MBA Secondary Market Presentation

Navneet Agarwal
Senior Vice President

April 21, 2009

 AGENDA

 Market Overview
 Housing Market
 RMBS Market

 Rating Actions
 Updated Expected Loss Projections
 Rating actions

 Moody’s Methodology Updates

 New Processes
 Servicer Quality Ratings
 ASF Project ReSTART

2
Market Overview
 House Price Appreciation
16
% change year ago
14 Existing single-family homes
12 Home price index
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12 Sources: NAR, FHFA, Moody's Economy.com
-14
98Q4 00Q1 01Q2 02Q3 03Q4 05Q1 06Q2 07Q3 08Q4
4
 House Prices About Balanced
35 180
Source: Moody's Economy.com
30 160

25 140

20 120
Average percent overpriced (L)
15 100

10 80

5 60

0 40
Number of
overpriced
-5 metro 20
areas (R)
-10 0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
5
 Housing Affordability
150 95

145 Source: NAR, Moody's Economy.com

90
140

135
85
130

125 80

120 Composite housing

affordability index (L) 75
115
First-time homebuyer
110 affordability index (R) 70
105 % of median-priced home that
median income-earning family can afford
100 65
98Q4 99Q4 00Q4 01Q4 02Q4 03Q4 04Q4 05Q4 06Q4 07Q4 08Q4
6
 Mortgage Interest Rates
8.5
% 30-yr. average conventional
8.0 commitment rate
1-yr. commitment rate
7.5

7.0

6.5

6.0

5.5

5.0

4.5

4.0
Source: Freddie Mac, Moody's Economy.com
3.5
98Q4 99Q4 00Q4 01Q4 02Q4 03Q4 04Q4 05Q4 06Q4 07Q4 08Q4
7
 Inventories
575 4,000
New single-family homes for sale (L)
550
Existing single-family homes for sale (R) 3,500
525
500 3,000
475 Sources: BOC, NAR, Moody's Economy.com
2,500
450
425 2,000
400
1,500
375
350 1,000
325
500
300
Ths, SA
275 0
98Q4 00Q1 01Q2 02Q3 03Q4 05Q1 06Q2 07Q3 08Q4
8
Long-Run Supply & Demand Nearly Balanced
1,700
Single-family total units, SAAR, ths
1,600
Long-run supply
1,500

1,400
Long-run demand
1,300

1,200

1,100

1,000

900
Source: Moody's Economy.com
800
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

9
Some Letup in Mortgage Credit Tightening
100
Net % of banks tightening mortgage loan standards
Sources: FRB, Moody's Economy.com
80
Total market
60 Prime
Nontraditional
Subprime
40

20

-20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
10
 2009 RMBS Issuance

 Primary RMBS Issuance

 There have been no public RMBS offerings in 2009
 Three RMBS Transactions, with a combined issuance value
of $368 million closed in 2008 Q4
 43 RMBS Transactions, with a combined issuance value of
$25.4 billion closed in 2008 Q4

 Resecuritization
 There have been 15 public resecuritizations in 2009, totaling
$4.4 billion in offered securities
 2008 Q4 issuance was $3.5 billion from 14 transactions.

11
Surveillance Update
 Updated Expected Loss Projections
 Loan by loan attributes modelled (e.g. Updated LTV,
MSA, FICO, Documentation, Prop, Occupancy, Lien)
 Forward expectation of HPA / Unemp(Jumbo) factored in
 Projecting delinquencies through end of 2009
 Projecting defaults after 2009; projecting lifetime default
frequency
 Projecting losses given expected defaults (severity)

13
Updated Expected Loss Projections – Step 1

 Project DQs through the end of 2009 (projected housing

trough)
 Statistical analysis incorporating loan characteristics
and macro-economic trends in predicting default
behaviour
– Change in LTV will have a material impact on future delinquency

– Fixed vs Adjustable continues to be predictive

– Unemployment rate and HPA trends significantly impact defaults

 Performance trends point to similar delinquency trends

at year-end

14
Updated Expected Loss Projections – Step 2

 Project lifetime defaults

 What drives the post-2009 defaults?
– Cumulative default rate through end of 2009 as benchmark

– Changes in benchmark default rate due to changes in macro-

economic factors and

– Changes in pool factor due to voluntary prepayment rate

 “Default-burnout factor” is the ratio of future default

rate to benchmark default rate

15
Updated Expected Loss Projections – Step 2

 Estimate LGD. EL = Defaults * LGD

 Incorporate loan-level characteristics
– Location / LTV (Est change in HPA factored in)
 Recent observations and trends – historical data
 Normalization for data anomaly
 Results - Loss Severity
– Jumbo: 35% to 45% Jumbo
– Subprime: 55% to 75% for Subprime
– Alt-A/ PoA: 35% to 75%

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Updated Expected Loss Projections - Summary

Vintage
Asset Type
2005 2006 2007 2008
Jumbo 1.70% 3.55% 5.05% 6.20%
Alt-A 20% 24% N/A
Option ARM 12% 27% 30% N/A
Subprime 13% 30% 36% N/A

All ELs %OB

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 Jumbo Rating Actions

Jumbo Rating Transitions

2006 and 2007 Vintage Transactions
As of 4/13/09

Original Current Rating/Last Rating Before WR

Rating Aaa Aa A Baa Ba B Caa Ca C Total UPG Total DNG Total Ratings
20.6% 17.9% 28.4% 16.8% 12.4% 2.5% 1.3%
Aaa 2,228 2,806
(578) (502) (798) (472) (349) (71) (36)
16.2% 18.0% 19.4% 20.6% 12.5% 11.0% 2.0% 0.3%
Aa 0 289 345
(56) (62) (67) (71) (43) (38) (7) (1)
4.2% 4.2% 25.0% 4.2% 25.0% 37.5%
A 0 23 24
(1) (1) (6) (1) (6) (9)
9.1% 4.5% 31.8% 45.5% 9.1%
Baa 0 20 22
(2) (1) (7) (10) (2)
71.4% 14.3% 14.3%
Ba 0 7 7
(5) (1) (1)
60.0% 20.0% 20.0%
B 0 5 5
(3) (1) (1)
0 2,572 3,209

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 Alt-A Rating Actions

Alt-A Rating Transitions

2006 and 2007 Vintage Transactions
As of 4/13/09

Original Current Rating/Last Rating Before WR

Rating Aaa Aa A Baa Ba B Caa Ca C Total UPG Total DNG Total Ratings
8.8% 1.2% 0.8% 2.7% 3.0% 12.3% 55.0% 14.5% 1.5%
Aaa 7,503 8,230
(727) (100) (65) (226) (250) (1,009) (4,530) (1,196) (127)
0.8% 0.0% 0.2% 0.2% 0.3% 1.3% 17.6% 79.5%
Aa 0 2,298 2,317
(19) (1) (5) (5) (8) (29) (408) (1,842)
0.4% 0.1% 0.1% 0.1% 0.8% 98.5%
A 0 1,456 1,462
(6) (1) (1) (2) (12) (1,440)
0.5% 0.1% 0.2% 0.5% 98.8%
Baa 0 1,318 1,325
(7) (1) (2) (6) (1,309)
0.4% 0.9% 98.7%
Ba 0 227 228
(1) (2) (225)
100%
B 0 32 32
(32)
0 12,834 13,594

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 Subprime Rating Actions

Subprime Rating Transitions

2006 and 2007 Vintage Transactions
As of 4/13/09

Original Current Rating/Last Rating Before WR

Rating Aaa Aa A Baa Ba B Caa Ca C Total UPG Total DNG Total Ratings
21.9% 6.6% 6.5% 7.1% 12.0% 17.2% 16.8% 11.1% 0.8%
Aaa 2,492 3,192
(700) (210) (208) (227) (383) (549) (536) (353) (26)
1.8% 1.5% 2.1% 4.0% 6.3% 6.2% 5.5% 72.6%
Aa 0 1,896 1,930
(34) (29) (40) (78) (122) (119) (106) (1,402)
0.5% 1.1% 0.6% 1.0% 1.6% 0.9% 94.3%
A 0 1,926 1,935
(9) (22) (11) (19) (31) (18) (1,825)
0.2% 0.8% 0.5% 0.5% 0.3% 97.8%
Baa 0 1,886 1,889
(3) (15) (9) (9) (6) (1,847)
0.3% 0.3% 0.5% 0.2% 98.6%
Ba 0 575 577
(2) (2) (3) (1) (569)
0 8,775 9,523

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Moody’s Methodology Updates
Moody’s Proposed Enhancements for US RMBS

 More Comprehensive Originator Reviews

 Expanded Data Fields
 Stronger Representations & Warranties
 Independent 3rd Party Pre-Close Review
 Post Securitization Forensic Review

22
 ASF Project RESTART

 Increase reporting and transparency in US RMBS and

ABS
 Establish standard data sets, practices and procedures
for transaction parties
 Create a standing, cross-industry committee to review
and update procedures as the market evolves

23
 ASF Project RESTART

 Standardized RMBS Disclosure Package

 Standardized RMBS Reporting Package
 Representations and Warranties Standards
 Repurchase Procedures- Forensic Reviews
 Due Diligence Procedures
 Model Servicing Procedures

24
 Servicer Quality Ratings

 Servicer Quality or “SQ” ratings are performed by

servicer function and product
 Servicer Function: Primary, Special, Master
 Product type: Prime, Subprime, 2nd lien, HLTV, Insured

 Ratings are subject to annual review

 Incorporates both quantitative and qualitative
assessment of servicing operations
 SQ ratings range from SQ1 (strong) to SQ5 (weak)
 Assess effectiveness in mitigating losses

25
 Servicer Quality Ratings - Framework

SQ
Assessment

Servicing
Servicing Ability
Stability

Legal Technology
Customer Management
Loss Timeline Financial Compliance &
Service/ &
Mitigation Management Stability & Disaster
Collections Staffing
Oversight Recovery

26
 SQ Ratings – 2008 Trends

 Challenges facing servicers: rising defaults; increased

government regulation; increased loss mitigation
programs
 Servicer responses and trends:
 Increase in default staff and technology
 Increased loss mitigation initiatives and workout volumes
 Rising cost of servicing
 Servicing stability / Servicer consolidation

 See Moody’s 2008 Review and Perspective for 2009:

US Mortgage Servicer Ratings

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