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means of amicably resolving foreclosure cases. In contrast to the many difficulties encountered when formal mediations and large-scale modifications were new, the major national lenders are now well situated to incorporate existing practices and procedures into new jurisdictions. Indeed, many lenders are now seen as leaders in the development of new loss mitigation strategies, rather than reluctant and begrudging participants in the process. So what does 2013 hold for loss mitigation? Only time will tell. Scott P. Ciupak is managing attorney of the loss mitigation practice at Reimer, Arnovitz, Chernek & Jeffrey Co., L.P.A. He has been practicing law for 10 years and is licensed in Ohio and Michigan. S E C O N D A R Y M A R K E T LAURIE GOODMAN SENIOR MANAGING DIRECTOR - RMBS STRATEGY Amherst Securities Group, L.P. In 2012, both agency and non-agency mortgage-backed securities (MBS) delivered extraordinary returns. Agencies were buoyed by strong government support through QE3, coupled with very limited net production (the latter courtesy of tight credit standards). Non-agencies were aided by continued shrinkage of the legacy book of business, strong demand from new mortgage opportunity funds, elimination of the threat of forced selling by European and U.S. banks, and an improving housing market. However, such strong performance is unlikely to be repeated in 2013. In the agency market, assuming rates remain low (near current levels) all year with no further policy changes impacting prepayments, prepayment rates should begin to burn out. This is a positive for a market with an average dollar price of 108.5, as less rapid paydowns allow investors to clip higher coupons for a longer period of time. The risks to the market are twofold. First, if rates begin to drift higher, lower coupon MBS could cheapen substantially on extension fears. Second, a universal refi program could eliminate protection from the Home Affordable Refinance Program's June 1, 2009, cut-off date. We remain quite positive on the outlook for legacy non-agency mortgage-backed securities. While this year's performance won't be replicated, we still anticipate they will outperform other fixed income sectors, including high yield corporate bonds. Housing should continue improving, which will lower the default rate and the loss given default. Modification success should also continue improving. 58 The risk premium on non-agency MBS is likely to continue tightening as the range of outcomes narrows. That is, most investors have completely eliminated any possibility of a further sizable drop in home prices. Moreover, investors have become more comfortable with differences in behavior across servicers. One caveat: If there is a global widening of risk premiums, the non-agency MBS sector might be impacted, although it should still outperform other asset classes. We expect considerably more new nonagency issuance in 2013 over 2012, albeit the total volume will be very limited by historical standards. New issuance is economical, at least in limited quantities. Many new non-bank originators do not have a portfolio, so securitization is a natural outlet for their product. Their natural partners are mortgage real estate investment trusts (REITs) that are happy to hold a deal's subordinate tranches. However, we believe volumes will remain very limited by historical standards—banks are unlikely to be significant securitizers, preferring to hold whole loans on balance sheet where it receives more favorable capital treatment than securities of equal risk. Moreover, banks are awash with deposits; with limited loan demand, mortgages are an attractive asset. Finally, while we believe the "qualified mortgage" (QM) rule will be decided by the Consumer Financial Protection Bureau by January 2013, the rules governing risk retention on securitizations are likely to take much longer to resolve. Until that occurs, banks will be reluctant to securitize. On the governmental front, we expect the emphasis to shift from helping delinquent borrowers modify their mortgages to helping current borrowers refinance their mortgages. It is too early to speculate on the probability of universal refinancing programs, but any universal refinancing program will raise the value of legacy non-agency MBS and lower the value of existing agency MBS. Laurie Goodman heads up Amherst's strategic, business development, and research initiatives for RMBS. She was ranked #1 Mortgage Strategy and Agency Structured Products analyst by Institutional Investor for 11 consecutive years (1998-2008) and in 2009, she was inducted into the Fixed Income Analysts Hall of Fame. S E C O N D A R Y M A R K E T RON D'VARI CEO AND CO-FOUNDER NewOak Capital The key drivers of the secondary mortgage market in the United States in 2013 will continue to be housing prices, the job market, underwriting standards, mortgage rates, and credit availability. The data trends and most housing economists point to the continuation of a gradually improving U.S. housing market. This is due to record-low interest rates, high affordability, and more than five years of anemic new home construction. The job market and availability of credit are also expected to improve only gradually. Despite signs of recovery in housing, banks have been fairly conservative in mortgage underwriting due to the lack of regulatory certainty surrounding a long list of new mortgage lending rules. Specific areas of uncertainty include borrower's ability to pay, risk retention, and capital requirements. Clarification of new lending requirements is expected in early 2013. With banks' capital ratios also improving, we expect the availability of mortgage credit to improve in 2013. NewOak forecasts, on average, a 2 percent to 5 percent increase in home prices next year at the national level but fairly varied across markets. The forecast will be subject to a number of risks including the United States' fiscal cliff, European debt crises, and global economic improvements. House price improvements combined with a gradually improving job market are expected to lead to fewer defaults, higher recoveries, and some pick up in prepayments of always-current mortgages across various types of loan products depending on their current loan-to-value (LTV) ratios. Keeping spreads and other factors constant, analytical models point to dollar-prices of residential mortgage-backed securities (RMBS) increasing across prime, Alt-A, and subprime products throughout the capital structure in the 1.5 percent to 3 percent range. Alt-A RMBS presents the most promise in terms of price increases. Prime mortgages are expected to show the highest prepayments. Investors in non-agency RMBS should be wary of the rapid price increases in 2012. Most

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