Agency MBS Webcast FINAL (CorrectTimings

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1 For audio, please dial 866.422.9305

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2 Daniel R. Adler, Principal, Senior Portfolio Manager, Director of the Investment Management Group Timothy J. Cunneen, CFA, Principal, Senior Portfolio Manager, Mortgage Strategist “Back to the Future”

“Back to the Future” : 

3 “Back to the Future” Today’s topics: Review of Federal Reserve purchase program size and effects Expectations for spreads and rates Prepayment outlook

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4 Fed Purchase Program Review “Back to the Future”

Smith Breeden’s Expectations for 2010 : 

5 Smith Breeden’s Expectations for 2010 We expect the end of the Fed program to result in a widening of mortgage spreads and likely higher mortgage rates. We believe the volatility of mortgage spreads will increase and trading opportunities will rise. We believe opportunities for security selection will be high as certain collateral characteristics will have very different prepayment behavior. January 4, 2010. This is Smith Breeden’s current assessment of the market. It is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results.

U.S. Government institutional holdings of agency MBS have increased significantly. : 

6 U.S. Government institutional holdings of agency MBS have increased significantly. Information as of December 2009. Source: Federal Reserve Availability calculation from Smith Breeden estimates. Underlying data from the Federal Reserve. This information is taken, in part, from sources that we deem reliable but no warranty is made as to accuracy. December 2009 December 2008 Holders of Mortgages with Agency Guarantee

The Federal Reserve’s agency MBS purchase program has absorbed a large percentage of new MBS origination, primarily in the 30-year space. : 

7 The Federal Reserve’s agency MBS purchase program has absorbed a large percentage of new MBS origination, primarily in the 30-year space. Data as of February 3, 2010 Source: Federal Reserve and eMBS. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. 30-year MBS January 1, 2009 through February 3, 2010 - 100 200 300 400 500 600 700 800 3.5 4 4.5 5 5.5 6 6.5 Coupon (%) ($ Billions) MBS production Fed purchases

Average Federal Reserve Purchase ($ Billions) per day : 

8 Average Federal Reserve Purchase ($ Billions) per day Information as of February 3, 2010. Source: Federal Reserve. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. 1/1/2009 through 2/3/2010 0 1 2 3 4 5 6 7 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 ($ Billions)

The Federal Reserve’s involvement has boosted mortgage pricing. : 

9 The Federal Reserve’s involvement has boosted mortgage pricing. Data as of January 29, 2010 Source: Federal Reserve. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. FN 4.5 Prices Since Fed Announcement 11/24/08 through 01/29/10 95 96 97 98 99 100 101 102 103 10/27/08 11/27/08 12/27/08 01/27/09 02/27/09 03/27/09 04/27/09 05/27/09 06/27/09 07/27/09 08/27/09 09/27/09 10/27/09 11/27/09 12/27/09 01/27/10 02/27/10 Price

Spreads have tightened dramatically to 2005-07 levels, but the current environment is very different. : 

10 Spreads have tightened dramatically to 2005-07 levels, but the current environment is very different. Source: Smith Breeden Analytics. Current Coupon Mortgage Option-Adjusted Spread to LIBOR (Swaps) 06/30/05 through 01/29/10 -20 0 20 40 60 80 100 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Basis Points Current Coupon Mortgage Yield Spread to LIBOR (Swaps) 06/30/05 through 01/29/10 0 20 40 60 80 100 120 140 160 180 200 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Basis Points Data as of January 29, 2010

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11 After the Purchase Plan “Back to the Future”

The Federal Reserve’s exit from their purchase program should result in excess supply. : 

12 The Federal Reserve’s exit from their purchase program should result in excess supply. Actual data from January 2009 through December 2009. Forecasted data from January 2010 through June 2010. Source: eMBS and Federal Reserve. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. (120) (100) (80) (60) (40) (20) - 20 40 60 80 100 120 140 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Forecast Net Issuance Less Fed Purchases ($ Billions) Net Issuance Net Issuance Less Fed Purchases

MBS issuance has dropped despite continued low rates. : 

13 MBS issuance has dropped despite continued low rates. Data as of February 3, 2010 Source: www.embs.com This information is taken from sources that we deem reliable but no warranty is made as to accuracy.

Float net of Fed purchases is significantly lower. : 

14 Float net of Fed purchases is significantly lower. Data as of November 30, 2009. Source: Treasury, Federal Reserve, and eMBS. Treasury holdings estimates based on index weights calculated by Smith Breeden Analytics. This information is taken, in part, from sources that we deem reliable but no warranty is made as to accuracy. FNMA 30-year Fixed Outstanding Balances 2007-2009 Vintage by Coupon - 50 100 150 200 250 300 350 3.50 4.00 4.50 5.00 5.50 6.00 6.50 Coupon (%) Balance ($ Billions)

Comparison of Historical Performance Between Mortgages and Treasuries. : 

15 Comparison of Historical Performance Between Mortgages and Treasuries. Data as of January 29, 2010. Source: Barclays Capital and Smith Breeden Analytics. Standard Deviation calculations from Smith Breeden Analytics. Note: Numbers are rounded. This information is taken, in part, from sources that we deem reliable, but no warranty is made as to accuracy.

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16 Prepayment Outlook “Back to the Future”

Prepayment speeds have not escalated to levels seen in 2003. : 

17 Prepayment speeds have not escalated to levels seen in 2003. Historical data is provided to show two periods with similar refinance incentives but different prepayment behavior. Source: eMbs, Smith Breeden Analytics. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. July 2009 Speeds vs. Peak 2003 Speeds (30 year FNMA/FHLMC/GNMA) 0 10 20 30 40 50 60 70 80 90 -250 -150 -50 50 150 250 350 Rate Incentive (WAC - Rate) CPR

Specified securities offer prepayment protection. : 

18 Specified securities offer prepayment protection. Source: eMbs. This information is taken from sources that we deem reliable but no warranty is made as to accuracy. This data is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results. Generic FNMA 30 Speeds by Collateral Type 0 5 10 15 20 25 30 35 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 Coupon CPR

The largest delinquency buckets coincide with the peak in the housing market. : 

19 The largest delinquency buckets coincide with the peak in the housing market. Data as of September 30, 2009. Source: FHLMC. This information is taken from sources that we deem reliable but no warranty is made as to accuracy.

Delinquency rates should continue to rise despite some signs of housing stability. : 

20 Delinquency rates should continue to rise despite some signs of housing stability. 90+ Day Delinquency Rates by Agency 12/1/1997 through 10/1/2009 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Delinquency Rate x FHA FNMA FHLMC Data as of October 1, 2009. Source: FHA delinquency rate from eMBS. FNMA and FHLMC delinquency rates from respective agencies. The FHA and FHLMC data series have a later start date than the FNMA series in the chart above. The start dates are 10/1/2005 for FHA and 3/1/2008 for FHLMC. This information is taken from sources that we deem reliable but no warranty is made as to accuracy.

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21 Question & Answer “Back to the Future”