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
1-29-06 NY (tom).ppt
1
U.S. Debt Securities Outstanding
($ Billions)
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005 Q3
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
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
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
Source: Bond Market Association
1-29-06 NY (tom).ppt
2
Trends in Approved Asset Classes—1998–
2005
(% of Central Banks which have approved the asset class)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
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
Source: UBS Central Bank Surveys, 1998-2005
1-29-06 NY (tom).ppt
3
Risk/Reward — Fixed Income Asset Classes
Nominal Return
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+
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
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
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
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
Citigroup Yield Book Indices
1-29-06 NY (tom).ppt
4
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
1-29-06 NY (tom).ppt
5
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
1-29-06 NY (tom).ppt
6
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
1-29-06 NY (tom).ppt
7
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
1-29-06 NY (tom).ppt
8
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
1-29-06 NY (tom).ppt
9
Components of Prepayment Speeds
(Agencies)
Housing Turnover (moving)
Cash-out Refinancing
Rate Refinancing
CPR
6-10%
2-8%
0-80%
1-29-06 NY (tom).ppt
10
Refi Curve
70
60
CPR
50
40
30
20
10
-100
-50
0
50
100
150
200
250
300
350
Refi Incentive
1-29-06 NY (tom).ppt
11
Technology Has Moved Refi Curve
260
Refi Threshold (2001-03 Wave)
240
Incentive Threshold (bps)
220
Refi Threshold
200
Linear (Refi Threshold)
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
1-29-06 NY (tom).ppt
12
PSA Curves
10
9
8
7
CPR
6
5
4
100% PSA
150% PSA
3
2
1
0
0
5
10
15
20
25
30
Age (in Months)
35
40
45
1-29-06 NY (tom).ppt
50
13
Mortgage Cashflows for a $100,000 30-yr 5.5% Loan
600
500
$ Amount
400
300
200
Interest Payment
Principal Payment
100
0
0
30
60
90
120
150
180
210
240
270
300
330
360
Age in Months
1-29-06 NY (tom).ppt
14
Mortgage Cashflows for a $100MM GNMA Pool With 0%
Prepayments
60,000
50,000
$ Amount
40,000
30,000
20,000
Interest Payment
10,000
Principal Payment
0
0
30
60
90
120
150
180
210
240
270
300
330
360
Age in Months
1-29-06 NY (tom).ppt
15
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)
1-29-06 NY (tom).ppt
16
Pass-Thru Cashflows ($100MM 30yr GNMA 5.5% @
100 PSA)
120,000
Servicing
Interest Payment
Principal Payment
100,000
Cash Flow ($)
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)
1-29-06 NY (tom).ppt
17
WAL Profile
WAL
12
10
8
6
4
2
11
10
9
8
7
6
5
4
3
Mortgage Yields
1-29-06 NY (tom).ppt
18
Negative Convexity
Price
140
7.5% Mtg
130
7.5% 10yr Tsy
7.5% 5yr Tsy
120
7.5% 2yr Tsy
110
100
90
80
11
10
9
8
7
6
5
4
Mortgage Yields
1-29-06 NY (tom).ppt
19
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.
1-29-06 NY (tom).ppt
20
Making Sequential CMOs
Principal payments from $100mm 7.5% Deal
Principal
800,000
700,000
600,000
500,000
400,000
A
300,000
B
200,000
C
D
100,000
0
0
60
120
180
Months
240
300
360
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
A
200,000
B
C
100 PSA
D
0
0
60
120
180
Month
240
300
360
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
WAL Spread
FHR 2289 VA
3.0
115/C
FHR 2288 VC
4.0
133/C
FHR 2288 VB
11.9
150/C
FHR 2219 PG
3.0
120/C
FHR 2219 PH
5.1
138/C
FHR 2219 PL
10.1
154/C
FHR 2219 PM
19.1
158/C
FNR 00-5 A
3.0
159/C
FHR 2292 AB
4.8
166/C
FNR 00-5 B
8.3
172/C
FNR 00-5 C
15.3
186/C
266 WAM 6.5
6.1
174/C
FN 6.5% TBA
7.1
181/C
FHR 2102 KJ
4.6
226/C
FHR 2292 ZK
0.8
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
1-29-06 NY (tom).ppt
24
U.S. Mortgage Market—Agency vs. Non-Agency
($ billion)
Agency Pass Throughs (not in CMOs)
Agency CMOs
Total Agency
1999
523
161
684
2000
402
79
481
2001
710
354
1,064
2002
907
536
1,443
2003
1,620
516
2,136
2004
701
318
1,019
2005
665
295
960
Resi A—Prime-Jumbo
Resi A—Alt–A
Resi B&C—Subprime Home Equity
Other *
Total Non–Agency
75
12
56
5
148
54
16
52
13
136
142
11
87
27
267
172
53
123
66
414
237
74
195
80
586
233
159
362
110
864
280
332
465
114
1,191
Source: Inside MBS & ABS
* Scatch & Dent, Seconds, Resecuritizations.
2005p = Based on first three quarters of 2005.
1-29-06 NY (tom).ppt
25
Loan and Borrower Characteristics
Residential A
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
Agency*
1st
<=Agency
Agency
660
715
70%
Owner
0%
180,000
Jumbo A
1st
>= Agency
A
600
735
70%
Owner
35%
430,000
Alt-A
1st
none
A/A600
710
80%
20% Investor
60%
235,000
Residential B/C
Subprime
Home Equity
1st or 2nd
none
A-/C
500
620
83%
5% Investor
35%
165,000
Agency
45
15
40
2.50-3.00%
45
35
20
6.00-7.50%
27
66
7
18-22%
HEL
HELOC
2nd
none
A
680
720
85%
Owner
0%
40,000
HEL Closed
2nd
none
A/A680
720
75%
Owner
0%
30,000
0
85
15
Monoline
0
85
15
*FNMA & FHLMC
Agency Limit = $359,650 as of January 1, 2005.
$417,000 as of January 1, 2006.
1-29-06 NY (tom).ppt
26
Distribution of Credit Scores & LTV Across Products
2005 Vintage Loans
30
SubPrime
%
FICO
25
ALT-A
20
Prime
15
10
5
840-869
810-839
780-809
750-779
720-749
690-719
660-689
630-659
600-629
570-599
540-569
510-539
480-509
450-479
420-449
0
FICO
35
SubPrime
30
ALT-A
25
LTV
Prime
%
20
15
10
5
0
10
20
30
40
50
60
LTV
70
80
90
100
110
1-29-06 NY (tom).ppt
27
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
K-
ARMs
Fixed
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
K-
<1
00
K
%
Loan Size—
<1
00
K
Loan Size—
%
Loan Size Distribution Across Products
2005 Vintage Loans
35
30
SubPrime
25
ALT-A
20
Prime
15
10
5
0
Loan Size
40
35
SubPrime
30
ALT-A
25
Prime
20
15
10
5
0
Loan Size
1-29-06 NY (tom).ppt
28
Enhancement Reflects Collateral Differences
“Six-Pack” Deal
Collateral
Deal with XS / OC
AAAs
AAAs
AA “M1”
A “M2”
BBB “M3”
BB “B1”
B “B2”
N.R. “B3”
IO
Excess-Spread O/C-based
Credit Enhancement
—
“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
Classic “Six Pack”
Credit Enhancement
—
Interest
Payments
enhancement structures
come mainly in two flavors
Deal Collateral Face Value Total Principal Payments
 In Non-Agency MBS, credit
AA “M1”
A “M2”
BBB “M3”
XS – OC
Residual
Interest on
the bonds
Interest on
the bonds
1-29-06 NY (tom).ppt
29
Typical Evolution—OC Target & Actual OC
Actual OC
Triggers playing a role
After step-down
OC at Target
uil
d
-Up
OC
OC
B
OC Relative to Orig. Balance
Target OC
Re
lea
se
OC allowed to decrease
Along with collateral balance
1 yr
2 yrs
3 yrs
4 yrs
Deal seasoning
Step-Down Date
1-29-06 NY (tom).ppt
30
Credit vs. Prepayment Stability
(More)
Prepayment
Stability
Prepayment stability a key attribute of
Subprime
Subprime
Agency
Alt-A
Jumbo
(Less)
(Lower)
Credit
(Higher)
1-29-06 NY (tom).ppt
31
0
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
80
May-00
90
Jan-00
Sep-99
May-99
Jan-99
1-month CPR
Prepayment Sensitivity of Non-Agency Sectors
100
Jumbo
Alt A
Subprime
FN 99 7%
70
60
50
40
30
20
10
1-29-06 NY (tom).ppt
32
Historical Cumulative Loss Comparison*
Resi A—Prime-Jumbo
10 - 20 bps
Resi A— Alt-A
50 – 80 bps
Resi B&C— Subprime
400 – 500 bps
*Cum losses for 2003-2005 vintages will be much less because
of strong housing price appreciation.
1-29-06 NY (tom).ppt
33
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
Alt-A
Loss Coverage
28.0
13.5
7.8
4.8
3.3
1.8
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
1-29-06 NY (tom).ppt
34
MBS Issuance By Sector—Agency vs. NonAgency
700,000
Agency
600,000
Non-Agency
Non-Agency ($mm)
500,000
400,000
300,000
200,000
100,000
2005-Q4
2005-Q3
2005-Q2
2005-Q1
2004-Q4
2004-Q3
2004-Q2
2004-Q1
2003-Q4
2003-Q3
2003-Q2
2003-Q1
2002-Q4
2002-Q3
2002-Q2
2002-Q1
0
Source: Inside MBS & ABS
1-29-06 NY (tom).ppt
35
Non-Agency MBS Issuance By Sector
140,000
Prime Jumbo
Subprime Home Equity
Alt-A
All Other
120,000
Non-Agency ($mm)
100,000
80,000
60,000
40,000
2005-Q4
2005-Q3
2005-Q2
2005-Q1
2004-Q4
2004-Q3
2004-Q2
2004-Q1
2003-Q4
2003-Q3
2003-Q2
2003-Q1
2002-Q4
2002-Q3
2002-Q2
0
2002-Q1
20,000
Source: Inside MBS & ABS
1-29-06 NY (tom).ppt
36
RMBS Issuance—By Type ($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.
1-29-06 NY (tom).ppt
37
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
1-29-06 NY (tom).ppt
38
1-29-06 NY (tom).ppt
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
GNMA 1s and 2s 30-Yr / All Pass-Thru
Production
35
30
25
20
15
10
5
39
Sep-05
May-05
Jan-05
Sep-04
10
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Subprime Profitability
12
2/28 HEL WACs
LIBOR+90
Profitability
8
6
4
2
-
1-29-06 NY (tom).ppt
40
Evolution of Non-Agency Loan Characteristics
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
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
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
Source: Loan Performance
Oct-04
Oct-04
Jul-05
Jul-04
Jul-04
Jul-05
Apr-04
Apr-04
Apr-05
Jan-04
Jan-04
Apr-05
Oct-03
Oct-03
Jan-05
Jul-03
Jul-03
Jan-05
Apr-03
Jan-02
Oct-01
Apr-03
0
Jan-03
5
Jan-03
10
Oct-02
15
Oct-02
20
Jul-02
25
Jul-02
Alt-A & Prime
Apr-02
35
Apr-02
Jan-02
Oct-01
30
Jul-01
Apr-01
Jan-01
50
Jul-01
Apr-01
Jan-01
Option ARMs
%—1st Lien
Fixed and ARMs
%
IO%—1st
Lien Fixed
and ARMs
%
IO% Peaked When Option ARMs Took Off
60
Subprime
Alt-A & Prime
40
30
20
10
0
1-29-06 NY (tom).ppt
42
Dominance of “Affordability” Mortgages
80
Alt-A & Prime
70
Subprime
60
Affordability = IO + Option ARMs
40
30
20
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
0
Apr-01
10
Jan-01
%
50
1-29-06 NY (tom).ppt
43
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
%
U.S. Annual Home Price Appreciation
16
14
12
10
8
6
4
2
0
Source: Freddie Mac
1-29-06 NY (tom).ppt
44
Subprime Cumulative Loss by Vintage & Foreclosure by States
450
400
Vintage Year
Bps
350
300
1998-2003
250
200
150
100
c
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
30
25
CA
MS
NE
TN
UT
2001
FC Freq %
20
15
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
Loss Severity (%)
40
Loss Severity
30
20
10
0
CA
MA
UT
NE
TX
NC
TN
OK
23
26
29
MS
3.5
CA
MS
NE
TN
UT
Cumulative
Loss Rates
Cumulative Loss Rate (%)
3
2.5
MA
NC
OK
TX
2
1.5
1
0.5
0
5
8
11
14
17
20
32
Loan Age
1-29-06 NY (tom).ppt
46
Subprime 2/28 ARM with 2-year Penalties
100
80
CPR (%)
2000
2001
60
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
Housing
Appreciation
7 - 12%
CPR
ARM*
70
CPR
Fixed*
30
CDR**
Base
Loss
Severity
20
Cum
Defaults
6.67
Cum
Loss
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.
1-29-06 NY (tom).ppt
48
Loss Coverage Ratios If Housing Inflation
Slows
Subprime
Rating
AAA
AA
A
BBB
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%
13.3
10.0
8.0
6.0
5.0
3.8
3.0
2.3
Loss Coverage
2 - 3% HPI
0% HPI
45/20 CPR
40/18 CPR
Cum Loss =
Cum Loss =
6.00%
8.33%
3.3
2.5
2.0
1.5
2.4
1.8
1.4
1.1
-2-3% HPI
35/15 CPR
Cum Loss =
12.00%
1.7
1.3
1.0
0.8
Source: UBS
Source: UBS
1-29-06 NY (tom).ppt
49
Impact of Lower Housing Inflation on Losses
Cumulative
Losses
=
Cumulative
Defaults
x
Loss
Severity
Jumbo
5 - 7% Housing Inflation
2 - 3% Housing Inflation
0% Housing Inflation
10.0 bp
24.0 bp
42.0 bp
=
=
=
1.00%
1.20%
1.40%
x
x
x
10%
20%
30%
Alt-A
5 - 7% Housing Inflation
2 - 3% Housing Inflation
0% Housing Inflation
60.0 bp
105.0 bp
160.0 bp
=
=
=
3.00%
3.50%
4.00%
x
x
x
20%
30%
40%
Subprime
5 - 7% Housing Inflation
2 - 3% Housing Inflation
0% Housing Inflation
4.00%
6.00%
8.33%
=
=
=
11.50%
13.35%
15.15%
x
x
x
35%
45%
55%
Source: UBS
1-29-06 NY (tom).ppt
50
Loss Coverage Ratios If Housing Inflation
Slows
Jumbo
Rating Enhancement
2.60 - 3.00
AAA
1.20 - 1.50
AA
.65 - .90
A
.45 - .55
BBB
.30 - .35
BB
.15 - .20
B
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
0% HPI
Cum Loss = 42.0 bps
6.7
3.2
1.9
1.1
0.8
0.4
Alt-A
Rating Enhancement
6.00 - 7.50
AAA
3.00 - 3.75
AA
2.00 - 2.50
A
1.50 - 2.00
BBB
.75 - .90
BB
.35 - .50
B
5 - 7% HPI
Cum Loss = 60.0 bps
11.3
5.6
3.8
2.9
1.4
1.8
Loss Coverage
2 - 3% HPI
Cum Loss = 105.0 bps
6.4
3.2
2.1
1.7
0.8
0.4
0% HPI
Cum Loss = 160.0 bps
4.2
2.1
1.4
1.1
0.5
0.3
5 - 7% HPI
Cum Loss = 4.00%
5.0
3.8
3.0
2.3
Loss Coverage
2 - 3% HPI
Cum Loss = 6.00%
3.3
2.5
2.0
1.5
0% HPI
Cum Loss = 8.33%
2.3
1.8
1.4
1.1
Subprime
Rating Enhancement
18.00 - 22.00
AAA
14.00 - 16.00
AA
11.00 - 13.00
A
8.00 - 10.00
BBB
Source: UBS
1-29-06 NY (tom).ppt
51
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part,
certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the
views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no
part of his or her compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed by that research analyst in the research report.
This material has been prepared by the division, group, subsidiary or affiliate of UBS AG (“UBS”) identified herein. In certain countries UBS AG is referred to as UBS SA. UBS Warburg is a business group of
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