www.adelsonandjacob.

com Adelson & Jacob Consulting, LLC

The Future of
Securitization
Mark Adelson
Adelson & Jacob Consulting, LLC
www.adelsonandjacob.com

Moody's Corporation & NYU Stern School of Business

5th Annual Credit Risk Conference
Skirball Center at 566 LaGuardia Place
New York City

14 May 2008
www.adelsonandjacob.com Adelson & Jacob Consulting, LLC

Fed Funds Target Rate, NASDAQ Composite Index, and

Annual Rate of U.S. Home Price Appreciation
16

14 Fed Funds Target Rate (%)

NASDAQ (1990=1)
12
U.S. HPA (%)
10

0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Federal Reserve, Yahoo

14 May 2008 2
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U.S. Mortgage Originations

4.0

3.5

3.0

2.5
($ trillions)

2.0

1.5

1.0

0.5

0.0

2008P
2009P
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: Inside Mortgage Finance, Mortgage Bankers Associations

14 May 2008 3
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U.S. Public Home Equity ABS Issuance

100 500

80 400
($ billions)

60 300

40 200

20 100

0 0

2008P
2001
2002
2003
2004
2005
2006
2007
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

Source: Moody's, Bloomberg, Asset Securitization Report

14 May 2008 4
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Insured Portion of U.S. Home Equity ABS Issuance

100% Insured Portion 500

Issuance Volume

Issuance Vol ($ billions)

80% 400
Insured Portion

60% 300

40% 200

20% 100

0% 0
1992
1993
1994
1995
1996
1997
1998
1999
2000

2001
2002
2003
2004
2005
2006
Sources: Asset-Backed Alert Database (insured portion), Moody's, Bloomberg, Asset Securitization Report

14 May 2008 5
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Home Equity ABS Yield Spreads over Swaps/LIBOR and

Annual Structured Finance CDO Funded Issuance Volume
450 240
SF CDO Issuance
400 ARM BBB- Spread 210
ARM BBB Spread
350 Fixed BBB Spread 180
Spreads (basis points)

Issuance ($ billions)
300 150

250 120

200 90

150 60

100 30

50 0
2001 2002 2003 2004 2005 2006 2007
Source: JPMorgan
14 May 2008 6
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Sub-prime Performance (12/2007)

Source: Moody's

14 May 2008 7
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Sub-prime Performance (12/2007)

Source: Moody's
14 May 2008 8
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Sub-prime Downgrades in 2007

Source: Moody's
14 May 2008 9
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Basic HEL ABS Structure – Tranching

100

80

60 AAA

Loans
40

20 AA
A
BBB
Residual
0
Underlying Assets Securities

14 May 2008 10
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HEL ABS Deal Structure – Tranching

100

80
Tranche Losses (%)

60

Assets
40 Residual
BBB
A
20 AA
AAA

0
0 10 20 30 40 50 60 70 80 90 100
Pool Losses (%)

14 May 2008 11
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CDO Downgrades in 2007

Source: Moody's
14 May 2008 12
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The Current Situation

„ Defaults are likely for most 2006-07 sub-prime mortgage ABS

tranches initially rated triple-B
„ Defaults are likely for many 2006-07 sub-prime mortgage ABS
tranches initially rated single-A
„ These defaults are not surprising in an environment of declining home
prices
„ SF CDO tranches rated triple-A are likely to default because of
concentrated exposure the triple-B and single-A layers of sub-prime
mortgage deals
„ CDO professionals did not expect so many securities rated at the
triple-B and single-A levels to default at the same time because they
had not observed it in the recent past

14 May 2008 13