Managing Your HFA’s Financial Health in the Face of Uncertainty

cfX Incorporated588 Broadway, Suite 1203New York, NY 10012

NCSHA 2014 – Boston

October 21, 2014

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HFA Aggregate Balance Sheets ($ Billions)

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HFA Aggregate Equity ($ Billions)

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HFA Aggregate Parity Ratios (Equity as a % of Bonds)

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Management Scenario Assumptions

• Adjustments from Rating Agency Assumptions

– SBPA fees

– Redemption frequency & ordering

– Operating distributions

– Prepayment recycling

– Universal cap and mortgage yield compliance

– Foreclosure frequency and loss severity

– Future debt issuance

• Prepayment Assumptions5

Historical Prepayments as % of PSA Model

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Use the OTS Prepayment Model Instead of PSA

• Prepayments are derived from interest rates

• 3 Factors

– Age of the loan

– Seasonality – time of the year

– Refinance Factor

• Compare Market Loan Rates vs. Loan Coupon

– Higher Rate Loans Prepay > Lower Rate Loans

– Rates fall ---- Prepayments up

– Rates rise ---- Prepayments down

• % of OTS calibration still necessary7

Projected Prepayments 6% Loan Using OTS Model

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Projected Prepayments 4% Loan Using OTS Model

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Historical Prepayments as % of PSA Model

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Historical Prepayments as % of OTS Model

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WSJ Surveys - Average Predicted 10 Year UST Rates

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WSJ Surveys - Average Predicted 10 Year UST Rates

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WSJ Surveys - Average Predicted 10 Year UST Rates

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WSJ Surveys - Average Predicted 10 Year UST Rates

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WSJ Surveys - Average Predicted 10 Year UST Rates

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Management Cash Flow Interest Rate Scenarios

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Management Cash Flow Scenarios

• Interest Rate Scenarios

– Current Rates

– Ramp Up +100, +200, +300, +400bp

– Ramp Down -100, -200, -300, -400bp

– Sometime Bracket with Rating Agency Rates

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Management Cash Flow Scenarios

• Debt Structure Evaluation

– 3 vs. 4 vs. 5 Year PACs

– PACs vs. Cross-Calls/Recycling

– Variable/Swaps/Unhedged

• Economic Refunding Evaluation

– Future Savings vs. Upfront Costs

– PV Savings Before and After Tax Compliance

• Future Operating Distributions

– Sensitivity to future interest rates

– Budgeting/Planning19

Management Cash Flow Scenarios

• Validate Continuous Lending Programs

– Impact of “Below Full Spread” Lending

– Model captures cross-call & recycling opportunities (Cross-call ~ 27bps)

– Leverage Accumulated Equity/Excess Spread

– Manage & Sustain Size of MRB Balance Sheet

– Maintain Market Position

• Program Development

– Cost/Benefit of Multiple Rate Programs

– Cost/Benefit of Changes in Lender Comp.20

Management Cash Flow Scenarios

• Final Thoughts

– HFAs have had > 40 years of success

– Will ballooning equity + shrinking balance sheets expose HFAs to raids ?

– Liabilities might be same as 2002 but scenario modeling capabilities are way up

– Management Scenario Cash Flows can be an effective tool for HFA Managers

– Model results from Saturday night

» Not Pass Interference !!!21