U.S. Mortgage Backed Securities Market
January 29, 2006
Thomas Zimmerman Executive Director U.S. Securitized Products Strategy Group
U.S. Mortgage Backed Securities Market
Size and importance History Securitization concepts Cash flow basics
— — —
Prepayments Average Life Variations Option Adjustment Spread
CMOs Non-Agency market New affordability products Impact of housing price appreciation
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1
U.S. Debt Securities Outstanding
($ Billions) U.S. Treasury Mortgages Corporate 1,437.7 372.1 776.5 1,619.0 534.4 959.6 1,724.7 672.1 1,074.9 1,821.3 772.4 1,195.7 1,945.4 971.5 1,292.5 2,195.8 1,333.4 1,350.4 2,471.6 1,636.9 1,454.7 2,754.1 1,937.0 1,557.0 2,989.5 2,144.7 1,674.7 3,126.0 2,251.6 1,755.6 3,307.2 2,352.1 1,937.5 3,444.7 2,486.1 2,122.2 3,441.8 2,680.2 2,359.0 3,340.5 2,955.2 2,708.6 3,266.0 3,334.2 3,046.5 2,951.9 3,564.7 3,358.6 2,967.5 4,125.5 3,835.4 3,204.9 4,704.9 4,094.1 3,574.9 5,309.1 4,462.0 3,943.6 5,472.5 4,704.5 4,066.1 5,752.1 4,982.2 AssetBacked 0.9 7.2 12.9 29.3 51.3 89.9 129.9 163.7 199.9 257.3 316.3 404.4 535.8 731.5 900.8 1,071.8 1,281.1 1,543.3 1,693.7 1,827.8 1,922.6
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Q3
Agencies 293.9 307.4 341.4 381.5 411.8 434.7 442.8 484.0 570.7 738.9 844.6 925.8 1,022.6 1,300.6 1,620.0 1,854.6 2,149.6 2,292.8 2,636.7 2,745.1 2,555.7
Source: Bond Market Association
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Trends in Approved Asset Classes—1998– 2005
(% of Central Banks which have approved the asset class) Asset class U.S. Agencies Supranationals Sovereign Eurobonds Sovereign Globals Pfandbriefes Bank Debt MBS / ABS Corporates Landesbank Debt Yankee Bonds TIPs Local Government Canadian Provinces Equities 2005 82 74 60 54 48 41 39 38 37 19 16 14 9 5 2004 76 63 60 50 44 21 39 38 33 12 9 12 10 3 2003 78 62 58 56 38 24 27 32 27 14 na 14 10 2 2002 75 60 58 54 35 21 22 28 30 16 na 16 8 na 2001 71 62 61 52 37 26 17 22 30 22 na 16 9 na 2000 62 54 60 44 34 20 19 20 32 28 na 18 10 na 1999 68 63 66 50 28 16 12 15 28 12 na 18 10 na 1998 54 60 66 34 12 4 2 10 12 18 na 8 12 na
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Source: UBS Central Bank Surveys, 1998-2005
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Risk/Reward — Fixed Income Asset Classes
Nominal Return 01/89-12/05 Average Excess Standard Return Deviation 0.240 1.140 0.234 0.922 0.223 1.329 0.234 1.210 0.286 1.356 0.095 0.517 0.206 1.177 0.276 1.760 0.392 2.439 0.114 0.517 0.222 1.066 0.295 1.580 0.448 2.625 0.162 0.524 0.250 1.083 0.315 1.589 0.382 2.041 Curve = Flat to Flat 07/92-12/05 Average Average Excess Standard Sharpe Return Return Deviation Ratio 0.552 0.208 1.110 0.188 0.528 0.184 0.833 0.221 0.519 0.176 0.868 0.203 0.541 0.198 1.328 0.149 0.550 0.207 1.215 0.170 0.603 0.260 1.384 0.188 0.409 0.066 0.482 0.137 0.512 0.168 1.162 0.145 0.590 0.246 1.773 0.139 0.731 0.388 2.468 0.157 0.429 0.086 0.490 0.176 0.527 0.184 1.044 0.176 0.606 0.262 1.601 0.164 0.778 0.434 2.633 0.165 0.482 0.139 0.507 0.274 0.568 0.225 1.105 0.203 0.631 0.288 1.632 0.176 0.707 0.364 2.146 0.170 Curve = Steep to Flat
Broad Investment-Grade (BIG) Bond Index Mortgage Index Asset Backed Treasury Government Sponsored BIG Credit Treasury 1-3 yr Treasury 3-7 yr Treasury 7-10 yr Treasury 10+ yr Government Sponsored 1-3 yr Government Sponsored 3-7 yr Government Sponsored 7-10 yr Government Sponsored 10+ yr BIG Credit 1-3 BIG Credit 3-7 BIG Credit 7-10 BIG Credit 10+
Citigroup Yield Book Indices
Average Return 0.636 0.629 0.618 0.630 0.682 0.491 0.601 0.672 0.787 0.509 0.617 0.690 0.843 0.557 0.645 0.711 0.778
Sharpe Ratio 0.211 0.254 0.168 0.194 0.211 0.184 0.175 0.157 0.161 0.221 0.208 0.187 0.170 0.308 0.231 0.198 0.187
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History of U.S. Mortgage Market
1930s—Great Depression led to 30-year fixed rate mortgage 1932—Federal Home Loan Bank system for thrift and FSLIC to insure
depositors. Major source of residential mortgages until 1970s. Role greatly reduced with thrift crisis of 1980s.
1934—FHA—established to insure high LTV loans 1938—FNMA—established to purchase & hold FHA loans 1968—FNMA became private corporation—split into FNMA & GNMA 1970—First GNMA pass-through security 1970—FHLMC chartered as second GSE 1971—FHLMC issued first pass-through 1983—FHLMC issued first sequential pay CMO
5
1-29-06 NY (tom).ppt
Mortgage Types
Fixed-rate
— —
15-year 30-year
Adjustable-rate
— —
Treasury LIBOR
Hybrid (fixed period, then adjustable period)
— —
3/1s 5/1s
Balloon (30-year amortization, then balloon payment)
— —
5-year 7-year
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Securitization Process or
(Conversion of Mortgage Collateral into Mortgage-Backed Securities)
Securities issued by a bankruptcy remote trust not an originator Securities payment comes from cash-flow of underlying collateral, not
payment from originator of loans.
If originator of loans goes into bankruptcy, does not impact cash-flow
to security holders
Credit enhancement:
—
—
3rd party guarantee— – GNMA, FHLMC, FNMA for agencies – AAA monoline for non-agency Internal to deal— – Excess spread – Overcollateralization (OC) – Subordinated classes
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Prepayments—The Key to Agency MBS Valuation
Homeowner has right to call his loan at any time. MBS = Treasury + Short a ―Call‖
Very few prepayment penalties in Agency MBS
When rates decline, homeowners prepay faster
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Prepayment Terminology
SMM
= Single Monthly Mortality Rate = Actual Principal Payment – Scheduled Principal Payment Beginning Principal
CPR
= SMM Annualized
PSA
= Public Securities Association Standard Prepayment Ramp
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Components of Prepayment Speeds (Agencies)
Housing Turnover (moving) Cash-out Refinancing Rate Refinancing CPR 6-10% 2-8% 0-80%
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Refi Curve
70 60 50
CPR
40 30 20 10 -100
-50
0
50
100
150
200
250
300
350
Refi Incentive
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Technology Has Moved Refi Curve
260 240 220
Refi Threshold (2001-03 Wave) Refi Threshold Linear (Refi Threshold)
Incentive Threshold (bps)
200 180 160 140 120 100 80 60 40 20 0 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Report Date
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PSA Curves
10 9 8 7 6
CPR
5 4 3 2 1 0 0 5 10 15 20 25 30 Age (in Months) 35 40 45 50 100% PSA 150% PSA
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Mortgage Cashflows for a $100,000 30-yr 5.5% Loan
600
500
400
$ Amount
300
200 Interest Payment 100 Principal Payment
0 0 30 60 90 120 150 180 210 240 270 300 330 360 Age in Months
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Mortgage Cashflows for a $100MM GNMA Pool With 0% Prepayments
60,000
50,000
40,000
$ Amount
30,000
20,000 Interest Payment Principal Payment
10,000
0 0 30 60 90 120 150 180 210 240 270 300 330 360 Age in Months
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Pass-Thru Cashflows ($100MM 30-yr GNMA 5.5% @ 6% CPR)
120,000 Servicing Interest Payment Principal Payment
100,000
Cash Flow ($)
80,000
60,000
40,000
20,000
0 0 30 60 90 120 150 180 210 240 270 300 330 360 Age (in Months)
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Pass-Thru Cashflows ($100MM 30yr GNMA 5.5% @ 100 PSA)
120,000
100,000
Servicing Interest Payment Principal Payment
Cash Flow ($)
80,000
60,000
40,000
20,000
0 0 30 60 90 120 150 180 210 240 270 300 330 360 Age (in Months)
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WAL Profile
WAL 12
10
8
6
4
2 11 10 9 8 7 Mortgage Yields 6 5 4 3
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Negative Convexity
Price 140 130 120 110 100 90 80 11 10 9 8 7 6 5 4 7.5% Mtg 7.5% 10yr Tsy 7.5% 5yr Tsy 7.5% 2yr Tsy
Mortgage Yields
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Calculation of Prepayment Option Cost
OAS approach
1. Simulate 500 interest rate paths.
2. Calculate prepayments on each path.
3. Calculate yield spread of MBS to LIBOR (Treasury) curve so average
price across all paths just equals price of MBS.
4. This is the expected yield pick-up to LIBOR (Treasury) curve, after
adjusting for prepayment risk.
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Making Sequential CMOs
Principal payments from $100mm 7.5% Deal
Principal 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 0 60 120 180 Months 240 300 360 A
B
C
D
21
Making PAC CMOs
Principal payments from $70 million 7.5% Deal
Principal 1,200,000 1,000,000
250 PSA
800,000 600,000 400,000 200,000 0 0 60 120 180 Month 240 300 360 A B C
100 PSA
D
22
Range of CMO WAL Profiles
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Bond Short VADM Intermediate VADM Longer VADM 3yr PAC 5yr PAC 10yr PAC Last Cashflow PAC 2yr Payer/TAC/Type 2 5yr Payer/TAC/Type 2 10yr Payer/TAC/Type 2 Last Cashflow Payer Seasoned Collateral New Collateral Less Callable Support/Super PO More Callable Support/Rocket Z
5 3.4 6.3 11.5 3.6 6.7 12.1 18.5 2.5 6.0 13.1 24.2 9.9 11.7 15.7 25.0
10 3.4 6.3 11.5 3.1 5.9 10.9 18.4 1.6 3.9 8.1 18.9 7.0 7.8 5.7 0.5
15 3.4 6.3 8.7 3.1 5.5 10.0 17.9 1.2 2.8 5.5 15.1 5.3 5.6 1.2 0.2
CPR 20 3.4 6.0 7.1 2.6 4.1 7.6 14.1 0.9 2.2 4.1 12.3 4.1 4.2 0.8 0.1
6.5x6.5 Examples
25 3.3 5.6 5.8 2.1 3.2 6.0 11.3 0.7 1.8 3.3 10.1 3.3 3.4 0.6 0.1
30 3.0 4.8 4.9 1.7 2.6 4.9 9.3 0.6 1.5 2.6 8.5 2.7 2.8 0.5 0.1
35 2.7 4.0 4.1 1.4 2.2 4.1 7.8 0.6 1.3 2.2 7.2 2.3 2.3 0.4 0.1
Bond FHR 2289 VA FHR 2288 VC FHR 2288 VB FHR 2219 PG FHR 2219 PH FHR 2219 PL FHR 2219 PM FNR 00-5 A FHR 2292 AB FNR 00-5 B FNR 00-5 C 266 WAM 6.5 FN 6.5% TBA FHR 2102 KJ FHR 2292 ZK
WAL Spread 3.0 4.0 11.9 3.0 5.1 10.1 19.1 3.0 4.8 8.3 15.3 6.1 7.1 4.6 0.8 115/C 133/C 150/C 120/C 138/C 154/C 158/C 159/C 166/C 172/C 186/C 174/C 181/C 226/C 305/C
23
U.S. Mortgage Market
(Dollars in Millions) Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005-Q3 GNMA 93,874 105,790 118,940 159,981 179,981 212,145 262,698 315,832 340,527 369,687 401,278 425,241 419,516 414,066 450,934 472,283 506,340 536,810 537,431 582,263 611,553 591,368 537,888 473,738 441,345 411,870 FHLMC 16,962 19,897 42,952 57,720 70,025 99,908 169,186 205,992 219,701 266,060 308,369 351,906 401,525 434,499 460,656 512,238 551,513 576,846 640,471 740,157 810,894 940,933 1,072,990 1,156,188 1,199,290 1,284,393 FNMA 717 14,450 25,121 36,215 54,987 95,778 137,330 172,259 219,577 291,194 362,667 435,979 486,804 530,343 569,724 633,210 687,981 804,205 924,941 1,016,398 1,238,125 1,478,610 1,851,728 1,984,217 2,226,000 Total NonAgency Agency 110,836 126,404 176,342 242,822 286,221 11,000 367,040 24,016 527,662 16,617 659,154 27,800 732,487 34,865 855,324 43,325 1,000,841 55,193 1,139,814 98,183 1,257,020 146,146 1,335,369 174,571 1,441,933 192,637 1,554,245 206,487 1,691,063 232,206 1,801,637 276,930 1,982,107 355,470 2,247,361 394,559 2,438,845 426,265 2,770,426 496,101 3,089,488 551,806 3,481,654 683,231 3,624,852 1,071,894 3,922,263 1,410,000 Total MBS 110,836 126,404 176,342 242,822 286,221 367,040 527,662 686,954 767,352 898,649 1,054,176 1,223,814 1,389,020 1,519,069 1,647,933 1,778,545 1,947,263 2,112,337 2,390,251 2,706,828 2,865,110 3,266,527 3,641,294 4,164,885 4,696,746 5,332,263 Residential Total MBS as % of Resi Mtg Mortgages 962,259 11.5 1,034,857 12.2 1,074,995 16.4 1,191,648 20.4 1,326,092 21.6 1,523,590 24.1 1,726,460 30.6 1,924,218 35.7 2,157,749 35.6 2,382,954 37.7 2,619,009 40.3 2,787,186 43.9 2,955,012 47.0 3,116,500 48.7 3,296,249 50.0 3,467,257 51.3 3,695,159 52.7 3,935,995 53.7 4,294,768 55.7 4,716,558 57.4 5,126,312 55.9 5,635,791 58.0 6,309,623 57.7 7,105,053 58.6 8,071,089 58.2 8,784,300 60.7
Source: Inside MBS & ABS Estimates in italics
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U.S. Mortgage Market—Agency vs. Non-Agency
($ billion) 1999 523 161 684 75 12 56 5 148 2000 402 79 481 54 16 52 13 136 2001 710 354 1,064 142 11 87 27 267 2002 907 536 1,443 172 53 123 66 414 2003 1,620 516 2,136 237 74 195 80 586 2004 701 318 1,019 233 159 362 110 864 2005 665 295 960 280 332 465 114 1,191
Agency Pass Throughs (not in CMOs) Agency CMOs Total Agency Resi A—Prime-Jumbo Resi A—Alt–A Resi B&C—Subprime Home Equity Other * Total Non–Agency
Source: Inside MBS & ABS * Scatch & Dent, Seconds, Resecuritizations. 2005p = Based on first three quarters of 2005.
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Loan and Borrower Characteristics
Residential A Agency* 1st <=Agency Agency 660 715 70% Owner 0% 180,000 Agency Jumbo A 1st >= Agency A 600 735 70% Owner 35% 430,000 45 15 40 2.50-3.00% Alt-A 1st none A/A600 710 80% 20% Investor 60% 235,000 45 35 20 6.00-7.50%
Lien Loan Limit Credit FICO: Min Avg Avg CLTV Occupancy Documentation (Low/No Doc) Avg Loan Size Loan Purpose: Purchase Cash Out Rate Refi AAA Credit Support
*FNMA & FHLMC
Residential B/C Subprime Home Equity 1st or 2nd none A-/C 500 620 83% 5% Investor 35% 165,000 27 66 7 18-22%
HEL HELOC 2nd none A 680 720 85% Owner 0% 40,000 0 85 15 Monoline HEL Closed 2nd none A/A680 720 75% Owner 0% 30,000 0 85 15
Agency Limit = $359,650 as of January 1, 2005. $417,000 as of January 1, 2006.
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Distribution of Credit Scores & LTV Across Products
2005 Vintage Loans
30 SubPrime 25 ALT-A Prime
FICO
%
20 15 10 5 0
420-449
450-479
480-509
510-539
540-569
570-599
600-629
630-659
660-689
690-719
720-749
750-779
780-809
810-839
FICO 35 30 25 SubPrime ALT-A Prime
LTV
%
20 15 10 5 0 10 20 30 40 50 60 LTV 70 80 90 100 110
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840-869
27
ARMs
Loan Size—
Fixed
% %
Loan Size—
10
15
20
25
30
35
40
10
15
20
25
30
35
0 0 5 Loan Size
5
<1 00 K <1 00 K
2005 Vintage Loans
Loan Size Distribution Across Products
Loan Size
1-29-06 NY (tom).ppt
Prime
ALT-A
SubPrime
Prime
ALT-A
SubPrime
10 0K -2 00 K 20 0K -3 00 K 30 0K -4 00 K 40 0K -5 00 K 50 0K -6 00 K 60 0K -7 00 K 70 0K -8 00 K 80 0K -9 00 90 K 0K -1 00 10 0K 00 K11 00 11 K 00 K12 00 K 12 00 K10 0K -2 00 K 20 0K -3 00 K 30 0K -4 00 K 40 0K -5 00 K 50 0K -6 00 K 60 0K -7 00 K 70 0K -8 00 K 80 0K -9 00 90 K 0K -1 00 10 0K 00 K11 00 11 K 00 K12 00 K 12 00 K-
28
Enhancement Reflects Collateral Differences
Collateral ―Six-Pack‖ Deal Deal with XS / OC
In Non-Agency MBS, credit
Deal Collateral Face Value Total Principal Payments
enhancement structures come mainly in two flavors
—
—
Interest Payments
―Six-pack‖ structures where several locked-out subs provide credit enhancement. Mainly used on Jumbos and Alt-As Excess-spread / Overcollateralization structures, where locked-out subs are complemented by excess interest from the collateral to cover losses. Mainly used in Subprime, High-LTV, Scratch & Dent, sometimes Alt-A
AAAs
AAAs
AA ―M1‖
Classic ―Six Pack‖ Credit Enhancement
A ―M2‖ BBB ―M3‖ BB ―B1‖ B ―B2‖ N.R. ―B3‖ IO Interest on the bonds
Excess-Spread O/C-based Credit Enhancement
AA ―M1‖ A ―M2‖ BBB ―M3‖ XS – OC Residual Interest on the bonds
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Typical Evolution—OC Target & Actual OC
Target OC
OC Relative to Orig. Balance
Actual OC
Triggers playing a role After step-down
OC at Target
OC
d-U p
Re
lea
se
OC B
uil
OC allowed to decrease Along with collateral balance
1 yr 2 yrs 3 yrs 4 yrs
Deal seasoning
Step-Down Date
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Credit vs. Prepayment Stability
(More)
Prepayment stability a key attribute of Subprime
Prepayment Stability
Subprime
Agency Alt-A
(Less)
(Lower) Credit
Jumbo
(Higher)
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1-month CPR
10 20 30 40 50 60 70 80 90 0
100
Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04
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Jumbo Alt A Subprime FN 99 7%
Prepayment Sensitivity of Non-Agency Sectors
Sep-04
32
Historical Cumulative Loss Comparison*
Resi A—Prime-Jumbo Resi A— Alt-A Resi B&C— Subprime
10 - 20 bps 50 – 80 bps 400 – 500 bps
*Cum losses for 2003-2005 vintages will be much less because of strong housing price appreciation.
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Loss Coverage by Rating Level
Jumbo
Rating Enhancement AAA 2.60-3.00 AA 1.20-1.50 A .65-.90 BBB .45-.55 BB .30-.35 B .15-.20 Current loss = 10 bps Loss Coverage 28.0 13.5 7.8 4.8 3.3 1.8
Alt-A
Rating Enhancement AAA 6.00-7.50 AA 3.00-3.75 A 2.00-2.50 BBB 1.50-2.00 BB .75-.90 B .35-.50 Current loss = 60 bps Loss Coverage 11.3 5.6 3.8 2.9 1.4 0.7
Subprime
Rating Enhancement AAA 18.00-22.00 AA 14.00-16.00 A 11.00-13.00 BBB 8.00-10.00 Current loss = 400-450 bps Loss Coverage 5.0 3.8 3.0 2.3
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MBS Issuance By Sector—Agency vs. NonAgency
700,000 600,000 500,000 Agency Non-Agency
Non-Agency ($mm)
400,000 300,000 200,000 100,000 0
2002-Q1
2002-Q2
2002-Q3
2002-Q4
2003-Q1
2003-Q2
2003-Q3
2003-Q4
2004-Q1
2004-Q2
2004-Q3
2004-Q4
2005-Q1
2005-Q2
2005-Q3
Source: Inside MBS & ABS
2005-Q4
35
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Non-Agency MBS Issuance By Sector
140,000 120,000 100,000 Prime Jumbo Subprime Home Equity Alt-A All Other
Non-Agency ($mm)
80,000 60,000 40,000 20,000 0
2002-Q1
2002-Q2
2002-Q3
2002-Q4
2003-Q1
2003-Q2
2003-Q3
2003-Q4
2004-Q1
2004-Q2
2004-Q3
2004-Q4
2005-Q1
2005-Q2
2005-Q3
Source: Inside MBS & ABS
2005-Q4
36
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RMBS Issuance—By Type ($million)
% of Total Date 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2005-Q1 2005-Q2 2005-Q3 2005-Q4 Agency 269,132 370,648 367,884 725,952 685,078 479,011 1,087,499 1,444,426 2,131,953 1,018,871 960,372 198,851 229,104 287,455 244,962 Alt-A 498 1,803 6,518 21,236 12,023 14,696 11,374 53,463 74,151 158,586 332,323 59,563 82,050 103,755 86,955 Jumbo Subprime Seconds 25,838 17,772 2,012 31,419 30,769 5,141 49,975 56,921 4,570 97,365 75,830 7,375 74,631 55,852 3,266 56,052 48,145 3,825 142,203 87,053 15,512 171,534 122,681 24,803 237,455 194,959 20,351 233,378 362,549 49,133 280,704 464,990 60,736 64,118 98,220 10,356 66,522 119,213 12,366 70,775 118,974 21,414 79,289 128,583 16,600 S&D 2,068 0 924 790 1,374 2,374 5,522 25,172 47,033 34,701 29,004 6,674 8,147 7,081 7,102 Re-MBS 739 762 224 616 754 1,062 4,736 14,357 7,748 21,383 16,786 2,631 10,371 2,820 965 Other Total MBS 318,058 440,541 487,016 929,163 832,977 605,165 921 1,354,819 1,945 1,858,381 4,520 2,718,170 4,432 1,883,033 6,721 2,151,635 791 441,202 774 528,547 2,706 614,980 2,450 566,907 Agency 84.6 84.1 75.5 78.1 82.2 79.2 80.3 77.7 78.4 54.1 44.6 45.1 43.3 46.7 43.2 Alt-A 0.2 0.4 1.3 2.3 1.4 2.4 0.8 2.9 2.7 8.4 15.4 13.5 15.5 16.9 15.3 Jumbo Subprime 8.1 5.6 7.1 7.0 10.3 11.7 10.5 8.2 9.0 6.7 9.3 8.0 10.5 6.4 9.2 6.6 8.7 7.2 12.4 19.3 13.0 21.6 14.5 22.3 12.6 22.6 11.5 19.3 14.0 22.7
Source: Inside MBS & ABS, based on SEC filingss and industry surveys. MBS are backed by 1-4 family mortgage loans. Agency CMO/REMICs are backed by FNMA, FHLMC or GNMA collateral. Starting January 2001, Non-Agency MBS include private-label Note: jumbo and Alt-A transactions, plus mortgage-related ABS, including subprime HEL, second liens, HELOCs, high LTV loans and manufactured housing loans. ABS data prior to 2001 include some mortgage-related collateral.
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Factors Behind Growth in Subprime HEQ Issuance
More subprime borrowers
—
Increase in consumer debt burden
Greater % of subprime borrowers taking out mortgages
—
Aggressive marketing programs
—
Internet access
Expanded definition of subprime
—
Includes more Alt-A
Securitizers accounting for greater share of subprime lending
—
More aggressive lending
—
Rapid expansion into new geographic areas
Consumers shifting installment debt to mortgage debt Lower rates = Increased rate refis Greater housing inflation = Increased cash-out refis Competitive pricing
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10
15
20
25
30
35
5
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
39
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GNMA 1s and 2s 30-Yr / All Pass-Thru Production
10
12
2
4
6
8
-
Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05
1-29-06 NY (tom).ppt
Subprime Profitability
2/28 HEL WACs LIBOR+90 Profitability
May-05 Sep-05
40
Evolution of Non-Agency Loan Characteristics
Full Doc % 72.2 65.2 64.0 72.5 66.8 53.4 49.3 46.4 39.5 37.6 33.6 31.6 31.7 30.5 31.8 31.5 72.2 68.9 74.9 72.9 67.4 65.1 62.0 59.6
Orig Class Type Year # Loans Prime 1998 299,312 1999 200,871 2000 124,263 2001 274,548 2002 357,834 2003 462,067 2004 440,404 2005 153,368 ALT-A 1998 153,616 1999 91,918 2000 65,887 2001 106,964 2002 182,154 2003 377,563 2004 742,341 2005 461,508 Subprime 1998 313,046 1999 455,706 2000 410,275 2001 489,668 2002 681,806 2003 1,070,217 2004 1,645,204 2005 722,406 Source: Loan Performance
Orig Orig Loan Inves Amount ARM % WAC FICO CLTV Size % 98,691 9.0 7.23 725 72.3 330 0.6 70,479 19.4 7.19 721 72.4 351 0.9 45,722 33.1 7.92 725 74.5 368 1.1 119,939 27.3 6.99 729 69.2 437 0.5 167,779 43.1 6.08 734 65.9 469 0.5 215,880 50.3 5.14 736 66.0 467 1.0 189,105 76.5 4.46 733 71.7 429 2.5 72,043 63.4 4.97 737 73.2 470 2.6 23,761 0.4 7.89 711 74.4 155 18.5 13,811 3.7 8.25 698 76.9 150 20.2 12,590 8.0 9.20 695 78.6 191 15.3 29,220 20.8 7.83 703 75.9 273 8.8 46,934 30.1 7.00 709 74.7 258 13.0 88,173 35.0 5.94 711 73.8 234 19.2 182,698 68.2 5.33 710 79.3 246 17.3 121,895 62.5 4.51 714 77.9 264 14.9 28,975 52.5 9.77 602 77.7 93 6.2 43,496 54.4 9.88 602 78.2 95 5.0 42,145 68.6 10.52 595 79.0 103 5.0 60,551 70.1 9.54 603 79.9 124 4.9 97,524 74.4 8.47 612 80.3 143 5.2 174,756 68.6 7.45 621 81.7 163 5.4 293,860 78.1 7.05 622 83.5 179 5.4 136,169 84.2 7.18 622 84.6 189 5.3
DTI 25.2 23.4 29.9 31.0 30.9 31.2 33.7 34.5 30.4 27.0 34.0 34.9 35.0 34.1 35.3 36.0 35.9 37.8 38.9 39.1 39.3 39.7 40.2 40.4
CA 46.1 48.8 38.0 46.0 47.9 47.4 49.3 47.6 41.3 32.5 35.1 43.1 43.7 44.4 43.1 43.0 18.5 18.8 19.7 25.1 29.9 32.9 33.6 30.0
1-29-06 NY (tom).ppt
41
IO%—1st Lien Fixed and ARMs
Option ARMs %—1st Lien Fixed and ARMs
%
10 15 20 25 30 35
10 20
%
30 40 50 60 0
0
5
Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05
Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05
Subprime Alt-A & Prime
IO% Peaked When Option ARMs Took Off
Source: Loan Performance
Alt-A & Prime
1-29-06 NY (tom).ppt
42
Dominance of ―Affordability‖ Mortgages
80 70 60 50
%
Affordability = IO + Option ARMs Alt-A & Prime Subprime
40 30 20 10 0
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jul-01
Jul-02
Jul-03
Jul-04
Apr-01
Apr-02
Apr-03
Apr-04
Oct-01
Oct-02
Oct-03
Oct-04
Apr-05
Jul-05
1-29-06 NY (tom).ppt
43
%
10 12 14 16 0 2 4 6 8
Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04
U.S. Annual Home Price Appreciation
Source: Freddie Mac
1-29-06 NY (tom).ppt
Mar-05
44
Subprime Cumulative Loss by Vintage & Foreclosure by States
450 400 350 300
Bps
Vintage Year 1998-2003
250 200 150 100 50 0 3 7 11 15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 Seasoning 1998 2001 1999 2002 2000 2003 c
30
25
20
2001
FC Freq %
15
CA MS NE TN UT
MA NC OK TX
10
5
0 3 6 9 12 15 18 21 24 27 30 33 Loan Age
1-29-06 NY (tom).ppt
45
2001 Subprime Mortgages— Loss Severity & Cumulative Loss Rates, by States
50
40
Loss Severity (%)
30
Loss Severity
20
10
0 CA MA UT NE TX NC TN OK MS
3.5 3 CA MS NE TN UT MA NC OK TX
Cumulative Loss Rate (%)
2.5 2 1.5 1 0.5 0 5 8
Cumulative Loss Rates
11
14
17
20 Loan Age
23
26
29
32
1-29-06 NY (tom).ppt
46
Subprime 2/28 ARM with 2-year Penalties
100
80
2000
CPR (%)
60
2001 2002
40
2003 2004
20
0 0 3 6 9 12 15 18 21 24 27 30 33 36 Loan Age
1-29-06 NY (tom).ppt
47
Impact of Prepayments & HPA on Subprime Losses
HPA/CPR/LS Combination A B C D E
Housing Appreciation 7 - 12% 5 - 7% 2 - 3% 0% -2 - 3%
CPR ARM* 70 50 45 40 35
CPR Fixed* 30 25 20 18 15
CDR** Base Base Base Base Base x 1.20
Loss Severity 20 35 45 55 60
Cum Defaults 6.67 11.58 13.35 14.99 20.04
Cum Loss 1.50 4.09 6.07 8.33 12.15
* ARM CPR Vectors identified by peak speed at 24 months. Fixed CPR Vectors identified by speed at end of 12 month seasoning ramp. **Base CDR curve based on historical current losses. For combination E, base CDR multiplied by 1.20 to account for recession.
1-29-06 NY (tom).ppt
48
Loss Coverage Ratios If Housing Inflation Slows
Subprime Rating AAA AA A BBB
Source: UBS
Enhancement 18.00 - 22.00 14.00 - 16.00 11.00 - 13.00 8.00 - 10.00
7 - 12% HPI 70/30 CPR Cum Loss = 1.50%
5 - 7% HPI 50/25 CPR Cum Loss = 4.00%
Loss Coverage 2 - 3% HPI 0% HPI 45/20 CPR 40/18 CPR Cum Loss = Cum Loss = 6.00% 8.33%
-2-3% HPI 35/15 CPR Cum Loss = 12.00%
13.3 10.0 8.0 6.0
5.0 3.8 3.0 2.3
3.3 2.5 2.0 1.5
2.4 1.8 1.4 1.1
1.7 1.3 1.0 0.8
Source: UBS
49
1-29-06 NY (tom).ppt
Impact of Lower Housing Inflation on Losses
Cumulative Losses Jumbo 5 - 7% Housing Inflation 2 - 3% Housing Inflation 0% Housing Inflation Alt-A 5 - 7% Housing Inflation 2 - 3% Housing Inflation 0% Housing Inflation Subprime 5 - 7% Housing Inflation 2 - 3% Housing Inflation 0% Housing Inflation
Source: UBS
=
Cumulative Defaults
x
Loss Severity
10.0 bp 24.0 bp 42.0 bp
= = =
1.00% 1.20% 1.40%
x x x
10% 20% 30%
60.0 bp 105.0 bp 160.0 bp
= = =
3.00% 3.50% 4.00%
x x x
20% 30% 40%
4.00% 6.00% 8.33%
= = =
11.50% 13.35% 15.15%
x x x
35% 45% 55%
1-29-06 NY (tom).ppt
50
Loss Coverage Ratios If Housing Inflation Slows
Jumbo Rating Enhancement AAA 2.60 - 3.00 AA 1.20 - 1.50 A .65 - .90 BBB .45 - .55 BB .30 - .35 B .15 - .20 5 - 7% HPI Cum Loss = 10.0 bps 28 13.5 7.8 4.8 3.3 1.8 Loss Coverage 2 - 3% HPI Cum Loss = 24.0 bps 11.7 5.6 3.3 2.0 1.4 0.8 Loss Coverage 2 - 3% HPI Cum Loss = 105.0 bps 6.4 3.2 2.1 1.7 0.8 0.4 Loss Coverage 2 - 3% HPI Cum Loss = 6.00% 3.3 2.5 2.0 1.5 0% HPI Cum Loss = 42.0 bps 6.7 3.2 1.9 1.1 0.8 0.4
Alt-A Rating Enhancement AAA 6.00 - 7.50 AA 3.00 - 3.75 A 2.00 - 2.50 BBB 1.50 - 2.00 BB .75 - .90 B .35 - .50
5 - 7% HPI Cum Loss = 60.0 bps 11.3 5.6 3.8 2.9 1.4 1.8
0% HPI Cum Loss = 160.0 bps 4.2 2.1 1.4 1.1 0.5 0.3
Subprime Rating Enhancement AAA 18.00 - 22.00 AA 14.00 - 16.00 A 11.00 - 13.00 BBB 8.00 - 10.00
Source: UBS
5 - 7% HPI Cum Loss = 4.00% 5.0 3.8 3.0 2.3
0% HPI Cum Loss = 8.33% 2.3 1.8 1.4 1.1
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Analyst Certification
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