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n~ Conceptualizing Mission Costs 4 CONFIDENTIAL AND PROPRIETARY - PDF document

Jan 10, 2024 •524 likes •715 views

Costs and Benefits of Mission Activities Project Phineas June 14, 2005 Highly Restricted - Confidential Treatment Requested 1 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172093 Mission

  1. Costs and Benefits of Mission Activities Project Phineas June 14, 2005 Highly Restricted - Confidential Treatment Requested 1 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172093

  2. Mission Activities are Generally Considered the Quid Pro Quo of the Charter Benefits I Charter Costs/Constraints I Charter Benefits I Agency status opportunity cost of explicit constraints on • Securities worth more than otherwise business activities comparable AAAs • US residential secondary mortgage markets • Liquidity under all market conditions • Conforming loan limits • Scale • Credit enhancements Capital advantage Opportunity cost of Implicit constraints on • AAA regardless of "actual" rating business activities Process advantages • Regulatory, political, customer conflict avoid • Debt / MBS SEC exemption (except anti-fraud provisions) f explicit regulatory requirem • Use of Federal Reserve facilities State and local income tax exemption • Economic cost of goals business, potential fu d Competitive advantages that result Cost of self-defined mission activities from scale • Costs associated with self-imposed goals • Broad network of industry relationships (American Dream Commitment, minority lending, etc.) • Focused expertise in risk management • Wealth of market data and information • Corporate Contributions/Philanthropy (other than imposed fund) • Ability to set market standards • Partnership Offices, ACF, National Comm • Strong and respected brand Lending Center 2 -"Agency" status - Phineas securities trade better then comparable AAA companies due to implicit government support -Capital advantage - ability to act as AAA guarantor irrespective of actual rating -Process advantages -SEC exemption - (except anti-fraud provisions) -Obligations issuable and payable thru Federal Reserve facilities -State and local income tax exemption -A direct (although not explicitly stated) consequence of charter benefits is Phineas's scale. This drives several competencies / advantages including: -Broad network of relationships in industry -Focused expertise in risk management -Wealth of market data and information -Ability to set market standards -Strong and respected brand 2 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172094

  3. But, the Company Also Benefits from these Mission Activities • Incentives for innovation and risk-taking • Product and business development value • Produce revenues (albeit sometimes below hurdle rates) • Significant corporate cultural benefits: • Employee morale • Recruitment and retention • Brand name recognition, good will 3 3 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172095

  4. n~ Conceptualizing Mission Costs 4 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172096

  5. 1!~lrl Organ~I1~ .. ~.i~siC)n .. Costs • Explicit Mission Costs: • Affordable Housing Goals • Administrative costs: Compliance and reporting • Transactions to meet goals • Subsidies within business to meet goals • Fund at 5% of net earnings (Anticipated) • Implicit Costs: • Market Leadership Goals • Administrative Costs • Transactions to meet goals • Other Mission Activities: American Dream Commitment • Administrative costs • Non-economic mission business opportunity costs • Corporate contributions, relationship work 5 5 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172097

  6. Conceptua I izi ng Housing Goals Mission Costs Expected Sources of Costs 2000-2004 2005-2008 Legislation Housing Goals: Transactions to close gaps High SF refinances HUD has increased goals Increased targeting of percent-of-business lowered market that reach likely Explicit costs: opportunity below goals unsustainable levels by 2008 goals to eRA levels; New Administrative costs of Meeting the goals levels in 2002 and 2003, regulator to set goals required by HUD compliance and reporting requiring extraordinary based on new Increasing goals also mean regulations activities to meet goals definitions, but also with susceptibility to costs Product subsidies arguably more limited incurred during another Consequences of discretion Investor channel deal single-family refinance boom missing goal is Prospect of an underserved costs were significant vs. reputation risk markets fund model fees/opportunity Prospect of relief on Need to maintain MF primarily. HUD has costs percent-of-business production volumes even in enforcement goals: House bill midst of uneconomical authorities. It can excludes SF refinances, Multifamily housing 2003 market conditions compel a compliance separates single-family WAMU and World plan and impose and multifamily goals, Savings deals came with cease and desist Possibility that HUD will and has SF goals set large costs and authorities for regulate to diminish effects based on market significant administrative failure to produce an of single-family refinances standard expenses approved plan or comply with the Increased compliance costs New compliance costs approved plan. Flow contribution to from new certification for meeting "duty to costs hard to discern requirements embedded in serve"; increased use of regulations enforcement penalties Ongoing administrative costs for housing goals 5% underserved compliance are minimal markets fund comprised of net after-tax 6 6 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172098

  7. r~.~ Conceptua lizing """"""'1"""""'" .. c:()sts ... ~.~.~.~.~il : ••••••••••••••• Ma Expected Sources of Costs 2000-2004 2005-2008 Legislation Market Transactions to close gaps High levels of uncertainty High levels of uncertainty with Unclear if new regulator with respect to size of the respect to size of the market. will continue to place Leadership: market. Effort follows poor Fannie Mae has caught up to emphasis on minority Administrative costs performance vs. 1999 market since 1999 and lending, but legislation to HMDA exceeded HUD's standard in include new concepts of Lead the Market in Special marketing and most recent years leadership in MH, Minority Lending product efforts preservation, and subprime HUD compares Fannie Mae to a market that included Business has significantly Implicit Costs: Not MF not relevant more subprime than our closed gap with market: costs Will likely remain part of required by regulation extant business of attainment may drop our corporate culture and but goal is embedded depending upon future of PLS goals. in HUD's analysis market. supporting housing Investor channel costs vs. goals requirements model fees/opportunity costs Decline in FHA market share and rapid growth in PLS Consequences of market has made this goal missing goal is Some identifiable and costly more daunting in 2005 reputation risk flow channel efforts to meet these goals Additional flow strategies, new channels, new products under Administrative costs for consideration planning and strategy are significant 7 7 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172099

  8. 1!~lrl g~:~:ctivities Costs Sources of 2000-2004 2005-2008 Post-Legislation Costs Transactions to meet American Dream Commitment: American Dream Commitment Revitalized ADC 3.0. On- Other Mission toughest housing Most of the goals embedded in Most of the goals embedded in going mission focus as Activities: challenges the business the business part of core values. Implicit costs: Administrative costs ACF: Increased efforts to ACF: Moving to generate Can new business Includes those other manage business to cover costs sufficient revenue to make opportunities in the activities undertaken money mission space cover ACF, Product subsidies in the spirit of NCLC, and PO costs? Will NCLC: Have central mission meeting our self- legislation limit these focus without dedicated P&L. NCLC: Moving to closer defined public Grants and Subsidies activities through bright Drive business through special alignment with single-family purposes to expand lines and/or program affordable housing outreach to business objectives and homeownership, approvals? lenders, relationships with non- strategies create affordable traditional partners, and pilots, rental housing and experiments. Levels of cross- opportunity, and Partnerships & Partnership subsidization, corporate serve comunities Offices: Merged with ACF contributions, and Partnerships & Partnership Moving to more explicitly cover charitable work should be Offices: Have central mission these costs with new revenues open question for the focus, with no dedicated within 2 years organization if the 5% revenue source fund is enacted Fannie Mae Foundation: Fannie Mae Foundation Diminished support while building capital 8 8 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172100

  9. Quantifying Mission Costs: Base Case Analysis, 2000-2003 9 CONFIDENTIAL AND PROPRIETARY BUSINESS INFORMATION CONFIDENTIAL TREATMENT REQUESTED FM-FCIC 00172101

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