mortgage backed securities market
DESCRIPTION
TRANSCRIPT
U.S. Mortgage Backed Securities Market
January 29, 2006
Thomas ZimmermanExecutive DirectorU.S. Securitized Products Strategy Group
21-29-06 NY (tom).ppt
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
31-29-06 NY (tom).ppt
U.S. Debt Securities Outstanding
U.S. Asset-Treasury Mortgages Corporate Agencies Backed
1985 1,437.7 372.1 776.5 293.9 0.91986 1,619.0 534.4 959.6 307.4 7.21987 1,724.7 672.1 1,074.9 341.4 12.91988 1,821.3 772.4 1,195.7 381.5 29.31989 1,945.4 971.5 1,292.5 411.8 51.31990 2,195.8 1,333.4 1,350.4 434.7 89.91991 2,471.6 1,636.9 1,454.7 442.8 129.91992 2,754.1 1,937.0 1,557.0 484.0 163.71993 2,989.5 2,144.7 1,674.7 570.7 199.91994 3,126.0 2,251.6 1,755.6 738.9 257.31995 3,307.2 2,352.1 1,937.5 844.6 316.31996 3,444.7 2,486.1 2,122.2 925.8 404.41997 3,441.8 2,680.2 2,359.0 1,022.6 535.81998 3,340.5 2,955.2 2,708.6 1,300.6 731.51999 3,266.0 3,334.2 3,046.5 1,620.0 900.82000 2,951.9 3,564.7 3,358.6 1,854.6 1,071.82001 2,967.5 4,125.5 3,835.4 2,149.6 1,281.12002 3,204.9 4,704.9 4,094.1 2,292.8 1,543.32003 3,574.9 5,309.1 4,462.0 2,636.7 1,693.72004 3,943.6 5,472.5 4,704.5 2,745.1 1,827.8
2005 Q3 4,066.1 5,752.1 4,982.2 2,555.7 1,922.6Source: Bond Market Association
($ Billions)
41-29-06 NY (tom).ppt
Trends in Approved Asset Classes—1998–2005
Asset class 2005 2004 2003 2002 2001 2000 1999 19981 U.S. Agencies 82 76 78 75 71 62 68 542 Supranationals 74 63 62 60 62 54 63 603 Sovereign Eurobonds 60 60 58 58 61 60 66 664 Sovereign Globals 54 50 56 54 52 44 50 345 Pfandbriefes 48 44 38 35 37 34 28 126 Bank Debt 41 21 24 21 26 20 16 47 MBS / ABS 39 39 27 22 17 19 12 28 Corporates 38 38 32 28 22 20 15 109 Landesbank Debt 37 33 27 30 30 32 28 1210 Yankee Bonds 19 12 14 16 22 28 12 1811 TIPs 16 9 na na na na na na12 Local Government 14 12 14 16 16 18 18 813 Canadian Provinces 9 10 10 8 9 10 10 1214 Equities 5 3 2 na na na na naSource: UBS Central Bank Surveys, 1998-2005
(% of Central Banks which have approved the asset class)
51-29-06 NY (tom).ppt
Risk/Reward — Fixed Income Asset Classes
Average AverageAverage Excess Standard Sharpe Average Excess Standard SharpeReturn Return Deviation Ratio Return Return Deviation Ratio
Broad Investment-Grade (BIG) Bond Index 0.636 0.240 1.140 0.211 0.552 0.208 1.110 0.188Mortgage Index 0.629 0.234 0.922 0.254 0.528 0.184 0.833 0.221Asset Backed - - - - 0.519 0.176 0.868 0.203Treasury 0.618 0.223 1.329 0.168 0.541 0.198 1.328 0.149Government Sponsored 0.630 0.234 1.210 0.194 0.550 0.207 1.215 0.170BIG Credit 0.682 0.286 1.356 0.211 0.603 0.260 1.384 0.188Treasury 1-3 yr 0.491 0.095 0.517 0.184 0.409 0.066 0.482 0.137Treasury 3-7 yr 0.601 0.206 1.177 0.175 0.512 0.168 1.162 0.145Treasury 7-10 yr 0.672 0.276 1.760 0.157 0.590 0.246 1.773 0.139Treasury 10+ yr 0.787 0.392 2.439 0.161 0.731 0.388 2.468 0.157Government Sponsored 1-3 yr 0.509 0.114 0.517 0.221 0.429 0.086 0.490 0.176Government Sponsored 3-7 yr 0.617 0.222 1.066 0.208 0.527 0.184 1.044 0.176Government Sponsored 7-10 yr 0.690 0.295 1.580 0.187 0.606 0.262 1.601 0.164Government Sponsored 10+ yr 0.843 0.448 2.625 0.170 0.778 0.434 2.633 0.165BIG Credit 1-3 0.557 0.162 0.524 0.308 0.482 0.139 0.507 0.274BIG Credit 3-7 0.645 0.250 1.083 0.231 0.568 0.225 1.105 0.203BIG Credit 7-10 0.711 0.315 1.589 0.198 0.631 0.288 1.632 0.176BIG Credit 10+ 0.778 0.382 2.041 0.187 0.707 0.364 2.146 0.170
Citigroup Yield Book Indices
Curve = Flat to Flat Curve = Steep to Flat
Nominal Return01/89-12/05 07/92-12/05
61-29-06 NY (tom).ppt
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
71-29-06 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
81-29-06 NY (tom).ppt
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
91-29-06 NY (tom).ppt
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
101-29-06 NY (tom).ppt
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
111-29-06 NY (tom).ppt
Components of Prepayment Speeds (Agencies)
CPRHousing Turnover (moving) 6-10%Cash-out Refinancing 2-8%Rate Refinancing 0-80%
121-29-06 NY (tom).ppt
Refi Curve
10
20
30
40
50
60
70
-100 -50 0 50 100 150 200 250 300 350
Refi Incentive
CP
R
131-29-06 NY (tom).ppt
Technology Has Moved Refi Curve
0
20
40
60
80
100
120
140
160
180
200
220
240
260
Jan-86
Jan-87
Jan-88
Jan-89
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
Report Date
Inc
en
tiv
e T
hre
sh
old
(b
ps
)
Refi Threshold (2001-03 Wave)
Refi Threshold
Linear (Refi Threshold)
141-29-06 NY (tom).ppt
PSA Curves
0
1
2
3
4
5
6
7
8
9
10
0 5 10 15 20 25 30 35 40 45 50Age (in Months)
CP
R
100% PSA
150% PSA
151-29-06 NY (tom).ppt
Mortgage Cashflows for a $100,000 30-yr 5.5% Loan
0
100
200
300
400
500
600
0 30 60 90 120 150 180 210 240 270 300 330 360
Age in Months
$ A
mo
un
t
Interest Payment
Principal Payment
161-29-06 NY (tom).ppt
Mortgage Cashflows for a $100MM GNMA Pool With 0% Prepayments
0
10,000
20,000
30,000
40,000
50,000
60,000
0 30 60 90 120 150 180 210 240 270 300 330 360
Age in Months
$ A
mo
un
t
Interest Payment
Principal Payment
171-29-06 NY (tom).ppt
Pass-Thru Cashflows ($100MM 30-yr GNMA 5.5% @ 6% CPR)
0
20,000
40,000
60,000
80,000
100,000
120,000
0 30 60 90 120 150 180 210 240 270 300 330 360
Age (in Months)
Ca
sh F
low
($
)
Servicing
Interest Payment
Principal Payment
181-29-06 NY (tom).ppt
Pass-Thru Cashflows ($100MM 30yr GNMA 5.5% @ 100 PSA)
0
20,000
40,000
60,000
80,000
100,000
120,000
0 30 60 90 120 150 180 210 240 270 300 330 360
Age (in Months)
Ca
sh
Flo
w (
$)
Servicing
Interest Payment
Principal Payment
191-29-06 NY (tom).ppt
WAL Profile
2
4
6
8
10
12
11 10 9 8 7 6 5 4 3
Mortgage Yields
WAL
201-29-06 NY (tom).ppt
Negative Convexity
80
90
100
110
120
130
140
11 10 9 8 7 6 5 4
Mortgage Yields
7.5% Mtg
7.5% 10yr Tsy
7.5% 5yr Tsy
7.5% 2yr Tsy
Price
211-29-06 NY (tom).ppt
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.
221-29-06 NY (tom).ppt
Making Sequential CMOsPrincipal payments from $100mm 7.5% Deal
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
0 60 120 180 240 300 360Months
AB
D
C
Principal
231-29-06 NY (tom).ppt
Making PAC CMOsPrincipal payments from $70 million 7.5% Deal
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
0 60 120 180 240 300 360
Month
100 PSA
250 PSA
A B CD
Principal
241-29-06 NY (tom).ppt
Range of CMO WAL Profiles
CPR 6.5x6.5 Examples
Bond 5 10 15 20 25 30 35 Bond WAL Spread
1 Short VADM 3.4 3.4 3.4 3.4 3.3 3.0 2.7 FHR 2289 VA 3.0 115/C
2 Intermediate VADM 6.3 6.3 6.3 6.0 5.6 4.8 4.0 FHR 2288 VC 4.0 133/C
3 Longer VADM 11.5 11.5 8.7 7.1 5.8 4.9 4.1 FHR 2288 VB 11.9 150/C
4 3yr PAC 3.6 3.1 3.1 2.6 2.1 1.7 1.4 FHR 2219 PG 3.0 120/C
5 5yr PAC 6.7 5.9 5.5 4.1 3.2 2.6 2.2 FHR 2219 PH 5.1 138/C
6 10yr PAC 12.1 10.9 10.0 7.6 6.0 4.9 4.1 FHR 2219 PL 10.1 154/C
7 Last Cashflow PAC 18.5 18.4 17.9 14.1 11.3 9.3 7.8 FHR 2219 PM 19.1 158/C
8 2yr Payer/TAC/Type 2 2.5 1.6 1.2 0.9 0.7 0.6 0.6 FNR 00-5 A 3.0 159/C
9 5yr Payer/TAC/Type 2 6.0 3.9 2.8 2.2 1.8 1.5 1.3 FHR 2292 AB 4.8 166/C
10 10yr Payer/TAC/Type 2 13.1 8.1 5.5 4.1 3.3 2.6 2.2 FNR 00-5 B 8.3 172/C
11 Last Cashflow Payer 24.2 18.9 15.1 12.3 10.1 8.5 7.2 FNR 00-5 C 15.3 186/C
12 Seasoned Collateral 9.9 7.0 5.3 4.1 3.3 2.7 2.3 266 WAM 6.5 6.1 174/C
13 New Collateral 11.7 7.8 5.6 4.2 3.4 2.8 2.3 FN 6.5% TBA 7.1 181/C
14 Less Callable Support/Super PO 15.7 5.7 1.2 0.8 0.6 0.5 0.4 FHR 2102 KJ 4.6 226/C
15 More Callable Support/Rocket Z 25.0 0.5 0.2 0.1 0.1 0.1 0.1 FHR 2292 ZK 0.8 305/C
251-29-06 NY (tom).ppt
U.S. Mortgage Market
Total Non- Total Residential Total MBS asYear GNMA FHLMC FNMA Agency Agency MBS Mortgages % of Resi Mtg1980 93,874 16,962 110,836 110,836 962,259 11.5 1981 105,790 19,897 717 126,404 126,404 1,034,857 12.2 1982 118,940 42,952 14,450 176,342 176,342 1,074,995 16.4 1983 159,981 57,720 25,121 242,822 242,822 1,191,648 20.4 1984 179,981 70,025 36,215 286,221 11,000 286,221 1,326,092 21.6 1985 212,145 99,908 54,987 367,040 24,016 367,040 1,523,590 24.1 1986 262,698 169,186 95,778 527,662 16,617 527,662 1,726,460 30.6 1987 315,832 205,992 137,330 659,154 27,800 686,954 1,924,218 35.7 1988 340,527 219,701 172,259 732,487 34,865 767,352 2,157,749 35.6 1989 369,687 266,060 219,577 855,324 43,325 898,649 2,382,954 37.7 1990 401,278 308,369 291,194 1,000,841 55,193 1,054,176 2,619,009 40.3 1991 425,241 351,906 362,667 1,139,814 98,183 1,223,814 2,787,186 43.9 1992 419,516 401,525 435,979 1,257,020 146,146 1,389,020 2,955,012 47.0 1993 414,066 434,499 486,804 1,335,369 174,571 1,519,069 3,116,500 48.7 1994 450,934 460,656 530,343 1,441,933 192,637 1,647,933 3,296,249 50.0 1995 472,283 512,238 569,724 1,554,245 206,487 1,778,545 3,467,257 51.3 1996 506,340 551,513 633,210 1,691,063 232,206 1,947,263 3,695,159 52.7 1997 536,810 576,846 687,981 1,801,637 276,930 2,112,337 3,935,995 53.7 1998 537,431 640,471 804,205 1,982,107 355,470 2,390,251 4,294,768 55.7 1999 582,263 740,157 924,941 2,247,361 394,559 2,706,828 4,716,558 57.4 2000 611,553 810,894 1,016,398 2,438,845 426,265 2,865,110 5,126,312 55.9 2001 591,368 940,933 1,238,125 2,770,426 496,101 3,266,527 5,635,791 58.0 2002 537,888 1,072,990 1,478,610 3,089,488 551,806 3,641,294 6,309,623 57.7 2003 473,738 1,156,188 1,851,728 3,481,654 683,231 4,164,885 7,105,053 58.6 2004 441,345 1,199,290 1,984,217 3,624,852 1,071,894 4,696,746 8,071,089 58.2
2005-Q3 411,870 1,284,393 2,226,000 3,922,263 1,410,000 5,332,263 8,784,300 60.7
Source: Inside MBS & ABS
Estimates in italics
(Dollars in Millions)
261-29-06 NY (tom).ppt
U.S. Mortgage Market—Agency vs. Non-Agency
1999 2000 2001 2002 2003 2004 2005Agency Pass Throughs (not in CMOs) 523 402 710 907 1,620 701 665Agency CMOs 161 79 354 536 516 318 295Total Agency 684 481 1,064 1,443 2,136 1,019 960
Resi A—Prime-Jumbo 75 54 142 172 237 233 280Resi A—Alt–A 12 16 11 53 74 159 332Resi B&C—Subprime Home Equity 56 52 87 123 195 362 465Other * 5 13 27 66 80 110 114Total Non–Agency 148 136 267 414 586 864 1,191Source: Inside MBS & ABS
* Scatch & Dent, Seconds, Resecuritizations.
2005p = Based on first three quarters of 2005.
($ billion)
271-29-06 NY (tom).ppt
Loan and Borrower Characteristics
Residential B/CSubprime
Agency* Jumbo A Alt-A Home Equity HELOC HEL ClosedLien 1st 1st 1st 1st or 2nd 2nd 2ndLoan Limit <=Agency >= Agency none none none noneCredit Agency A A/A- A-/C A A/A-FICO: Min 660 600 600 500 680 680 Avg 715 735 710 620 720 720Avg CLTV 70% 70% 80% 83% 85% 75%Occupancy Owner Owner 20% Investor 5% Investor Owner OwnerDocumentation (Low/No Doc) 0% 35% 60% 35% 0% 0%Avg Loan Size 180,000 430,000 235,000 165,000 40,000 30,000Loan Purpose:
Purchase - 45 45 27 0 0Cash Out - 15 35 66 85 85Rate Refi - 40 20 7 15 15
AAA Credit Support Agency 2.50-3.00% 6.00-7.50% 18-22% Monoline*FNMA & FHLMC
Agency Limit = $359,650 as of January 1, 2005.
$417,000 as of January 1, 2006.
Residential A HEL
281-29-06 NY (tom).ppt
Distribution of Credit Scores & LTV Across Products
2005 Vintage Loans
FICO
LTV
0
5
10
15
20
25
30
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
840-
869
FICO
%
SubPrime
ALT-A
Prime
0
5
10
15
20
25
30
35
10 20 30 40 50 60 70 80 90 100 110
LTV
%
SubPrime
ALT-A
Prime
291-29-06 NY (tom).ppt
Loan Size Distribution Across Products2005 Vintage Loans
Loan Size—
ARMs
Loan Size—
Fixed
0
5
10
15
20
25
30
35
<100K
100K
-200
K
200K
-300
K
300K
-400
K
400K
-500
K
500K
-600
K
600K
-700
K
700K
-800
K
800K
-900
K
900K
-100
0K
1000
K-1100
K
1100
K-1200
K
1200
K-
Loan Size
%
SubPrime
ALT-A
Prime
0
5
10
15
20
25
30
35
40
<100K
100K
-200
K
200K
-300
K
300K
-400
K
400K
-500
K
500K
-600
K
600K
-700
K
700K
-800
K
800K
-900
K
900K
-100
0K
1000
K-1100
K
1100
K-1200
K
1200
K-
Loan Size
%
SubPrime
ALT-A
Prime
301-29-06 NY (tom).ppt
Enhancement Reflects Collateral Differences
In Non-Agency MBS, credit enhancement structures come mainly in two flavors
— “Six-pack” structures where several locked-out subs provide credit enhancement. Mainly used on Jumbos and Alt-As
— Excess-spread / Over-collateralization 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
Dea
l Co
llate
ral F
ace
Val
ue
- T
ota
l Pri
nci
pal
Pay
men
ts
AA “M1”
AAAs
A “M2”
BBB “M3”
BB “B1”
B “B2”
N.R. “B3”
AA “M1”
AAAs
A “M2”
BBB “M3”
Interest on the bonds
Inte
rest
P
aym
ents IO
XS – OC
Interest on the bonds
Residual
Exc
ess
-Sp
rea
d O
/C-b
ase
d
Cre
dit
En
ha
nce
me
nt
Cla
ssic
“S
ix P
ack
” C
red
it E
nh
an
cem
en
t
Collateral “Six-Pack” Deal Deal with XS / OC
311-29-06 NY (tom).ppt
Typical Evolution—OC Target & Actual OC
OC
Rel
ativ
e to
Orig
. B
alan
ce
Deal seasoning1 yr 2 yrs 3 yrs 4 yrs
Target OC Actual OC
Step-Down Date
OC
Bui
ld-U
pOC at Target
OC Release
Triggers playing a roleAfter step-down
OC allowed to decreaseAlong with collateral balance
OC
Rel
ativ
e to
Orig
. B
alan
ce
Deal seasoning1 yr 2 yrs 3 yrs 4 yrs
Target OC Actual OC
Step-Down Date
OC
Bui
ld-U
pOC at Target
OC Release
Triggers playing a roleAfter step-down
OC allowed to decreaseAlong with collateral balance
321-29-06 NY (tom).ppt
Credit vs. Prepayment Stability
(More)
(Less)
(Lower) (Higher)Credit
PrepaymentStability
Subprime
Alt-AJumbo
Agency
Prepayment stability a key attribute of Subprime
331-29-06 NY (tom).ppt
Prepayment Sensitivity of Non-Agency Sectors
0
10
20
30
40
50
60
70
80
90
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
Sep
-04
1-m
onth
CP
RJumboAlt ASubprimeFN 99 7%
341-29-06 NY (tom).ppt
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.
351-29-06 NY (tom).ppt
Loss Coverage by Rating Level
Jumbo Alt-A
Rating Enhancement Loss Coverage Rating Enhancement Loss CoverageAAA 2.60-3.00 28.0 AAA 6.00-7.50 11.3AA 1.20-1.50 13.5 AA 3.00-3.75 5.6A .65-.90 7.8 A 2.00-2.50 3.8
BBB .45-.55 4.8 BBB 1.50-2.00 2.9BB .30-.35 3.3 BB .75-.90 1.4B .15-.20 1.8 B .35-.50 0.7
Current loss = 10 bps Current loss = 60 bps
Subprime
Rating Enhancement Loss CoverageAAA 18.00-22.00 5.0AA 14.00-16.00 3.8A 11.00-13.00 3.0
BBB 8.00-10.00 2.3Current loss = 400-450 bps
361-29-06 NY (tom).ppt
MBS Issuance By Sector—Agency vs. Non-Agency
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
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
2005
-Q4
Non
-Age
ncy
($m
m)
Agency
Non-Agency
Source: Inside MBS & ABS
371-29-06 NY (tom).ppt
Non-Agency MBS Issuance By Sector
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
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
2005
-Q4
Non
-Age
ncy
($m
m)
Prime JumboSubprime Home EquityAlt-AAll Other
Source: Inside MBS & ABS
381-29-06 NY (tom).ppt
RMBS Issuance—By Type ($million)
Date Agency Alt-A Jumbo Subprime Seconds S&D Re-MBS Other Total MBS Agency Alt-A Jumbo Subprime1995 269,132 498 25,838 17,772 2,012 2,068 739 318,058 84.6 0.2 8.1 5.61996 370,648 1,803 31,419 30,769 5,141 0 762 440,541 84.1 0.4 7.1 7.01997 367,884 6,518 49,975 56,921 4,570 924 224 487,016 75.5 1.3 10.3 11.71998 725,952 21,236 97,365 75,830 7,375 790 616 929,163 78.1 2.3 10.5 8.21999 685,078 12,023 74,631 55,852 3,266 1,374 754 832,977 82.2 1.4 9.0 6.72000 479,011 14,696 56,052 48,145 3,825 2,374 1,062 605,165 79.2 2.4 9.3 8.02001 1,087,499 11,374 142,203 87,053 15,512 5,522 4,736 921 1,354,819 80.3 0.8 10.5 6.42002 1,444,426 53,463 171,534 122,681 24,803 25,172 14,357 1,945 1,858,381 77.7 2.9 9.2 6.62003 2,131,953 74,151 237,455 194,959 20,351 47,033 7,748 4,520 2,718,170 78.4 2.7 8.7 7.22004 1,018,871 158,586 233,378 362,549 49,133 34,701 21,383 4,432 1,883,033 54.1 8.4 12.4 19.32005 960,372 332,323 280,704 464,990 60,736 29,004 16,786 6,721 2,151,635 44.6 15.4 13.0 21.62005-Q1 198,851 59,563 64,118 98,220 10,356 6,674 2,631 791 441,202 45.1 13.5 14.5 22.32005-Q2 229,104 82,050 66,522 119,213 12,366 8,147 10,371 774 528,547 43.3 15.5 12.6 22.62005-Q3 287,455 103,755 70,775 118,974 21,414 7,081 2,820 2,706 614,980 46.7 16.9 11.5 19.32005-Q4 244,962 86,955 79,289 128,583 16,600 7,102 965 2,450 566,907 43.2 15.3 14.0 22.7Source: Inside MBS & ABS, based on SEC filingss and industry surveys.
Note: 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 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.
% of Total
391-29-06 NY (tom).ppt
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
401-29-06 NY (tom).ppt
GNMA 1s and 2s 30-Yr / All Pass-Thru Production
5
10
15
20
25
30
35
Ja
n-9
0
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
411-29-06 NY (tom).ppt
Subprime Profitability
-
2
4
6
8
10
12Ja
n-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
May
-05
Sep
-05
2/28 HEL WACsLIBOR+90Profitability
421-29-06 NY (tom).ppt
Evolution of Non-Agency Loan Characteristics
Class TypeOrigYear # Loans
OrigAmount ARM %
OrigWAC FICO CLTV
LoanSize
Inves%
Full Doc% DTI CA
Prime 1998 299,312 98,691 9.0 7.23 725 72.3 330 0.6 72.2 25.2 46.1 1999 200,871 70,479 19.4 7.19 721 72.4 351 0.9 65.2 23.4 48.8 2000 124,263 45,722 33.1 7.92 725 74.5 368 1.1 64.0 29.9 38.0 2001 274,548 119,939 27.3 6.99 729 69.2 437 0.5 72.5 31.0 46.0 2002 357,834 167,779 43.1 6.08 734 65.9 469 0.5 66.8 30.9 47.9 2003 462,067 215,880 50.3 5.14 736 66.0 467 1.0 53.4 31.2 47.4 2004 440,404 189,105 76.5 4.46 733 71.7 429 2.5 49.3 33.7 49.3 2005 153,368 72,043 63.4 4.97 737 73.2 470 2.6 46.4 34.5 47.6
ALT-A 1998 153,616 23,761 0.4 7.89 711 74.4 155 18.5 39.5 30.4 41.3 1999 91,918 13,811 3.7 8.25 698 76.9 150 20.2 37.6 27.0 32.5 2000 65,887 12,590 8.0 9.20 695 78.6 191 15.3 33.6 34.0 35.1 2001 106,964 29,220 20.8 7.83 703 75.9 273 8.8 31.6 34.9 43.1 2002 182,154 46,934 30.1 7.00 709 74.7 258 13.0 31.7 35.0 43.7 2003 377,563 88,173 35.0 5.94 711 73.8 234 19.2 30.5 34.1 44.4 2004 742,341 182,698 68.2 5.33 710 79.3 246 17.3 31.8 35.3 43.1 2005 461,508 121,895 62.5 4.51 714 77.9 264 14.9 31.5 36.0 43.0
Subprime 1998 313,046 28,975 52.5 9.77 602 77.7 93 6.2 72.2 35.9 18.5 1999 455,706 43,496 54.4 9.88 602 78.2 95 5.0 68.9 37.8 18.8 2000 410,275 42,145 68.6 10.52 595 79.0 103 5.0 74.9 38.9 19.7 2001 489,668 60,551 70.1 9.54 603 79.9 124 4.9 72.9 39.1 25.1 2002 681,806 97,524 74.4 8.47 612 80.3 143 5.2 67.4 39.3 29.9 2003 1,070,217 174,756 68.6 7.45 621 81.7 163 5.4 65.1 39.7 32.9 2004 1,645,204 293,860 78.1 7.05 622 83.5 179 5.4 62.0 40.2 33.6 2005 722,406 136,169 84.2 7.18 622 84.6 189 5.3 59.6 40.4 30.0
Source: Loan Performance
431-29-06 NY (tom).ppt
IO% Peaked When Option ARMs Took Off
Option ARMs %—1st Lien Fixed and ARMs
IO%—1st Lien Fixed and ARMs
Source: Loan Performance
0
10
20
30
40
50
60
Jan
-01
Ap
r-0
1
Jul-
01
Oct
-01
Jan
-02
Ap
r-0
2
Jul-
02
Oct
-02
Jan
-03
Ap
r-0
3
Jul-
03
Oct
-03
Jan
-04
Ap
r-0
4
Jul-
04
Oct
-04
Jan
-05
Ap
r-0
5
Jul-
05
%
Subprime
Alt-A & Prime
0
5
10
15
20
25
30
35Ja
n-0
1
Ap
r-0
1
Jul-
01
Oct
-01
Jan
-02
Ap
r-0
2
Jul-
02
Oct
-02
Jan
-03
Ap
r-0
3
Jul-
03
Oct
-03
Jan
-04
Ap
r-0
4
Jul-
04
Oct
-04
Jan
-05
Ap
r-0
5
Jul-
05
%
Alt-A & Prime
441-29-06 NY (tom).ppt
Dominance of “Affordability” Mortgages
0
10
20
30
40
50
60
70
80
Jan-
01
Apr
-01
Jul-0
1
Oct
-01
Jan-
02
Apr
-02
Jul-0
2
Oct
-02
Jan-
03
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
%
Alt-A & Prime
Subprime
Affordability = IO + Option ARMs
451-29-06 NY (tom).ppt
U.S. Annual Home Price Appreciation
0
2
4
6
8
10
12
14
16
Ma
r-9
0
Ma
r-9
1
Ma
r-9
2
Ma
r-9
3
Ma
r-9
4
Ma
r-9
5
Ma
r-9
6
Ma
r-9
7
Ma
r-9
8
Ma
r-9
9
Ma
r-0
0
Ma
r-0
1
Ma
r-0
2
Ma
r-0
3
Ma
r-0
4
Ma
r-0
5
%
Source: Freddie Mac
461-29-06 NY (tom).ppt
Subprime Cumulative Loss by Vintage & Foreclosure by States
0
50
100
150
200
250
300
350
400
450
3 7 11 15 19 23 27 31 35 39 43 47 51 55 59 63 67 71
Seasoning B
ps
1998 1999 20002001 2002 2003
c
0
5
10
15
20
25
30
3 6 9 12 15 18 21 24 27 30 33
Loan Age
FC
Fre
q %
CA MA
MS NCNE OK
TN TXUT
Vintage Year
1998-2003
2001
471-29-06 NY (tom).ppt
2001 Subprime Mortgages—Loss Severity & Cumulative Loss Rates, by States
0
10
20
30
40
50
CA MA UT NE TX NC TN OK MS
Loss
Sev
erity
(%
)
0
0.5
1
1.5
2
2.5
3
3.5
5 8 11 14 17 20 23 26 29 32
Loan Age
Cum
ulat
ive
Loss
Rat
e (%
)
CA MAMS NCNE OKTN TXUT
Loss Severity
Cumulative
Loss Rates
481-29-06 NY (tom).ppt
Subprime 2/28 ARM with 2-year Penalties
0
20
40
60
80
100
0 3 6 9 12 15 18 21 24 27 30 33 36
Loan Age
CP
R (
%)
2000
2001
2002
2003
2004
491-29-06 NY (tom).ppt
Impact of Prepayments & HPA on Subprime Losses
HPA/CPR/LS Housing CPR CPR Loss Cum CumCombination Appreciation ARM* Fixed* CDR** Severity Defaults Loss
A 7 - 12% 70 30 Base 20 6.67 1.50
B 5 - 7% 50 25 Base 35 11.58 4.09
C 2 - 3% 45 20 Base 45 13.35 6.07
D 0% 40 18 Base 55 14.99 8.33
E -2 - 3% 35 15 Base x 1.20 60 20.04 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.
501-29-06 NY (tom).ppt
Loss Coverage Ratios If Housing Inflation Slows
Source: UBS
7 - 12% HPI 5 - 7% HPI 2 - 3% HPI 0% HPI -2-3% HPI70/30 CPR 50/25 CPR 45/20 CPR 40/18 CPR 35/15 CPR
Rating EnhancementCum Loss =
1.50%Cum Loss =
4.00%Cum Loss =
6.00%Cum Loss =
8.33%Cum Loss =
12.00%
AAA 18.00 - 22.00 13.3 5.0 3.3 2.4 1.7AA 14.00 - 16.00 10.0 3.8 2.5 1.8 1.3A 11.00 - 13.00 8.0 3.0 2.0 1.4 1.0
BBB 8.00 - 10.00 6.0 2.3 1.5 1.1 0.8
Source: UBS
Subprime
Loss Coverage
511-29-06 NY (tom).ppt
Impact of Lower Housing Inflation on Losses
Cumulative Cumulative LossLosses = Defaults x Severity
Jumbo5 - 7% Housing Inflation 10.0 bp = 1.00% x 10%2 - 3% Housing Inflation 24.0 bp = 1.20% x 20%0% Housing Inflation 42.0 bp = 1.40% x 30%
Alt-A5 - 7% Housing Inflation 60.0 bp = 3.00% x 20%2 - 3% Housing Inflation 105.0 bp = 3.50% x 30%0% Housing Inflation 160.0 bp = 4.00% x 40%
Subprime5 - 7% Housing Inflation 4.00% = 11.50% x 35%2 - 3% Housing Inflation 6.00% = 13.35% x 45%0% Housing Inflation 8.33% = 15.15% x 55%
Source: UBS
521-29-06 NY (tom).ppt
Loss Coverage Ratios If Housing Inflation Slows
5 - 7% HPI 2 - 3% HPI 0% HPIRating Enhancement Cum Loss = 10.0 bps Cum Loss = 24.0 bps Cum Loss = 42.0 bpsAAA 2.60 - 3.00 28 11.7 6.7AA 1.20 - 1.50 13.5 5.6 3.2A .65 - .90 7.8 3.3 1.9
BBB .45 - .55 4.8 2.0 1.1BB .30 - .35 3.3 1.4 0.8B .15 - .20 1.8 0.8 0.4
5 - 7% HPI 2 - 3% HPI 0% HPIRating Enhancement Cum Loss = 60.0 bps Cum Loss = 105.0 bps Cum Loss = 160.0 bpsAAA 6.00 - 7.50 11.3 6.4 4.2AA 3.00 - 3.75 5.6 3.2 2.1A 2.00 - 2.50 3.8 2.1 1.4
BBB 1.50 - 2.00 2.9 1.7 1.1BB .75 - .90 1.4 0.8 0.5B .35 - .50 1.8 0.4 0.3
5 - 7% HPI 2 - 3% HPI 0% HPIRating Enhancement Cum Loss = 4.00% Cum Loss = 6.00% Cum Loss = 8.33%AAA 18.00 - 22.00 5.0 3.3 2.3AA 14.00 - 16.00 3.8 2.5 1.8A 11.00 - 13.00 3.0 2.0 1.4
BBB 8.00 - 10.00 2.3 1.5 1.1
Source: UBS
Loss CoverageSubprime
Loss CoverageJumbo
Loss CoverageAlt-A
531-29-06 NY (tom).ppt
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