The document outlines innovation strategies for mortgage lenders, emphasizing the need to adapt to changing market conditions by improving operational efficacy and cost management. It discusses various outsourcing options, including business process outsourcing (BPO) and knowledge process outsourcing (KPO), as methods for lenders to enhance efficiency while focusing on core competencies. The text also highlights the importance of risk management, data integrity, and leveraging technology to achieve competitive advantages in the evolving mortgage industry.

1. INNOVATION OPTIONS FOR MORTGAGE LENDERS Tim Rood, Managing Director

2. Today’s Agenda Introduction to Capital Financial Solutions (CFS) “ Marketscape” Where to Invest Innovation Options and Terminology Construct for Measuring and Evaluating the Success of Your Mortgage Business Discussion of Opportunities and Next Steps

3. Capital Financial Solutions Strategic Business Development (diagnostics and solution design) organization serving the financial services industry Uniquely qualified in providing objective, insightful, and action oriented counsel Services include expedited lender analysis and vendor selection Founded and managed by financial services professionals with mortgage operations & IT expertise Provide focused innovation options to improve a lenders business, through utilization of vendor’s services that address market needs

4. Current Environment Avg lender lost money on a per loan basis in 2007 Cost to originate has been going up for past 4 years No appreciable decrease in the cost to originate a loan in past 10 years Private label securitization market and REIT markets remain closed Significant execution risk for improperly closed loan . New focus on retention vs. liquidation 7,000 loans going into foreclosure a day 660,000 lender /investor owned REO 30% are defaulting on initial interest rate Those that survive the storm will be well positioned to grow significant market share during the rebound Consumer disclosure and suitability HMDA reporting – detail and frequency State & Federal practices and disclosures Investor eligibility and rep and warrant defense and litigation

5. The Mortgage Market is Ready for Innovation – The Time is Now Then: Quest for an end- to -end LOS Custom integrations to each service provider and component technology Long, expensive, and abandoned IT projects Now: Industry adoption of Web services Increasing comprehensiveness of MISMO Realization of the long-term benefits of service-oriented architecture Lenders can mix and match best in breed technology providers and fully leverage service providers to perform routine and specialized tasks.

6. The Mortgage Enigma: Where to Innovate and Invest? In the Past: Focus on Efficiency - Ability to originate loans as quickly and inexpensively as possible Mortgage business driven by volume and velocity. Main goal was to maximize throughput at the lowest cost. Efficiency goals were achieved without consideration for, and often at the expense of, Efficacy Today’s Reality: Focus on Efficacy – The ability to manage and control the quality of assets, to ensure high integrity and quality of loan production. Realization that a sustainable business model must have a strong focus on efficacy. Risk management and capital preservation strategies require a strong focus on efficacy Solving for efficacy yields substantial efficiency gains .

7. Efficiency Considerations Mortgage operations historically experience high fixed start up costs & operating costs in anticipation of loan volume Origination volume can vary 30-50% from year to year Critical to manage production capacity with market demand Inconsistent contributor/detractor to earnings Poor efficiency makes you a poor performer

8. Mortgage Industry Economic Factors (2002 – 2007) Source: MBA Cost Study data. Estimates provided for year 2007. ** Increasing costs, and increasing fixed costs, in the face of rising volume Managing costs and ensuring viable secondary execution is critical given loans are originated at substantial losses -$1,028 -$772 -$2,476 -$2,049 -$1,485 -$2,750

9. Efficacy Considerations Data integrity is critical to efficacy; poor integrity results in unidentified risks that can’t be priced, can’t be mitigated, and can’t be used in execution decisions Lender error rates can range between 5% and 14% of their loan submissions Lender processing twenty thousand applications a year generates between 1,000 and 2,800 records with bad names, wrong addresses, or other errors requiring post-purchase scrubbing. (Or, worse, a repurchase.) Two-thirds of lenders have no system for managing financial or operational risks – Mortech 2007 Unredeemable warranties undermining risk management are more expensive than no implied warranties at all HOPE is not a hedging strategy TRUST is not a risk management strategy POOR EFFICACY PUTS YOU OUT OF BUSINESS Boston-based PCi Corp, Mortgage Technology, June 2004

10. Efficacy Exposure Potential Lender Exposure to Low Quality Loans: Non Performing Assets / Buybacks With the expectation that as much as 15% of some mortgage classes will be in default by 2009, investors will be vigorously looking for breaches in the representations made by lenders Lender Exposure/ Contingent Liabilities

11. Innovation Options

12. Strategic Options for Innovation Degree of Lender’s Operational Responsibility LOW HIGH Private Label Mortgage Outsourcing Business Process Outsourcing (BPO) Tools & Technology Delegation of distinct or end-to-end lending and servicing activities typically performed by a mortgage industry participant (e.g. lender, servicer). For lenders that: Value in mortgage relationship with customer Mortgage operations is not a core competency Do not view mortgage business as the highest and best use of their capital Constrained by capital/ resource allocations required to be competitive Delegation of select business processes to a 3 rd party, that owns, administers, and manages the processes For lenders that: Consider mortgage operations a core competency Comfortable with mortgage investments and returns May lack efficiency or expertise in specific area(s) May be uncomfortable with risks and investments associated with discrete task(s) within mortgage operations Purchase/development/customization of IT Solutions and/or tools and services to improve returns and/or customer experience For lenders that: Consider mortgage operations a core competency Comfortable with mortgage investments and returns Desire to leverage a combination of technology tools and service providers to achieve competitive advantages and mitigate/transfer risks Knowledge Process Outsourcing (KPO) Delegation of business processes that require specialized knowledge about a process (e.g. Risk Analytics, Loan Pool Analysis, Accounting Compliance). For lenders that: Consider mortgage operations a core competency Comfortable with mortgage investments and returns Choose not to invest the time and money for activities that require heavy research and complex analytics

13. Optimization through Business Calculus

14. THIS SLIDESHARE SERVICE IS BROKEN AND FREEZES UP AT THIS PAGE GO TO: www.capfinsol.com TO SEE THE WHOLE THING, SORRY.

15. Private Label Overview & Drivers A partnership that offloads the operational and economic burdens of creating and maintaining a world class mortgage operation – while optimizing the economic and relationship value of bank customers Arms Bank with POS origination and decisioning technology that would be hard to justify obtaining on their own Achieves Equilibrium -To have a mortgage business that expands when demand is great & contracts when demand diminishes Predictable & consistent fee income stream Create more cross selling opportunities and preserve marketing rights of your customers

16. Private Label Model: Roles & Responsibilities Lender Responsibilities Vendor Responsibilities Direct Marketing Loan Processing Secondary marketing Closing & Funding Servicing Default Management Customer acquisition and lead generation AUS submissions, and manual underwriting as warranted Pipeline and/or interest rate hedging Schedule closing and order closing docs New loan boarding, Outbound collections Follow up on and verify leads Settlement services ordering and vendor management Rate lock administration and confirmation and extensions Pre and Post closing QC for eligibility and compliance Loan Workout: modifications, forbearance, short sale, etc. Default research, prior lien investigation, forensic reviews Capture borrower information Ordering verifications and clearing conditions Pipeline administration and reporting Electronic delivery and/or secure storage for retrieval and electronic signing Customer inquiry calls and e-mails Order property appraisals and follow property preservation instructions – field services Determine Program Eligibility Electronic and/or manual delivery and tracking of 3 day disclosures Trade log reconciliation MERS registration and investor delivery loan payoff quotes and lien releases REO management , contract negotiations, and sales Pre-qualify and provide estimate rate quote Document Drawing (electronic delivery and management) Fund loan Long term storage or vault to vault transfer ACH administration credit bureau report corrections, escrow analysis Final loss/gain analysis

17. Benefits from Private Label Model Economic Benefits Maintain presence in business and provide a full suite of products Focus on customer franchise management Expand delivery channel capabilities Continue to maintain ownership and control over customer Increase earnings from business by sharing in economic value created by outsourcer Free-up capital / reduce or eliminate investment requirement Lower earnings volatility Lock in margins Eliminate fixed costs Improve efficiency ratio Enhance customer service Eliminate operating / processing infrastructure Eliminate risk (delivery and financial) Reduce headcount Improve compliance performance (e.g. CRA) Strategic Benefits Operational Benefits

18. BPO Overview & Drivers BPO is a strategic sourcing arrangement whereby a mortgage company turns over all, or part, of a defined business process to a third-party specialist to manage on their behalf. By outsourcing, mortgage companies can focus on their core competencies, while the BPO provider can focus on the details of business functions. BPO service providers typically have the advantage of process, technology and labor management economies of scale, which allow them to run a more efficient operation. Outsourcing pieces of a mortgage operations is one of the key tools banks can use to achieve flexible capacity and a true variable cost structure, while at the same time enabling banks to focus more time and resources on their core competencies . Most common drivers: * Low margins and ROA Out-of-date technology (and the capital- and expense-intensive alternatives) Poor accuracy and quality People management and staffing issues Highest driver is Increased management accountability & increased customer expectations Lowest Driver is the growing cost of human resources *”Outsourcing for Maximum Returns, Ocwen Technology 2006

19. BPO Model: Roles & Responsibilities Lender Responsibilities Vendor Responsibilities Direct Marketing Loan Processing Secondary marketing Closing & Funding Servicing Loss Mit/ Default Management Customer acquisition and lead generation AUS submissions, and manual underwriting as warranted Pipeline and/or interest rate hedging Schedule closing and order closing docs New loan boarding, Loan Workout: modifications, forbearance, short sale, etc. Follow up on and verify leads Settlement services ordering and vendor management Rate lock administration and confirmation and extensions Pre and Post closing QC for eligibility and compliance Customer inquiry calls and e-mails Default research, prior lien investigation, forensic reviews Capture borrower information Ordering verifications and clear conditions Pipeline administration and reporting Electronic delivery and/or temp secure storage for retrieval and electronic signing loan payoff quotes and lien releases Order property appraisals and follow property preservation instructions – field services Determine Program Eligibility Electronic and/or manual delivery and tracking of 3 day disclosures Trade log reconciliation MERS registration and investor delivery ACH administration credit bureau report corrections, escrow analysis REO management , contract negotiations, and sales Pre-qualify and provide estimate rate quote Document Drawing (electronic delivery and management) Loan Funding Long term storage or vault to vault transfer Final loss/gain analysis

20. Value Creation from BPO Service & Quality Improvement Cost savings can range from 20-45% Outsourcing partner deliver continuous process / technology improvements and innovations Clearly defining business processes to be outsourced and the procedures/rules to be followed improve quality and decrease processing time Service quality improves by monitoring and measurement of service metrics against benchmarks – enforced via SLAs Cost Efficiencies Operational Flexibility Revenue Enhancement D evote more attention and re-deploy employees to critical areas F lexibility in modifying the scale of operations, helping lenders respond more quickly to changing market conditions Efficiencies result in shorter cycle times, which result in improved pull through that improve margins Reallocation of investment and working capital to product development and customer generation and retention

21. KPO Overview and Drivers The mortgage industry is at a level of complexity and regulatory scrutiny like no other time The complexity and scrutiny demands very specialized services and precise analytical/accounting interpretation KPO is referred to as "Knowledge Processing Outsourcing” – extension of, or evolution of BPO Helps companies to create huge business opportunities by providing lenders with very specific domain-based processes and business expertise While Traditional BPO is rooted in the outsourcing of processes/tasks that can be clearly defined to the point that human “judgment” is essentially removed Judgment and specialized skills – often “on demand” – are the cornerstone of the KPO value proposition

22. KPO: Areas of Consideration Retention & New Customer Development New Program Development Operations Support/Audit Accounting / Analytics Default Management Customer database mining and segmentation Underwriting / Risk Scorecard Rules administration for Business Process Management Servicing and Securitization accounting reviews Claims management and compliance audit Internet marketing plan New Program Development: FHA Lending Review and evaluation of compliance and best practices Credit Risk Analytics and Active Portfolio Management of High Risk Loans Marketing and management plans New Program Development: Reverse Mortgage Pipeline and/or interest rate hedging Fair Value analysis/valuations: fair value Loss mitigation strategies New Program Development: Construction Lending Vendor management, exception management, workflow automation Compliance and adherence to FAS 140, FAS 133, FAS 90, FAS 159 Loss Mitigation and REO final loss/gain analysis

23. Value Creation from KPO Service & Quality Improvement Access to subject matter expertise in critical areas at a fraction of the price of achieving it natively, and in far less time Automate manual inspections and audits and achieve built in quality vs. inspected in quality Critical research, insight, and analysis to drive strategic decision making process Quality assurance and compliance with respect to critical risk management areas Eliminates key dependency risks associated with staff subject matter experts Data and analytics used to embellish and calibrate core activities Cost Efficiencies Revenue Enhancement Improved time-to-market New product expansion Decreased load on employees frees up time for higher value activities

24. Technology & Tools Overview & Drivers Consider mortgage operations a core competency , are comfortable with mortgage investments and returns, and chose to leverage a combination of technology tools and service providers to achieve competitive advantages and mitigate/transfer risks Would benefit from technology or tools to augment, embellish, or generally improve the process or experience of processes or services Lenders can mix and match best in breed technology providers and fully leverage service providers to perform routine and specialized tasks How you apply it is more important than the technology

25. Tools & Technology Direct Marketing Loan Processing Secondary marketing Closing & Funding Servicing/ Portfolio Mgmt Default Management POS and Agents Assisted Origination Comprehensive Fraud (identity/property/ misrep/emp-income , compliance, and eligibility checks Pipeline and/or interest rate hedging Electronic closing room Match & Append data service Broker Price Opinions, value reconciliation report, REO appraisal Multi consumer lending products direct or agent assisted Electronic document management, disclosure, presentment, and eSign/Websign Rate lock administration and confirmation and extensions eNote registration with MERS Second Trust search/scrub Field services, condition reports Diagnose, analyze and present solutions Pricing & Eligibility Engines: Pipeline administration and reporting eSign & WebSign Electronic Vault Loss mitigation title services On demand customized lead search Vendor Mgmt: Vendor selection, integration, data/doc mgmt Pipeline Manager and Multi investor rate locks Compliance and eligibility checks Electronic modification preparation, presentment, and signing Best fit product tools Rules mgmt and workflow automation

26. Summary There is no one way, or even a right way to run your mortgage operation Get clear on the current state of your operation – where are the deficiencies, short comings , strengths, and opportunities Review your decision making criteria for strategic options: time to market, system and process compatibility, required investment, risk mitigation/transference, fixed/variable cost Benefits can be derived and value created by all of the innovation options Determine three things that you must do today – and ACT! CFS can assist by providing strategic business diagnostics to pinpoint where and when to target innovation investments, and what solution set is appropriate to achieve your desired goals.

27. Capital Financial Solutions Overview & Approach Solutions Broad and deep assessment & triaging of business problems – FAST! Triage the Problem Objectively Explore Solution Options Solve The Problem as Quickly & Cost Effectively as Possible Is it better that I try to solve the problem with help, or are there existing full/partial solutions in the market?