Fannie Mae ACES IO Investment Strategy Overview

FNMA ACES deals are comprised of pooled FNMA Delegated Underwriting and Servicing
(DUS) loans. The loans have short-stated final maturities associated with mandatory balloon
payments (usually 10 years or less), and have call protection which typically runs until the
final 3 months of the loan.

Most DUS loans require borrower prepayments be accompanied by yield maintenance

penalties (YMP) (as opposed to defeasance, lockout or fixed-penalty points). When paid, a
portion of the penalty is passed through to ACES IO bondholders (usually 70%), thus
providing additional income which may surpass the cash flows of the IO component, thereby
increasing returns.

Deals in the targeted universe are currently carrying mortgage rates roughly 50 -200 bps
higher than current rates, which act as incentive for borrowers to prepay to refinance sooner,
as perceptions are that rates are expected to rise in the near future.

Any YMP paid by borrowers are generally capitalized into a new mortgage, so the
combination of a new lower mortgage rate, along with the interest deduction taken for
payment of the penalty, can make the short-period breakeven time a more practical business
decision compared with risking higher mortgage rates while waiting for penalties to burn off.

Replacement of durable goods necessary in multifamily buildings usually occurs around the
7-year timeframe, combined with mandated balloon payoffs in 7-10 years, borrowers are more
willing to refi slightly earlier to capture lower rates.

Many of the loans underlying the targeted securities currently enjoy embedded equity
ranging from 50%-150% of appraised value, making earlier refinancing desirable to tap equity
embedded in the properties as soon as possible.

Majority of underlying loans in this program were originated in the post-subprime-calamity

time period, and were subject to higher underwriting scrutiny and therefore tend to be more
stable. Both Fannie and Freddie were under tremendous political and regulatory pressure to
be disbanded during this period, so any loans made during this period tended to be
underwritten exceptionally well.

All indications are that the FED is poised to continue to raise rates, so borrowers may try to
get ahead of the FED and lock in lower rates as soon as it becomes economically
reasonable to do so.

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 1
ACES IO Strategy Overview interest rates and asset valuations, multifamily-
borrower behavior plays a significant role in the
Fannie Mae ACES IOs can offer a unique decision of when loan payoffs occur. Unique to
investment opportunity due to the distinctive multifamily properties, is the need to replace the
attributes of the underlying pooled Fannie Mae DUS durable goods (i.e. refrigerators, stoves, etc.)
loans, upon which the ACES securities owe their provided in each housing unit. Reaching the end of
cash flows. Historical prepayment performance of their operative lives, the necessary replacement of
190 Fannie Mae ACES loan pools, totaling $57.64 these amenities can result in earlier loan
billion, along with the universe of applicable Fannie prepayments as borrowers look to recapture
Mae DUS loans (totaling almost $200 billion) clearly replacement costs and take advantage of higher
illustrate the correlation between observed faster appraisal values associated with new equipment.
prepayment speeds and the shortening of time until This often-overlooked component of borrower
maturity balloon. behavior is a meaningful contributor in the decision-
making process multifamily owners must consider
Driving this strategy is the receipt of YMP payments
when deciding when to pay off their existing loans.
to bondholders, associated with faster prepayment
speeds on the underlying DUS loans, which can
Extensive use of yield maintenance penalty call
complement the traditional interest-only class
protection, along with limited knowledge of
investment yields.
multifamily borrower behavior, creates a product line
Obviously, prepayments may not benefit all ACES in which many investors are unfamiliar. This blind
IO securities, but for those where the underlying spot presents an opportunity where knowledgeable
DUS loans exhibit the desired metrics, and the investors can financially benefit by taking advantage
associated IO securities are priced appropriately, of potentially higher returns associated with
the combination may result in increased returns. educating themselves on an off-the-run investment
opportunity.
Historical prepayment performance analysis of
Fannie Mae ACES pools originated since 2009, The strategy outlined herein is predicated upon the
clearly illustrates a prepayment speed ramp-up over performance of the Fannie Mae DUS loans
time, which increases as the underlying loans trend underlying these securities, along with an
towards their balloon maturities. A similar ramp is understanding of how borrower behavior affects the
seen when the larger universe of DUS loans is timing of the associated cash flows. Given the
analyzed. The results of these analysis are importance of these aspects to the performance of
discussed below in the Fannie Mae DUS the strategy, a brief overview of the Fannie Mae DUS
Prepayment Performance section. program, along with the associated multifamily-
borrower behavior, has been included to help
Although loan prepayment activity is fundamentally familiarize the reader with the concepts underlying
related to traditional economic triggers such as the investment strategy.

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 2
Fannie Mae DUS Program Overview
Fannie Maes Delegated Underwriting and Servicing
(DUS) program was created in 1988 to drive,
enhance and maintain product standardization in the
multifamily marketplace. Fannie Maes multifamily
book of business totals more than $300 billion
financed since 2000, with over $40 billion originated
in 2015 alone. This is a unique business model in
the commercial mortgage industry (with the
exception of a less frequently used FHA risk-sharing
product). Standard industry practice is for a loan
purchaser or guarantor to underwrite or re-
underwrite each loan before making a decision to
purchase or guaranty it. Under the DUS model,
designated lenders are authorized to commit Fannie
Mae to acquire multifamily loans. The loans must be
underwritten, originated and serviced according to
standards established by Fannie Mae. In exchange
for this authority, DUS lenders must share the risk of
Table 1: Types of Multifamily Mortgaged Properties Eligible for DUS MBS
Property Type
loss over the life of the loan, generally retaining one-
third of the underlying credit risk on each loan sold
to Fannie Mae. DUS lenders must post collateral to
secure their risk sharing obligations1.
Under the DUS program, approved lenders can
originate fixed-rate, adjustable-rate, balloon, fully
amortizing, partial and full-term interest-only
multifamily mortgage loans. These DUS loans can
be financed through MBS, DMBS, or Bond Credit
Enhancement executions. The most common final
balloon maturities for fixed rate multifamily loans are
5, 7, 10, 12, and 15 years, while adjustable-rate
mortgage loans usually have final balloon maturities
of 5, 7 or 10 years. The most common DUS MBS is
a 10/9.5 fixed rate (a 10-year balloon with 9.5 years
of yield maintenance), followed by the 7/6.5 fixed
rate (a 7-year balloon with 6.5 years of yield
maintenance)2.
Description

Standard Conventional Multifamily A multifamily loan secured by a residential property composed of five or more dwelling units and in which
generally no more than 20 percent of the net rentable area is rented to, or to be rented to non-residential
tenants.

Multifamily Affordable Housing and Low- A multifamily loan on a mortgaged property encumbered by a regulatory agreement or recorded restriction that
Income Housing Tax Credit limits rents, imposes income restrictions on tenants or places other restrictions on the use of the property.

Seniors Housing A multifamily loan secured by a mortgaged property that is intended to be used for elderly residents for whom
the owner or operator provides special services that are typically associated with either independent living or
assisted living. Some Alzheimers and skilled nursing capabilities are permitted.

Manufactured Housing Community A multifamily loan secured by a residential development that consists of sites for manufactured homes and
includes utilities, roads and other infrastructure. In some cases, landscaping and various other amenities such
as a clubhouse, swimming pool, and tennis and/or sports courts are also included.

Cooperative Blanket A multifamily loan made to a cooperative housing corporation and secured by a first or subordinate lien on a
cooperative multifamily housing project that contains five or more units.

Dedicated Student Housing Multifamily loans secured by multifamily properties in which college or graduate students make up at least
80% of the tenants.

1
An Overview of Fannie Maes Multifamily Mortgage Business, May 2012
2
Over Twenty Years of Multifamily Mortgage Financing Through Fannie Maes Delegated Underwriting and Servicing (DUS) Program, March 2015

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 3
Credit Quality of DUS Mortgage Loans
Eligible multifamily properties must be income-
producing multifamily rental properties or
cooperatives with a minimum of five individual units.
These multifamily properties must be existing,
recently completed, or in need of moderate
rehabilitation. A majority of the properties qualify for
30-year amortization schedules. A DUS mortgage
loan tends to range in size from $1 million to $50
million and is generally non-recourse3 to the
borrower. Additionally, DUS loans generally are
assumable after a review of the proposed
transferee, although a one-percent transfer fee
payable to Fannie Mae is commonly charged, which
is not passed on to the MBS investor.
Each mortgage is underwritten to a three-tier credit
structure based on debt service coverage ratio
(DSCR) and loan-to-value ratio (LTV). Table 2
summarizes the LTV and DSCR values for each tier
for standard conventional multifamily loans. DSCR
and LTV requirements are subject to change based
on market conditions. Stricter underwriting
standards apply to other asset classes such as
Seniors Housing, Student Housing, and
Manufactured Housing. Various asset classes are
described in the associated Multifamily MBS
Prospectus.
Table 2: Tier Level Credit Characteristics
Rating Minimum DSCR
Tier 2 Generally no lower than 1.25
Tier 3
Usually falling within a range of Usually falling within a range of
1.35 1.55
Tier 4 Usually in excess of 1.55
In addition to tier assignments, each property
underlying the multifamily MBS is subject to three
assessments.
1. An appraisal of the property is performed by a
licensed appraiser selected by the DUS lender.
Appraisals must conform to Uniform Standards of
Professional Appraisal Practice (USPAP)
standards. Fannie Mae does not approve specific
appraisers. The DUS lender is responsible for
selecting the appraiser and is solely accountable
for their performance.
2. Either an environmental assessment or an
American Society for Testing and Materials
(ASTM) screen is required and an ongoing
operations and maintenance plan may also be
required to ensure the property is operated in an
environmentally sound manner.
3. A physical needs assessment must be completed
by a qualified evaluator designated by the DUS
lender. If tenant safety, marketability, or property
conditions are compromised by unacceptable
circumstances, repairs may be ordered.
Generally, if the repairs are not completed by the
time of closing, a reserve fund for payment of the
repairs may be established.
DSCR and Net Operating Income (NOI), is collected
by Fannie Mae and disclosed on an annual basis.
Maximum LTV Ratio It is important to note that the underwriting guidelines
in the DUS Guide are guidelines and not rigid
Generally no higher than 80%
requirements. A waiver or exception may be granted
if it is deemed by Fannie Mae to be prudent given
65% 55% the applicable circumstances4.
Usually below 55%

* These figures are not an indication of the DSCR or LTV characteristics that will apply to any
given MBS, regardless of Tier. The DSCR, LTV and Tier for each MBS are disclosed in the
offering documents for that MBS.

3
Non-recourse: In the event of default, the lender agrees to take the pledged property as satisfaction for the debt and to have no claim on any other assets of the borrower.
4
Over Twenty Years of Multifamily Mortgage Financing Through Fannie Maes Delegated Underwriting and Servicing (DUS) Program, March 2015

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 4
DUS Prepayment Protection its full portion. Fannie Mae does not guarantee
payment of any prepayment premiums and Fannie
As part of the DUS program, each DUS loan Mae will only pass through the MBS investors
generally has voluntary prepayment protection portion of a yield maintenance payment to the extent
provisions. For fixed-rate loans, the prepayment it is collected. If a borrower prepays a mortgage loan
premium is usually a yield maintenance premium on or after the yield maintenance end date, Fannie
(YMP) or a declining percentage of the unpaid Mae will not pay any portion of the prepayment
principal balance. Other methods for calculating premium to the investor.
prepayment premiums are also possible. The
prospectus supplement will specify whether the The Treasury reference note used to compute the
loans in an MBS pool have prepayment premiums yield maintenance prepayment premium effectively
and, if so, will specify the method for calculating the increases this premium by the present value of the
prepayment premiums. The prospectus supplement spread differential between a DUS MBS and
will also state whether certificateholders share in any Treasuries. If the borrower prepays during the three
prepayment premiums collected on prepaid loans in months after the end of the yield maintenance
the pool and, if so, will describe the method of period, the borrower may be charged a one percent
allocation. prepayment premium based on the amount of
prepaid principal. Prepayment premiums paid in
Yield maintenance, the most common form of connection with prepayments occurring after the
prepayment protection, allows for full prepayments yield maintenance end date are not passed through
along with a yield maintenance prepayment to MBS investors.
premium payable by the borrower. The yield
maintenance prepayment premium for each Fannie Mae publishes a Monthly Yield Maintenance
mortgage loan is payable during a period of time, the Factor report which investors can use to calculate
yield maintenance period. If a borrower voluntarily their share of yield maintenance for those MBS
prepays a mortgage loan during the yield paying yield maintenance in the current month.
maintenance period, the yield maintenance
prepayment premium is based on a standard The various prepayment protection methods on
calculation, but is, at a minimum, 1% of the DUS loans provide considerable compensation to
outstanding unpaid principal balance of the loan at investors and reduce the incentive for a DUS loan to
the time of payoff, during the YMP period. be repaid before the prepayment end date
(curtailment). Voluntary partial prepayments
It is important to note that Fannie Mae calculates the generally are prohibited on DUS loans. Involuntary
share of the prepayment premium to be retained by prepayments such as condemnation awards or
the company and the share of prepayment premium insurance proceeds may occur. Investors can
to be passed on to the investor. Fannie Mae will determine the prepayment premium or yield
pass the yield maintenance prepayment premium to maintenance formula that applies to the loan
the investor only to the extent that collected underlying a particular MBS by reading the
premiums remain after the company has deducted Prospectus Supplement for that MBS type5.

5
Over Twenty Years of Multifamily Mortgage Financing Through Fannie Maes Delegated Underwriting and Servicing (DUS) Program, March 2015

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 5
Fannie Mae DUS REMIC Programs diversity and customized cash flows to meet investor
demand7. In 2015, Fannie Mae issued $11.7 billion
Fannie Mae DUS REMICs, also called ACES or in GeMS.
GeMS, represent an alternative way to gain
exposure to multiple DUS MBS pools. In contrast to Fannie Mae Alternative Credit Enhanced Securities
the homogenous pass-through deal structure of a (Fannie Mae ACES) are structured multifamily
DUS Mega, a DUS REMIC typically consists of securities created from multifamily MBS collateral
sequential-pay classes (often with par coupon and are similar in structure to GeMS securities.
pricing) and an IO class (Figure 1). Current Fannie Mae ACES are REMICS backed by
outstanding DUS REMIC volume is in excess of $80 MBS/DUS securities which are structured into
billion. The average deal size is around $550 million, sequential, bullet, IO, floater and inverse floater
consisting of more than 100 DUS MBS pools per classes. The ACES program predates the GeMS
deal, on average, at issuance. The underlying pools program, but is similar in that both allow inclusion of
in REMICs are predominantly standard multifamily multiple prefix pools, have no coupon range
(84%), followed by cooperative loans (6.5%) and requirements and are created through Fannie Maes
manufactured housing communities (4.8%). Unlike FNM Structured Transactions conduit. Both also
the clustered DUS MBS pools in a Mega, the range allow for collateral diversity, improved liquidity by
of coupons within a DUS REMIC can be much wider, block-size securities offerings and allow for
such as in FNA 2010-M7, in which coupons ranged customized cash flows to meet investor demand8.
from 4.64% to 7.14% (or 250 bps). DUS Megas can
also be part of the collateral in DUS REMICs. Upon
voluntary prepayment, the IO class usually receives
70% of the YM penalty, and the current pay bond Figure 1: Sample Fannie Mae DUS REMIC deal
receives the remaining 30%6.
Underlying Collateral Deal Structure: Interest
Fannie Mae Guaranteed Multifamily Structures for DUS REMIC (FNA) Sequential Pay Classes Only Class
(Fannie Mae GeMS) are structured multifamily
securities created from multifamily MBS collateral Class A1
selected by Fannie Maes Multifamily Capital $50mm (10%)
5yr Wtd Avg Life
Markets Desk. The Fannie Mae GeMS program is 140 DUS MBS Pools
an umbrella for all Fannie Mae portfolio structured

Class X
$500 million
multifamily products. The program was launched in Class A2
2011 and includes Multifamily Megas and REMICs. (100%) $450mm (90%)
The program attracts additional capital to multifamily 10yr Wtd Avg Life
finance from larger institutional investors who might
not find the characteristics of smaller, single-loan
DUS MBS attractive. GeMS provide par-priced,
block size, structured securities with collateral

6,7
Credit Suisse, Agency CMBS Market Primer, September 21, 2011
8
FNMA, ASF 2011: Fannie Mae Securitization Overview, February 2011
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 6
 THE 10-YEAR BALLOON A LESSON IN HISTORY
Ever stop to consider why the vast majority of non- widely accepted by investors looking for the security
agency CMBS loans have balloon maturities (in the of a U.S. government guarantee, combined with
form of Anticipated Redemption Dates ARD), and timely payment and ultimate payment pledges. Due
most Agency CMBS loans (excepting GNMA) carry to the nature of the underlying collateral (typically,
explicit 10-year balloon language? Is it just a housing projects), the name Project Loan stuck,
coincidence that Commercial Mortgage Backed and has been used since to describe multifamily
Securities (CMBS) loans carry call protection no housing loans associated with low-to-moderate-
longer than 10 years? What is so special about that income properties (customarily, the name is reserved
10th year? Current use of 10-year terms for CMBS call for GNMA Project Loan Certificates (GNMA PLC), but
protection and balloon periods owe their roots to has been used in other contexts as well).
multifamily properties once being the sole
Prior to the sweeping tax reform changes enacted in
securitized CRE collateral type.
1986 (Tax Reform Act of 1986), investors in
It would be expedient to say that the choice of 10 commercial real estate properties were able to enjoy
years term for balloon date and maximum call what was known as accelerated depreciation. This
protection was simply a matter of convenience, but tax loophole allowed property owners to
looking back to the earliest days of commercial real depreciate their CRE properties over a 12 -year
estate securitization confirms that the 10-year term periodroughly 1/3 of the typical 35- to 40-year
was not an arbitrary choice. The two main reasons amortization termresulting in significant savings.
why trace their roots back to the early days of CRE As the advantages of accelerated depreciation
financing. approached the end of the 12 -year period, property
owners actively sought to sell their properties for new
Although current commercial real estate
ones, effectively exchanging them and thus, re-
securitizations include loans made on many different
setting the depreciation clock. Given the time
property types, this was not always the case. Prior to
necessary to find new target properties, along with
the creation of CMBS in the early 1990s, the only
the process of selling their current property, the
public securitized CRE program was one confined to
majority of transactions occurred somewhere
multifamily lending through the securitization of
between the 10th and 12th years of the original
Federal Housing Authority (FHA)-originated loans.
mortgage term. Accelerated-depreciation exchange
The FHA multifamily program was established to
activity was not limited to multifamily properties, but
focus exclusively on those properties associated with
as described below, multifamily buildings have a
Section 8 voucher and Housing Assistance Program
separate and unique quality which exacerbated the
(HAP) programs, as the idea was to increase
effect.
financing opportunities on lower-quality
affordable-housing buildings. Initially, these loans Considering the nature of multifamily properties
were guaranteed solely by the FHA (at a slight unique characteristics relative to other CRE property
discount, issuing debentures in the event of default), types, an interesting and sometimes-overlooked
but in the early 1970s, individual FHA-originated aspect of borrower behavior becomes significant.
loans were further wrapped and guaranteed by Consider for a moment that a multifamily property is,
Ginnie Mae, creating a program that was more simply stated, an aggregation of a number of small

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 7
 homes contained in a single structure. In each of receive the highest appraisal/valuation on the
these homes is found a number of standard property. The timeframe where necessary
appliances (i.e. refrigerators, ovens, dishwashers, replacement of durable goods coincided with the
etc.), referred to in aggregate as durable goods, for runoff of the depreciation credit was referred to as
which the building owner is responsible to provide. the cross-over period. Although each property had
These durable goods typically have a life expectancy its own specific circumstances, the tendency was for
of somewhere between 7 and 10 years. It can be these events to occur around the 10th year.
further argued that the builder-quality amenities
Recognizing that their loans would remain
often found in apartments tend to be of slightly lower
outstanding for around 10 years, these borrowers
quality and thus may need to be replaced earlier than
adopted the practice of buying down their loan
comparable amenities found in private homes.
rates by including prepayment penalty covenants for
Given that the majority of these durable goods will the first 10 years of their loans. Since the likelihood
likely begin to reach the end of their usefulness was low that they would have to exit their loans
around the same time, multifamily property owners early, including call-protection provisions on their
recognize that once some of the items need to be loans impacted their operations little, yet was a
replaced, there is a very high likelihood that the benefit in lowering mortgage costs.
remainder will need to shortly thereafter. To lower
Since being implemented, the Tax Reform Act of 1986
costs, property owners tend to buy the replacement
replaced the accelerated-depreciation loophole with
items in bulk, and attempt to complete the
the now-current straight-line depreciation
replacement of these items at one time. Because the
deduction, which permits depreciation of CRE
cost of replacement, although meaningful,
holdings over a longer, 29 -year schedule. Although
represents a relatively small percentage of the value
the change in the tax code removed the depreciation-
of the asset, property owners tend to pay
savings incentive to sell properties prior to the 12th
replacement costs out-of-pocket as opposed to
year, multifamily borrowers still needed to recoup
taking out a supplemental loan. With the funds
the cost of the replacement of durable goods.
coming out of operating income, property owners are
Because of this necessity, multifamily property
incentivized to want to quickly refinance or sell to get
owners found themselves more amenable to
that money back. Historically, this activity usually
refinancing rather than selling, but the 10-year
occurs somewhere between the 7th and 10th years.
timeframe remained consistent.
Prior to 1986, if a multifamily property owner was
With the arrival of CMBS securitization in the early
incentivized to sell his property prior to the 12 th
1990s, although non-multifamily property types
anniversary of his outstanding loan to restart the
were introduced into the marketplace, the
accelerated-depreciation clock, and also had to
convention of 10-year loan payoffs and call
replace the durable goods in his building, he would
protection provisions, established over many years of
elect to sell or refinance right after the replacement
multifamily property activity, became the norm, and
of the durable goods. This helped ensure he would
remains today.

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 8
Fannie Mae DUS Prepay Performance
Historical performance data of more than 190 loan
groups (totaling $57.64 billion) within the targeted
universe of Fannie Mae ACES deals confirms that
as the underlying DUS loans approach their
mandatory balloon dates, prepayment speeds
increase rapidly (Figure 2). Many of these loans pay
off with yield maintenance penalties, a significant
portion of which (usually 70%) are passed through
to IO class bondholders, boosting returns.
Pooled REMIC securitizations (such as ACES deals)
offer monthly performance updates which allows for
more granular surveillance of loan pay-down activity.
This increased transparency clearly illustrates the
prepayment ramp speed pickup phenomena as
loans move towards their balloon maturities.
Observed speeds vary by loan composition, but the
trend is clear: as loans move inside the final 48
months until maturity, prepayment speeds ramp up
asymptotically towards maturity, with a significant
number of loans prepaying with penalty payments.
Figure 2: Fannie Mae ACES Speeds vs WAM
ACES Average Prepay Speeds
(April 2016)
6 Month Speeds
Additional analysis of the entire applicable
universe of Fannie Mae DUS loans (~$200 billion),
encompassing the most commonly-issued
structures found in ACES deals (10/9 and 5/4),
covering the past 15 years performance, resulted in
the clear emergence of prepayment patterns which
further corroborates the direct relationship between
shorter loan WAM periods and higher payoff speeds.
It is important to note that not all DUS loans are
securitized into ACES deals, but all ACES deals are
backed by pools of DUS loans. Therefore, although
the data from the larger universe of DUS loans is not
directly applicable to any specific ACES security, the
prepayment ramps which emerged are an important
confirmation of the performance of the collateral
group as a whole.
DUS payoff data, available on Fannie Maes website
is updated quarterly, but is segmented into annual
cohorts. Despite being less granular than the
monthly-reported ACES data, the Fannie Mae data
offers further corroboration that the prepayment
patterns noted in ACES deals are consistent in the
broader DUS universe, as would be expected
(Figure 3).
Figure 3: Annual DUS Prepay Speeds by Vintage
60%
50%
Historical DUS Prepay Speeds
40%
(2000-2015)
CPR

30% (annual cohorts)

12 Month Speeds
20% 100%
10% 80%
60%
CPR

0%
5 4 3 2 1 40%
REMAINING WAM (YRS) 20%
0%
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10

Using trailing 6-month prepayment speeds on ACES balloon and prepayment speed is graphically
deals, the correlation between remaining WAM to illustrated below (Figure 4). Note the high
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 9
correlation of faster speeds on those loan groups speeds as loans trend towards their balloon
with shorter balloon WAMs. Shorter cohorts can maturities, is not intended to create a universal
illustrate the correlation in more granularity, but due prepay speed curve to be applied to all ACES loans
to the relatively small amount of loans in each deal groups, but rather, to identify the speed pick-up trend
(typically 100-150 loans at origination), shorter specifically associated with this collateral type.
timeframes produce more volatile speeds between
periods, since a single loan payoff of a larger loan Each loan group underlying ACES deals has unique
may skew the data in a shorter observed period. qualities specific to that group, and therefore needs
Trailing 6-month averages were chosen to capture to be evaluated individually to forecast future
payoff trends, yet maintain a true representation of prepayment expectations. Factors used to gauge
speeds by smoothing the curves over a reasonable future speeds include: loan origination dates, gross
near-term timeframe. WACs, remaining time until balloon, penalty
It should be noted that this analysis, although costs/pass-through amounts and property equity.
confirming the presence of faster prepayment

Figure 4: ACES Loan Group Prepay Speeds (6-month rolling averages) vs Remaining WAM

FN ACES Prepay Speeds

(6mo Rolling Averages - April 2016)
11 100
10 90
9 80
8
70
Loan WAM (yrs)

7
60

CPR %
6
50
5
40
4
30
3
2 20

1 10

0 0
Outstanding FNA ACES Pools
<--Later Originations Earlier Originations-->

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 10
Fannie Mae DUS Prepay Motivation
Economics of Time Value be made up with a lower loan rate. If by waiting for
the penalty to decrease, rates move higher, it can
Traditional expectations apply when considering result in an economically worse financial situation.
prepayment probabilities on loans where the
borrowers in-place mortgage rates are higher than Example:
the current rate environment. Obviously, this will be
If a loan requires a 10-point penalty to prepay
tempered by the amount of penalty charged for an
today, and a new loan is 200 bps lower in rate
early payoff, but historical performance has shown
than the current mortgage rate, the penalty
that even with larger penalties, some borrowers will
would be made up by the 5th year of the new
elect to pay penalties if they believe rates are
loan (200bps savings/year x 5 years =
headed higher, for fear of missing out on the
1000bps).
opportunity to lock in lower rates.
Alternatively, if a year later, the penalty
It is somewhat counter-intuitive to believe a borrower
dropped to 8%, but rates rose 100 bps, a
will pay a high penalty to refinance, but other factors
borrower would then have to recoup the 8-
weigh in to the borrowers motivation:
point penalty cost with a new loan that is only
100 bps lower than the old rate, thereby
Borrowers utilizing the Fannie Mae DUS program
requiring 8 years to break even thus making
are aware that they must pay off their loans by the
the decision to refi earlier and pay the 10-point
stated balloon maturity date. Unlike traditional
penalty, a more prudent business decision.
CMBS where balloon payoffs are considered
anticipated, and can be extended by the Special
Additionally, any penalties paid to exit a loan can be
Servicer, Fannie Mae will immediately remove any
capitalized into the new loan, as well as taken as a
delinquent or matured loans (up to 60 days grace)
tax deduction, somewhat softening the blow of
and pay off the remaining balance to bondholders
paying the penalty.
via the Fannie Mae guarantee. This hard final makes
borrowers acutely aware they need to insure they
Remember that these borrowers are in the business
have a takeout strategy in place before the loan
of leveraging their properties. Unlike a residential
reaches maturity, or risk losing their property.
borrower whose goal is to completely pay off his loan
Knowing that they need to have an exit strategy,
and own the property outright, multifamily borrowers
borrowers are more inclined to act earlier to avoid
are not trying to completely pay down their loans,
triggering a default event if something delays their
rather, they want to leverage their properties to
take-out strategy. If they can refinance into a new
achieve the best performance against their business
mortgage that is significantly lower than their current
activities. As such, even paying a high penalty may
rate, they tend to do so more readily particularly if
make more financial sense than waiting for lower
they believe rates are headed higher in the near
penalties if they can lock in a lower mortgage rate to
future.
defray the net cost.
This phenomena has its basis in the fact that if a Borrower Behavior
borrower knows he has to pay off his current loan in
Multifamily, as a property type, is unique in the
the next 2 or 3 years, and there is a likelihood of
commercial real estate space in that it is the only
higher rates on the horizon, even with paying
property type where property owners are faced with
prepayment penalties, the cost of that penalty can
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 11
the task of periodically replacing consumer durable lesser quality and therefore need replacing towards
goods contained in each apartment unit. Durable the shorter end of the obsolescence curve. It is a
goods, in this context, refer to the typical residential reasonable assumption to expect that once the first
appliances found in most apartment units. Although few appliances need replacing, the remainder will
the strategy outlined herein applies to multifamily follow shortly thereafter. To this end, property
borrowers within the Fannie Mae DUS program, the owners typically buy replacements in bulk, and
multifamily-borrower behavior related to the switch out all of the appliances in the building at one
replacement of durable goods described below, is time, to save money.
not limited to any specific loan platform. It is
however, important to recognize that this behavior, Considering the time necessary to order the goods
when combined with hard balloon maturities such as and complete the work, borrowers have historically
those found in the DUS program, can result in loan undertaken beginning the process with around 2-3
prepayments earlier than may be normally expected. years to go before the outstanding loan maturity to
insure that any unforeseen delays do not run up
Borrowers in Fannie Maes DUS program know that against the loan maturity dates. Since these financial
they must sell or refinance their properties prior to outlays are reasonably large and are a cash drag on
loan maturity. Although empirical data is scarce, the borrower, once completed, borrowers tend to
based on anecdotal knowledge, the majority of these want to recover the expenses as soon as possible.
borrowers tend to be in the business of owning and Because this work occurs at a point that is not too
operating multifamily properties, and therefore many far from the time the loan is due to mature, taking out
elect to refinance their properties rather than sell. In a short supplemental loan isnt practical. The costs
either case, whether they choose to sell or refinance associated with these upgrades usually comes out
their loans, borrowers attempt to garner the highest of the propertys operating capital. Borrowers will
appraisal (if refinancing), or sale value for their need recoup the outlay by refinancing or selling the
properties to receive either the most leverage or sale property. These factors usually translate into earlier
proceeds possible. payoffs of the existing loans.

To obtain the highest valuations, the building and The borrower behavior described above tends to be
units need to be in the best-possible condition. This a universal practice, but given the current interest
requires the borrower to perform routine rate environment and expectations of higher rates in
maintenance as well as the periodic replacement of the not-too-distant future, the combination makes for
old appliances in the individual units. It is in the a very compelling incentive for borrowers to want to
borrowers best interest to complete any necessary refinance their loans sooner in the cycle than if
work prior to a sale or securing a new loan since prevailing mortgage rates were equal to or higher
upgrades usually translate into higher property than in-place rates.
valuations.
As described, although paying penalties will figure
A multifamily property is, simply stated, a cluster of into borrower math as to the timing of existing loan
small homes contained within a single building. Each payoffs, the facts are that these loans will have to be
of these homes typically has included in each unit paid off relatively soon, and the combination of
standard appliances such as refrigerators, ovens, currently low mortgage rates with the strong desire
air-conditioners, etc. The average useful life of these to recapture upgrade/maintenance expenses is a
durable goods tends to be around 7-10 years. Most very compelling incentive to act sooner rather than
property owners, in an effort to save money, choose wait and try to time the market. The data compiled
builder-grade appliances, which tend to be of and highlighted in the charts above illustrate that
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 12
borrowers within the targeted universe are indeed currently has almost $200 billion of multifamily loans
prepaying despite the penalty payments. Any rise in outstanding. According to Fannie Maes data, loans
interest rates should only intensify this activity as owned or guaranteed by Fannie Mae have enjoyed
borrowers feel they miss the opportunity to lock in extremely low default histories. Recently, serious
lower rates if they dont act quickly. delinquency rates were quoted by Fannie Mae at
0.05%9.
Remarkably enough, when data from each of the
2000-2003 and 2009-2012 timeframes are analyzed Also noteworthy is the understanding that along with
(periods of consistantly falling interest rates), the the characteristically conservative underwriting
early payoff phenomena is still present. Despite criteria that Fannie Mae utilizes, loans comprising
lowering rates along with prepayment penalties that the targeted universe of our strategy were originated
were also trending down, a significant number of during the post-subprime-crisis era, in which both
DUS borrowers still elected to prepay their loans Fannie Mae and Freddie Mac were under
early and pay the penalties. Although the actual tremendous political pressure. Remember that
motives for this borrower behavior cannot be known during this period, congress was seriously
with certainty, the reasoning described above offers considering disbanding both GSEs. The intense
a plausible explanation. scrutiny resulted in loans originated during this
timeframe to be especially clean since neither
Fannie Mae Multifamily Underwriting agency wanted to have to explain any negative
events and give any additional reason to shut them
With respect to loan performance and default down. Even today, both Freddie Mac and Fannie
expectations, note that Fannie Mae has been Mae remain in conservatorship.
engaged in the multifamily sector since 1988, and

Source: Fannie Mae Business Information, February 2016 Source: Fannie Mae Business Information, February 2016

9
Fannie Mae, Fannie Mae Multifamily Mortgage Business Information, February 2016
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 13
ACES IO Market Imbalance the presence of the established historical
prepayment curves, a reasonable expectation of
Fannie Mae ACES IO securities represent a small worst case early amortization events may also be
subset within the Fannie Mae multifamily program, achieved. Note that any prepayments during the
which itself, is a subgroup of the broader Agency YPM period will be accompanied by penalties
CMBS universe. Because of its limited size, ACES passed through to investors, potentially offsetting IO
IOs attract less investor attention. Combined with coupon loss, and in many cases, can increase yields
the steeper learning curve associated with the as compared to the traditional IO cash flows. These
ACES/DUS programs, including the unique impact boundaries allow investors the opportunity to apply
of multifamily borrower behavior, ACES IOs are conservative downside scenarios to potential
often overlooked by investors. The confluence of investment securities to optimize the risk/reward
these factors creates a supply/demand imbalance. profiles.

Approximately $60 billion (original face) of ACES IO The FNA ACES IO strategy exploits the high
bonds have been issued to date. When factored- probability of early loan payoffs (with accompanying
down balances (current face) and discount pricing penalty payments to bondholders) on the underlying
are taken into consideration, the investable market collateral, and leverages the structure of these
of these securities shrinks to around $2.5 billion. securities to produce returns which may exceed
With a significant portion of these bonds likely to standard IO cash flow returns. By targeting those IO
remain in account hands, it is estimated that the classes backed by loan pools exhibiting the
actual amount of market-available ACES IO characteristics which best capture the performance
securities is between $50 and $200 million annually. desired, investors can better manage risk/reward
When considering the amount of investable dollars metrics.
available in IO classes structured off of ACES deals,
it quickly becomes apparent that this smaller corner 100%CPY and the Asteroid
of the CRE market can be easily overlooked.
Typically, a 100%CPY assumption is used to
Risk/Reward Tradeoff analyze a worst case scenario on securities with
prepayment penalties on the underlying loans. This
Traditionally, higher-yielding investment assumption implies the earliest payoff scenario
opportunities are associated with a higher risk without receipt of any penalties being paid to
profile, balancing against the potential of greater bondholders. Although mathematically correct, the
returns. ACES IOs, although not immune to application of 100%CPY on Fannie Mae ACES
downside risk, can offer investors a different securities as a worst case scenario is inaccurate, ill-
risk/reward tradeoff due to the relative short duration advised, and can significantly misrepresent risk.
of the securities, combined with the tendency of the
underlying collateral to perform as expected. Working in concert, there are a number of factors
All DUS pools have hard balloon maturities, which in which contribute to the very high likelihood that a
the universe of ACES IO class securities targeted for significant amount of borrowers will not pay off their
the strategy, tend to have relatively short timeframes loans right when the YMP period ends.
(typically 1-5 years). Assurance that the loans will These factors are as follows:
pay off by maturity (Fannie Mae guarantee), allow
investors to know the absolute longest period of time 1) Although the borrowers YMP period typically
expires 6 months from maturity, the
the associated IO securities will last. Combined with
additional 1% penalty imposed by Fannie
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 14
 Mae (which is not passed through to percentage) remain outstanding until the
bondholders) extends the borrowers actually final months of the loan. This may be due to
penalty period up until the final 3 months of similar burnout activity as seen in
the loan. Even though 100%CPY is residential loans, or to some borrowers not
mathematically correct in the assumption being as sophisticated as others when it
that penalties expire when the YMP ends, comes to financial matters. Whatever the
the 100%CPY assumption does not take this reasoning, the activity is present and it
additional penalty into consideration. It is contributes to the position that using
therefore reasonable to expect that if a 100%CPY is an inaccurate measure of
borrower gets to within the final 6 months of payoff probability.
the loan, he may consider holding off just
another 3 months to avoid paying any Conventional wisdom in the investment community
penalties at all. is to analyze any opportunity to a perceived worst
case scenario, then work backwards to determine if
2) When calculating YMP, the formula takes an acceptable risk/reward profile emerges. This
into consideration a number of salient factors approach is a valid one so long as the downside
to arrive at the amount of penalty due. This boundary selected is reasonable with respect to
formula also has a provision that, in no case
the likelihood of occurrence.
will the minimum YMP be lower than 1% of
the UBP. Mathematically, the 1% minimum
threshold typically is reached about 3 months Consider the absurd notion that a worst-case
prior to the actual end of the YMP period. scenario involved an asteroid destroying the Earth
Given that a penalty will go no lower than the tomorrow. Yes, it is a worst case, but the likelihood
minimum, borrowers must decide if they will is relatively remote. If investors were to consider this
wait until the penalties expire, or pay the 1% event when buying securities, virtually nothing would
minimum. As stated above, if they wait, they be a viable investment choice. Recognizing the
will likely be paying off after the YMP end absurdity of the argument above, but using it as an
date, which is longer than the 100%CPY illustration of a point, it is easily seen that risk and
assumption, if they choose to pay the 1% probability are not the same. If a risk exists, but its
minimum, it is likely that they will do so as probability is low, should it be called into
early as possible to be able to recapture
consideration as a reasonable downside boundary?
expenses, tap any latent equity, and secure
new financing. In either case, the 100%CPY
payoff point will likely be missed. The use of 100%CPY to determine a worst-case
prepayment scenario on ACES loans is certainly a
3) Discussed in the sections above, borrower risk, but the factors listed above, along with the
behavior is a significant contributing factor in supporting data behind them, make the probability
the timing of when loans tend to prepay. As of the event very low. As such, although current
has been illustrated, historical trends clearly street convention is to utilize the 100%CPY hurdle
show a high predisposition for borrowers to as a potential worst-case prepayment event on
prepay early and pay penalties. These securities with prepayment-protected loans, in the
events will also make a 100%CPY case of ACES securities, the likelihood of this event
assumption inaccurate. is sufficiently remote, such that its implementation
usually results in an overstatement of risk.
4) Historical analysis of Fannie Mae ACES
pools indicate that a significant number of Additionally though not as common, depending upon
loans (roughly 15% of the original balance,
the composition of the underlying loans and the
which represents a higher current balance
This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 15
configuration of any given ACES pool, using
100%CPY may produce results which, in some
cases may overstate returnsan equally
problematic issue as that of being too conservative.

Analytics Accuracy
When evaluating any security, the accuracy of the
analytics systems used to generate cash flows need
to be precise. This is never truer than when
evaluating Fannie Mae ACES securities since in
addition to the standard principal and interest cash
flows, the system used needs to be able to consider
the cash flows contributed from any penalties that
are passed through to bondholders. This has been
more challenging than would be expected.

Since, as discussed above, the DUS/ACES

programs represent a smaller subset of the Agency
CMBS world, and therefore offer fewer securities
than other programs, analytics capabilities have
been slower to catch up in applying accurate cash
flows with respect to the allocation of prepayment
penalties.

As such, it is imperative to insure that any analytics

systems used to generate return and cash flow
profiles accurately account for the additional
prepayment penalties. Many providers of analytics
have been addressing this issue, but at the time of
this writing some have been less successful than
others.

Investors analyzing these instruments need to

insure that the analytics providers used to generate
cash flows on these securities are reflecting
accurate results.

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 16
Sources:
FNMA, November 1, 2011 article titled Basics of Multifamily MBS
FNMA, May 1, 2012 article titled An Overview of Fannie Maes Multifamily Mortgage Business
FNMA, March 2015 MBSenger article titled Over Twenty Years of Multifamily Mortgage Financing
Through Fannie Maes Delegated Underwriting and Servicing (DUS) Program
Credit Suisse, February 21, 2013 article titled Agency CMBS Market Primer
FNMA, February 2011 article titled ASF 2011: Fannie Mae Securitization Overview
FNMA, February 2016 article titled Fannie Mae Multifamily Business Information
JRER, No.2 2003 Frank E. Nothaft and James L. Freund, article titled The Evolution of Securitization in
Multifamily Mortgage Markets and Its Effect on Lending Rates
Freddie Mac, February 2016 article titled Freddie Mac Update

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 17
Agency CMBS Summary Matrix

Ginnie Mae Fannie Mae Freddie Mac

Project Loan REMICs DUS Megas, K-Deals
DUS REMICs

Program FHA / GNMA Project Loans DUS MBS (Delegated Underwriting Capital Markets Execution
Servicing)

Market Size (Outstanding $93 billion $200 billion $128 billion

Balance)

Bloomberg Ticker GNR Mega: FN FREMF,

REMIC: FNA (FHMS for guaranteed classes)

Example Deal GNR 2015-183 FNA 2015-M17 FREMF 2015-K51

Deal Structure Multi-tranche, Mega: Single-tranche, pass Multi-tranche, sequential pay

sequential pay classes through, classes with credit enhancement
REMIC: Multi-tranche, sequential
pay classes

IO Class Yes Mega: No Yes (multiple)

REMIC: Yes

Average Deal Size Range $180mm - $780mm Mega: $80mm $530mm - $1.25 Bil
REMIC: $550mm

Average # of Loans per Deal 65 Mega: 25 70

REMIC: 135

Loan Terms (most popular) Fixed rate, 35 - 40 year maturities Fixed-rate, 10 year balloon Fixed-rate, 10 year balloon
with full extension maturities with 30 year maturities with 30 year
amortization (10/9.5s) amortization

Payment Schedule Monthly Monthly Monthly

Collateral / Property Types Mostly low, and moderate
income multifamily housing and
healthcare loans (nursing homes
and assisted living facilities)
Proceeds can be used for new
construction or substantial
rehabilitation projects, as well as
refinancing of existing mortgages
Mostly standard conventional
multifamily housing
Other eligible property types:
affordable multifamily housing and
low-income housing tax credit,
seniors housing, manufactured
housing, coops, student housing,
military housing, rural rental
housing
Mostly standard conventional
multifamily housing secured by
occupied, stable and completed
properties
Limited amount of age-restricted
multifamily, student housing,
cooperative housing and Section 8
housing assistance payments (HAP)
contracts

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 18
 Ginnie Mae Fannie Mae Freddie Mac
Project Loan REMICs DUS Megas, K-Deals
DUS REMICs

Loan Origination Process Originated and underwritten by a
network of HUD-approved private
lenders according to FHA statuary
requirements
Loans are insured by HUD, and
Ginnie Mae provides additional
guarantee
Origination and servicing
guidelines are set by Fannie Mae in
DUS program (Delegated
Underwriting Servicing)
Loans are originated,
underwritten and serviced by a
network of private DUS lenders
Loans are shared by a DUS lender
and Fannie Mae according to a loss
sharing arrangement
Originated are
sourced/originated by Freddie
Mac's Program Plus Seller/Servicer
network of private lenders
Loans are underwritten in-house
by Freddie Mac through its Capital
Markets Execution (CME) program

Guarantees Full faith and credit guarantee of Fannie Mae guarantee Freddie Mac guarantee
US government (on the senior classes)

Nature of Guarantee Full recovery and timely payment
of principal and interest
Prepayment penalties are not
guaranteed for IO bondholders
Full recovery and timely payment Timely payment of interest to
of principal and interest senior classes (Classes A1, A2, and
Yield maintenance payments X1)
(YMP) associated with prepayments Timely payment of principal to
are not guaranteed the classes A1 and A2 upon
maturity of any loan, and ultimate
payment of principal by final
distribution date (no extension)
Reimbursement of any realized
losses and expenses allocated to
senior classes upon resolution of
defaulted loans (not on the date
loan default occurs)

Call Protection "2/8". Lockout for 2yrs, followed
by 8yrs prepayment penalty which
declines 1% annually from 8% to
1%. Once the most popular call
provision (i.e. 2005-2013).
"5/8". Lockout for 5yrs, followed
by 5yrs prepayment penalty which
declines 1% annually from 5% to
1%. Once the most popular call
provision (i.e. pre-2005).
"Decreasing 10". No lockout
period. Prepayment penalties begin
immediately, starting at 10%, which
decrease 1% annually until gone.
Currently the most popular penalty
type.
"10/9.5" DUS MBS. Yield Lockout and Defeasance for the
Maintenance for 9.5yrs, open last 6 term of the loan except for the last
months (most popular) 3 months
"7/6.5" DUS MBS. Yield
Maintenance for 6.5yrs, open last 6
months
Call protection features can also
include defeasance, prepayment
fees and lockout
Fannie Mae also places a fixed,
1% penalty on prepayments which
occur after YMP expire, until final 3
months prior to balloon.

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 19
 Ginnie Mae Fannie Mae Freddie Mac
Project Loan REMICs DUS Megas, K-Deals
DUS REMICs

Market Pricing Assumption 15% CPJ, the conventional Project 0% CPY: zero defaults and no
Loan Default (PLD) curve for
default, and 15% flat CPR for
voluntary prepayments after
lockout
0% CPR
prepayments after lockout
Vectored analysis; due to
passthrough of YM penalties on
prepayments, vectored speeds
need to be applied to capture
"true" value. Historically, 0% CPR
was (and to some degree, still is)
the conventional market pricing
assumption, but historical
performance of these securities
illustrates the need for further
prepay analysis

Sources: Ginnie Mae, Fannie Mae, Freddie Mac, CREFC, Credit Suisse, Morgan Stanley, Bloomberg

This is sales and trading commentary prepared for institutional investors; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from
others at Academy Securities (including Research). Academy Securities may engage in conflicting activities including principal trading before or after sending these views -- market making, lending, and the
provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not
include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and is not a personal recommendation or investment advice
or a basis to consider Academy Securities to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605
(where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or
completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. By communicating with Academy Securities, you acknowledge
understanding of, and consent to, the foregoing and to the voice recording of telephone conversations with personnel of Academy Securities.

Page | 20