, but it's definitely not, I think, the knee jerk all the way to the right pendulum swing we had in the beginning. It's starting to swing back towards the middle, not probably as quickly as I think probably all of us on the phone would be like, woo. But it is not as drastic as it was initially. Tom, do you see that, as well? Tom O'Neal: Yes. I agree with that. You know, obviously, the credit scoring is still problematic. They have overlays that are the most stringent. But they are, again, looking at programs that have less cash into it. We're seeing some MI companies actually reaching out to state housing agencies and, again, some programs with the state housing agencies to be used in conjunction with bond programs, which all have but stopped at a certain point in time. But we are seeing still a tremendous amount of conservatism and heavy audits on the very back end, where there are issues with delinquencies and defaults, and every one of those cases are getting heavily scrutinized by the MI companies. But on the front end, it seems to, as LaDonna says, it's not where it was, but it has come back some. I think as everyone's getting a little bit better at understanding the tricks and the causes of default, and we're just all getting a little more scientific about it. And I think the MI companies have, as well, and so we're seeing some cases, they are loosening some of those, what LaDonna called a knee jerk reaction, but it's still a long way to go. I mean, there's no two ways about it, that it is difficult to get high-LTV conventional financing today. Rob Grossinger: Tom, could you just, for purposes of education, the declining markets is a term of ours in the industry. Could you just say what that is? Because there's actually, I know, something that you and LaDonna see every day, which is a defined set of markets that are viewed as declining. What does that mean to you?

16


Tom O'Neal: Sure. Well, first of all, there's no market in the country that any lender can't lend in. A declining market would be a market where big performance within that market, just the delinquencies history, the entire demographics of a particular market, property valuation that's happening with it, there's a greater conservatism in terms of the underlying guidelines that have to be applied. The most typical will be a larger cash investment on the part of the borrower, a lower loan to buyer, if you will. So where you might be able to lend 97 percent in one market, you may be limited to 95 in another market that is sort of designated as a declining market, simply because of what the property values in that market have done. Rob Grossinger: Thanks. Kent? Kent Buhl: Yeah. Let's go to Nancy, Nancy Baker [ph]. Where are you calling from? Q: Hi. I'm calling from Michigan State Housing Development Authority. And my question is for both LaDonna and Tom. I am wondering how you're communicating your willingness to do these types of loans to your front line, loan originating staff. I meet with many of them in western Michigan, and either they don't seem quite aware of the product. Perhaps it's just government program, but I don't know. But how are you communicating to them that they can, indeed, do these as a loan? Tom O'Neal: So I'll talk to that first and then LaDonna give a perspective from Chase. But at Bank of America, we have our guidelines that are published to all of our sales and affiliate locations, [inaudible] locations, that instruct them as to how we view community second programs, soft second programs, how those programs will review. We maintain a database that is accessible by all Bank of America associates that shows the specific programs we've approved for their use. Most of them that are active in affordable housing markets and with affordable housing products are very well aware of my team. They work very closely with them. We've done training sessions, of course, with the bond programs. We're very active in training in Michigan and all the other state agency programs, but certainly in terms of use of the portable housing programs or soft second, there is information out there if they are willing and able to look into it. Unfortunately, as does Chase, we've got a very, very large sales force, and even within the same office, you'll find one loan officer that's totally aware of what's at their fingertips, and another loan officer that simply isn't. So it's a matter of just reaching a little more deeply into what's available to them. Q: I really appreciate the two of you being on the call today, because boy, I'll be namedropping like crazy. LaDonna Reeves: And I was just going to say, this is LaDonna from Chase; that is what you should do. If in fact, you're going into an office, and you're finding that they are unaware of a product or program that's available, please give me a call. So similar to Tom at Bank of America, one, myself as a business development manager for Chase and the other peers that I had in my part of the presentation, it is our job to train both our sales and our operations staff on these programs and products that are available for us.

17


Just like Bank of America, we actually have as part of our online home lending guide, a specific, affordable housing program, Share Point Drive, which goes through the parameters of any of the bond programs we're currently working with, any of the down payment assistance programs that we're approved as working with. And it step-by-step goes through them and shows the loan officer, these are the products that you can structure this program with. Here's the benefits that are available to the borrower. We attach the guidelines as something they can review and upload. So you know, if you're going, and you're finding that that is the feedback that you're getting, as Tom said, we've got thousands of loan officers. Please give us a call. Let me know who that loan officer was, and we can certainly reach out to both him and his lending manager and explain to them, you're missing something here, because we do this training, we've had this training. So please do that. Q: I appreciate it and thank you so very much, and I guess I'll be one of your adjunct trainings later. So thank you so much for joining the call. Kent Buhl: Thanks, Nancy, for the question. Q: Mm-hmm. Kent Buhl: And who's next? It looks like Travis, Travis Brown [ph]. Are you there? Hello, Travis. Maybe we'll come back to Travis. And let's try Leonard. Leonard, are you there? Q: Yes. I am. Kent Buhl: Very good. Where are you calling from, and what's your question? Q: And the question about is the loan to value. We found that our members, when they are going to sell, the liens that are placed on the property, or the mortgage that's placed on or the second mortgage or third mortgage that's placed on these properties from the grant sources, from the NSP grants, from the state homes funds if it's layered financing, the lenders are counting the first mortgage and counting each of the second or third, which are mortgages just placed to secure the conditions of the grant sources for a period of years which goes away after 30, like everything else. But it sets the amount that they have to repay goes down if they sell, and there are no payments. But all of them are added together, and all of them added together with the first make a loan to value that is sometimes 150 percent of the appraised value. Those are being rejected because of loan to value.

18


Tom O'Neal: Okay. Yeah. And that's the situation I was trying to refer to earlier. As a lender, we are required to include those secondary liens in the loan to value calculation, because they aren't grants. They are loans, and while they have a forgiveness provision, or there's no payment required, some borrowers sell prior to the end of their affordability period, or should they vacate the property and rent it out or a number of provisions in those loans that are considered event of default, and in which case, they owe the money, or at least a portion of it. And for that reason, we have to account for them in the loan to value calculation. Where we have some latitude, though, and where I think some of the breakdown, particularly with NSP, where there's rehab involved is how that acquisition cost is being accounted for. So if your borrower's only paying $100,000 of the purchase price itself so it's subsidized, they buy in on at $50,000 for rehab work. The acquisition cost can be determined on the basis of what they're paying plus the rehab. So your loan does not have to be 150 percent. Now, FHA, again, does have the additional enhancement that if the rehab work is done, or if there's rehab involved, the acquisition cost can be the sum of what those loans are for hard money. But I think what you're referring to is where you've got purchase prices being subsidized, and the rehab cost is not being included in the acquisition. Q: Correct. Tom O'Neal: That's [inaudible] portion. Q: For to purchase and rehab the property, then the property is worth. So the grant moneys is what makes up that difference between what it actually takes to purchase and rehab the property. Tom O'Neal: Again, it's not grant, though, and that's where a lot of people are confused. It is a loan, and it is not a grant. And so it does have to be accounted for, but I think where the education in, for lenders, as well, is what agency guidelines are for how the acquisition cost and what the financing scheme can be. Q: So the question, I guess, is how do you turn that mortgage instrument from something that looks to you more like a grant than a loan? What language should be changed in that -- Tom O'Neal: No, no. You don't need to. Your loan is made for rehab purposes. That loan can be included in the acquisition cost of the property. Rob Grossinger: And, Tom, I think what Leonard's asking, in the traditional, where the NSP money is being used to subsidize the purchase price, which then causes it to go above the appraisal, no rehab, what would be a way to meet the public policy goal of the NSP grantee, which is to have some form of use restriction, and meet your legal requirements not having liens in excess of? Tom O'Neal: Sure. But that's what I'm trying to say. There is no limitation to the lender in that regard. We can use that amount. If there were $50,000 of NSP disbursed for rehab, we can use that rehab cost plus the actual purchase price paid by the borrower. So if the NSP provider is

19


subsidizing the acquisition cost to the nonprofit or developer to cover rehab, that amount can be documented and included in the acquisition costs as the basis for computing our loan. LaDonna Reeves: Right. On FHA, because FHA is the cost to acquire -- you know what might help, Tom? Give him a financial example. So meaning you purchase a property for $50,000, and you have to put $100,000 into it. Your acquisition costs are counted $150,000. Now the purchase price is $100,000. You're going to record a lien of another $50,000 that gets you back to $150,000. You're still at 100 percent, because the cost to acquire, including that rehab, was the $150,000. Did I kind of explain that right? Q: But say it was appraised at $80,000. Tom O'Neal: Mm-hmm. But that's okay. That does not require you to have a value that meets your actual cost. And unfortunately, with lenders, because I deal with this internally at Bank of America quite a bit, even with our own underwriters, is that's not outside the guidance. You can have a situation, again, just to put hard numbers to it, if the purchase price is being subsidized by $50,000, so the borrower's paying $100,000 or $60,000 of rehab costs that went into it that your valuation is not totally realized at $150,000, it's, say, $120,000, you've got first and second liens of $150,000. You can base your first mortgage against what they've paid for the property, but you can have a CLTV that exceeds $100,000. So long as that is a government entity-provided rehab purpose, rehab reason. Q: All right. Thank you. LaDonna Reeves: [inaudible] [talking over each other] Rob Grossinger: Go ahead, Leonard. Q: It sounds like there might need to be some additional training, I guess, on our good lenders here. Because they're looking at the appraised value and not allowing all of the mortgages to exceed that appraised value. Tom O'Neal: I'm certain that's the case. And in the case of FHA, the 4155, which is their side for it, it's very clear in the secondary financing section that the government agency section, combined loan, if you will, to exceed the value of the property. Q: Okay. So there needs to be a little bit more education on the parts of some of the underwriters. So I guess we are going to have to, as others have said, lean on you guys for some TA. Tom O'Neal: Please. You know, again, I review this part of the HUD guides quite a bit. You know, in Section 5, I can quote in Section 5, it's Chapter 1-13 of the 4155, and I review it with frequency with underwriters that seem to have confusion as to what would seem to be an accepted combine on the value.

20


Q: Thank you so much. I appreciate that, the information, and I will definitely be in touch with you. Rob Grossinger: Yeah. And this is Rob, and just to be crystal clear, I want to posit a [inaudible] to make sure that this is clear. Nonprofit CDC, community development corporation, buys a house and rehabs it to the tune of $150,000 of acquisition and rehab costs. It then turns around and sells it to John and Mary Smith for $100,000, but NSP money is left in to subsidize up to the $150,000 cost. So now, John and Mary Smith acquired with private financing for $100,000, but have a secondary lien of NSP for $50,000, and it's only priced to $100,000. So all the rehab was done by the nonprofit. It's all done, and now you're just making sure the nonprofit comes out whole. Does that work, as well? Tom O'Neal: Yeah. And so to use your example, you can have a first mortgage in that event of, let's say, $96,500. You're going to do a max financing of the FHA loan on a $100,000-dollar acquisition cost. He's got $50,000 of rehab NSP money that went into it. Whether your property value came in it at $100,000 or $120,000, or it's something short of $150,000, it does not make it ineligible for an FHA loan. You can still do that, because again, you're not making a loan to value that exceeds what the borrower was paying. You can't borrow back money. You know, you still have to pay your first mortgage on what's paid, but your combined loan to value can exceed your appraised value when you have that rehab. Rob Grossinger: Okay. Thank you, Tom. Kent, back to you. Kent Buhl: Very good. Let's go to Tim, Tim Kraft [ph]. Hello? Are you there, Tim? Perhaps not. Okay. We'll come back to Tim. And next is Nancy, who's been patiently waiting with her hand up. Nancy, where are you calling from? Q: Hi. I'm Nancy Burkman [ph]. I'm with a nonprofit housing partner in Florida, and my question is in regards to the information that LaDonna said about credit scores and the bank's overlay. She had mentioned during her slides that the banks overlay with 660 to 680, while FHA was at 620. Is that correct? I didn't understand. LaDonna Reeves: I'm so sorry. I was on mute. No. I mean, I wasn't saying the overlay on the conventional. That was just what the credit scores are on the conventional products when you're laying the community second. But yes. On FHA, Chase does have a minimum cycle threshold of 620, which would be an FHA overlay. Q: Got you. Okay. I was just confused on that. [talking over each other] Tom O'Neal: -- turn out at 580. So most lenders have some overlay above the absolute minimum of the FHA.

21


Q: Okay. Let me follow up on that loan to value that you all just mentioned. How do we get around the combined loan to value requirements of NSP? I mean, I believe they have a combined loan value of 105. Is that correct? LaDonna Reeves: On the conventional products? Q: Yeah. I'm talking about neighborhood stabilization program, actual federal guidelines like HOME and so forth, that do have combined loan to value requirements of 105 percent, correct? So how can you sign up Ms. Smith for more than 105 percent and spend outstanding mortgages, no matter what the bank's LTV and how they figure it. Tom O'Neal: Yeah. I think maybe Rob can better address what the NSP requirements are. I can address what the secondary market requirements are, and that's what you're referencing at 105 with the conventional limitation for combined loan value. I'm not as familiar with what NSP eligibility requirements would be. Rob Grossinger: Well, since we have David and others on the phones from HUD, I'm wondering if they would like to take a crack at that. If not, we can come back and try and answer that separately. But I'm going to see if they want to take a crack. Or if they can't. I'm not quite sure about technology here. Kent Buhl: Yeah. David or Hunter, are you there? All right. They stepped away. Q: And maybe it's just the purchase-waiting grantee that requires 105, but I pretty much thought that was required on all federal programs. I could be wrong. Rob Grossinger: Yeah. I'm getting blank looks from the people that surround me right now that are familiar with federal programs. So I think the -- Q: Just the idea of selling a house to somebody that a house that's worth $100,000 and giving them a total debt of $150,000 doesn't quite sound right. Rob Grossinger: Well, there's more to the story. Q: You do that, and for -- I mean, the grantee basically makes the difference, and that money just doesn't go back in a big -- Tom O'Neal: Right. And that actually, in a lot of markets, where you know values of -- even if you acquire and rehab, the cost is going to exceed the value. You have to leave money in. And so that's a recognition of what those -- Q: Right. I forget what the gentleman was paying earlier about $150,000 in total and selling it for $100,000 and there being notes out there up to $150,000, and that being allowable. I didn't understand.

22


Tom O'Neal: Well, again, most of that second liens are going to be soft. They're not going to average in provisions, and they were forgiven over time, and they will also be forgiven, in most cases, where that original owner sells the property to an income-eligible borrower. Q: But you're talking about -- okay. So the nonprofit, up to $150,000. When they acquire it and rehab it, they can spend up to [inaudible]. Tom O'Neal: Right. And well, we can talk about this separately. But I think to clarify, you can leave $50,000 in NSP money in the house with a note that is to the borrower, but the borrower has no payments under that. It's just to keep the restrictions in place. Q: Okay. Well, that's a note, but I mean, most people don't worry about it, and therefore your loan to value gets -- unless, I mean, and the mortgage actually says, when they go to sell it, and they can't pay off this mortgage, and their retail restrictions do allow them to do so, I guess it's possible to write it that way. Tom O'Neal: But what I mean, they are. That's not a lien that they should have to pay off if they adhered to the retail restrictions. Q: Okay. Rob Grossinger: Okay. I think we're combining the two. I think you're right. I just had somebody walk in who said you cannot invest the borrower in excess of 100 percent. So the structure would have -- Q: Or 105. Rob Grossinger: Yeah, 105. The structure would have to be where that extra rehab amount is simply eaten by the nonprofit. It's not eaten, but -- Q: Or the grantee. Rob Grossinger: It's in the grantee's world to deal with. Q: Right. Okay. Thank you. Rob Grossinger: All right. So we were unclear, and thank you for clarifying for us what clarity we needed. Q: All right. Thank you. Kent Buhl: Thank you, Nancy, and let's go to Larry. Larry, are you there? Hello, Larry? No. All right. Then after Larry, we have Ken, and hold on a second here.

23


Let's go to Tim. Tim, hello? Hello, Tim? Q: Hello. Kent Buhl: Tim, hi. Q: Yes. Hello. Kent Buhl: Where are you calling from? Q: Lafayette, Indiana. Kent Buhl: Very good. A lot of folks in the Midwest today. What's your question? Q: Well, my question deals with the fact that the speakers from the two large mortgage companies are talking about their rules and regulations that kind of apply universally around the country. But NSP is basically a local situation, and do their representatives locally have the ability to make modifications to loan programs to fit local requirements and local needs as far as applying these national requirements? In other words, do they give their local people flexibility to design a program that might meet what's going on in my community as far as being able to find homebuyers for these properties? Tom O'Neal: I guess I'm still not clear on the question. Can you go through that again? Q: Well, yeah. You have some standards that you apply across the board, underwriting standards. But let's say I have situations locally here where those underwriting standards aren't going to necessarily apply. My borrowers, they have credit scores of 590. Are you going to allow your people to be flexible enough to change credit score requirements so that I can get somebody in with a 590? Tom O'Neal: No. Q: So you're not going to provide flexibility, which is then making NSP financing a little bit more difficult. [talking over each other] Q: Go ahead. Tom O'Neal: Again, it's not an opportunity to fit every circumstance. You are right in that we use a broad stroke in determining minimum credit scores or overall risks that we apply that's going to be applied in California like it would in Indiana. We don't have an opportunity, at least within Bank of America, to make a loan today to a borrower that has a credit score of 590. Q: It seems to me that what we're doing is we're, again, restricting the people who can buy these homes and not serving the need of the folks who have to have the need served. For example, our

24


NSP area is heavily Hispanic, and the people who are going to buy this area and are Hispanic are not going to have a lot of the secondary market underwriting criteria that Bank of America or Chase or Regency or whoever is going to require in order to make a mortgage. So are we going to be hamstrung in that we can't offer product to those people? And I was just hoping that there'd be some flexibility by Bank of America and Chase and so on where the local people could say, yes, we will design things a little bit differently. But that doesn't seem to be the case. LaDonna Reeves: Well, can I ask a question? So specifically in your mind, you just said the Hispanic borrower; what specific characteristics are you thinking are going to be a hurdle that's insurmountable? Q: Well, I think one of the hurdles is going to be identity. You know, many of them have had to use false identity to get work, and now they have their own Social Security card. But when you go to pull up a credit report, you may get two or three different Social Security numbers on it. And that's going to be a red flag to the secondary market lender. They're going to say, "No, no. We're not going to do that. There's some issue here that needs to be dealt with." Tom O'Neal: I'll be right upfront. You're right. That's going to be an obstacle for us and probably any secondary market lender. You might need to find a local institution that's willing or interested in making that type of loan for their portfolio, because you aren't going to have a secondary market home for that type of situation. Q: I'm just curious what other NSP grantees -- I work for the city of Lafayette, and we have 11 homes that we've rehabbed, and we're doing another 50 or 60 of them. And I'm just curious what situations other NSP grantees have run into, if they've run into something similar to that, where the secondary market programs that are structured are not going to meet the needs of the people that we're all trying to serve in the communities where we're doing this work. And I'd just be curious to hear from other people at some point in time what their experiences have been. Do they find local lenders who are amenable to making exceptions to do maybe CRA lending or something like that, as opposed to the lenders use the broad sweep of national standards? Rob Grossinger: This is Rob, and I will answer from our experience of working with lots of different grantees, and then depending on people's questions, if they want to chime in. But where we find the most success in this is with funds that are set up locally to do just that, and they may be that a number of banks come together and provide low-interest, a little bit longer-term loans to create a fund that can then be used for first mortgage lending. Q: So like a lending consortium or something. Rob Grossinger: Right. And then the lender itself is doing an investment in the fund, and they don't have to worry about secondary market. And the fund itself holds those loans. There are funds like that all over the country, which are allowed to have much more flexibility. Now, performance in many of those over the last three or four years has been difficult, but I think we're coming out the other side, and we're starting to see more successful backed -- as with everything

25


with the market, the market has been bad for everyone. But those funds are still operating. They're being renewed in many cases. So that's one option. I think the other is, as Tom said, there are in many cases local banks who will portfolio those loans, and as long as you can create a fence around the applicant that gives them comfort that there's a lot of due diligence being done in qualifying the borrower under whatever terms you agree to, portfolio loans can serve that purpose. But the traditional large national bank platform is a secondary market platform. So I would really encourage you to bring together some of your local community banks or credit unions to talk about this, as well as see about some sort of consortium where the national banks who do want to help in this regard might be able to lend into or invest into a consortium-type fund. Q: Is there an index of any consortiums like that that you're aware of? Rob Grossinger: You know where I would start is with NHF of Chicago. It's got one of the largest ones I know of in the country. I think my contact information is on there. Get a hold of me, and I can put you in touch with them as well as some others. And then you know your community banks best of all in terms of bringing them together, but I'd be glad to work with you to identify some of those funds that have been created and are self-sustaining at this point. Q: All right. Very good. Thank you. Rob Grossinger: Kent, back to you. Kent Buhl: Thank you, Tim. And let's see. Let's now go to Elise. Nope, nope. She's no longer with us. So how about let's go to Ken, and it looks like is Ken here, the second? No. So Ken, let's see. His question is, "In the NSP example, reconstruction costs of $190,000, market value of $215,000, with a sale price of $150,000. Can we take a soft second at $65,000?" So David Nagarro's [ph] with us now. And can you shed some final light on this, David? Hello, David? I guess not. Okay. Well, we'll get back to David if he reappears. So and Michelle. Let's look at -- Michelle does not have a phone icon. So she just makes the point that the HRA of the city of St. Paul is developing their own financing products that they will hold long-term. So it's that flexibility that Rob was mentioning. Other questions, looks like we're almost down to the bottom, but let's go to Patrick [ph]. Hello, Patrick. Q: Yes. Hello. This is Patrick Dearden [ph]. I'm actually calling from Asbury Park, New Jersey. I want to revisit the CLTV issue that Leonard raised earlier and ask if there's any difference in how that applies if you're doing new construction as opposed to rehab. Can those excess funds beyond what the intended sale price would be subsidize the cost of construction? Does that work the same way in terms of that CLTV that you indicated worked for a rehab situation? Tom O'Neal: Hi, Patrick. It's Tom O'Neal. We spoke last week, I believe.

26


Q: Yes, Tom. Hi. How are you? And I appreciate the information that you e-mailed to me, as well. Thank you. Tom O'Neal: Not a problem. Actually, I'd love to chat with you about it, and your question is good for the entire audience. And the answer is yes. You know, I think in the situation that you've got, actually, what's key is for you to document for your lender what those rehab costs are. Because if my memory serves me, you're displaying a sales contract at just what the borrower's paying, not a rehab fund that went into the property. Q: Correct. So again, the point here is that, and it's perhaps where we run into a problem with FHA, that it's not rehab but construction costs. Tom O'Neal: Well, yes. Yeah. And I'm using the terms interchangeably, but yes. But doing construction is the same thing. You need to document the total acquisition costs, which would include the fund that went into the home. And what you're displaying to the lender is a subsidized contract where it's just their acquisition. It's not including the NSP money that went into building the home. And so I think the key is to provide your lender with that information. I was looking at a program today with the city of Chicago where their contract outlines all of it. It outlines the borrower's acquisition cost, and it outlines the NSP funds that went into it. And so a lender can use that to determine a total acquisition cost. They can build their first mortgage off of what the borrower's paying, but at least they can see the total liens, and that is workable. Q: Right. Okay. Good. Because that's exactly the situation we've had. Tom O'Neal: Right. Although you have the separate issue that you have to deal with, which is the TCA on resale restrictions. Q: Correct. Yes. That's right. Okay. Thank you for that information, Tom. Tom O'Neal: No problem. Kent Buhl: Thank you, Patrick. And let's see. Travis submitted a question. "Are the banks willing to be more flexible and aggressive to lending or relending on the specific homes that NSP participants are buying directly from the banks via the First Look programs?" Rob Grossinger: LaDonna and Tom, do you want me to protect you on that answer and just say no? Tom O'Neal: Well, I was going to say no. I mean, obviously, what we have to do is we have to ensure that the new mortgage we're making is marketable, that it meets secondary market requirements. So we don't have a lot of latitude by the fact that we happen to have acquired that property through foreclosure. We have a positive vested interest in having it sold and a new successful homeowner, but we need to make sure that the new buyer is also qualified under secondary market guidelines, as well.

27


Rob Grossinger: And I want to stress to everybody what's very important when you start to think about your credit needs is to really create the full exposure you're looking to put all of your lending partners at risk of. And I know that makes it sound negative. But if you think in total you're going to do 50 houses, and you'd like to be able to acquire 50 first mortgages for your homebuyers, and the total cost of that is going to be X, whatever that amounts to, that's a discussion, then, you can bring your financial institutions, your more regional or even local financial institutions and credit unions together and say, how do we address this need? This is the amount of credit we need available. This is the portfolio we're talking about in terms of homes, and this is the criteria and profile of the potential borrowers. You'd be surprised how those sort of small lending consortiums get started with just that type of conversation. Also, with respect to what then Bank of America and Chase and Wells are already doing, they can then consider becoming a participatory lender within that pool that comes from a different source. It's not from the mortgage group. It comes from usually the community development banking group. But I know, for example, just in Chicago, Bank of America and Wells and Chase are all participating in the large $100 million-dollar pool that's there. So once you can put a fence around exactly what you need and who you're talking about serving and the condition of the houses you want to be sold, it becomes a much easier conversation with your lending partners. Kent Buhl: Sirabi has her hand up. Do you have a question, Sirabi? No. So let's go up to Nancy Critten [ph]. What's your question? Q: Yeah. And with regards to the banks being aggressive and so forth, my question is I know Fannie Mae is not on this call, but they have a Home Pass mortgage, where they're doing 3 percent down, no appraisal required, no mortgage insurance for their REO properties. Chase and Bank of America, are you a lender in that program with Fannie Mae? LaDonna Reeves: I can answer for Chase. Oh, I'm sorry. Go ahead, Tom. Tom O'Neal: I was just out, and I missed part of the question. Could you repeat it? Q: Are you a lender through Fannie Mae's Home Pass program, where it's a special-type program where it's 3 percent down, no appraisal, no mortgage insurance. I'm on their website reading it right now. So I'm just curious. LaDonna Reeves: So to answer that question for Chase, Chase is going to be participating for Chase, but it will not be probably until, like, the end of the second quarter. Because we have to build out our origination systems to accommodate the product parameters, Q: Yeah [talking over each other]

28


Q: -- only their REOs. We at [inaudible], we're trying to acquire REOs for this program, and I'm running up against this as an actual competition to NSP. When a buyer's out there looking, and they don't have to get an appraisal, and they just -- so it's kind of interesting. Is Bank of America going to be a participant? Tom O'Neal: We are not currently, if it is pending, and quite honestly, I don't know if it's even on our plate to consider. Q: Okay. Good. Thank you. Kent Buhl: Scanning for further questions. Rob Grossinger: Kent, do we have anything further? Kent Buhl: Looking, and at the moment, it seems we do not. Rob Grossinger: I'd like to present the opportunity again to David or anyone from HUD to present some final comments as they've been participating. [talking over each other] David Nagarro: Hello, hello. I couldn't say anything. Thank you. I think one of the questions that came up a little bit earlier was about saddling homeowners with the subsidy amount that the grantee may have put into the house. The way we have defined the maximum sales price for a home is that regardless of what the investment may have been, into the property, the maximum price that the home could be sold for is either the appraised value or that total development cost. Now, within those parameters, you still have to figure out what the homebuyer can afford. So to the extent that the property sales price has to be reduced in order to make it affordable for the homebuyer, that is what we would call a development subsidy. Or in other words, it is sunk cost for the grantee. Now, if the grantee is trying to recapture some of those funds, or they don't want to take on a development subsidy, then there are cases where they can offer a second mortgage or a silent second of some kind. But the typical case is usually the development subsidy. So I think that question came up a little bit earlier, and I just wanted to add that piece. Other than that, I've just been sitting back, enjoying the discussion. Rob Grossinger: Thanks, David. It's Rob. And yeah, we got ourselves tangled up for a minute on that, but then ultimately freed ourselves, and I hope fully answered that consistently with what you just said. But I would like to know if you had any other questions, anyone from HUD, or are we good to go? David Nagarro: I think we're good to go. I would ask that for those grantees who are remaining on the call, to the extent that there are other issues around home mortgage financing that we did not discuss this afternoon, that perhaps we could discuss in further detail, please let us know

29


30

about that through the survey that we have at the end. Because we could always do follow-up webinars. We just want to make sure that we're providing value to you. So thank you all again. Kent Buhl: And when you do leave the webinar, you'll be taken automatically to a brief survey form, and we, again, hope you take just a couple minutes to give us your feedback. That's valuable to us. So, Rob, any final thoughts for you? Rob Grossinger: Nope. Kent Buhl: Nope. Okay. Rob Grossinger: Other than thank everybody for joining and especially thank our panelists for taking the time out of their day. Mike and LaDonna and Tom, thank you very much. And building on what David said, any either future topics passed along to HUD through the survey, any specific questions, you can contact any of us through the contact information you have on the webinar. Kent Buhl: Great. For these upcoming webinars, HUD NSP webinars in March, a whole roster for you. And we look forward to hosting some of these here. Thanks for being here, everyone. Thanks again to our panelists and our presenters and our participants and we look forward to seeing you soon on another HUD NSP webinar. Take care, everyone.

Documents

HUD NSP3 Accessing Credit-Permanent Mortgage Financing · that means you're also competing as you're trying to sell houses with other, either distressed sales, such as short sales