homeside mortgage

HomeSide Lending International 11th October, 2000 www.national.com.au Contents ã ã ã ã HomeSide’s US Business HomeSide’s Global Strategy HomeSide, globally Summary 2 HomeSide’s US Business Kevin Race President and Chief Operating Officer 3 US Mortgage Value Chain - Overview BORROWER BORROWER ORIGINATION FUNDING SERVICING INVESTOR INVESTOR o Customer Education / Marketing o Application Taking o Application Processing o Underwriting o Pipeline Risk Management o Closing o Warehousing o Managing Interest Rate Risk o Managing Credit Risk o Packaging of Securities o Sales & Trading of mortgage securities o Secondary Marketing o o o o o o o o o Loan Set-up Information Processing Payment Processing Escrow Management Loss Mitigation Customer Service Master Servicing Pay Offs Legal Compliance (e.g., registration, QA) 4 Origination Process overview ã Retail sources ã ã Branch offices with sales staff that meet directly with end borrowers, or Direct consumer contact via telemarketing or through the internet. ã Wholesale sources ã ã ã ã Broker ã Acquiring loans from mortgage brokers where the loans typically close with HomeSide funds Correspondent ã Acquiring loans from other mortgage bankers where the loans close with the originator's funds and is sold to HomeSide Assignment of Trade / Co-issue / Quarterly Bulk ã A joint transaction between the originator and HomeSide where the loans are sold to the investor and HomeSide acquires the servicing rights ã Bulk acquisitions Bulk Acquisition of mortgage servicing portfolios 5 Making money in Production ã Economics / Drivers ã ã Total production market ã HomeSide production Production margins ã Competitors pricing ã Revenue sources ã ã Application and other Fees Sales (price by volume) of loans to third party investors ã Expenses / Expense Drivers ã ã Variable / Proportional ã Application and Processing costs ã Purchases (price by volume) of loans from production sources Leveragable / less Variable ã Channel production costs - sales force / support 6 Production margins spectrum Expected Production Margins flow rtner Pa rred e Pref Correspondent channels Co-issue channels Bulk acquisitions Consumer Direct / teleweb Broker channels Operational Effort 7 Variable Production Expense base Production Expenses against Production Volume 25,000,000 8,000,000 7,000,000 20,000,000 6,000,000 15,000,000 5,000,000 4,000,000 10,000,000 3,000,000 2,000,000 5,000,000 1,000,000 0 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 0 Total Production expenses Production Volume, ex Bulk (in $'000) 8 Servicing overview ã Activities directly connected with borrowers ã ã ã ã ã Collect payments from mortgagors Pay hazard insurance Pay taxes Pay mortgage insurance Handle insurance claims ã Activities directly connected with Investors (owners of the mortgage) ã ã ã ã Remit consolidation payments to investors Handle delinquent mortgages Foreclose on the Investor’s behalf when necessary Sell OREO on Investor’s behalf when requested 9 Making money in Servicing ã Economics / Drivers ã ã ã ã Servicing book size Servicing Income Servicing Cost per Loan Amortisation of MSR ã Revenue sources ã ã ã ã Servicing Fees - paid by third party owner Ancillary Fees and Charges - paid by borrower Incremental revenue - paid by other users of database Float income on timing of borrower inflows against third party outflows ã Expenses / Expense Drivers ã ã Variable / Proportional ã Amortisation of MSE ã Costs of hedging the MSR balance Leveragable / less Variable ã Servicing costs 10 Leveraging Servicing scale Servicing Total Expense against Portfolio Size 20,000,000 160,000 18,000,000 140,000 16,000,000 120,000 14,000,000 100,000 12,000,000 10,000,000 80,000 8,000,000 60,000 6,000,000 40,000 4,000,000 20,000 2,000,000 0 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 0 Total Servicing Expense Avg. Servicing Portfolio (in $ mm) 11 Production vs Servicing Revenue Production and Servicing Revenue Quarterly in US$ millions 160 120 80 40 0 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Servicing Production 12 Funding Process overview ã Interface with Investors to determine daily pricing parameters ã Communicate pricing to originators ã ã ã ã ã ã ã Manage pipeline of unclosed loans Borrow money from warehousing source Fund individual loans Obtain commitment from Government Sponsored Entity (GSE) Pool like loans into securities Deliver securities to a secondary market Repay warehouse funding source 13 Comparison - Traditional Bank vs HomeSide Traditional Bank Balance Sheet • 70% - 80% of Assets are held to maturity • Credit risk retained • Risk management focused on match funding and managing credit risk • 60%-80% of income driven by net interest margin • Fee income result of owning interest margin • Credit costs key event risk • Risk management focused on managing and preserving net interest margin Homeside • 70% - 80% of Assets marked-to-market • Credit risk sold off or transferred • Risk management focused on liquidity management and preservation of asset value • 70% of income fee based • Net interest margin result of holding assets for sale event risk • Credit risk minimal • Interest rate cycle key event risk • Risk management focused on preserving asset values Income Statement 14 HomeSide’s Global Strategy Blake Wilson Executive Vice President Chief Financial Officer 15 Vision, and Competencies To be the most efficient provider of mortgage services to the world Wholesale Origination Direct Technology Servicing Securitization and Risk Management Access to Capital 16 Key Strategies Overview ã Continue our Preferred Partner programme to capitalize on industry consolidation through acquisitions - by leveraging our :ã ã Low Cost servicing platform Consolidation expertise ã Exploit technology advantages to create significant share growth through e-commerce ã ã Implement the HomeSide Solutions technology and operations Expand business to business platform ã Leverage HomeSide capabilities outside US markets ã ã ã Expand HomeSide Australia business Enter Europe through HomeSide UK based business to business channel Create global mortgage securitization capability to allow the NAB group to more flexibly manage capital and funding ã Diversified product range ã ã Home Equity products Fannie Mae expanded approval products 17 U.S. Mortgage Market Size The U.S. Mortgage Market is the world’s largest Debt Market US Mortgage debt market in US$ trillions $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: MBA Database/FNMA Fact Sheet R 8% CAG 18 Industry Consolidation Market Share of US Top Servicers (1994 - 2007E) Top 5 Servicers Top 25 Servicers 100% 90% 80% 70% 60% 82% 47% 50% 40% 30% 20% 10% 0% 1994 1995 1996 1997 51% 52% 35% 38% 42% 25% 13% 15% 18% 20% 24% 1998 1999 2007E 19 Preferred Partnerships Generalised Structure ã Partner sells existing servicing portfolio to HomeSide in exchange for cash ã ã ã ã Cash value based on fair value of servicing portfolio Monetise portion of off-balance sheet value and provide capital for reinvestment Eliminate intangible at parent; improve tangible capital ratios Eliminates servicing portfolio interest rate and operating risk ã Partner may retain balance sheet and servicing rights to portfolio assets ã HomeSide sub-services the Partner’s portfolio ã Partner enters into extended exclusive rights agreement to sell all of the origination flow ã Significant investment made by HomeSide in technology, management and process linkages to streamline that flow into HomeSide ã Partners retains customer relationship for banking products; HomeSide obtains rights to customer for mortgage-related products 20 History of Preferred Partnerships ã ã ã ã ã ã ã ã BankBoston Barnett Mortgage Banc One Mortgage Corporation People’s Bank First Chicago NBD Cendant Corporation NAB Australia Colonial Bank March 1996 May 1996 June 1998 November 1998 March 1999 June 1999 June 2000 August 2000 21 Internet Useage Origination via the Internet 1998 Percentage 2005 Percentage Influenced by WEB 10-20% Influenced by WEB 50-75% Originated over WEB 1% Originated over WEB 10-20% Closed over WEB Closed over WEB 5-10% Source: Morgan Stanley Dean Witter Research, February 1999. 22 HomeSide Solutions ã Technology development and business alliance with the worlds largest mortgage participant ã ã Leverages HomeSide’s Mortgage Desktop technology to create a new Internet mortgage underwriting and origination experience for customers ã Significantly reduced process steps / costs ã Firm approval for loans granted on-line, real time Creates Internet origination channel for HomeSide ã Leverages the investment that financial services companies (New Entrants) have already made in their brand names Fannie Mae will facilitate the evolution of this channel to be a significant portion of their flow by 2003 ã 23 HomeSide Solution Partnerships ã Trusted Advisors ã ã ã ã Banks and Insurance (eg. Banc One / Wingspan) Brokerage and Investment Managers Real Estate Brokers Legal and Accounting Advisors ã Significant Consumer Brands ã ã ã Internet Portals Retailers Global Consumer Brands ã Affinity Groups ã ã ã Entertainment (eg. Black Entertainment Network - BET.com) Corporations Relocation (eg. Suddath Relocations) 24 HomeSide, globally Blake Wilson Executive Vice President Chief Financial Officer 25 Global Mortgage Markets Mortgage Market size (in US$ billions) Brazil Australia Poland * UK Germany Japan US 0 1000 2000 3000 4000 36 150 740 760 1100 1610 5000 5000 6000 26 Preferred Partnerships with the NAB Group Marketing Origination - Sales National Retailers Origination - Production Servicing Secondary Marketing & Funding National Funding Retailer Production Retailer Production Servicing Customer Segments Direct Retailing Securitisation Securitisation Wholesale (Broker) Broker New Investor New Investor Funding Funding National 3rd Party Originators New Investors Responsibility: HomeSide 27 HomeSide Australia Servicing ã ã Phase 1 - Plan Solution Phase 2 - Develop & Implement ã March 1998 - August 1998 September 1998-June 2000 Conversion completed of NAB Loans ã ã ã May 9 May 22 June 12 10,000 BNZA Loans 115,000 VIC & TAS Loans 245,000 All Other Loans ã HomeSide Australia now servicing 370,000 loans ã Phase 3 ã Securitisation Capability 28 HomeSide UK - Entrance Strategies “Blending HomeSide US expertise with local requirements and talent” Servicing related opportunities Forge Preferred Partnership with market leader ã Support Securitization as the need grows in Global Markets ã Origination related opportunities Transfer our proven “business to business” model to new markets ã Leverage Internet and Workflow experiences and tools ã 29 Summary ã HomeSide is headquartered in the world’s largest mortgage market ã Our cost efficiency and scale gives us the ability to :ã ã create economic value from alliance and acquisition opportunities. leverage existing technology into actively growing e-commerce markets - and we are doing so in an alliance with the world’s largest mortgage player ã Our Australian experience with the NAB Australia project is now leverageable into other markets 30