U'S' RMBS Update

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U.S. RMBS Update

• April 2009

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U.S. RMBS New Issue Ratings
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The Fitch ResiLogic Default and Loss Model

• 25 MSA-level and State economic forecasts and
  National risk index (NRI) economic forecast
• Economic factors, i.e. trends in housing prices,
  income, employment, employment diversity,
  construction rates
• Demographic factors, i.e. population growth and
  distribution
• Regional factors, i.e. property tax rates, growth
  controls
• Topographical factors, i.e. coastal or inland,
  mountains
• Seasoning component adjusts FOF and LS to account
  for loan age
• Additional FOF penalty factors for loans with
  limited underwriting or simultaneous second liens
• Reduced LS credit for loans with primary mortgage
  insurance

www.fitchratings.com
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MSA Risk Multipliers

• Top 25 MSAs
• The largest component of the risk multiplier is
  UFAs five-year home price forecast
• Takes into account personal income and
  distribution, employment growth and housing
  construction
• 5-Year projected real home price movement from
  Q408
• National -21
• CA -45
• Riverside MSA -50
• San Diego MSA -54

www.fitchratings.com
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National Risk Index

• The NRI reflects changes in 19 economic measures
• Provides a default probability for loans
  originated today
• Updated quarterly 201 for Q109
• Historic high this quarter has risen in all but
  one quarter since Q3 2004 previous peak of 160
  in 1990
• Fitch uses a stressed level of 250 to limit
  ratings volatility

www.fitchratings.com
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Historical National Risk Index Value
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California UFA Default Multiplier
Source Fitch, UFA
www.fitchratings.com
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The National Risk Multiplier and Examples of
Regional Multipliers
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Seasoned Loan Component

• Fitch analyzes seasoned loan pools in the course
  of re-REMIC analysis expects to continue to see
  seasoned loan pools in the future
• ResiLogic is able to analyze seasoned loans based
  on
• loan age
• delinquency status
• previous 12 month payment history
• property value changes
• Greater weight on the past-due status of the loan
  than its initial collateral characteristics

www.fitchratings.com
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In 2009.

• Originator reviews
• Company and management experience, sourcing
  procedures, underwriting and risk management
• Reps and warranties
• what reps and warranties are required before
  Fitch can rate a transaction
• Third party loan level reviews
• loan files inspected and a report generated that
  details loans underwritten outside the
  originators guidelines or have underwriting
  information missing or different to certain
  minimum standards

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The Housing Market and RMBS Performance
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Home Values Decline Sharply Office of Federal
Housing Enterprise Oversight Purchase-Only Price
Index
OFHEO Purchase-Only Price Index, YoY Change
() as of Q4 2008
Source Fitch Ratings, OFHEO
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Home Values Decline Sharply Case-Shiller-Weiss
Home Price Index
Case-Shiller-Weiss Index, YoY Change () as of Q4
2008
Source Fitch Ratings, Case-Shiller-Weiss
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California Home Price Inflation By Origination
Quarter
HPI (as of Q4 2008)
Source Fitch Ratings, Case-Shiller-Weiss
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Where are the bottoms of home prices?
Nominal basis, assuming 3 annual inflation
Case-Shiller Index
Source Case-Shiller, UFA, Fitch
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Rapid Rise in Defaults for Subprime and Alt-A
Source Fitch Ratings, LoanPerformance
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Declining Underwriting Standard and Aggressive
Borrowing in Prime Sector
Combined Loan-to-Value Ratio
of Borrowers with Full Documentation Loan
Source Fitch, Loan Performance
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Use of Loan Modifications Increasing
Source Fitch, Loan Performance
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Modification Type Demonstrate Different
Effectiveness

• By modification type, of loans returning to 60
  days delinquent

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Fitch Takes Prospective Rating Actions on RMBS

• 2008 Fourth Quarter
• November Revised surveillance criteria published
  for US RMBS subprime transactions. Subsequent
  review of 2005 2007 vintage subprime bonds
  based on revised loss expectations is completed.
• December Revised surveillance criteria published
  for US RMBS Alt A transactions. Subsequent review
  of Alt A transactions (all vintages) based on
  revised loss expectations is completed. Fitch
  introduces Fitch RMBS Loss Metrics.
• 2009
• January Review of Scratch Dent and 2nd Lien
  transactions is completed.
• February Subsequent review of Pre-2005 subprime
  bonds based on revised criteria and loss
  expectations is completed.
• March A special report on prime RMBS performance
  is published which includes revised loss
  projections. Revised surveillance criteria
  published for US RMBS Prime transactions.
  Subsequent review of pre-2005 vintage prime bonds
  based on revised loss expectations is completed.
  Fitch incorporates Recovery Ratings into the
  surveillance process.
• April Subsequent review of 2005 2088 vintage
  prime bonds based on revised loss expectations is
  completed. Fitch RMBS Loss Metrics is updated to
  include prime RMBS in addition to Alt A and
  subprime RMBS key performance data for
  approximately 3,500 pools and 40,000 bond classes
  now available.

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Rating Transition Initial to Current RatingAs
of April 11, 2009
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Rating Transition Initial to Current RatingAs
of April 11, 2009
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Fitch Outlook

• 2005 through 2007 vintage securitizations will
  continue to underperform. Subprime and Alt A
  transactions will continue to exhibit the worst
  performance.
• Modifications on Subprime and Alt-A loans may
  help loss performance, but the level of ultimate
  modification activity is still unclear.
• Ultimate effect on loan performance from federal
  legislative proposals and regulatory initiatives
  remains uncertain.
• RMBS bonds will continue to be impacted by
  deteriorating macroeconomic trends such as cuts
  in consumer spending, increasing unemployment,
  and declining home values.
• As economic conditions continue to deteriorate,
  Fitch forecasts that U.S. home prices will
  further decline nationally by as much as 10 from
  3Q2008. Home price declines in California will
  continue to deteriorate at an increased pace,
  falling as much as an additional 25 from 3Q2008
  values.
• Past and continuing home price declines and
  prolonged time to recovery has put higher rated
  bonds at risk.
• Prime bonds not immune from macroeconomic trends
  performance has deteriorated dramatically over
  last few quarters putting ratings on all classes
  under downgrade pressure.

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