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AGENCY REVIEW A LOOK AT THE GSES' LATEST DELINQUENCY NUMBERS AND TOP HEADLINES 5.59% fannie single family freddie single family 5.07% October 2012 fannie » 3.35% freddie » 3.31% 4.55% 4.03% 3.51% 3.00% 2.48% note: Delinquent loans reported here include all single-family loans 90 or more days past due as a percentage of portfolio size. Historical data covers a moving 12-month period. Source: Fannie Mae October 2012 Monthly Summary and Freddie Mac October 2012 Monthly Volume Summary 1.96% 1.44% 0.92% 0.40% /12 /12 10 /12 09 08 /12 /12 06 07 /12 /12 /12 05 04 /12 03 02 /11 /12 01 /11 11 12 /11 /11 10 /11 09 /11 08 /11 07 /11 06 /11 05 04 /11 /11 02 03 /10 /11 12 01 /10 /10 10 11 Freddie's 2013 Buyback Strategy: Older Loans for QC but Fewer Reviews Freddie Mac is ramping up repurchase demands and "the put-back that [it's] been going through from 2006 forward on loans . . . [it is] increasing that put-back now to '04 and '05," U.S. Bancorp CEO Richard Davis told investors at the Goldman Sachs Financial Services Conference in New York in early December. According to Davis, Freddie Mac informed U.S. Bancorp and other large servicers that the GSE will require them to buy back defaulted loans originated in years prior to the housing crisis. While Davis said the move was "unexpected," Freddie Mac maintains it has always had the authority to pull files for review when loans stop performing, regardless of when the loans were originated. "Our repurchase policies for nonperforming loans have not changed. If there 20 are rep and warrant violations, we can discuss appropriate remedies with the lender," said Brad German, spokesman for Freddie Mac. As Davis says, up until now, both Freddie Mac and Fannie Mae have only reviewed loans from 2006 or later in assessing repurchases. But German explains that the GSE's file review strategy is adjusted periodically to ensure the company is gathering the type of data needed to improve its quality control processes and reduce taxpayer exposure to risk. "We have begun telling servicers 2013 file reviews will include non-performing loans originated in 2004 and 2005," German said. But, he added, "We also expect to request fewer total non-performing loan files next year than we did this year." As German describes the review adjustments, Freddie Mac is asking to take a look at loan files—and only the files of nonperforming loans—dating back to the years of the housing boom simply as a quality control measure. He says Freddie Mac is "fully committed to working with our lenders to . . . improve the overall quality of conforming, conventional mortgages sold to Freddie Mac" while remaining "responsible stewards of taxpayer resources." Davis says U.S. Bancorp "is still sizing" how the added vintage reviews will impact the company's reserves. While any associated losses won't be realized until Q 4 analysis, Davis says U.S. Bancorp is already setting aside what it expects in repurchase demands from 2006 and forward, and then will "add another $0.01 or $0.02 worth" for 2004 and 2005 originations. Still, the risk attached to older, legacy assets raises concerns among bankers. "That's the reason the mortgage business gets harder to love because you don't know whether or not you're done with it," Davis remarked. "There used to be kind of a statute or an unspoken statute of how long you could hold a transaction, sell a transaction, underwrite a transaction, or close out a deal." But now, Davis says you see this same type of scrutiny and liability coming from different agencies wanting to "reach back" to double-check lenders actions. "Even if the rules were right then, even if that own agency approved [the loan] then, it seems that it still is at risk," Davis said. Davis told investors he is "quite concerned" about the banking business next year. "I don't like what I see," he said. With low interest rates and the rising costs of adhering to new regulations, Davis believes banks will see smaller returns. "This economic environment is challenging," he said. KNOW THIS The typical HARP household saves 34% monthly, according to Dan Green, a Cincinnati loan officer and blogger for TheMortgageReports.com.

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