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74 Mae about 40 years – from its inaugural MBS issue in 1970 to 2010 – to reach the $1 trillion mark in guaranties outstanding, and then only four additional years to reach the $1.5 trillion mark, a phenomenal growth spurt by any standard. Ginnie Mae's staff has grown slowly and is still only a tiny fraction of the staff size of the GSEs. Ginnie Mae has returned a healthy profit every year for the United States Treasury and continues to fulfill its mission of attracting global capital into America's housing finance markets. It has poured approximately $5 trillion of liquidity into mortgage finance markets since the housing bubble burst, helping fund millions of units of housing during that very difficult time. While the landscape has shifted dramati- cally, Ginnie Mae's very simple model remains fundamentally unchanged. It operates a single security on a single platform, creating a level playing field for all 433 qualified issuers, enabling global investment, and allowing global investors to purchase billions of dollars of MBS without concern over the underlying credit risk of the loans or the particular issuer of each MBS. Keys to Ginnie Mae's success include: » e bifurcation of credit and interest rate risk created by the explicit government guaranty; » e ability to attract the lowest-cost funding for issuers; and » e value (fungibility) of our guaranty to global investors. So, yes, Ginnie Mae is successful, and our business model works. Why change anything? While we do not foresee changing our business model, we must modernize our operating structure and add staff to keep up with the market and evolve for the future. SECONDARY MARKET EVOLUTION As previously mentioned, the housing environment is vastly different from the one in which Ginnie Mae's model was conceived. Ginnie Mae's outstanding guarantees, once dominated by broad depository financial institutions is now equally issued to monoline mortgage organizations that are not part of a larger organization. In addition, the numbers and types of issuers who want to rely on the Ginnie Mae guaranty are broadening, creating greater risk. Traditionally, banks dominated Ginnie Mae's guaranty base, so there was very little real risk, because depositories have substantial liquidity and are regulated for safety and soundness. However, banks are retreating from mortgage lending for three primary reasons: (1) limitations on resources to cope with defaulted loans; (2) decreased appetite for risk in the current environment; and (3) Basel III requirements. Two new types of entities are emerging most: (1) established non-depositories that conduct mortgage banking activities through traditional measures, which have substantially increased their acquisition of Ginnie Mae MBS obligations and underlying mortgage servicing rights (MSRs), and (2) non-depositories, which require greater oversight because of their contracting of all issuer operational responsibilities. ese trends create more complex business models. For example, a non-depository may buy loans from a mortgage originator and hire another entity to perform the servicing function, which could be the mortgage lender who sold it the loans. ese organizations, such as Fannie Mae and Freddie Mac, make their income between the borrower's interest rate and the interest rate on its Ginnie Mae-guaranteed MBS, minus a servicing fee. Ginnie Mae does not view the growing presence of non-banks as a negative and in fact welcomes the flow of capital into the market, given the shrinking of credit availability. Ginnie Mae's main concern is the non-bank's limited access to sources of needed liquidity to meet the financial obligations of being an MBS issuer, which would be problematic. Also, while the non-depositories are regulated by the Consumer Finance Protection Bureau for consumer-related issues, they are not subject to the same prudential safety and soundness regulation as depositories. Ginnie Mae, therefore, has to step into that role, particularly when it comes to monitoring liquidity, which raises infrastructure and staffing concerns for Ginnie Mae. Further, these different, more complex entities present significant legal, accounting and technological challenges for Ginnie Mae. To effectively monitor the new entities, which often receive their capital from various complex investment vehicles such as REIT and private equity funds, we are changing our counterparty and governing practices so we can assess our issuers' financial and operating capacity. Given that the beauty of the Ginnie Mae model, and our fourth loss position, is that our guaranty only comes into play if the corporate resources of the issuer are depleted, it makes sense that we would have a vested interest in the financial soundness of our issuers, particularly when it comes to liquidity. Does this mean COMPOSITION OF GINNIE MAE MBS SINGLE FAMILY ISSUANCE VOLUME DEPOSITORIES NON-DEPOSITORIES *Ginnie Mae Issuers are responsible for servicing the securities & the loans backing them; in the case an original Issuer sells servicing to another entity, the new entity takes on all obligations of the original Issuer FY2014 SF ISSUANCE VOLUME: $277 B FY2010 SF ISSUANCE VOLUME: $389 B FY2010 FY2014 50% 50% 82% 18%

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