And lastly and importantly, and we'll come back to this point, the emergence of some very interesting new portfolio products being

Transcription

1 NationalDevelopmentCouncil_24Jan12_Fin Page 1 of 40 Hello, everybody. Welcome to the webinar on Deeper Dive on Mortgage Financing Tips. I'm joined today by Rob Grossinger, who is heads up community stabilization for the Enterprise Community Partners, and also by our friends in HUD Community Planning and Development, who oversee the Neighborhood Stabilization Program. I think John Laswick, David Noguera, and Hunter Kurtz are all with us, so thank you for joining us and for all your support. Jennie, why don't we move into the into the presentation here? We see the names, and we'll just move on to kind of a reminder on how to ask the questions. This is one of three sessions that we're conducting, HUD-sponsored sessions on financing. The first one was last week on some of the basics around lessons learned at some mortgage financing roundtables we held last summer. We'll talk a little bit more about that. Today, we're going to do a deeper drive on some of the key mortgage financing tips. And then on February 2nd, we'll be talking about interim financing, financing that's used to help facilitate or leverage private capital for acquisition renovation, the short-term financing you need to redevelop and re-convey property. So what are we going to cover today? We're going to cover four primary topics. First, we're going to discuss how the design of soft second programs can really affect the mortgage credit that we're seeking for our borrowers. We found through the roundtables this was a very important topic, and one of great frustration. Secondly, we're going to talk about some of the key elements of the conventional conforming market and also the FHA mortgage products and compare them, be able to help you determine for your borrowers when one is better than the other. There's no one answer there. It really depends on a number of factors. Third, we'll determine which products work best given different borrower characteristics, which scenarios would largely influence the kind of product that you're seeking for your home buyers. And then lastly, we'll talk about some strategies to increase participation by both the national and regional mortgage lenders, and even community lenders within your community related to NSP. Page 1 of 40

2 NationalDevelopmentCouncil_24Jan12_Fin Page 2 of 40 Now I'm going to go through the next few slides rather quickly, because I have to suspect that a good number of you attended last week's session, but this is just a refresher and intended to really bring the others up to speed here on what did happen last summer. HUD had requested that Enterprise Community Partners and the National Community Stabilization Trust lead a series of discussions around the country on what's working and not working with mortgage lending in NSP markets. They heard loud and clearly from you that there were a lot of difficulties in helping obtain mortgage financing for your borrowers, particularly when you spent a lot of time and effort finding the properties and accessing them, purchasing them from financial institutions, then renovating them, only to find out mortgage capital was so tight. So we conducted these six sessions. You can see the locations, Chicago, Orlando, Los Angeles, Sacramento, Newark, and Atlanta. In each of those sessions we had typically five or six, maybe seven lender representatives, always had at least Fannie or Freddie at the table, some large lenders, national lenders, like Bank of America, Wells, Chase, Citi, and we'd have some regional or local players as well. And then the reminder of the 20 or 25 attendees were NSP grantees and their sub-recipients. It really created a small, intimate conversation about what's working and not working, and I think we came up with some important takeaways. We'll mention five of them here briefly. First, and this will be no surprise to you, securing mortgage financing from prospective buyers was a daunting challenge. In fact, in a in both those roundtables as well as an assessment we did that preceded the roundtable, 75 percent of the NSP respondents said it was a big, big problem. Secondly, we heard that tighter credit standards in the wake of the housing crisis has become in their eyes the biggest obstacle to success. That 57 percent said low credit scores were a problem. Another 52 percent said poor credit histories, bankruptcies, recent foreclosures were a problem. Another 32 percent talked about the fact that property values were still declining and that was a problem. So certainly credit was top of the list of problems. Thirdly, as we mentioned, soft seconds, subordinate financing structures created a lot of at least delay if not preventing a lot of deals from going forward. A lot of the financial institutions have become more cautious in looking at the subordinate financing structures. Rob will speak to that in a minute. Page 2 of 40

3 NationalDevelopmentCouncil_24Jan12_Fin Page 3 of 40 Fourth we can go to the next page, Jennie we found that appraise this was a real takeaway, a surprise to me, at least, that perhaps in more than any other factor other than credit, we heard from grantees that low appraisals or inaccurate appraisals or using inappropriate comps were a major problem, and were precluding borrowers from being able to quality for a mortgage. And then lastly, sort of a pervasive misinformation among housing industry partners on what is NSP, how does it really work. You know, we needed to convert lenders and others into understanding these are markets of opportunity, not distressed markets where risk is higher. So what about today's landscape? You know, there are fewer mortgage originators. We literally have three of our top lenders, financial institutions in this country, Bank of America, Wells Fargo, and Chase, that originate more than half of all mortgage, although that is changing. We've seen a surge in the last nine months where a lot of other lenders, regional lenders, are really stepping up and providing some responsive mortgage products across the board. But today's landscape is also marked by a resurgence of FHA. There was a time back in 2005, 2006, where FHA was about 4 percent of the marketplace, and now they're more than they're about 30 percent of the marketplace, and more than half of all first time homebuyer mortgages are being originated with FHA insurance. This is also a market if you go back just a minute. There you go. It's also a time when there's a sort of reawakening at the GSEs to a conforming marketplace. Without the existence of subprime mortgages, we are seeing a sort of back to basics from the GSEs, Fannie and Freddie, trying to provide more liquidity, stability, and affordability in the marketplace, although perhaps with a little bit more of one hand tied behind their back, given the current situation with the GSEs. Thirdly, underwriting fundamentals are just we're back to the fundamentals and we're back to really tight underwriting standards. Frankly, we're seeing that pendulum swing way in the opposite direction of where we are back in prior to the housing implosion. And lastly and importantly, and we'll come back to this point, the emergence of some very interesting new portfolio products being Page 3 of 40

4 NationalDevelopmentCouncil_24Jan12_Fin Page 4 of 40 originated by lenders specifically for neighborhood stabilization purposes. Okay. And this just sort of reminds us all of what those three Cs are that we learned many years ago. It is back to the basics, so we need to be thinking about credit, particularly the impact that tighter credit scores will have on qualifying, and that's particularly the case in the conventional mortgage market. We'll be relying heavily on the automated underwriting tools that Fannie and Freddie use and that FHA use, Loan Prospector for Freddie, Desktop Underwriter for Fannie Mae. And unfortunately, less reliance on compensating factors, and by that what I mean is because most loans pass through an automated underwriting system to begin with, it's going to really require that loans be pulled out of that system when they don't immediately qualify and look at them from a manual underwriting basis, and look at ways that we can compensate for the factors that are otherwise perceived as high risk. Well, we'll explain that in more detail in a little bit here. The other two factors you're familiar with, capacity and collateral. With capacity, debt-to-income ratios have tightened. We were getting up in excess of 50, 55, 60 percent total debt-to-income. We're going to see those down around the mid-40s now, and that has significant implications when it comes to soft seconds, particularly how you apply those soft seconds, because frankly, very easily you could be solving for debt-to-income and create an issue on loan-to-value. And then lastly on this slide I think it's important to note that more than ever, having some borrower skin in the game, some borrow coming from them, is always important to helping qualify borrowers. And I guess this is a me too, Rob. So lastly, with NSP funding flexibility, there are a number of programs that can help here. But it's key here as we go forward through the rest of this presentation, you think about what the what these obstacles are that we're trying to overcome and look for solutions, whether it's the monthly carrying cost of that principle interest tax insurance, the lack of cash for closing and down payment, and certainly, as we talked about, the biggest barrier, impaired credit or the fact that there's been some recent foreclosure or bankruptcy that the borrower is living with. Page 4 of 40

5 NationalDevelopmentCouncil_24Jan12_Fin Page 5 of 40 So this might be a good time to just take a pit stop before I turn it over to Rob and see if there are any questions. We do have a few questions. The first one is you mentioned NSP lender programs. Like who? Well, I hate to delay the answer, but we're going to talk about some of the portfolio products and some of the other products the primary lenders have here a little later in our presentation. Suffice to say that we're seeing both a lot of the regional and community lenders started with some portfolio products that seem responsiveness, and now we're beginning to see some of the big national players also explore the possibility of a NSP type product as well. Okay. Also, I just want to do a quick reminder. To ask a verbal question, please select the hand icon. You will be placed in a queue and I will identify you once your line has been unmuted. You can then ask your question. After the question has been asked, please deselect your hand icon. I'm not seeing any hands up, but I do have I'm not sure if it's a question or a statement, but it's, "I'm working with Wells Fargo on a current NSP mortgage. It is taking them forever to approve the NSP program for this particular loan. It also took them forever to approve a first-time homebuyers' program that I run for this particular buyer as well." [Crosstalk] Rob Grossinger: Audience Member: Actually, I think that's a ideal sort of segue to Rob, who's going to talk about soft seconds, and I guess the short answer is that this person is not alone. It's something that we're all experiencing in terms of slow processing and lenders trying to get their arms around what this new NSP is all about. Rob? Thanks, Craig. I actually do have one hand raised. Sorry. Go ahead, Jennie. You've been unmuted. Yeah. Hi. My name is Dave with the City of. I'm the one that typed in the Wells Fargo question. Yeah. I mean, it was we have an NSP buyer, a house, she's already been approved everything. Like I said, it just seems to be taking forever. One, we Page 5 of 40

6 NationalDevelopmentCouncil_24Jan12_Fin Page 6 of 40 have a homebuyers' first-time homebuyers' program, where I give $8, towards the down payment. It took them forever to approve that. And then now that got all approved, they're ready to go with the mortgage, and then next thing you know, Wells Fargo needed to approve the NSP program, and that still hasn't happened. We have to we've had this person renting from somebody else because they can't move into the house because of the delay. It just seems I don't understand what's taking so long for them to you know, I guess they're being very cautious about the way they're lending money, like you started to say. Yeah. I think one of the things that we discovered this is Craig that we heard loud and clear from these roundtables is that many of the community lending staff, the loan processors, the intake representatives, even the underwriters, are not familiar with government programs, and certainly not familiar with NSP. But there are people what many of the lenders said is when that happens, we need to know about it in our community development teams, and what we'll do is get in touch with those folks, explain what's going on, maybe allay some of their concerns. Frankly, a lot of these originators now are more cautious than ever. And then help them just kind of get over some of their hesitancy. On this particular situation, if you would like to contact Rob or myself after this after this session, we'll deal with the specifics and give you the names of a couple of people you could call at Wells Fargo. Audience Member: Rob Grossinger: Great. Thank you. Thank you very much. I appreciate that. You just I don't know if it was, like you said, not an understanding of one, the NSP program, and two, the program we had was like, you know, it was we we're hold third place mortgage, but yet it was just still like we're had to jump through hoops just even to get them to approve our mortgage. But that would be fine. Great. All right. So I think it's time for this is Rob Grossinger, and it's time for me to take over here. I'm going to as I was listening to that last exchange, and thinking a little bit about what we've heard, and this is where Craig always gets nervous when he co-moderates things with me, I'm not going to go off-script, Craig. Don't worry about it. Page 6 of 40

7 NationalDevelopmentCouncil_24Jan12_Fin Page 7 of 40 But I am I do want to hit a couple of highlights about things that make this more difficult than it should be. So let's start with this whole concept of NSP program mortgages, or NSP soft seconds, or NSP down payment systems. I could spend from today until the end of the week talking about how the structure of the major national financial institutions makes it very difficult for them to understand anything in specificity, and that things have to be done in sort of multiple executions over and over and over again, something that they can build into a understandable process for them, so that they're able to then move forward. So I'm going to put this in the language of something that may make sense to the lenders that you're working with. They may not understand the NSP program, but they do understand what a down payment assistance grant or loan is. And so the more you tie this to things that they understand, language they understand, and I think that came out very loud and clear when we did these roundtables around the country, is that even the use of particular words has different meanings to you as an NSP grantee, to the homebuyer, and to the lender. There are just different languages that go on. Different words have different sort of instigate different thought processes and cause multiple problems. So let's take a look at the soft second structures. And when we talk about this, what we're really just saying is you may be choosing in your community to use your NSP money to somehow make that mortgage more affordable, whether it's increasing the amount of down payment that can go in to bring down the total principal amount that's borrowed, the different ways that Craig was listing before, you can use that. The question is are you doing it for what social purpose or what public policy purpose? If you're doing it to simply help more borrowers become eligible to buy the house, then there's one approach that you may want to think about. If you're doing it to maintain affordability for the long run, to sort of create an affordable housing stock for an extended period of time, that has different implications. And the third is if you're doing it and you're trying to protect against any possible gain the homeowner can get from your largesse, so to speak, then you're going to be putting other restrictions on, which have even more unintended consequences. So you've got to think through your public policy, where you're coming from to start. So most providers of NSP or any kind of down payment assistance or principal reduction assistance or any of the kind of largesse Page 7 of 40

8 NationalDevelopmentCouncil_24Jan12_Fin Page 8 of 40 we're talking about put in some form of a recapture provision, because what they don't want the homeowner to do is flip the house, take advantage of that money, and walk away with it by selling the house, even just for the same amount they purchased it for, and being able to recapture that sort of extra grant money. So there'll be some form of if you sell either within this particular time or if you ever sell, there's a recapture of that assistance that's provided. I'd ask you to think about how you know, what sort of time period you want, what sort of time period the first mortgage is. Try to line things up so that they work together hand in hand with respect to what you're providing and the other sources of funding that are coming into the mortgage. And try and remember what your real public policy purpose is and stick to that. Don't get sidetracked by things that all of a sudden you think, oh, it'd be nice if we could do this, or be nice if we could do that, because the more you lay on top of the requirements for this, the less likely it is any lender is going to want to come to the table with you and be a first lien lender while you're a second lien lender. So the question is, under resale, if you look at that bullet point, you know, if you want things to extend beyond the term of your assistance, or worse yet, and I say this not from a public policy standpoint but from an administrative standpoint, beyond any sort of sale or transfer, you're simply making this more difficult to execute. The one thing I will say that if you try and make that affordability requirement stay alive post-foreclosure, you'll never have a lender participate with you as a first lien lender. They need when they take a property through foreclosure, they need to be able to sell it to whoever is willing to buy it, and they need to be able to sell it as quickly as possible. So the more bells and whistles you put in, the slower the process is going to go. That doesn't explain the prior statement about, you know, it's taking forever, but what I would ask is that you think about this. As you put your program together, you should be putting it together now most of you I'm hoping most of you on the call already have your programs put together, but if you have the capacity to change them or you're creating a new one now, sit down with the lenders you want to be part of your program and structure it with them. Don't try and structure and then say to them, "This is our program. You have to adapt." Big banks don't adapt. That's just the bottom line. Page 8 of 40

9 NationalDevelopmentCouncil_24Jan12_Fin Page 9 of 40 And so if you think they're going to adapt for you, whether you're representing the State of California, the City of Chicago, or the Town of Biloxi, Mississippi, they're not going to adapt. They can't. They are structured in a particular way to do what they do. They're going to want you to adapt to them, and as usual, the 600 pound gorilla in the room gets to call the shots. So structure this in a way that the lenders you want and if you want to then rely on regional or even local banks, fine, but find those people that understand what you're structuring, so that you're not going buyer by buyer to them, saying, "All right, here's this buyer, Ms. Jones. I want you to approve this first-time homebuyer assistance I'm giving." But if you can say, "This is exactly the same way that we've laid out in the program you've already approved, we already sat down with you and you approved it," there should be no delays, because they're going to see the exact same paperwork and the same content of that paperwork that they saw in putting the program together. There are everything sort of works together, sometimes in negative ways, sometimes in positive ways. When you add this money to be helpful to the homebuyer but you put a lien on the mortgage, you're adding to their combined their CLTV, they're combined loan-to-value, and there's a limit on that as far as how high they'll go, even if your document states this is a nonamortizing loan, that it's forgiven in ten years. It doesn't make a bit of difference. A lien represents the loan, which represents the total of the loan, which can butt up against or exceed the combined loan to value that your lenders are willing to go for with a first lien loan. So most importantly, and we stress this every time we talk, whether it's in a regional roundtable, on one of these webinars, or just walking down the street, you have to conform to the secondary market requirements. If you want any lender who is going to be selling their loans into the secondary market, Freddie Mac or Fannie Mae, your requirements have to conform with their requirements, and they are very easy to find. I think can we go to the next slide? Let's go one more. Well, the I thought we were going to put those into this deck, but they're very easy to find by going to either Freddie Mac or Fannie Mae's website, and we will try and get something out, or Craig and I can get something out to tell you exactly where those soft second requirements are. And when I turn this back over to Craig, he may be even able to tell you off the top of his head. So it's very important to follow those. Page 9 of 40

10 NationalDevelopmentCouncil_24Jan12_Fin Page 10 of 40 So we're now into page or slide 14. I just want to walk through these questions, because they're not really questions. They're if you do this, okay, if you do that, no, not okay. They're posed in questions, but they really should have little skulls and crossbones after the ones where if you do that, there's no hope of ever working with a lender. Again, CLTV, you don't want to go above five percent, because most mortgage products aren't going to allow that. If your if the money is coming not from you I think this is probably moot for all of you on the call, but just make sure that the whoever is providing this assistance represents something that the lender can be comfortable with, whether it's a governmental entity or a nonprofit or an employer. It's just it's something they're much more comfortable with dealing with. You will never get your lien to be above in the pecking order the first lien of the first mortgage lender. It's I don't think anyone even tries. I'm laying that out there, but just remember, that's just not going to happen. The rest of these, instead of reading them one after another, which can be kind of boring, understand that what these questions are telling you is if you've done this, you've probably violated the underwriting rules of the lender you're with, and almost any lender. You really have to structure your assistance in a way that there's no additional gain to you, there's no additional requirements beyond what any lender would allow, and it doesn't add to the combined loan to value. So for example, if you're saying you're going to do a shared appreciation where you're going to provide some assistance, and if they sell the property at a appreciated price, you're going to share some of that with the seller, you have to make sure that you're not trying to claim more than what your fair share is of the total value of the home. Negative amortization for all of you, it just means taking anything that you're deferring and rolling it into and adding to the principal. That's a no-no across the board, even for first lien lenders now in most situations. So you really just want to be careful with all of these that you have vetted them with the lenders you want to participate. We're finding that the most successful assistance programs, and again, I don't want to limit it to just NSP, because it's there are state-run programs and municipal funded programs and even philanthropy will fund some of these sort of programs. The most successful the ones are the ones that have sat down with the lenders they've Page 10 of 40

11 NationalDevelopmentCouncil_24Jan12_Fin Page 11 of 40 targeted in their community and said, "I'd like you to participate when we're making this assistance available. Here are the documents we plan to use. Please show them to your lawyers and let us know what you think." Negotiate that ahead of time. Again, you don't have a tremendous amount of negotiating power, because the lenders the bigger the lender, the more stuck they are in their particular process. But there are some places in which you can make a viable argument about why you want to do something that they may be willing to say, "Okay, we haven't done that before but we'll do it now." Please sit down, go through that. If you come to them with a loan and say, "Oh, and by the way, here's the assistance we're giving and here's the documents for it," and they haven't seen it before, it's not only going to take a lot of time, if there's any deviation from the way they do things, it'll never get approved. And I'm sounding draconian only because we've been hearing this for years and years, and, you know, an ounce of prevention goes a long way. Getting it done on the front end and getting the approvals done on the front end with your targeted lenders makes you happy with your lenders and makes your lenders happy with you. Slide let's keep going, Jennie. One more. One more after that. Okay. As I was saying before, any deed restrictions that you are trying to keep in place post-foreclosure, no lender's going to accept that as a set of documents. We talked about shared equity. Combo programs are where you try and do, you know, multiple things. You try to accomplish something at resell and a recapture, but you're also trying to accomplish something else. Don't make it complicated. Keep it simple. I'm going to go to the next slide. We keep hearing that in every political venue. It's the economy, stupid. It's this, stupid. It's that. So in this case, simple, simple, simple. The more the more bells and whistles, the less likely you're going to be successful, and all it's going to do is frustrate you, and then that's not fun. Nobody wants to be in that position. So if as the very last bullet point, if you've already done this with your HOME programs or your CDBG, that they do understand that, and so the more the similarity between not the programs are not necessarily that similar, but your program should Page 11 of 40

12 NationalDevelopmentCouncil_24Jan12_Fin Page 12 of 40 be similar, because they can't they are not good at I shouldn't say they can't, but they're not good at reinventing the wheel. Financial institutions, for whatever we want to say, have gotten so big, right or wrong, that their processes are very difficult to ask them to make exceptions, to ask them to deal with your community differently than they do with the rest of the communities. You can get that with some of your local institutions, but their lending, their capital sources, are usually less. And you may be able to get it with some of your regional. So I'm going to stop there and see if we have questions. We do have a couple of questions. As a quick reminder, to ask a verbal question, please select the hand icon. You'll be placed in a queue, and I will identify you once your line has been unmuted. Then you may ask your question. After your question has been asked, please deselect your hand icon. We do have one question here that says, "I was a participant at the Newark session where a draft overview for NSP 2 mortgages was distributed. Has this been made final? If so, how can we get a copy of it?" Rob Grossinger: I will defer to Craig, since I didn't attend the Newark session. Well, I did, and I even recall it, Rob, which is good these days. I think we're referring to the mortgage guide. There was a draft of a mortgage how do NSP grantees access mortgage credit for their borrowers, a guide of some 45 or so pages that was drafted in advance of the roundtables. And we then after the roundtables this past fall went back and edited the document, updated some of the material, and incorporated a lot of the interesting takeaways that we heard at the roundtables. That document now I think is within weeks of being available to the public, and I don't know if David or John want to speak to it, but I think that it'll be broadly disseminated by that time. Next question, for Wells Fargo, contact their SPA, Special Programs Administration Department, and have your program approved beforehand, and it will expedite individual processing issues. The same goes for most banks. Okay. Page 12 of 40

13 NationalDevelopmentCouncil_24Jan12_Fin Page 13 of 40 Rob Grossinger: Yeah. And I appreciate that statement from Andrea, because otherwise I just would have given out Mussi Gabler's and made her miserable. One thing that [Crosstalk] Rob Grossinger: Oh, go ahead, Jennie. I'm sorry. Do you have thoughts on whether or not the Safe Act has implications on nonprofit NSP grantees developers who are giving an NSP soft second? It Rob, do you want to comment? No. I don't have a feel for that one. I don't think it does. You know, I think Rob said this in his remarks, but I really think that a lot of times we're making things more difficult than they need to be. The sort of checklist that Rob went through is actually from the Fannie Mae website, and I've found that in talking to financial institutions, the lenders on the ground, if you make it clear to them that you are in adhering your soft second adheres, complies with either Fannie Mae's Community Seconds Fannie Mae calls their guidelines Community Seconds, Freddie Mac calls theirs Affordable Seconds. If you tell the lender that these guideline that your soft second meets the test of Fannie's Community Seconds and Freddie's Affordable Seconds, and I would believe in 99 percent of the cases it does, that gives them comfort. That may discourage them from doing the sort of sausage-making review through many channels of a large lending institution, because they know that that guideline has already been used by them endlessly for years as a safe harbor. And so I think that's key to this thing, that the GSEs are trying to make the soft second structure easier. We just have to have the primary lender connect the dots from your program to those guidelines. Audience Member: We also have a live question from Brenda. You're unmuted. Please go ahead and ask your question. Good morning. This is Brenda with Affordable Housing Clearinghouse in California. I just had a suggestion for the for working with the lenders. We have found that it we succeed Page 13 of 40

14 NationalDevelopmentCouncil_24Jan12_Fin Page 14 of 40 more when we have a lender participation or introduction to the program of those who want to participate. And if you go over the program with those who attend, you actually have a better success rate of processing your NSP funds, because if you keep the same folks on your roster that you work with, it makes the process a lot smoother. We couldn't agree more, Brenda. We have a couple more questions. The first one is a statement, I believe. "We are having our third meeting with our seven primary lenders and their respective local originators. Soft second design points will be extremely helpful to us." Okay. Well, I think these webinar decks are available after the sessions, and I think you'll find in there a lot of the guidelines you want. Let me also I don't want to belabor this point, because we have more to cover here in terms of the products themselves, but let me Rob mentioned an access that I might have, and I did dig it out while he was talking. To obtain Freddie Mac's Affordable Second guidelines, you would go to S-E-L-L, /expmkts, the abbreviation for expanding markets. E-X-P-M as in Michael, K-T-S/ almost done affsec, for Affordable Seconds. A-F-F-S-E-C. If you do that, you'll get all of their guidelines there in a simple framework. For Fannie Mae, it's about the same length, but let me try it quickly. E as in electronic, as in single family, sf/mortgageproducts/pdf/cschecklist.pdf. Okay? That last part was C as in community, S as in seconds, checklist.pdf. All right? Hunter Kurtz: Craig, this is Hunter real quick. I think we probably can get that information posted on the slides so that we can update the slides on the website and have that information on there. Awesome. Great. Great. Okay. Should we Actually, we have a couple more questions. "With regards to Wells Fargo, I did go and have been dealing with the SPA Group, and that is where the hold-up is." I believe that's a follow-up from the previous question. Yeah. We're going to follow up Rob and I will follow up with the Wells Fargo team. You know, they have been we've met with them any number of times around neighborhood stabilization. Page 14 of 40

15 NationalDevelopmentCouncil_24Jan12_Fin Page 15 of 40 They have created some new products that are very focused on neighborhood stabilization. And I think we just need to make them aware that there's some consternation out there among the grantees still. Okay. The last question, "Safe Act isn't causing a problem, but the lack of final rules from CFPB on QRM and QM seems to be. Any thoughts?" Well, I mean, yes, the QRM stuff is huge, and it's sort of like a black cloud that's hanging over all this. But I don't think you should expect any sort of clarity in the very near future. I know they have gone back to the drawing board and they are now rethinking the notion that any mortgage request that includes less than 20 percent down is somehow inherently a high risk loan. I think we have I think we have and this is my term, not HUD's. I think we've beaten them up enough that they're sensitive to that fact, and looking for a more surgical way to get at high risk, rather than just the LTV or the amount of borrower equity. It is something we're going to have to be diligent in watching, but I feel comfortable that there are structures in place that we'll avoid this being a real obstacle for us going ahead. Shall we move into products? What we want to do in this next segment is talk about some of the key mortgage products, maybe some that you're already familiar with, you give an update on them. And I want to acknowledge one other participant in this presentation here that I was negligent at the beginning in acknowledging, and that's Matt Callahan. Matt's based in California, in the LA market, specializes in neighborhood stabilization lending, and also specializes in first time home ownership lending, does a lot of FHA and conventional. He was also one of our partners on these mortgage roundtables as we went around and facilitated these discussions, so he has the benefit of having heard from a lot of grantees. And we I asked him if he would join us in this discussion, and I'm going to ask him to add some real life perspective to some of the things that we're talking about here. So we're going to talk about the conventional/conforming market. That really is just the term often given to what Fannie Mae and Freddie Mac represent, the GSEs, Government Support Enterprises. We'll talk about FHA. And then as someone Page 15 of 40

16 NationalDevelopmentCouncil_24Jan12_Fin Page 16 of 40 requested earlier, we'll talk about some of the kinds of portfolio products we're beginning to see in the marketplace. So first let's Jennie, if you can move to the next slide here. Let's talk a little bit about the conventional marketplace. It certainly has changed from five years ago. It is a much more cautious and methodical process than it used to be. But certainly the key automated underwriting systems are in place and are being used, and, you know, these are good tools. I must tell you that I think that both LP, Loan Prospector, and DU, Desktop Underwriter, do a wonderful job of quickly assessing layers of risk in determining what is an approval loan or not. That's the good news. The bad news is given the unique circumstances of some of our borrowers and some of the types of activities we're undertaking in NSP, sometimes that sort of one size fits all series of algorithms to determine acceptability of a mortgage just doesn't work as well. It's the extenuating circumstance that gets lost in the fray. And so we're working with the GSEs to make sure that they not only use these automated tools, but that we have manual overrides to look again at those borrowers when the AU system, the automated underwriting system, doesn't work the way it's intended. But they're good systems, and they've been refined over and over for the last, oh, gosh, 20 years. PMI. We're not going to spend a lot of time talking about private mortgage insurance here today, but it's important to remember that when you are doing conforming loans, and that loan to value exceeds 80 percent, the GSEs are required by law to have some form of credit enhancement, some sort form of mortgage insurance. And frankly, I think the private mortgage insurers have been more in the bunker than anybody over the last few years. The good news is we're seeing the PMIs become financially stronger, come back into the mix. There was a time there a year ago where you would be hard-pressed to find an MI that was willing to insure anything with a LTV above 90 percent, and that's changing. We're back up to the 95 percent, and in some cases higher than that level now. And I think it's important, because they play an important role in this whole this whole process. One little one little sidebar here that we mentioned last week but I want to mention again is that private mortgage insurance, unlike FHA insurance, private mortgage insurance has been deductible on a homeowner's income tax. That started in 2006, and that was the case all the way through to the end of But that legislation was not renewed. It may Page 16 of 40

17 NationalDevelopmentCouncil_24Jan12_Fin Page 17 of 40 still be, but right now you cannot the borrower cannot deduct the MI coverage. And then of course the two products we're going to spend a little time talking about here are Fannie Mae's MyCommunity Mortgage and Freddie Mac's Home Possible. These are the flagship programs for those two GSEs when it comes to affordable lending. They precede NSP, but they can very I think very effectively sometimes meet the needs of your borrowers. So let's talk about those in a little bit more details. Fannie's MyCommunity mortgage, and I'm going to ask Matt to comment on both of these products in a minute. But the LTV can be as high as 95, and I think in some instances actually can even go up to 97 percent, including the financing of that MI we just talked about. There's not necessarily a minimum borrower contribution, but believe me, it is an important factor, and I would encourage you to have a borrower contribution to increase the likelihood of approval. The combined long-to-value, the CLTV, by combined we're referring to the first mortgage that would be the MyCommunity mortgage, as well as any other indebtedness, maybe your soft seconds and other forms of indebtedness, cannot exceed 103 percent. Sometimes that can go I think, Matt, as 105, but when you get above that, it's going to be tough. So you look for a LTV below 95 and a combined long to value hopefully no higher than 193 percent. It's tough to pinpoint a credit score and say, "This is your threshold." You'll see we put in parentheses there manual. With automated underwriting systems, with the Desktop Underwriter, you could find a MyCommunity that qualifies at 630, 640, maybe 620, because of the other contributing factors. Maybe there's a lower loan-to-value. Maybe you've provided a very deep soft second that makes it all possible. So but we do know this. When it does not get approved officially, it's not an accept in Desktop Underwriter, the instructions are to use a minimum credit score of 660 when you are manually underwriting the loan. So it gives a little picture into what may lie ahead for your borrower. No reserves are required on a one unit property. What do we mean by reserves? Lenders will look at how much cash is available to that borrower in an account, in an identifiable account, to Page 17 of 40

18 NationalDevelopmentCouncil_24Jan12_Fin Page 18 of 40 document that if there's a rainy day problem, the heating system goes out, the roof starts leaking, that they have something to fall back upon. With MyCommunity, on a single family loan there's no requirement for reserves. There is a two-month reserve, which means two months' mortgage payments reserved, for a two to fourunit property. And then lastly, non-borrower down payment from a properly documented gift, grant, or Community Second is key to this, right? So if in order to qualify for being a soft subsidy, you want to make sure it is a grant, a gift, or one of those Community Seconds that Rob walked us through before. Let's compare that to Freddie here, and then I'd love to hear from Matt on what his experience has been on the ground. Freddie's program, Home Possible, is very similar. LTV of up to 95 percent, including financed MI, but here's where it differs. Currently, the combined, the CLTV, is only up to 95 percent. Not 103, 95. So that means you're really going to have trouble applying your soft seconds to a Home Possible mortgage today, unless the LTV is much lower than 95, and your soft second is bringing it up to 95 percent. Big difference. And again, there's no minimum borrower contribution, but you see the asterisks there. We really think it's advisable. And similar to MyCommunity, I don't have to say it all, no reserves for one unit. Similar credit score threshold. Counseling is required for first-time homebuyers. That would be true for Fannie Mae's product as well. So that's a quick snapshot on the two GSE products that are most widely used for this purpose. Matt, you know, in some of the roundtables, I heard that there was difficulty in making a MyCommunity or Home Possible mortgage in this current environment. Has that been your experience? Matt Callahan: No, it hasn't, Craig. And I would say the majority of the clients that we're assisting with NSP or NSP type assistance programs, you know, especially where the LTV is going to be below at or below 80 percent, these products are a perfect fit. You know, they're designed to accommodate community lending initiatives. And the other point I think it's important to that may be what people think is not true, is that the overall pricing can be better. The overall cost to the consumer can be better than a so-called regular Fannie Mae or Freddie Mac loan, because if you have a lot of overlays and say lower credit scores or lower reserves or higher LTVs or what not, you're going to get a lot of hits on your final Page 18 of 40

19 NationalDevelopmentCouncil_24Jan12_Fin Page 19 of 40 pricing of that loan. Home Possible and MyCommunity mortgage eliminate almost all of those hits, and so your final pricing and cost can be much more favorable. Good. Good. Thank you. Let's talk about FHA here for a minute, and then we'll compare FHA to some of these conventional products. I think you all know about FHA financing, a loan guaranteed by and conforms to the FHA requirements. Ginnie Mae is actually the secondary market buyer of these loans, but FHA is insurance. It is the equivalent of the private mortgage insurance we talked about before. But FHA creates the guidelines. There's an up front mortgage insurance premium and a monthly mortgage insurance premium paid on this, on those loans. They tend to be a little higher than the conventional mortgage insurance for the same level of coverage, and we'll talk about that in a minute. And we'll talk a little bit about the two primary FHA products that you would find your borrowers using, 203(b), it's sort of the baseline, most popular purchase mortgage structure, and then 203(k), the purchase-rehab loan. So with the 203(b), minimum FICO again, it's hard to say minimum. You'll see some literature that talks about being able to lend with a credit score into the 500s, but our experience is that the lenders are pretty uncomfortable underwriting anything with a minimum FICO below 620. The debt-to-income generally can go beyond the 45 percent with some compensating factors. The factors might be the nature of the debt they have, or the nature of why their credit score is lower than it might otherwise be. LTV is 96.5 percent. That means a 3.5 percent down payment from someone. And that down payment can be from the borrower, but it also can be from your grant or soft seconds, as long as it comes from a government or nonprofit entity working with the government. There are some there are some frustrations out there around the slowness of the FHA home ownerships centers approving the nonprofit for that ability to provide the down payment assistance. There's no post-closing reserve. We talked about reserves before. No reserves required on a single family. And of course, the a key difference here between MIP standards for mortgage insurance premium. With a conventional mortgage, that mortgage insurance premium will go away, can go away, upon request, after the LTV is below 80 percent of the median. So if you've got a mortgage and with a soft second it's at an 85 percent loan-to-value, Page 19 of 40

20 NationalDevelopmentCouncil_24Jan12_Fin Page 20 of 40 and let's say after four years you've paid down enough principal that the value is now great enough that you're below 80 percent LTV, there's no requirement for that MI to continue. With FHA, it does continue for the life of the loan. An important little differentiation there. Let's go on, and just talk a little bit about, you know, some other key features here. Non-occupant co-signers are permitted. They're not permitted with the conventional/conforming markets, typically. There is allowance for the exclusion of deferred non-housing debt, such as student loans, which can be a big deal. And really, FHA even to this day is more of a story loan. Those extenuating circumstances we talked about, those compensating factors come into play here and it makes a big difference. So Matt, your experience with FHA, is it a more flexible tool, generally speaking, than Matt Callahan: Well, I think your final point, Craig, about being a story loan is important. You know, if you have a scenario that makes sense and any reasonable person looking at it, it would make sense, but it doesn't fit the conforming lending guidelines, which tend to be more black or white, an FHA is going to be a good choice. The only thing I was going to add in the points you make, Craig, with regards to FICO credit scores, it's important to always keep in mind that we're talking about the middle FICO score, not the lowest or the highest, but the middle. So sometimes the borrower can come in and say, "Oh, I've got a 600 FICO score," and you ask them, "How do you know?" "Well, I checked it on MyFreeCreditReport.com," or something. And you really need to get a Trimerge mortgage credit report and see what that middle FICO score is, and often that can get your borrower approved. That's a good point. Good point. Let's go on to the comparison, then, of the conventional and FHA, get a little clarity on where one works whoops, I jumped ahead. No, that's okay. Please go to the next slide. I forgot we were going to cover 203(k) here. A few words around 203(k). There's I read recently that some impressive results, that 203(k) had doubled from the volume has doubled from 2009 to 2010, and again from 2010 to 2011, which sounds very impressive. It's still a relatively modest number. I think it's somewhere around, at the end of 2010, there were 22,000 Page 20 of 40

21 NationalDevelopmentCouncil_24Jan12_Fin Page 21 of (k) mortgages in America, and our need, of course, is well beyond a few thousand. But this is an important product, and it is of growing use in NSP markets. And I want to differentiate between the standard 203(k) classic and the new streamlined program. 203(k) is a 15 to 30 year purchase rehab mortgage, so it's a mortgage where you would buy the home and you would also incorporate the renovation costs into one single mortgage payment. You can finance significant renovation. I mean, it could be, you know, $30,000.00, $40,000.00, $50,000.00, $60,000.00, $70, There's a minimum of $5, You can and this is important. You can finance up to six months of your principal interest tax insurance. So let's say you're living somewhere else while your home that you've just bought is being renovated. You can finance six months of that mortgage payment on your new home into the into the long-term 30-year mortgage so that you're not caught paying a mortgage on two different properties while the renovation is occurring, a nice feature. The total loan-to-value I should use CLTV, combined long-tovalue, is the lesser of the purchase and rehab price cost, or 110 percent of the appraised after-rehab value. And I have to warn you, the costs associated with the 203(k) can be higher. It can be as much as three percent higher than a conventional mortgage without rehab. Let's look at the streamlined. With the streamlined purchase and rehab, it's a lot simpler, and I would encourage you, if you're going to go this route, if you're going to do a direct to homebuyer execution rather than use a turnkey developer approach, which is most commonly used, if you're doing a direct to homebuyer, use the streamlined approach. Don't go to the more cumbersome and older program. This is simpler, easier, cheaper. Fifteen to 30 years, again. The rehab must be between $5, and $35,000.00, so it's more modest. You cannot finance that six months of PITI, but you also don't have to hire the architect and the consultants and have a HUD blessing and approval. And you must start the construction after approval of the loan and complete it within six months. But it is a it is a more streamlined vehicle. We'll answer your questions about this in a minute. Let's go to the comparison here. Oh, we keep jumping ahead. Portfolio products. A number of you asked questions about portfolio products, and I Page 21 of 40