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CSFB’s Starter Kit for Non-Agency Residential Mortgage-Backed Securities
Non-Agency RMBS issuance has surpassed Agency issuance since
Q3:04 for the first time in the history of the RMBS markets and has been
accompanied by growing investor interest.
We offer this comprehensive report to new and existing investors in
RMBS. We hope the scope of coverage proves comprehensive and
useful in daily practice.
Mortgage Market Insights
20 October 2005
Contributors
Satish Mansukhani
+1 212 325 5985
Mutaz Qubbaj
+1 212 325 0172
Mortgage Market InsightsTable of Contents
2 20 October 2005
Table of Contents
I. Introduction.......................................................................... 4
Conforming limit determines Agency or non-Agency label...........5
Common source of loans and similar processes from loan
application, origination, to securitization characterize Agency and
non-Agency RMBS ......................................................................7
The Credit Continuum..................................................................9
Recent issuance dynamics ........................................................11
II. Collateral Characteristics .................................................. 14
III. Credit Enhancement ........................................................ 22
Allocation of scheduled and unscheduled principal payments,
interest payments, and credit losses..........................................27
Shifting Interest Schedule ..........................................................28
Credit deleveraging due to prepayments ...................................29
Performance triggers incorporated in deals with shifting interest
structure.....................................................................................31
Failing delinquency/loss triggers shorten senior classes while
extending subordinates..............................................................31
Mortgage defaults and losses ....................................................33
Historical performance and adequacy of credit enhancement
levels..........................................................................................34
Credit rating transitions favor non-Agency RMBS over corporate
bonds .........................................................................................37
IV. Nuances of Non-Agency RMBS....................................... 38
Discount/Premium loans in non-Agency deals and creation of
WAC IOs and WAC POs............................................................38
Optional Redemptions ...............................................................38
Compensating Interest...............................................................39
V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS.. 41
Rate premium and refinancing incentive defined .......................41
Prepayment profiles in the non-Agency sector follow placement
along the credit continuum.........................................................43
Aging Effects..............................................................................45
Seasonality ................................................................................45
Mortgage Market InsightsTable of Contents
20 October 2005 3
Home Price Appreciation ...........................................................46
Curve Shape and Mortgage Product Innovation ........................46
Media Effect...............................................................................46
Cash-out or Equity Takeout Effect .............................................46
VI. Common AAA Structures within Securitized Prime Jumbo
Deals .................................................................................... 47
Pass-Throughs...........................................................................48
Sequentials ................................................................................50
Planned Amortization Class (PAC) ...............................................54
Support/Companion...................................................................56
Accrual/Z....................................................................................57
Non-Accelerated Seniors (NAS) ................................................59
Sequential Floater......................................................................63
Weighted average life profile across varying structures – A
composite view ..........................................................................64
VII. Investment Opportunities................................................ 66
VIII. Conclusions................................................................... 70
Reasons for investing in non-Agency RMBS .............................70
Keys to non-Agency valuation ...................................................71
Appendix A – Securitization Deal Participants ...................... 72
Appendix B – Rating Agency Methodologies ........................ 74
Standard and Poor’s (S&P)........................................................75
Fitch Ratings..............................................................................80
Dominion Bond Rating Service (DBRS).....................................83
Appendix C - Glossary .......................................................... 86
Appendix D - Useful Bloomberg Pages................................. 95
Mortgage Market InsightsI. Introduction
4 20 October 2005
I. Introduction
The birth of the United States residential mortgage-backed securities (RMBS) sector
was characterized by the government’s sponsorship provided through the establishment
of entities such as the Federal National Mortgage Association (Fannie Mae), the Federal
Home Loan Mortgage Corporation (Freddie Mac) and the Government National
Mortgage Association (Ginnie Mae). Securities issued by Fannie Mae and Freddie Mac
are collateralized by mortgages with any losses generated on this collateral absorbed by
the issuing entity. Mortgages backing Ginnie Mae issued securities are insured by the
Federal Housing Administration (FHA) or guaranteed by the Veterans Administration
(VA). These securities are referred to as Agency RMBS and they comprise an
outstanding balance of $3.9 trillion1 as of 1H 2005.
A growing sector within the US RMBS market has been non-Agency RMBS, i.e.,
securities that are not issued and guaranteed by either Fannie Mae, Freddie Mac or
Ginnie Mae. The total outstanding volume of non-Agency RMBS is $1.3 trillion as of 1H
2005 (see Chart 1). So rapid has been the growth of the non-Agency RMBS sector that
total origination volumes are running at the same pace as origination volumes of Agency
eligible mortgages. During 2Q 2005, total non-Agency origination volumes were $285.4
billion compared with $307 billion in Agency origination.
Chart 1 Non-Agency RMBS is a growing segment of outstanding US RMBS
$1,001
$1,140
$1,257
$1,484
$1,585
$1,707
$1,843
$1,952
$2,135
$2,397
$2,594
$2,935
$3,268
$3,639
$3,711
$3,897
$55
$98
$147
$176
$194
$208
$235
$280
$361
$399
$426
$496
$552
$683 $1,088
$1,305
$0
$1,000
$2,000
$3,000
$4,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1H:05O
uts
tan
din
g R
MB
S B
ala
nc
e (
$B
illi
on
s)
Agency RMBS
Non-Agency RMBS
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Issuance volumes of non-Agency RMBS have surpassed those of Agency RMBS since
3Q 2004, marking the first time in the history of the RMBS sector that this has occurred
(see Chart 2). Total 2005 non-Agency RMBS issuance is on a pace to surpass the trillion
dollar mark if issuance for all of 2005 continues at the same pace as during 1H 2005. In
the first nine months of 2005, $864 billion in total issuance has already been recorded.
1 Source: Inside MBS & ABS
Mortgage Market InsightsI. Introduction
20 October 2005 5
Chart 2 Non-Agency RMBS* issuance volumes have recently surpassed those of Agency RMBS
$235
$268 $455
$568
$359
$269
$370
$368
$726
$685
$479
$1,088 $
1,443
$2,131
$1,019
$856
$24
$49
$89
$98
$63
$49
$70
$119
$203
$148
$136
$267 $414 $586
$864 $1,084
$0
$500
$1,000
$1,500
$2,000
$2,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005**
RM
BS
Issu
an
ce (
$B
illi
on
s)
Agency RMBS
Non-Agency RMBS
*Non-Agency RMBS issuance volume includes prime jumbo, Alt-A and subprime and other non-Agency product including second liens,
HELOCs, and high LTV loans.
**2005 RMBS issuance numbers annualized based on actual 1H:05 issuance.
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Conforming limit determines Agency or non-Agency label Loan balance and collateral attributes are key differentiating features leading to a loan
being eligible for Agency or non-Agency securitization.
The conforming limit set by the Office of Federal Housing Enterprise Oversight
(OFHEO) determines if a loan can qualify for the Agency guarantee. Loans with
balances below the conforming limit, currently $359,650, may be eligible for Agency
securitization. The conforming limit is set every year, generally in October, and is based
on annual home price increases. Fannie Mae and Freddie Mac can issue a guarantee
only on loans below the conforming limit. The conforming limit has never declined and,
as shown in Chart 3, in years when the rate of home price appreciation has been flat,
the conforming limit has remained stable. Notably, as a result of the steady increases in
the conforming limit, a loan that a year ago could have been classified as non-Agency
today may be classified as Agency.
Mortgage Market InsightsI. Introduction
6 20 October 2005
Chart 3 Conforming loan limit differentiates non-Agency from Agency RMBS
$93,750
$98,500
$107,000
$108,300
$114,000
$115,300
$133,250
$153,100
$168,700
$187,600
$187,450
$191,250
$202,300
$203,150
$203,150
$203,150
$207,000
$214,600
$227,150
$240,000
$252,700
$275,000
$300,700
$322,700
$333,700
$359,650
0%
2%
4%
6%
8%
10%
12%
14%
1979 1983 1987 1991 1995 1999 2003
Ind
ex
In
cre
as
e
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Co
nfo
rmin
g L
oa
n L
imit
($
)
Conf. Loan Limit Purchase HPI (LHS)
Source: Credit Suisse First Boston (US Mortgage Strategy), OFHEO
The conforming limit embeds a geographic bias on the composition of non-Agency
RMBS. This is fallout from the disparity in home prices along the coasts of the United
States relative to the states in between (see Chart 4), leading to a higher concentration
of loans from states with higher average home prices within non-Agency RMBS.
Chart 4 Conforming loan limit imposes a geographic bias on non-Agency loans, typically focused in high-priced coastal states
A laska
$176
Median Price ($K)
$230 to $422
$158 to $230
$133 to $158
$121 to $133
$100 to $121 Idaho$126
Michigan
$142
Wes t V irginia$118
Ne w Y ork$228
Vermont$132
Louis iana$11 6
Mis sissippi
$102
S ou th Caro lina$133
North Carol ina$139
Florida$207
D ist rict of Columbia$33 6
Ma ryland$288
De laware
$158
New Jersey$314
Connecticut
$237
Rhode Is land
$265
Cal iforn ia
$422
Mas sac husetts$364
New Ha mpsh ire$235
Ma ine$133
Alabama$124
Arizona$177
A rkansas
$100
Colorado
$209
Ge orgia
$134
Ill inois
$194
Indiana$109
Iowa
$10 4
Kans as$125
Ke ntucky$113
Minnesota$169
Mis sou ri
$118
Monta na$134
Ne bras ka
$118Nevada$ 284
New Me xic o
$15 0
North Dakota$103
Oh io$132
Oklahoma$103
Oregon$19 0
Pe nns ylvania
$135
South Dakota
$100
Tenness ee$129
T exas$121
Utah$155
V irginia$230
Washing ton
$226
Wisconsin$139
Wyoming$129
Ha wa i i
$362
Top and Bottom Five States
California $422K Arkansas $100K
Massachusetts $364K South Dakota $100K
Hawaii $362K Mississippi $102K
District of Columbia $336K North Dakota $103K
New Jersey $314K Oklahoma $103K
A laska
$176
Median Price ($K)
$230 to $422
$158 to $230
$133 to $158
$121 to $133
$100 to $121 Idaho$126
Michigan
$142
Wes t V irginia$118
Ne w Y ork$228
Vermont$132
Louis iana$11 6
Mis sissippi
$102
S ou th Caro lina$133
North Carol ina$139
Florida$207
D ist rict of Columbia$33 6
Ma ryland$288
De laware
$158
New Jersey$314
Connecticut
$237
Rhode Is land
$265
Cal iforn ia
$422
Mas sac husetts$364
New Ha mpsh ire$235
Ma ine$133
Alabama$124
Arizona$177
A rkansas
$100
Colorado
$209
Ge orgia
$134
Ill inois
$194
Indiana$109
Iowa
$10 4
Kans as$125
Ke ntucky$113
Minnesota$169
Mis sou ri
$118
Monta na$134
Ne bras ka
$118Nevada$ 284
New Me xic o
$15 0
North Dakota$103
Oh io$132
Oklahoma$103
Oregon$19 0
Pe nns ylvania
$135
South Dakota
$100
Tenness ee$129
T exas$121
Utah$155
V irginia$230
Washing ton
$226
Wisconsin$139
Wyoming$129
Ha wa i i
$362
Top and Bottom Five States
California $422K Arkansas $100K
Massachusetts $364K South Dakota $100K
Hawaii $362K Mississippi $102K
District of Columbia $336K North Dakota $103K
New Jersey $314K Oklahoma $103K
Source: Credit Suisse First Boston (US Mortgage Strategy), Census Bureau, NAR, Economy.com
Mortgage Market InsightsI. Introduction
20 October 2005 7
Common source of loans and similar processes from loan application, origination, to securitization characterize Agency and non-Agency RMBS Several similarities exist between mortgages backing Agency and non-Agency RMBS
even though they may be packaged and traded under seemingly different securitization
vehicles. These include the fact that all of these mortgages are sourced across the United
States and processed similarly from point of borrower application to loan origination,
onward to securitization, and eventually to investor placement. The distribution of housing
units across the United States is displayed in Chart 5, which highlights the concentration
of housing units along the East2 and West
3 Coasts, constituting 38% and 15% of the total
number of housing units in the United States, respectively.
Chart 5 Common source of loans backing Agency and non-Agency RMBS
South Carol ina
1.9
Florida
7.8
Mississ ippi
1.2
Alabama
2
West V irg in ia0.9
Dis trict o f Col umbia
0.3
Maryland
2 .2
North Ca rol ina
3.8
V irginia3.1
Louis ia na
1.9
Oklahoma
1.6
Delaware
0.4
New Je rs ey
3 .4
Connecticu t
1.4
Rhode Island
0.4
Mass ach use tts2 .7
Maine0.7
New Hamps hire
0.6
Vermon t0 .3
Idaho
0.6
Nevada
0 .9
Cal ifo rnia12.7
Min nes ota2.2
Arizona
2.4Arkansa s
1.2
Colorado
2
Georgia
3.6
Ill inois
5
Indiana
2 .7
Iowa
1.3
Kans as
1 .2Ke ntucky
1.8
Michiga n
4.4
Mis souri
2.5
Montana
0 .4
Ne bras ka
0.7
New Mexic o
0 .8
New York
7.8
North Dakota
0.3
Ohio4.9
Oregon1.5
Pe nns ylvania5.4
South Dakota0.3
Tenness ee2.6
T exas
8.7
Utah
0 .8
Wa shington
2 .6
Wisconsin
2.4Wyoming
0.2
Number of Units (MM)
3.1 to 12.7
2.2 to 3.1
1.3 to 2.2
0.7 to 1.3
0.2 to 0.7
Hawai i
0.5
A laska
0.3
Top and Bottom Five States
California 12.7MM Wyoming .2MM
Texas 8.7MM Alaska .3MM
Florida 7.8MM District of Columbia .3MM
New York 7.8MM North Dakota .3MM
Pennsylvania 5.4MM South Dakota .3MM
South Carol ina
1.9
Florida
7.8
Mississ ippi
1.2
Alabama
2
West V irg in ia0.9
Dis trict o f Col umbia
0.3
Maryland
2 .2
North Ca rol ina
3.8
V irginia3.1
Louis ia na
1.9
Oklahoma
1.6
Delaware
0.4
New Je rs ey
3 .4
Connecticu t
1.4
Rhode Island
0.4
Mass ach use tts2 .7
Maine0.7
New Hamps hire
0.6
Vermon t0 .3
Idaho
0.6
Nevada
0 .9
Cal ifo rnia12.7
Min nes ota2.2
Arizona
2.4Arkansa s
1.2
Colorado
2
Georgia
3.6
Ill inois
5
Indiana
2 .7
Iowa
1.3
Kans as
1 .2Ke ntucky
1.8
Michiga n
4.4
Mis souri
2.5
Montana
0 .4
Ne bras ka
0.7
New Mexic o
0 .8
New York
7.8
North Dakota
0.3
Ohio4.9
Oregon1.5
Pe nns ylvania5.4
South Dakota0.3
Tenness ee2.6
T exas
8.7
Utah
0 .8
Wa shington
2 .6
Wisconsin
2.4Wyoming
0.2
Number of Units (MM)
3.1 to 12.7
2.2 to 3.1
1.3 to 2.2
0.7 to 1.3
0.2 to 0.7
Hawai i
0.5
A laska
0.3
Top and Bottom Five States
California 12.7MM Wyoming .2MM
Texas 8.7MM Alaska .3MM
Florida 7.8MM District of Columbia .3MM
New York 7.8MM North Dakota .3MM
Pennsylvania 5.4MM South Dakota .3MM
Source: Credit Suisse First Boston (US Mortgage Strategy), Census Bureau, NAR, Economy.com
The origination process is also identical for these mortgages, with no difference in the
processing of a loan, both from the borrower’s or lender’s perspective. The process
from origination to securitization is illustrated in Chart 6. It begins with a borrower’s
application, eventually ending up in securing either an Agency or non-Agency RMBS.
2 East Coast states include: Connecticut (1.2%), Delaware (0.3%), District of Columbia (0.2%), Florida (6.4%),
Georgia (3.0%), Maine (0.6%), Maryland (1.8%), Massachusetts (2.2%), New Hampshire (0.5%), New Jersey (2.8%), New York (6.4%), North Carolina (3.1%), Pennsylvania (4.5%), Rhode Island (0.3%), South Carolina (1.6%), Vermont (0.2%), Virginia (2.6%). 3 West Coast states include: Alaska (0.2%), California (10.5%), Hawaii (0.4%), Oregon (1.2%), Washington
(2.1%).
Mortgage Market InsightsI. Introduction
8 20 October 2005
Chart 6 From origination to securitization
Origination Securitization
Conduits 1/IssuersConduits 1/IssuersBanks /
Mortgage Bankers
Banks /
Mortgage BankersMortgage BrokersMortgage Brokers Broker/Dealers Broker/Dealers InvestorsInvestors
Warehouse
Lending
Warehouse
Lending
FNMA/Freddie G - Fees
FNMA/Freddie G - Fees
Borrowers Borrowers
FNMA/Freddie Portfolio
FNMA/Freddie Portfolio
Conduits 1/IssuersConduits 1/IssuersBanks /
Mortgage Bankers
Banks /
Mortgage BankersMortgage BrokersMortgage Brokers Broker/Dealers Broker/Dealers InvestorsInvestors
Warehouse
Lending
Warehouse
Lending
FNMA/Freddie G - Fees
FNMA/Freddie G - Fees
Borrowers Borrowers
FNMA/Freddie Portfolio
FNMA/Freddie Portfolio
1 Conduits are aggregators of collateral originated by mortgage bankers, brokers and other sellers that the conduit then securitizes
through broker/dealers.
Source: Credit Suisse First Boston (US Mortgage Strategy)
For a more detailed description of the participants in the securitization process and their
respective roles, refer to Appendix A, Securitization Deal Participants.
Execution levels eventually determine the choice of securitization vehicle and whether a
mortgage loan backs an Agency or non-Agency RMBS security or is retained within the
lender’s portfolio. An example of this process is illustrated in Chart 7, beginning with a
mortgage loan originated and ending with the higher price execution eventually
determining whether the loan is classified as Agency or non-Agency. In the illustrated
example, the higher price execution favors Agency securitization.
Chart 7 Execution levels drive the choice of securitization vehicle between Agency and non-Agency
Loan Originated at 5.65%
(Gross WAC)
Non-Agency Subordinates3.5% of deal at 10pt spread
behind AAA
Agency Security4.825% Net WAC
Indicated price of $100.62
based on market pricing
Non-Agency Security5.275% Net WAC
Indicated price of $100.90
based on market pricing
Price of $100.55
Minus
37.5bps servicing
Minus
45bps g-fee
Minus
Credit Cost
$0.35
(3.5% subs * $10)
Difference = $0.07
Favors Agency
Securitization
Loan Originated at 5.65%
(Gross WAC)
Non-Agency Subordinates3.5% of deal at 10pt spread
behind AAA
Agency Security4.825% Net WAC
Indicated price of $100.62
based on market pricing
Non-Agency Security5.275% Net WAC
Indicated price of $100.90
based on market pricing
Price of $100.55
Minus
37.5bps servicing
Minus
45bps g-fee
Minus
Credit Cost
$0.35
(3.5% subs * $10)
Difference = $0.07
Favors Agency
Securitization
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsI. Introduction
20 October 2005 9
Two main considerations in the process of evaluating the choice of securitization vehicle
for a particular loan are the cost of providing credit protection and market valuations on
Agency and non-Agency securities.
The cost of credit protection in the case of an Agency RMBS is assessed through an
Agency guarantee fee, the g-fee. In the illustrated example, the g-fee is 45 basis points,
which is stripped off the gross mortgage rate, and subtracting the servicing fees results in
the net coupon rate on the security. Notably, because of the g-fee, the same loan could
result in the creation of a lower coupon rate Agency security relative to a higher coupon
rate non-Agency security.
Credit protection in the case of non-Agency RMBS is provided through the creation of
subordinate securities. These are first in line to offer credit protection to the senior most
AAA-rated classes, and are accordingly priced at lower prices relative to AAAs reflecting
their higher exposure to credit risk. The cost of this subordination is correspondingly the
percentage of the deal that are subordinates, as determined by rating agencies,
multiplied by the price discount relative to the AAA-rated senior classes. As a result of
possible variance in g-fee levels as well as prices and spreads on subordinate
securities, the cost of providing credit protection through either means is subject to
change over time.
Furthermore, market pricing factors determine the prices of Agency and the highest AAA-
rated non-Agency securities. Accordingly, price execution levels and eventual
classification of Agency or non-Agency are also subject to change. A loan that was once
classified as Agency could today, because of changes in these factors, be classified as
non-Agency.
The Credit Continuum Risk-based pricing of mortgage products, a process through which various factors
associated with the borrower, property and loan type, has resulted in the development of
a credit continuum (see Chart 8). At one end of the spectrum are very high credit quality
borrowers classified as prime jumbo and at the opposite end of the spectrum are
subprime borrowers characterized as weak credit quality borrowers. Chart 8 illustrates
the variation of characteristics along each section of the credit continuum, focusing on
the four main areas of prime jumbo, “Tier 1” Alt-A, “Tier 2” Alt-A and subprime.
Similarities between the two ends of the spectrum, prime jumbo and subprime, include
borrowers that almost always provide full documentation, borrowers that occupy the
home for which they are obtaining mortgage financing, and the property securing the
mortgage is in most cases a single-family unit. Prime jumbo borrowers carry relatively
high FICO scores, often in excess of 720, have loan-to-value ratios of under 80%, and
are applying for the loan to purchase a property or refinance an existing loan. In this
report, we will primarily discuss the portion of the US RMBS sector backed by prime
jumbo fixed-rate borrowers but, to ensure a contextual examination, touch on the Alt-A
and subprime sectors where relevant.
The middle of the credit continuum is occupied by what is collectively labeled as the
Alternative-A (Alt-A) sector, which is characterized by several variables that fall between
the prime jumbo and subprime space (FICO scores, loan-to-value ratios) but most notably
carry features different from those that are shared by prime jumbo and subprime, i.e., non-
owner occupied properties, non-full documentation loans, and non-single family units.
Mortgage Market InsightsI. Introduction
10 20 October 2005
The various possibilities for layers of exceptions from prime jumbo have led to the
development of several tiers classified within this sector along any combination of
attributes as “Tier 1” Alt-A and “Tier 2” Alt-A; the fewer the number of exceptions, the
closer to prime; the greater the number of exceptions, the closer to subprime.
Subprime lending is extended to borrowers that have FICO scores of 640 or lower, on
average, and carry high loan-to-value ratios. The weak credit quality of these borrowers
results in loan balances being lower than the conforming limit, as lenders are cautious of
extending excessive credit to these borrowers.
Credit considerations determine the classification of loans as either Agency or non-
Agency. The g-fee is determined based on the insuring entity’s assessment of the credit
quality of the underlying loans and comfort in extending credit protection for a given g-
fee level. Alternatively, investor considerations in pricing of subordinate securities is
determined by their comfort with the credit quality of the underlying mortgages, resulting
in vastly differing pricing levels assigned to subordinates backed by prime, Alt-A or
subprime. These credit considerations are inputs into the determination of price
execution levels, eventually leading to the classification of a loan as eligible for Agency
or non-Agency RMBS. Notably, expansion in the appetite for loans with credit features
previously excluded by the Agencies can result in loans that at one point were labeled
as non-Agency becoming eligible, based on new criteria, for the Agency classification.
In summary, the divide between Agency and non-Agency is reflective of a number of
factors that are transitory, requiring investors to understand which features originally
resulted in a loan being packaged in a security classified as either.
Chart 8 The development of the credit continuum, which spans from prime jumbo to subprime, is a result of risk-based pricing of mortgage products
Characteristic
Loan Balance
Rate Premium
Loan-to-Value
Average FICO
Loan Purpose
Documentation
Occupancy
Property Type
Characteristic
Loan Balance
Rate Premium
Loan-to-Value
Average FICO
Loan Purpose
Documentation
Occupancy
Property Type
Subprime
Significantly lower
than GSE limit
Premium to
Tier 2
Alt-As
High % of LTV>80
<640
Cashout
Full
Owner
Single-family
Tier 1
Alt-As
Mix of <, > GSE limit
Premium to
Prime rates
Increase in % of
LTV>80
700-720
Tier 2
Alt-As
Lower than GSE limit
Premium to
Tier 1
Alt-As
Increase in % of
LTV>80
640-690
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Layered Risk
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Characteristic
Loan Balance
Rate Premium
Loan-to-Value
Average FICO
Loan Purpose
Documentation
Occupancy
Property Type
Characteristic
Loan Balance
Rate Premium
Loan-to-Value
Average FICO
Loan Purpose
Documentation
Occupancy
Property Type
Subprime
Significantly lower
than GSE limit
Premium to
Tier 2
Alt-As
High % of LTV>80
<640
Cashout
Full
Owner
Single-family
Subprime
Significantly lower
than GSE limit
Premium to
Tier 2
Alt-As
High % of LTV>80
<640
Cashout
Full
Owner
Single-family
Tier 1
Alt-As
Mix of <, > GSE limit
Premium to
Prime rates
Increase in % of
LTV>80
700-720
Tier 1
Alt-As
Mix of <, > GSE limit
Premium to
Prime rates
Increase in % of
LTV>80
700-720
Tier 2
Alt-As
Lower than GSE limit
Premium to
Tier 1
Alt-As
Increase in % of
LTV>80
640-690
Tier 2
Alt-As
Lower than GSE limit
Premium to
Tier 1
Alt-As
Increase in % of
LTV>80
640-690
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Layered Risk
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Low % of single-family versus
jumbo and sub-prime
High % of cashout versus jumbo
Low % of full doc versus
jumbo and sub-prime
Low % of owner-occupied versus
jumbo and sub-prime
Layered Risk
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Prime Jumbo
Greater than GSE
limit
None
Under 80%
720 or higher
Purchase/Rate-Term
Refi
Full
Owner
Single-Family
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsI. Introduction
20 October 2005 11
Recent issuance dynamics The non-Agency RMBS sector collectively comprises securities backed by fixed- and
adjustable-rate mortgages spanning various credit grades: prime jumbo, “Tier 1” Alt-A,
“Tier 2” Alt-A and subprime (see Chart 9). As shown in Chart 2, $864 billion in non-
Agency RMBS was issued in 2004 and issuance is on pace to be $1.08 trillion in 2005.
This compares to total Agency RMBS issuance of $1.02 trillion in 2004 and projected
issuance of $856 billion in 2005.
The increase in non-Agency issuance has been propelled by two dominant factors: the
popularity of hybrid mortgages and the surge in issuance of securities backed by Alt-A
and subprime mortgages. Notably, hybrids are a smaller share of the Agency issuance
mix while comprising the majority of the non-Agency issuance mix. In addition, the non-
Agency sector also witnesses the leading edge of product innovation – including
interest-only, option ARMs – and this has gone hand-in-hand with the growth in
issuance of the more credit-sensitive Alt-A and subprime mortgages relative to historical
issuance, which was dominated by prime jumbo mortgages.
Chart 9 Strong non-Agency RMBS issuance across both fixed and hybrid product
$214$326 $307
$696 $657
$427
$1,041
$1,338
$1,925
$835
$0
$500
$1,000
$1,500
$2,000
$2,500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MB
S I
ss
ua
nc
e (
$B
illi
on
s) Agency Fixed rate
$283$300
$210$204
$91
$125
$181
$90
$52
$30
$0
$50
$100
$150
$200
$250
$300
$350
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MB
S I
ss
ua
nc
e (
$B
illi
on
s) Subprime Fixed rate
Alt-A Fixed rate
Jumbo Fixed rate
$55$45
$61
$31 $28
$56 $52
$123
$206
$184
$0
$50
$100
$150
$200
$250
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MB
S I
ss
ua
nc
e (
$B
illi
on
s) Agency Hybrid
$14 $18 $32 $37
$138
$224
$494
$23$12 $14
$0
$100
$200
$300
$400
$500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MB
S I
ss
ua
nc
e (
$B
illi
on
s)
Subprime Hybrid
Alt-A Hybrid
Jumbo Hybrid
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Stability in originator, issuer, and underwriters has characterized the prime jumbo and
Alt-A segments, both fixed and hybrid, of the non-Agency RMBS sector. Countrywide,
Washington Mutual, Wells Fargo, Bank of America, and Chase Home Finance have
consistently ranked among the top originators of prime jumbo and Alt-A mortgages (see
Table 1). Greater consolidation is evident given that the share of the top five originators
has increased to 56% in 2004 from 47% in 2002, while the share of the top ten
originators has risen to 75% from 62% over the corresponding time frame.
Mortgage Market InsightsI. Introduction
12 20 October 2005
Table 1 Top prime jumbo and Alt-A originators, 2002-2004
2004 2003 2002
Rank Lender
Vol.
($Bn)
Mkt
Share
(%) Lender
Vol.
($Bn)
Mkt
Share
(%) Lender
Vol.
($Bn)
Mkt
Share
(%)
1 Countrywide 85 17.2% Wells Fargo 93 14.2% Wells Fargo 81 14.9%
2 Washington Mutual 71 14.4% Washington Mutual 85 12.8% Washington Mutual 77 14.2%
3 Wells Fargo 68 13.8% Chase Home Finance 65 9.9% Chase Home Finance 37 6.9%
4 Bank of America 26 5.3% Countrywide 65 9.8% Countrywide 35 6.3%
5 Chase Home Finance 24 4.8% Bank of America 31 4.7% Bank of America 24 4.4%
6 CitiMortgage 24 4.8% Cendant Mortgage 23 3.4% Cendant Mortgage 22 4.0%
7 Golden West Financial 19 3.9% CitiMortgage 22 3.4% CitiMortgage 18 3.3%
8 GMAC Mortgage 18 3.7% ABN AMRO 19 2.9% GMAC-RFC 16 3.0%
9 GreenPoint Mortgage 18 3.6% GreenPoint Mortgage 17 2.5% GreenPoint Mortgage 15 2.8%
10 Cendant Mortgage 16 3.1% National City Mortgage 17 2.5% Golden West Financial 12 2.3%
2004 Total 495 2003 Total 660 2002 Total 544
2004 Top 5 275 55.5% 2003 Top 5 339 51.4% 2002 Top 5 254 46.7%
2004 Top 10 369 74.6% 2003 Top 10 437 66.2% 2002 Top 10 337 62.0%
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Countrywide and Bank of America have consistently featured in a ranking of the top five
issuers between 2002-2004, with Bear Stearns, Lehman Brothers, and Wells Fargo
rounding out this list in 2004 (Table 2). Notably, the share of the top ten issuers has
declined from 79% in 2002 to 67% in 2004, which has largely been an outcropping of
the growth in dealer conduit platforms. Among dealer conduits, Bear Stearns, CSFB,
Lehman Brothers, and UBS have consistently featured in rankings of the top ten issuers
between 2002-2004.
Table 2 Top prime jumbo and Alt-A issuers, 2002-2004
2004 2003 2002
Rank Issuer
Vol.
($Bn)
Mkt
Share
(%) Issuer
Vol.
($Bn)
Mkt
Share
(%) Issuer
Vol.
($Bn)
Mkt
Share
(%)
1 Countrywide 50 12.8% Countrywide 43 13.7% Washington Mutual 41 17.8%
2 Bear Stearns 33 8.4% Washington Mutual 34 10.8% Countrywide 27 11.8%
3 Lehman 30 7.6% Bank of America 26 8.5% GMAC-RFC 20 8.8%
4 Bank of America 27 6.8% UBS Warburg 22 7.2% CSFB 17 7.4%
5 Wells Fargo 27 6.8% Wells Fargo 22 7.1% Bank of America 15 6.7%
6 Impac 21 5.5% Lehman 20 6.3% Wells Fargo 15 6.5%
7 Washington Mutual 21 5.4% CSFB 20 6.3% Lehman 15 6.5%
8 UBS Warburg 21 5.2% GMAC-RFC 18 5.8% Bear Stearns 13 5.6%
9 CSFB 18 4.6% Bear Stearns 18 5.7% UBS Warburg 9 3.9%
10 IndyMac 14 3.5% Merrill Lynch 12 3.8% Goldman Sachs 9 3.7%
2004 Total 392 2003 Total 312 2002 Total 229
2004 Top5 166 42.4% 2003 Top 5 147 47.2% 2002 Top 5 120 52.5%
2004 Top 10 261 66.7% 2003 Top 10 234 75.2% 2002 Top 10 180 78.7%
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Mortgage Market InsightsI. Introduction
20 October 2005 13
The top five underwriters of prime jumbo and Alt-A non-Agency RMBS have consistently
included Bear Stearns, Lehman, and CSFB, with RBS Greenwich and Bank of America
rounding out this ranking in 2004 (Table 3). The share of the top ten underwriters
remains high at 86% in 2004 versus 89% and 90% in 2003 and 2002, respectively.
Table 3 Top prime jumbo and Alt-A underwriters, 2002-2004
2004 2003 2002
Rank Issuer
Vol.
($Bn)
Mkt
Share
(%) Issuer
Vol.
($Bn)
Mkt
Share
(%) Issuer
Vol.
($Bn)
Mkt
Share
(%)
1 Bear Stearns 75 19.1% Bear Stearns 49 15.7% Bear Stearns 40 17.3%
2 Lehman 41 10.5% Lehman 35 11.3% Lehman 32 14.0%
3 RBS Greenwich 41 10.5% CSFB 35 11.2% CSFB 31 13.7%
4 Bank of America 32 8.1% UBS Warburg 34 11.0% UBS Warburg 20 8.8%
5 CSFB 31 7.8% Countrywide 26 8.5% RBS Greenwich 19 8.4%
6 Countrywide 30 7.8% Bank of America 25 8.1% Goldman Sachs 16 7.1%
7 UBS Warburg 26 6.7% Goldman Sachs 24 7.6% Countrywide 15 6.5%
8 Goldman Sachs 24 6.2% Merrill Lynch 18 5.9% Bank of America 15 6.4%
9 Citigroup 19 4.8% RBS Greenwich 18 5.8% Salomon Smith Barney 10 4.5%
10 Merrill Lynch 18 4.6% Morgan Stanley 14 4.4% JP Morgan 8 3.5%
2004 Total 392 2003 Total 312 2002 Total 229
2004 Top 5 220 56.1% 2003 Top 5 180 57.7% 2002 Top 5 142 62.2%
2004 Top 10 338 86.1% 2003 Top 10 278 89.3% 2002 Top 10 207 90.3%
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
Mortgage Market InsightsII. Collateral Characteristics
14 20 October 2005
II. Collateral Characteristics
A distinguishing feature of securitized assets is the high degree of transparency in the
underlying collateral. This is characterized by loan-level collateral data available for a
new pool of loans being packaged into securities, monthly prepayment and default
performance data available subsequent to securitization, and historical performance
data available at a granular level. This level of transparency facilitates an investment
decision process that is unrivaled within other fixed income asset classes.
Non-Agency RMBS have much higher standards of disclosure than Agency RMBS.
While loan level details are provided on non-Agency RMBS, the level of disclosure until
now on Agency RMBS has been at the quartile level, i.e., a quartile level distribution is
provided for a given characteristic.4
The prime jumbo segment of the non-Agency sector, by nature of its name, reflects the
prime credit quality of the underlying borrowers. This is evidenced mainly through
higher credit scores, lower loan-to-value ratios, and a high share of owner-occupied
properties relative to the characteristics of Agency RMBS. (Compare collateral
characteristics5 of 30-year fixed-rate jumbo versus FNMA for the 2004 vintage in Table
4. For purposes of illustration we also provide collateral characteristics for 30-year
fixed-rate Alt-A to tie in with our earlier comments on the development of the credit
continuum. Table 5 provides a similar analysis for 15-year fixed-rate RMBS.)
4 Freddie Mac announced on 15 September 2005 that during the fourth quarter of 2005 the company intends
to expand disclosure on its single-family mortgage participation securities to provide loan-level information at issuance for all newly issued fixed-rate and adjustable-rate PC securities. This new level of disclosure will significantly close the gap between Agency and non-Agency loan-level reporting, and is limited by only being provided on new issue securities. 5 Definitions of characteristics are available in the Glossary in Appendix C.
Mortgage Market InsightsII. Collateral Characteristics
20 October 2005 15
Table 4 2004 vintage 30-year fixed-rate collateral characteristics
Agency Non-Agency
Product FNMA Fixed 30yr Alt-A Fixed 30yr
Prime Jumbo
Fixed 30yr Alt-A Fixed 30yr
Conforming / Non-Conforming Conforming Conforming Non-Conforming Non-Conforming
GWAC (%) 5.94 6.39 5.89 6.23
IO (%) 0 7 1 14
Avg. Loan Size ($K) 166 154 511 504
California (%) 18 23 49 50
FICO 716 713 741 711
LTV (%) 73 76 68 70
SF / PUD (%) 96 80 93 91
2-4 Units (%) 4 12 1 5
Owner-Occupied (%) 91 67 96 91
Second Home (%) 4 3 4 4
Investor (%) 4 31 0 5
Full Doc (%) N/A 37 62 31
Low Doc (%) N/A 54 37 62No Doc (%) N/A 9 1 7
Purchase (%) 48 55 44 41
Cashout Refi (%) N/A 31 15 35
Refi (%) 52 14 41 24
Purpose Other (%) N/A 0 0 0
Prepay Penalty (%) 0 14 3 17
Prepay Penalty Term (months) 0 43 41 45
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Table 5 2004 vintage 15-year fixed-rate collateral characteristics
Agency Non-Agency
Product FNMA Fixed 15yr Alt-A Fixed 15yr
Prime Jumbo
Fixed 15yr Alt-A Fixed 15yr
Conforming / Non-Conforming Conforming Conforming Non-Conforming Non-Conforming
GWAC (%) 5.21 5.62 5.18 5.49
IO (%) 0 0 0 0
Avg. Loan Size ($K) 137 119 534 538
California (%) 20 24 42 43
FICO 728 718 742 720LTV (%) 61 65 58 62
SF / PUD (%) 96 77 95 92
2-4 Units (%) 4 14 0 2
Owner-Occupied (%) 92 45 92 90
Second Home (%) 4 3 7 5
Investor (%) 4 52 0 5
Full Doc (%) N/A 34 59 42
Low Doc (%) N/A 63 34 54
No Doc (%) N/A 2 6 4
Purchase (%) 18 23 20 24
Cashout Refi (%) N/A 45 18 36
Refi (%) 82 32 61 40
Purpose Other (%) N/A 0 0 0
Prepay Penalty (%) 0 8 0 10
Prepay Penalty Term (months) 0 43 38 40
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Mortgage Market InsightsII. Collateral Characteristics
16 20 October 2005
Homogeneity in the underlying collateral is a distinguishing feature of the prime jumbo
segment of the non-Agency RMBS sector. An examination of the collateral
characteristics for the largest issuers displays limited variation, especially along the
dimensions of borrower credit quality (high FICO scores), loan-to-value (low LTV) ratios,
and occupancy (predominantly owner-occupied). This is illustrated in Table 6.
Mo
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Table 6 Prime jumbo 30- and 15-year fixed-rate RMBS: Collateral characteristics by issuer (2004 Vintage)
Prime Jumbo 30-year Prime Jumbo 15-year
Countrywide
(CWHL)
Bank of
America
(BOAMS)
RFC
(RFMSI)
Wells Fargo
(WFMBS)
Goldman
Sachs
(GSR)
Countrywide
(CWHL)
Bank of
America
(BOAMS)
RFC
(RFMSI)
Wells Fargo
(WFMBS)
Goldman
Sachs
(GSR)
Origination Amount ($MM) 5,099 4,114 1,784 1,020 1,226 261 277 357 903 624
Number Of Loans 10,016 7,839 3,977 2,080 2,459 485 519 837 1,784 1,191
Gross WAC 5.98 5.88 5.84 5.79 5.90 5.24 5.37 5.13 5.13 5.18
Avg. Loan Size ($K) 509 525 449 490 498 539 534 427 506 524
FICO 741 745 745 734 740 744 749 748 739 741
Combined LTV 72 67 67 66 69 63 57 56 56 60
Full Doc (%) N/A 24 83 46 74 N/A 17 77 40 76
Low Doc (%) N/A 76 17 39 26 N/A 83 23 41 24
Docum
en-
tatio
n
No Doc (%) N/A 0 0 15 0 N/A 0 0 19 0
Owner Occupied (%) 96 94 99 96 95 93 89 98 92 90
Second Home (%) 4 6 1 4 4 7 11 2 8 10
Occu-
pancy
Investor (%) 0 0 0 0 0 0 0 0 0 0
Single Family Res. (%) 70 72 73 93 71 68 67 72 93 72
2-4 Units (%) 1 2 1 1 1 0 0 1 1 0
Pro
pert
y
Type
PUD (%) 25 21 23 0 22 28 27 24 0 23
Purchase (%) 55 38 32 34 52 30 22 8 20 23
Cash-out Refi (%) 13 17 17 18 14 19 17 17 18 18
Purp
ose
Refi (%) 33 44 50 48 34 51 60 75 62 59
Prepay Penalty (%) 0 12 2 0 1 0 0 1 0 0
Prepay Penalty Term (Months) N/A N/A 50 N/A N/A N/A N/A 36 N/A N/A
California (%) 49 61 49 48 46 36 58 44 47 31
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Mortgage Market InsightsII. Collateral Characteristics
18 20 October 2005
The collateral composition of any particular segment of the Agency and non-Agency
RMBS sectors is a function of the underwriting matrix utilized by originators. These
underwriting matrices are subject to transitions over time as eligibility criteria set by a
given originator evolve.
An illustrative underwriting matrix is provided in Table 7. We use this matrix to illustrate
the layers of examination that each and every individual loan undergoes before being
originated and included in a mortgage pool for securitization. The underwriting matrix
displayed depicts the effect of specific attributes on valuations assigned to 30-year
prime jumbo product within a specific LTV bucket. Red cells indicate a negative effect
on valuations as a result of the collateral being characterized by a weak attribute, such
as the occurrence of a high combined LTV (CLTV) and a low FICO score. Blue cells
indicate a positive effect on valuations as a result of collateral being characterized by a
strong attribute, such as a high FICO score.
This underwriting matrix illustrates the possible layers of risk associated with each
collateral attribute, whereby a loan characterized by a combination of multiple weak
attributes will be subject to a greater negative effect on its valuation than if characterized
by a single or no weak attributes.
Table 7 The underwriting matrix for 30-year prime jumbo – Pricing, collateral
characteristics*
Pricing Matrix for 30-Year Prime Jumbo
30 YR Jumbo A LTV
<= 60.00 60.01-65 65.01-70 70.01-75 75.01-80 80.01-85 85.01-90 90.01-95 95.01-97 97.01-100
Adjustment for LTV NA NA
Attribute Adjustment
<= 70 NA NA NA NA NA NA NA
80.01-85 NA NA NA NA
85.01-90 NA NA NA
90.01-95 NA NA NA
95.01-100 NA NA NA NA NA NA NA NA NA NA
>= 780 NA NA
720 - 779 NA NA
700 - 719 NA NA
680 - 699 NA NA
660 - 679 NA NA NA
640 - 659 NA NA NA
620 - 639 NA NA NA NA
DOC = Full NA NA NA
DOC = Low NA NA NA
DOC = No Income Verification NA NA NA NA NA
<=40.00 NA NA NA
40.01-45.00 NA NA NA
DOC = Full NA NA
DOC = Low NA NA
DOC = No Income Verification NA NA NA
<=40.00 NA NA
40.01-45.00 NA NA
Owner Occupied NA NA
Investor NA NA NA
Second Home NA NA
Purchase NA NA
Refinance NA NA
Cashout NA NA NA
FICO < 660
FICO >= 660
Occupancy
Purpose
CLTV
FICO
*A red cell indicates a payup, resulting from contributing weaker attributes. A blue cell indicates a paydown, resulting from contributing
stronger attributes.
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsII. Collateral Characteristics
20 October 2005 19
Table 8 The underwriting matrix for 30-year Alt-A – Pricing, collateral
characteristics*
Pricing Matrix for 30-Year Alt-A
LTV
<= 60.00 60.01-65 65.01-70 70.01-75 75.01-80 80.01-85 85.01-90 90.01-95 95.01-97 97.01-100
Adjustment for LTV
Attribute Adjustment
<= 70 NA NA NA NA NA NA NA
80.01-85 NA NA NA NA
85.01-90 NA NA NA
90.01-95 NA NA
95.01-100
>= 780
720 - 779
700 - 719
680 - 699
660 - 679
640 - 659
620 - 639
DOC = Full
DOC = Low
DOC = No Income Verification NA
DOC = No NA NA
<=40.00
40.01-45.00
45.01-50.00 NA
>50 NA
DOC = Full
DOC = Low
DOC = No Income Verification NA
DOC = No NA NA
<=40.00
40.01-45.00
45.01-50.00
>50 NA
Owner Occupied
Investor NA NA
Second Home NA NA
Purchase
Refinance
Cashout NA
Purpose
FICO < 660
FICO >= 660
Occupancy
CLTV
FICO
*A red cell indicates a payup, resulting from contributing weaker attributes. A blue cell indicates a paydown, resulting from contributing
stronger attributes.
Source: Credit Suisse First Boston (US Mortgage Strategy)
At the inception of the non-Agency RMBS sector, the lack of clear segmentation based on
the credit quality of the underlying borrowers led to an entire range of mortgages across
the credit continuum that did not fit the Agency eligibility requirements being included in
non-Agency securitizations. However, the development of the Alt-A sector, beginning in
1995, and the subprime sector in 1997, provided a separate channel for these loans to be
securitized, translating into an increasingly homogeneous prime jumbo segment. This
homogeneity is reflected in an examination of the transitions in collateral characteristics
displayed in Table 9 as well as through a comparison of the illustrative underwriting
matrices for prime jumbo and Alt-A (compare Tables 7 and 8). We draw readers’ attention
to specific combinations of collateral attributes, identified as “NA,” which are simply not
permitted into prime jumbos. A visual comparison of the two easily illustrates the tighter
criteria for inclusion of a loan in prime jumbo.
Homogeneity in fixed-rate prime jumbo product is also reflected through an examination
of collateral characteristics across a range of FICO buckets as illustrated against a
comparison versus Alt-A product (see Tables 10 and 11). Prime jumbo product is
characterized by significantly less variability in collateral characteristics relative to Alt-A,
reflective of the more stringent standards for inclusion of a loan in this segment.
Mo
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Table 9 Fixed-rate prime jumbo characteristics over time – High loan balances, high credit quality, high California concentration, high owner-
occupied and low prepay penalty
30-year 15-year
2001 2002 2003 2004 2001 2002 2003 2004
Origination Amount ($MM) 73,709��
58,767��
55,277��
20,980���
� 14,209��
25,108��
31,193��
3,368��
Number Of Loans 178,260��
130,086��
115,168��
44,495���
� 31,721��
53,121��
63,348��
7,436��
Gross WAC (%) 7.19��
6.67��
5.92��
5.89���
� 6.72��
6.08��
5.30��
5.19��
Avg. Loan Size ($K) 413��
452��
480��
472���
� 448��
473��
492��
453��
FICO 731 ��
736 ��
739 ��
740 ���
� 737 ��
741 ��
741 ��
741 ��
LTV 71 ��
68 ��
67 ��
68 ���
� 62 ��
58 ��
57 ��
58 ��
Combined LTV 80 ��
79 ��
78 ��
82 ���
� 64 ��
71 ��
68 ��
70 ��
Full Doc (%) 79��
76��
69��
61���
� 75��
73��
67��
60��
Low Doc (%) 18��
20��
29��
37���
� 22��
23��
27��
34��
Docum
en-
tatio
n
No Doc (%) 2��
1��
2��
2���
� 2��
3��
5��
6��
Owner Occupied (%) 97��
97��
97��
94���
� 95��
96��
96��
89��
Second Home (%) 2��
3��
3��
4���
� 4��
4��
4��
7��
Occu-
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Investor (%) 0��
0��
0��
2���
� 0��
0��
0��
4��
Single Family Res. (%) 78��
78��
78��
73���
� 80��
81��
82��
79��
2-4 Units (%) 1��
1��
1��
2���
� 0��
0��
1��
2��
Pro
pert
y
Type
PUD (%) 16��
17��
16��
19���
� 16��
15��
13��
13��
Purchase (%) 40��
34��
27��
43���
� 18��
11��
9��
20��
Cash-out Refi (%) 21��
20��
18��
16���
� 23��
20��
20��
19��
Purp
ose
Refi (%) 40��
47��
55��
41���
� 59��
68��
72��
60��
Prepay Penalty (%) 3��
2��
2��
4���
� 1��
1��
2��
0��
Prepay Penalty Term (Months) 58 ��
58 ��
47 ��
46 ���
� 58 ��
47 ��
38 ��
38 ��
California (%) 44��
47��
50��
49���
� 33��
39��
42��
41��
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Mortgage Market InsightsII. Collateral Characteristics
20 October 2005 21
Table 10 30-year fixed-rate jumbo collateral characteristics by FICO distribution
Jumbo Fixed-Rate 30-year
FICO Bucket <620 620-639 640-659 660-679 680-699 700-719 720-779 >=780
Avg. Loan Size ($K) 495 406 411 421 439 461 483 482
IO (%) 3 0 0 1 1 1 1 1
GWAC (%) 6.14 5.99 5.91 5.92 5.88 5.89 5.84 5.84
FICO 593 630 651 670 690 710 752 791
LTV (%) 72 69 69 69 69 69 68 66
LTV > 80 & <= 90 (%) 2 4 4 3 2 2 1 1
LTV > 90 (%) 1 2 1 1 1 1 0 0
MI (%) 3 7 5 4 2 3 2 1
Investor (%) 0 4 3 3 3 2 2 1
Full Doc (%) 52 92 89 64 61 44 46 46
Low Doc (%) 48 7 9 16 23 27 29 37
No Doc (%) 0 1 2 2 2 1 1 2
Purchase (%) 62 25 31 34 35 38 41 50
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Table 11 30-year fixed-rate Alt-A collateral characteristics by FICO distribution
Alt-A Fixed-Rate 30-year
FICO Bucket <620 620-639 640-659 660-679 680-699 700-719 720-779 >=780
Avg. Loan Size ($K) 177 204 202 208 203 196 200 197
IO (%) 5 11 7 9 8 9 11 13
GWAC (%) 6.51 6.66 6.54 6.46 6.36 6.29 6.19 6.12
FICO 599 629 650 670 689 709 748 792
LTV (%) 77 77 77 75 74 74 73 69
LTV > 80 & <= 90 (%) 12 14 14 13 11 11 9 7
LTV > 90 (%) 10 14 13 9 8 9 7 4
MI (%) 21 28 26 21 19 19 15 11
Investor (%) 14 15 18 21 23 27 31 35
Full Doc (%) 31 34 37 26 27 29 35 40
Low Doc (%) 46 53 50 59 60 57 53 48
No Doc (%) 0 10 9 10 9 9 8 9
Purchase (%) 64 37 39 39 43 47 53 58
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Mortgage Market InsightsIII. Credit Enhancement
22 20 October 2005
III. Credit Enhancement
A distinguishing feature of non-Agency RMBS is the requirement for credit protection to
be offered within the deal structure. This protects investors from losses experienced on
the underlying mortgage collateral. In contrast, investors in Agency RMBS securities
receive credit protection through a guarantee by the issuing entity (i.e., Fannie Mae,
Freddie Mac and Ginnie Mae), which absorbs any realized losses.
Credit protection in non-Agency RMBS can take various forms, of which the most
commonly utilized is the senior/subordinate structure within the prime jumbo fixed-rate
RMBS segment. Pool insurance (wherein losses generated by an entire pool of loans are
covered), bond insurance (wherein losses experienced by a specific bond are covered),
and reserve funds are other less frequently used forms of credit enhancement.
The sufficiency of credit enhancement for a given pool of loans, irrespective of the
above choices, is determined by the rating agencies. This includes Standard and
Poor’s (S&P), Moody’s Investors Service, Fitch Ratings, and Dominion Bond Rating
Service (DBRS), each using a variety of statistical analysis and proprietary models to
determine credit enhancement levels. For a more detailed description of rating agency
methodologies to determine credit enhancement levels, refer to Appendix B, Rating
Agency Methodologies.
The senior/subordinate structure divides a pool of mortgage collateral into the most highly
rated AAA classes and subordinate classes rated from AA to the unrated class. Generally,
six subordinate classes are created with the AA, A, and BBB-rated classes referred to as
investment grade and the BB, B, and unrated classes referred to as sub-investment grade.
The subordinate classes are first in line to absorb losses, thereby protecting the AAA
classes from any losses generated on the underlying mortgage collateral.
The senior/subordinate structure is the most commonly used in providing credit
enhancement in the prime jumbo and Alt-A RMBS sector. An option that is sometimes
used in the Alt-A sector, and is the standard within the subprime sector, is the utilization
of over-collateralization (OC)/excess spread and subordinate bonds as credit support.
The determinant of which structure is eventually used is a function of the mortgage rate
on the underlying collateral. The higher the rate, i.e., the further away from prime the
credit quality of the borrowers, the greater the likelihood of using OC/excess spread.
Comparative credit enhancement levels across the prime jumbo and Alt-A RMBS
sectors are illustrated in Chart 10. The farther away from prime quality the nature of Alt-
A, the higher the credit enhancement levels mandated by the rating agencies. For a
brief description of credit enhancement structures, please see the sidebar alongside
titled Description of common credit enhancement structures.
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 23
Description of common credit enhancement structures
Credit enhancement can come in several forms provided either internally within a deal or externally by a third party. Internal
forms of credit enhancement are provided by a reallocation of collateral cash flows leading to credit tranching. The most
popular forms are subordination and over-collateralization (OC)/excess spread. We discuss these below.
Senior/Subordinate Shifting Interest Structure: In the case of a senior/subordinate structure, subordinate tranches provide
credit support to senior classes within a deal. Allocation of losses progress from the lowest to the highest rated classes. This
form of credit support often calls for the allocation of a disproportionate amount of principal prepayments to the senior classes
of the deal so that the subordinate classes remain outstanding for a sufficiently long time to ensure availability of credit support
to the seniors.
This allocation of principal prepayments often follows a shifting interest schedule, through which a portion of prepayments due
to the subordinate classes in a given deal that are shifted to the senior classes declines over a period of time (typically five
years hard lockout followed by another five years of shifting interest for fixed-rate RMBS).
Over-Collateralization and Excess Interest: Credit enhancement through OC and excess interest arise from the weighted
average net mortgage rate of a group of loans exceeding the weighted average pass-through rate on bonds (plus certain
expenses of the trust), generating excess interest collections. This excess interest is initially applied to the reduction of the
aggregate principal balance of securities, resulting in a more rapid amortization of the aggregate principal balance of these
securities, as compared to the decline in the aggregate mortgage collateral balance. This creates OC and this application of
excess interest continues until the OC target is met. Upon funding of the OC, any realized losses on the collateral are covered
by the OC and the monthly excess spread prior to the subordinate classes being hit. Remaining excess spread is directed to
the residual holder, which may or may not be the issuer.
Mo
rtga
ge M
ark
et In
sig
hts
III. Cre
dit E
nhancem
ent
Chart 10 Credit enhancement structures: Senior/subordinate on prime jumbo A, and senior/subordinate or OC/excess spread on Alt-A
Jumbo A Credit Tranching (example deal)
Alt-A Credit Tranching (example deals)
'Subs' 2.65%
'AAA' 97.35%
‘NR' 0.10%
'B' 0.15%
'BB' 0.25%
'BBB' 0.30%
'A' 0.50%
'AA' 1.35%
'Subs' 4.90%
'AAA' 95.10%
‘NR' 0.30%
'B' 0.40%
'BB' 0.30%
'BBB' 0.65%
'A' 1.05%
'AA' 2.20%
Non-OC Deal OC Deal
'Subs+OC of 0.50%'
9.40%
'AAA' 91.10%
'OC' 0.50%
(fully funded)
'BBB-' 0.95%
'BBB+' 1.20%
'A' 2.75%
'AA' 4.00%
Jumbo A Credit Tranching (example deal)
Alt-A Credit Tranching (example deals)
'Subs' 2.65%
'AAA' 97.35%
‘NR' 0.10%
'B' 0.15%
'BB' 0.25%
'BBB' 0.30%
'A' 0.50%
'AA' 1.35%
'Subs' 2.65%
'AAA' 97.35%
‘NR' 0.10%
'B' 0.15%
'BB' 0.25%
'BBB' 0.30%
'A' 0.50%
'AA' 1.35%
'Subs' 4.90%
'AAA' 95.10%
‘NR' 0.30%
'B' 0.40%
'BB' 0.30%
'BBB' 0.65%
'A' 1.05%
'AA' 2.20%
'Subs' 4.90%
'AAA' 95.10%
‘NR' 0.30%
'B' 0.40%
'BB' 0.30%
'BBB' 0.65%
'A' 1.05%
'AA' 2.20%
Non-OC Deal OC Deal
'Subs+OC of 0.50%'
9.40%
'AAA' 91.10%
'OC' 0.50%
(fully funded)
'BBB-' 0.95%
'BBB+' 1.20%
'A' 2.75%
'AA' 4.00%
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 25
Given the predominant use of senior/subordinate structures in the entire non-Agency
sector, we explain nuances of this structure in greater detail (see Chart 11).
Chart 11 Senior/subordinate structures are most commonly utilized within the non-Agency RMBS sector in 2004
Other
11%Excess
Spread / OC
1%
Senior /
Subordinate
88%
Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS
In the example deal structure illustrated in Chart 12, rating agencies require 2.5% of the
original balance of the mortgage collateral to be carved as subordinates. The remaining
97.5% of classes are assigned a AAA rating. Of the entire 2.5% of subordinates, 1.35%
are AA-rated, 0.45% are A-rated, 0.25% are BBB-rated, 0.20% are BB-rated, 0.15% are
B-rated, and the remaining 0.10% are unrated.
Rating agencies, when arriving at the amount of credit enhancement required at each
credit grade level, do so to try and assign similar default probabilities for a given rating
level between RMBS and corporates. Hence, based on their methodologies and
statistical analysis, a BBB-rated non-Agency RMBS should, in theory, be exposed to a
probability of default similar to other BBB-rated corporates.
Rating-agency-mandated subordination levels on prime jumbo RMBS have declined
over time, most notably since the mid-90s (see Chart 13). This has resulted from a
combination of factors including:
• Development and increased use of credit scoring, which allows for more
accurate evaluation of the credit worthiness of the underlying borrower.
• Tiering of the non-Agency market along credit grades, which currently span
across prime jumbo, various tiers of Alt-A, and on to subprime.
• Risk-based pricing, which in conjunction with the two factors above has enabled
originators to understand the various levels of risk at the individual loan level
and thereby evaluate the rate at which the loan should be originated.
Mortgage Market InsightsIII. Credit Enhancement
26 20 October 2005
• Establishment of consistent and uniform underwriting standards.
• Enhanced property appraisal methodologies.
• Rating agency comfort with historical and expected performance of products.
Chart 12 Example senior/subordinate structure – All prepay cash flows directed to AAA-rated class, losses allocated starting from the lowest rated (unrated) class
'Subs' 2.50%
'AAA' 97.50%
'UR' 0.10%
'B' 0.15%
'BB' 0.20%
'BBB' 0.25%
'A' 0.45%
'AA' 1.35%
Prepayments
Losses
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 27
Chart 13 Subordination levels have steadily declined on prime jumbo RMBS*
-
1
2
3
4
5
6
7
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Issuance Year
% o
f D
ea
l a
t Is
su
e UR
B
BB
BBB
A
AA
Inception of Alt-AInception
of
Subprime Tiering of
Alt-A
Non-Agency Product Development Cycle
*These subordination levels are specific to the Residential Funding Mortgage Securities Inc. (RFMSI) shelf.
Source: Credit Suisse First Boston (US Mortgage Strategy)
Allocation of scheduled and unscheduled principal payments, interest payments, and credit losses Principal and interest cash flows in a senior/subordinate structure are allocated as follows:
• Interest and scheduled principal cash flows are distributed on a pro-rata
basis to the AAA and subordinate classes.
• Unscheduled principal cash flows, i.e., principal prepayments, are initially
directed entirely to the AAA classes. Subordinate classes are subject to a
prepay lockout, whereby they do not receive their pro-rata share of
prepayment cash flows during the first five years. Over the following five
years, a declining percentage of their pro-rata share of prepayment cash
flows is directed to the senior classes, leading to a shifting interest
schedule. The subordinates’ share of prepayment cash flows directed to
the seniors eventually declines to zero over a span of five years.
• Interest cash flows are distributed pro rata to the AAA and subordinate
tranches based on the coupon rate specified within the deal structure.
Credit losses are allocated as follows:
• Losses are first allocated to the lowest rated subordinate class offering
protection to each higher-rated class.
• Should losses generated on the underlying mortgage collateral result in the
writedown of a lower-rated class, for example the unrated class, then
subsequent losses are directed to the writedown of the next higher-rated
class, eventually moving up the subordinate stack in reverse sequential
order of rating.
For a brief description of how credit losses occur on individual mortgage loans, please
see the sidebar alongside titled How Credit Losses Occur.
Mortgage Market InsightsIII. Credit Enhancement
28 20 October 2005
How Credit Losses Occur
Stage (general time period) Servicer Action
Stage 1 Delinquency (15 days) Grace period (No additional fees incurred).
Stage 2 Delinquency (16 days)Late charge (mortgage late fee) assessed by lender and a "friendly
reminder call" may be made to the borrower.
Stage 3 Delinquency (30 days) Borrower is in default.
Stage 4 Delinquency (45 days) Regular calls from mortgage collectors to borrower.
Stage 5 Delinquency (60-90 days)Lender sends borrower notice of default giving borrower a specified
amount of time (remedial period) to make loan status current.
Stage 6 After remedial period Documents sent to local attorney to begin foreclosure proceedings.
Stage 7 Foreclosure Proceedings (Up to 9 Months)
Special Servicer acts to bring loan current, secures and liquidates
property upon reaching REO status. Short payoffs may result in an
accelerated recovery of proceeds.
Stage 8 REO (Up to 120 Days) Lender begins eviction process.
Stage 9 Sale of Property (Up to 120 Days)Broker price opinions based on detailed property inspection,
rehabilitation if necessary, marketing and sale of property.
Shifting Interest Schedule The shifting interest schedule in non-Agency deals calls for a portion of the pro-rata
share of the prepayment cash flows that would have gone to the subordinates, known
as the shift percentage, being directed to the AAA classes. This portion declines based
on a standardized pre-determined schedule. This kicks in during the five years following
the initial lockout period until the stepdown date (see Table 12). This period is referred
to as the stepdown period, terminating once the subordinate classes begin to receive all
due principal payments. The full stepdown schedule is displayed in Table 12.
Table 12 Senior/subordinate shifting interest schedule
Percentage of Subordinate Prepayments Percentage of Subordinate Prepayments
Redirected to AAA Classes Passed Through to Subordinate Classes
Period (Months) "Shift Percentage" "Stepdown Percentage" (1 - Shift Percentage)
Period 0 - 60 100% 0%
Period 61 - 72 70% 30%
Period 73 - 84 60% 40%
Period 85 - 96 40% 60%
Period 97 - 108 20% 80%
Period 108+ 0% 100%
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 29
Credit deleveraging due to prepayments The shifting interest schedule alters the weighted average life profiles of AAA and
subordinate securities as a result of the allocation of prepayment cash flows and lockout
features. We illustrate this through a comparison of the principal cash flows to a AAA-
and BBB-rated class under no prepayment (0% CPR) and prepayment (pricing speed)
scenarios (see Charts 14 and 15). Under the 0% CPR scenario, the unscheduled
principal cash flows are paid pro rata to the AAA and subordinate classes, leading to
similar balance profiles. However, in the event of prepayments, because of the shifting
interest schedule and lockout features, the subordinate classes are locked out (see
Chart 15) from receiving their pro-rata share of prepayment cash flows and only receive
scheduled principal, resulting in their balances amortizing at the same pace as in a 0%
CPR scenario during the first five years.
Chart 14 Accelerated amortization due to pro rata share of subordinate prepayments directed to AAA class
0%
20%
40%
60%
80%
100%
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
% o
f In
itia
l P
rin
cip
al B
ala
nce
AAA-Rated @ 0 CPR
AAA-Rated @ Pricing Speed
Accelerated amortization due to
prepayment redirection from
subordinate classes
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Chart 15 Pro-rata share of subordinate prepayment cash flows directed to AAA class locking out the BBB class
0%
20%
40%
60%
80%
100%
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
% o
f In
itia
l P
rin
cip
al B
ala
nce
BBB-Rated @ 0 CPR
BBB-Rated @ Pricing Speed
Locked out from receiving
principal prepayments for
first 5 years.
Part of principal
redirected to senior
classes.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
This accelerated reduction of the AAA classes relative to the subordinate classes leads to
credit deleveraging, i.e., the amount of credit support for a particular deal increases (see
Chart 16). The faster the realized amount of prepayments, the greater the reduction in the
outstanding balance of the AAA classes relative to the subordinate classes, thereby
resulting in an increase in the amount of credit support to the AAA classes.
Adverse selection, the process by which higher quality borrowers exit a pool at a faster
pace than lower quality borrowers, may negatively affect the performance of subordinate
bonds that remain outstanding in the deal for longer periods of time. As the credit
Mortgage Market InsightsIII. Credit Enhancement
30 20 October 2005
quality of the remaining borrower pool (borrowers that have not fully paid down their
mortgages) weakens with adverse selection, subordinate bonds may be exposed to
greater credit risk due to the shift in the collateral composition.
As a result of these structural features, the subordinate classes of deals structured using
the senior/subordinate, shifting-interest structure display less variability in weighted
average life (WAL) than do AAA classes, which absorb more of the prepayment variability
(see Chart 17).
Chart 16 Credit support increases under fast prepayment scenarios
0
5
10
15
20
25
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
Su
bo
rdin
atio
n to
AA
A C
lass (
%)
AAA Subordination @ 0PSA
AAA Subordination @ 100PSA
AAA Subordination @ Pricing Speed (300PSA)
AAA Subordination @ 500PSA
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Chart 17 Subordinates display less variability in WAL than seniors due to shifting-interest structure
0
5
10
15
20
25
0 50 100 200 300 400 500
Prepayment Scenarios (%PSA)
We
igh
ted
Ave
rag
e L
ive
s (
ye
ars
)
AAA WAL
BBB WAL
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 31
Performance triggers incorporated in deals with shifting interest structure Performance triggers, specifically delinquency and loss triggers, within a shifting interest
structure play an important role in impacting the WAL profile of classes in a prime jumbo deal.
A shifting interest delinquency/loss trigger will fail after the stepdown date (month 60) if:
• the six-month average of 60+-day delinquencies is greater than 50% of the
outstanding subordinate certificate balances, or
• cumulative losses as a percentage of the original subordinate bond balance
are greater than the percentages provided in Table 13 during the
corresponding periods.
Table 13 Cumulative loss trigger for prime jumbo senior/subordinate shifting interest structure
Period Cumulative Loss % of
(months) Original Subordinate Balance
60 - 72 30%
73 - 84 35%
85 - 96 40%
97 - 108 45%
109 - 120 50%
Source: Credit Suisse First Boston (US Mortgage Strategy)
Failing delinquency and loss triggers past the first five years within a deal with shifting
interest structures has the effect of locking out subordinates from principal prepayments
until such triggers pass.
Failing delinquency/loss triggers shorten senior classes while extending subordinates In the event of a delinquency/loss trigger failing beyond the stepdown date, the
subordinate classes’ share of prepayments will be redirected, in full, to the senior classes.
The senior classes will, as a result, exhibit shorter average lives, due to the extension of
the period of accelerated amortization past the stepdown date (Table 14).
Table 14 Senior class WAL decreases under trigger fail scenario while subordinate WAL increases
Scenario AAA WAL BBB WAL
(%PSA) Trigger Pass Trigger Fail Trigger Pass Trigger Fail
0 19.2 19.2 19.2 19.2
50 14.4 14.3 16.4 19.2
100 11.2 11.0 14.4 19.2
200 7.4 7.2 11.8 19.2
300 5.5 5.3 10.3 17.4
400 4.4 4.2 9.3 14.5
500 3.6 3.5 8.6 12.1
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsIII. Credit Enhancement
32 20 October 2005
Under the extreme case of a trigger fail scenario that prevails over the life of a deal, the
difference in the amortized balance between the trigger pass and trigger fail scenarios
reaches up to 1.8% of the AAA-rated class in the example deal, BOAMS 04-11, 2A2 class
(Chart 18).
Chart 18 Senior classes pay down faster under trigger fail scenarios due to redirection of subordinate class prepayments to senior classes
0%
20%
40%
60%
80%
100%
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
Ou
tsta
nd
ing
as %
of
Ori
gin
al B
ala
nce
0.0%
0.5%
1.0%
1.5%
2.0%
Diffe
ren
ce
(T
rig
ge
r P
ass %
- T
rig
ge
r F
ail
%)
2A2 % of Original Balance @ 300PSA / Trigger Pass 2A2 % of Original Balance @ 300PSA / Trigger Fail
Difference
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
The impact of a trigger fail is magnified on the subordinate classes (see Table 14). Under
the extreme case of a constant trigger fail scenario, the difference in the amortized
balance between the trigger fail and trigger pass scenarios reaches up to 57% of the
subordinate class in the example deal, BOAMS 04-11, 2B3 class (Chart 19).
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 33
Chart 19 Subordinate classes pay down significantly slower under trigger fail scenarios due to redirection of subordinate share of prepayments
0%
20%
40%
60%
80%
100%
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-23
Jan-25
Jan-27
Jan-29
Jan-31
Jan-33
Ou
tsta
nd
ing
as %
of
Ori
gin
al B
ala
nce
0%
10%
20%
30%
40%
50%
60%
Diffe
ren
ce
(T
rig
ge
r F
ail
% -
Tri
gg
er
Pa
ss %
)
2B3 % of Original Balance @ 300PSA / Trigger Pass 2B3 % of Original Balance @ 300PSA / Trigger Fail
Difference
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage defaults and losses Mortgage defaults are triggered by either a decline in borrower willingness to pay or
inability to pay. Generally, both conditions are required to result in rising default rates,
which may subsequently be translated into realized losses.
Catalysts that reduce a borrower’s willingness to pay are generally triggered by declines
in home prices, reduction in the value of the asset, and negative equity interest in the
property whereby the amount owed on the outstanding mortgage exceeds the value of
the underlying asset.
Catalysts triggering an inability to pay include a change in the financial status of a household,
often due to a change in the employment status leading to a reduction in income.
The occurrence of defaults doesn’t necessarily imply the realization of losses. The
magnitude of losses depends on the market value of the property at the time of
liquidation and on the transaction costs incurred over the period that a servicer
forecloses on a property up to the eventual disposal of the asset. These costs include
servicer advances, legal fees, repairs to the property, sales commissions, etc. The ratio
of the recovered balance, after these costs are covered, to the outstanding loan balance
is the recovery rate. The ratio of the unrecovered balance to the outstanding loan
balance is the severity rate.
Mortgage Market InsightsIII. Credit Enhancement
34 20 October 2005
Historical performance and adequacy of credit enhancement levels Historical loss rates on prime jumbo RMBS have been extremely low relative to the rating-
agency-mandated, credit enhancement levels (see Table 15). The highest cumulative
loss for any vintage over the last ten years has been 8bp on the 1996 vintage for prime
jumbo 30-year fixed-rate mortgages and 1bp on the 1999 and 2000 vintages for prime
jumbo 15-year fixed-rate mortgages. This compares to the lowest rated subordinate
class, the unrated class, which was generally sized around 10bp in 2004.
Rapid prepayments on these vintages since origination are evidenced through the
currently low factors. Moreover, this has also contributed to low defaults and realized
losses, as borrowers that refinanced and exited the pool would have otherwise
remained in the pool, potentially defaulting at some point in the future.
The default profile of prime jumbo mortgages is characterized by:
• Low levels of default rates and losses during the first few years after
origination, as borrowers are unlikely to default soon after loan origination.
• Peak default rates in year three after origination, whereas losses peak in years
four and five due to the delay between occurrence of default and loss as
servicers process a defaulted loan.
• Losses gradually decline after year five, as borrowers gradually build equity on
account of realized home price appreciation. The longer the borrower owns a
property, the higher the likelihood of experiencing home price gains.
The historical default and loss profile of prime jumbo 30-year RMBS is displayed in
Charts 20, 21 and 22. It is important to note the significant improvement in credit
experience on the more recent vintages which may be attributed, in part, to
improvements in prime jumbo collateral quality, rising home prices as well as the fast
prepayment speeds exhibited on recent vintages.
Table 15 Low historical loss rates on prime jumbo RMBS
Fixed-Rate Jumbo
30-Year 15-Year
Vintage
Original
Balance
($MM)
Current
Balance
($MM)
Current
Factor
Loss (bp
of Original
Balance)
Original
Balance
($MM)
Current
Balance
($MM)
Current
Factor
Loss (bp
of Original
Balance)
1996 13,729 28 0.20% 8
1997 27,284 78 0.29% 4
1998 67,270 412 0.61% 3 10,736 49 0.46% 0
1999 37,988 312 0.82% 5 6,309 70 1.11% 1
2000 28,283 98 0.35% 4 2,215 15 0.68% 1
2001 72,265 1,720 2.38% 2 14,001 247 1.76% 0
2002 58,050 8,930 15.38% 1 24,676 5,028 20.38% 0
2003 56,304 37,048 65.80% 1 30,472 19,973 65.55% 0
2004 25,182 21,873 86.86% 0 3,140 2,718 86.56% 0
2005 3,592 3,543 98.64% 0
Total 391,201 74,045 18.93% 3 98,057 28,108 28.66% 0
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 35
Chart 20 Fixed-rate prime jumbo default experience – 3-month CDRs on fixed-rate 30-year prime jumbo by vintage
0.00
0.05
0.10
0.15
0.20
0.25
0 6 12 18 24 30 36 42
WALA (Months)
3-M
on
th C
DR
(%
)
Market Composite Fixed 30yr Prime
Jumbo 2001 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2002 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2003 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2004 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2005 Vintage
Chart 21 Fixed-rate prime jumbo default experience – Cumulative defaults as a percentage of original balance on fixed-rate 30-year prime jumbo by vintage
0
1
2
3
4
5
6
0 6 12 18 24 30 36 42
WALA (Months)
Cu
mu
lati
ve D
efa
ult
(b
p o
f
Ori
gin
al B
ala
nce)
Market Composite Fixed 30yr Prime
Jumbo 2001 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2002 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2003 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2004 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2005 Vintage
Chart 22 Fixed-rate prime jumbo default experience – Cumulative losses as a percentage of original balance on fixed-rate 30-year prime jumbo by vintage
0.0
0.2
0.4
0.6
0.8
1.0
0 6 12 18 24 30 36 42
WALA (Months)
Cu
mu
lati
ve L
osses (
bp
of
Ori
gin
al B
ala
nce
)
Market Composite Fixed 30yr Prime
Jumbo 2001 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2002 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2003 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2004 Vintage
Market Composite Fixed 30yr Prime
Jumbo 2005 Vintage
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsIII. Credit Enhancement
36 20 October 2005
The constant CDR required to deliver the first dollar of loss to each credit grade of
subordinate classes, presented in Table 16, illustrates the adequacy of credit
enhancement levels (see Table 17 for illustrative current subordination levels). These
constant lifetime CDR rates are multiples of peak short-term CDR observations
presented in Chart 20.
Table 16 Constant CDR required to deliver first dollar of loss
Lifetime CDR to First Loss*
Pricing Date Pricing Speed AAA AA A BBB BB B
RFMSI 2004-S9 12/23/04 300PSA 2.79 0.80 0.49 0.31 0.19 0.06
WFMBS 2004-6 5/24/04 300PSA 2.54 0.94 0.57 0.35 0.18 0.07
CSFB 2004-8 Group 8 11/23/04 275PSA 3.10 0.87 0.52 0.32 0.20 0.09
* Intex run using following assumptions - 25% Loss Severity / 100% Servicer Advances / 12-Month Recovery Lag.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
A yield/default sensitivity analysis across the investment and sub-investment grade
classes also highlights the adequacy of credit enhancement levels (see Table 18). A
decline in yield levels for a given subordinate class identifies the level of defaults at which
a subordinate class begins to suffer writedowns arising from defaults and losses. Yield
erosion occurs between 0 and 0.125% CDR for the unrated class, between 0.25 and
0.375% CDR for the BBB class, and between 0.875 and 1% CDR for the A-rated class.
Table 17 Illustrative credit enhancement levels
Subordination to
Pricing Date AAA AA A BBB BB B
RFMSI 2004-S9 12/23/04 2.50 1.30 0.80 0.50 0.30 0.10
WFMBS 2004-6 5/24/04 2.65 1.30 0.80 0.50 0.25 0.10
CSFB 2004-8 Group 8 11/23/04 3.25 1.50 0.90 0.55 0.35 0.15
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsIII. Credit Enhancement
20 October 2005 37
Table 18 Default-adjusted yields under various default scenarios
% CDR (Using 25% Loss Severity)
Deal Tranche Rating 0 0.125 0.25 0.375 0.5 0.625 0.75 0.875 1 1.5
WFMBS 04-6 A8 AAA 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
A12 AAA 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
B1 AA 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.3% 1.4%
B2 A 5.8% 5.8% 5.8% 5.8% 5.8% 4.9% 1.0% -4.7% -15.8% -45.2%
B3 BBB 6.3% 6.3% 6.3% 5.7% -1.3% -17.1% -30.1% -40.9% -50.1% -77.2%
B4 BB 7.2% 7.2% 3.1% -16.1% -37.0% -52.5% -64.8% -74.9% -83.2% -106.3%
B5 B 11.2% 5.5% -33.4% -60.1% -78.0% -91.0% -100.7% -108.3% -114.3% -129.6%
B6 UR 21.1% -42.2% -82.3% -101.5% -112.2% -119.0% -123.6% -126.9% -129.5% -135.4%
* Intex run at 275PSA for AAAs and 300PSA for subordinates as of 08/11/05 close using following assumptions - 25% Loss Severity /
100% Servicer Advances / 12-Month Recovery Lag.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Credit rating transitions favor non-Agency RMBS over corporate bonds Rating transitions in 2004 within non-Agency RMBS (prime jumbo and Alt-A) highlights
the stronger bias for rating stability and upgrades as compared to the corporate sector.
Almost all non-Agency RMBS products maintained stable or attained higher ratings over
2004, whereas corporate issues experienced downgrades ranging from 1.5% up to
6.7% of the deals within individual credit ratings (see Tables 19 and 20). The rating
transitions presented for RMBS are conservative because they include Alt-A product
and are not based solely on the experience of the prime jumbo segment.
Table 19 RMBS annual rating transition matrix (2004)
To
From Aaa Aa A Baa Ba B
Caa or
below
Stable Rating /
Upgrade
Aaa 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00%
Aa 15.20% 84.80% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00%
A 2.83% 12.88% 84.13% 0.16% 0.00% 0.00% 0.00% 99.84%
Baa 0.33% 2.93% 11.87% 84.55% 0.33% 0.00% 0.00% 99.68%
Ba 0.00% 0.69% 4.84% 9.34% 84.78% 0.00% 0.35% 99.65%
B 0.00% 0.00% 0.52% 0.52% 14.51% 84.46% 0.00% 100.00%
Caa or below 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 100.00%
Source: Credit Suisse First Boston (US Mortgage Strategy), Moody’s Investors Service
Table 20 Corporate annual rating transition matrix* (2004)
To
1-year Aaa Aa A Baa Ba B
Caa or
below
Stable Rating /
Upgrade
Aaa 98.46% 1.54% 0.00% 0.00% 0.00% 0.00% 0.00% 98.46%
Aa 0.44% 96.99% 2.42% 0.15% 0.00% 0.00% 0.00% 97.43%
A 0.08% 3.16% 93.50% 3.27% 0.00% 0.00% 0.00% 96.73%
Baa 0.00% 0.09% 6.99% 89.57% 3.19% 0.17% 0.00% 96.64%
Ba 0.00% 0.00% 0.19% 14.03% 81.24% 4.35% 0.19% 95.46%
B 0.00% 0.14% 0.13% 0.27% 10.79% 81.95% 6.73% 93.27%
Caa or below 0.00% 0.00% 0.00% 0.00% 0.55% 13.12% 86.33% 100.00%
*Adjusted by excluding withdrawn rating and default transitions.
Source: Credit Suisse First Boston (US Mortgage Strategy), Moody’s Investors Service
Mortgage Market InsightsIV. Nuances of Non-Agency RMBS
38 20 October 2005
IV. Nuances of Non-Agency RMBS
Certain nuances of non-Agency RMBS are unique to the sector. We discuss these below.
Discount/Premium loans in non-Agency deals and creation of WAC IOs and WAC POs The dispersion of mortgage rates on loans within a given securitized pool relative to the
fixed-rate security issued with a specified coupon results in non-Agency RMBS loans
being split into two buckets: discount and premium. For example, due to this dispersion,
the underlying group of mortgage loans could have loans bearing either a higher or lower
rate relative to the desired pass-through coupon rate of 5.5% on a security (see Table 21).
In order to create a security bearing a 5.5% pass-through rate, a portion of the coupon
needs to be stripped off the loans bearing a premium rate relative to this pass-through
rate. The collective interest-only strip created is referred to as the WAC (weighted
average coupon) IO. On the flip side, for those loans bearing a discount rate relative to
this pass-through rate, the coupon needs to be grossed up by stripping off a portion of
the principal balance necessary to achieve the target coupon rate. The portion of these
non-interest-bearing, principal-only cash flows is referred to as the WAC (weighted
average coupon) PO. There is an active secondary market in both WAC IO and PO
issues which are generally priced to Agency Trust IO and PO issues.
Table 21 Premium/discount loans in non-Agency deals
Pass-Through
Loan WAC IO/PO Security
Premium Loan 5.75% Rate WAC IO of 25bp 5.5% Security
Discount Loan 5.25% Rate WAC PO of 4.54% of principal balance 5.5% Security
(1 - 5.25%/5.50%)*
* WAC PO percent of principal amount is calculated as 1 – (loan rate / target coupon).
Source: Credit Suisse First Boston (US Mortgage Strategy)
Optional Redemptions All non-Agency deals are subject to a call feature (referred to as an optional
redemption/termination) held by an entity, often the issuer or servicer on the deal, which
can exercise a call on the deal. Investors in the deal are effectively short this call option.
The primary criteria to exercise the call requires that the collateral factor, defined as the
ratio of the current balance to the original balance, be lower than a threshold amount (in
most cases, 10%, but for some issuers this may be set at 5%). Once the current
reported factor drops below this threshold, the holder of the option can exercise the call.
The exercise price of the call is often set to par. Hence, the call option is likely to be
exercised only if the collateral market value is sufficiently above par to provide an
economic return, after transaction costs, to the holder. Given an exercise price of par,
the coupon rate and default performance of the underlying pool of mortgages are the
main drivers, whereby higher coupon rates and lower default rates increase the
attractiveness, and thereby the probability, of exercising the call option.
Mortgage Market InsightsIV. Nuances of Non-Agency RMBS
20 October 2005 39
Exposure to this call feature varies across a deal structure. Last cash flow securities are
more exposed to the call feature as these classes become current paying, i.e., receiving
principal, around the same time the collateral factor drops below the threshold amount,
making the call feature on the deal eligible for exercise. In contrast, shorter, front-end
cash flows are less exposed to this call feature as they are likely to have paid off well
before a deal is eligible to be called.
The issuer, servicer, or residual holder may hold the call rights. Financial Accounting
Standards (FAS) 140 has limited the ability of the issuer to hold the call rights. In some
cases, the servicer may own the call rights, but the economic benefits are directed to the
residual holder. We guide readers to our Mortgage Market Insights publication, Optional
Redemptions: Soon to be Exercised on Your Portfolio, March 14, 2003 for further details
on the structure, differences among issuers and efficiency of exercise of this call feature.
Compensating Interest Investors in non-Agency RMBS may be exposed to interest shortfalls. This is not the
case for holders of Agency RMBS, wherein investors are guaranteed a full calendar
month’s (30/360) worth of interest dollars.
Interest shortfalls arise from borrower prepayment in full. In this case, the borrower
pays interest only for the period from the due date to the date of the prepayment. But,
interest on the security is due for the full month (30 days).
The extent of the interest shortfall can be either 15 or 30 days depending on the
definition of the prepayment period. A mid-month prepayment period (only prepayments
occurring during the latter 15 days of the month are passed through to investors on the
following month's distribution date) reduces the maximum value of interest shortfall.
Prepayment period definitions vary from issuer to issuer.
Investors in non-Agency RMBS are protected from prepayment shortfalls, to some
degree, by compensating interest features. Compensating interest policies vary from
issuer to issuer and the amount of protection is typically limited to a certain predefined
amount. These limits can vary from a specified amount of 12.5 or 25bp to a certain
amount of the servicing fee (SF) or master servicing fee (MSF) plus ancillary income
(see Table 22).
As such, investors generally favor securities with higher amounts of compensating
interest, especially in periods of heavy refinancing activity, and securities with mid-
month prepayment periods. We guide readers to our Mortgage Market Insights
publication, (Un)Compensated Interest: Revisiting Interest Shortfall Issues in Non-
Agency MBS, 14 July, 2003.
Mortgage Market InsightsIV. Nuances of Non-Agency RMBS
40 20 October 2005
Table 22 Compensating interest policies vary across issuers
Issuer
Bloomberg
Shelf Name 2005 2004 2003 2002 2001 2000 1999
Residential Funding
Corp RFMSI 12.5 12.5 12.5 12.5 12.5 12.5 12.5
Chase Mortgage Finance
Corp CHASE 12.5 12.5 12.5 12.5 12.5 12.5 12.5
Countrywide CWHL 12.5 12.5 12.5 12.5 12.5 12.5 12.5
Citicorp Mortgage CMSI 12.5 12.5 12.5 12.5 12.5 12.5 12.5
Bank of America
Mortgage Securities BOAMS 25 25 25 25 25 25 25
MASTR Asset
Securitization Trust MASTR SF* SF* SF* SF* SF* SF* SF*
Washington Mutual WAMU ** ** ** ** ** ** **
CSFB Mortgage
Securities Corp CSFB *** *** *** *** *** *** ***
Wells Fargo Mortgage
Backed Securities Trust WFMBS 20**** 20**** 20**** 20**** 20**** 20**** 20****
SF = Servicing Fee
* On loans serviced by WAMU, compensating interest is equal to the sum of the master servicing fee plus reinvestment income from
prepayments in full on the 15th day of the preceding distribution month through the 14th day of the month of distribution plus interest
payments received from full prepayments during the period from the 1st day through the 14th day of the month of distribution.
** For loans serviced by Washington Mutual Mortgage Securities Corp see WAMU under MASTR shelf, 25bp for loans serviced by
Washington Mutual Bank, FA. In late 2004, WAMU changed the terms of coverage to cap it at the lesser of master servicing
compensation and 12.5bp.
*** For deals issued from 2001-2003, the three major servicers and their respective compensating interest limits are Chase Manhattan
Mortgage Corp (25bp), Fairbanks Capital (25bp), and Washington Mutual Mortgage Securities Corp (4bp plus reinvestment income from
prepayments in full from the 15th day of the preceding distribution month through the 14th day of the month of distribution plus interest
payments received from full prepayments during the period from the 1st day through the 14th day of the month of distribution). Prior to
2001, the policy varies by issuer and servicer. For more recent CSFB deals, the two major servicers are Select Portfolio Servicing and
Wells Fargo Bank with the majority of coverage on deals of up to 25bp.
**** The lesser of 20bp or the available Master Servicing compensation as defined in the prospectus.
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
20 October 2005 41
V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
Rate premium and refinancing incentive defined The “mortgage rate” referred to most commonly in the United States is the rate on a 30-
year fixed-rate conforming balance loan. However, there are many products in the US
RMBS sector that have different benchmark rates. For example, in Chart 23, the 30-
year fixed-rate on a conforming balance loan is 5.60%. However, the rate on a 30-year
fixed rate non-conforming, prime mortgage is 25 basis points higher at 5.85%. This rate
differential is the result of pricing and liquidity differences between the two sectors. This
differential has averaged 25 basis points; however, it has gapped out either during short
periods characterized by liquidity-challenged markets, as in 1998 and late 2000 (see
Chart 24), or periods of substantial refinancing activity, as at the peak of the 2003
refinancing episode.
Chart 23 Rate premium and refinancing incentive defined
Jumbo Alt-A Rate 6.15%
Conforming Alt-A Rate 5.95%
Jumbo 30-year Rate 5.85%
Conforming 30-year Rate 5.60%
Rate premium = 35bp
Rate premium = 30bp
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
42 20 October 2005
Chart 24 30-year jumbo rate versus 30-year conforming rate
5
6
7
8
9
10
1/7/94
1/7/95
1/7/96
1/7/97
1/7/98
1/7/99
1/7/00
1/7/01
1/7/02
1/7/03
1/7/04
1/7/05
30
-Ye
ar
HS
H J
um
bo
an
d C
on
form
ing
Ra
tes
(%
)
-
10
20
30
40
50
60
Dif
fere
nc
e (
bp
)
30-Year Jumbo Rate 30-Year Conforming Rate
Difference (Jumbo - Conforming) Average Difference = 25bp
Source: Credit Suisse First Boston (US Mortgage Strategy), HSH
Gross mortgage rates on the underlying loans backing non-Agency RMBS AAA pass-
throughs bearing a given net coupon rate at the security level are generally lower than
Agency pass-throughs bearing the same net coupon rate. For instance, a 5.5% non-
Agency RMBS AAA pass-through could be created from a pool of mortgages with a
gross mortgage rate of 5.85%. However, the gross mortgage rate on a 5.5% Agency
pass-through is likely to be closer to 5.95% or higher, for the most part due to the
previously mentioned Agency g-fee.
Alt-A loans carry higher rates than prime jumbo mortgages to compensate for their
underlying layers of risk characteristics. This differential is referred to as the rate
premium; the more the layers of risk and the greater the severity of these, the higher the
rate premium, and vice versa. Similar to the rate differential that exists between prime
jumbo balance loans and Agency-eligible prime conforming balance loans, there is also
a similar rate differential between jumbo- and conforming-balance Alt-A loans.
As a result of the range of gross mortgage rates that can prevail on a 30-year fixed-rate
loan, the refinancing incentive, i.e., the magnitude of savings a borrower can extract from
refinancing out of a current loan into a new loan, can vary across products. Clearly, the
refinancing incentive should be measured relative to the current rate offered on a similar
product, not necessarily against the conforming 30-year fixed mortgage rate.
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
20 October 2005 43
Prepayment profiles in the non-Agency sector follow placement along the credit continuum
The historical prepayment profiles of various fixed-rate RMBS, Agency and non-Agency
prime jumbo and Alt-A, can be placed on a convexity continuum which mirrors the credit
continuum introduced earlier. In general, prepayment sensitivity of borrowers is strongly
correlated to creditworthiness, with greater sensitivity to refinancing evident on
mortgage pools backed by more creditworthy borrowers and vice versa. This is
illustrated in Chart 25, in which we present the historical prepayment experience on
2002 vintage 30-year fixed-rate Agency (FNMA), prime jumbo, conforming-balance Alt-
A, and non-conforming balance Alt-A products.
Chart 25 Aggregate prepayments – Agency versus non-Agency fixed-rate – 2002 vintage
0
20
40
60
80
100
200201
200204
200207
200210
200301
200304
200307
200310
200401
200404
200407
200410
200501
Month
3 M
on
th C
PR
Conforming Alt-A
30-year Fixed
Non-Conforming
Alt-A 30-year Fixed
Jumbo 30-year
Fixed
FNMA 30-year
Fixed
0
20
40
60
80
100
200201
200204
200207
200210
200301
200304
200307
200310
200401
200404
200407
200410
200501
Month
3 M
on
th C
PR
Conforming Alt-A
30-year Fixed
Non-Conforming
Alt-A 30-year Fixed
Jumbo 30-year
Fixed
FNMA 30-year
Fixed
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
In response to the historically low rates in 2003, record high prepayment speeds were
observed on prime jumbos followed next by non-conforming balance Alt-As, Agency,
and, finally, conforming-balance Alt-As. The general pattern, in terms of the initial
acceleration and subsequent slowdown, in response to the backup in mortgage rates,
are almost identical across these products and notably, between prime jumbo and
Agency RMBS, except for differences in the level of sensitivity displayed.
The prepayment sensitivity of non-conforming balance Alt-A 30-year fixed-rate RMBS is
notably less than on prime jumbos, but more comparable to Agency RMBS, highlighting
the impact of weaker collateral characteristics on subdued prepayment (and expected
weaker credit) performance. Similarly, conforming balance Alt-As display more stable
profiles relative to conforming balance Agency RMBS.
Loan-level disclosure, a standard in the non-Agency RMBS sector, facilitates
transparency in linking empirical performance to specific collateral attributes. To
illustrate the impact of specific characteristics on prepayments, we profile the prepayment
sensitivity for a select group of non-Agency and Agency RMBS from the 2002 vintage
restricted to the 6.5%-7% mortgage (WAC) rate, controlling for loan size and credit (FICO)
score. These profiles are presented in Charts 26 and 27. In each case, we observe the
relationship between exhibited prepayments and the featured characteristic. This helps to
further illustrate the value in loan level transparency of non-Agency RMBS essentially
enabling investors to make better, informed decisions with knowledge of the collateral
characteristics on a given non-Agency RMBS pool.
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
44 20 October 2005
Chart 26 Loan size is a differentiator of prepayments Prime jumbo 30-year, by average loan size, versus FNMA 30-year prepayments 2002 vintage, Prime jumbo 30-year: 6.5%<=WAC<7.0%
0
20
40
60
80
100
200201
200205
200209
200301
200305
200309
200401
200405
200409
200501
Month
3 M
on
th C
PR
ALS $100-200 K
ALS $200-300K
ALS $300-400K
ALS >=$600K
FNMA 30 Yr
Fxd;6.0<=Net Cpn
<6.5;ALS:$165K
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
The greater prepayment sensitivity of higher-balance loans is a consequence of the
greater dollar savings of refinancing on higher- relative to lower-balance loans. This is
illustrated in Table 23, which highlights the higher dollar savings on a higher balance
loan for the same magnitude of refinancing incentive.
Table 23 Loan balance is a key driver of prepayment speeds
Monthly Payment for Given Mortgage Rate
Loan Size 7% 6% 5% 4%
30-Year Jumbo $472K $3,140 $2,830 $2,534 $2,253
Savings Vs
7% Pmt$310 $606 $887
30-Year Agency $161K $1,071 $965 $864 $769
Savings Vs
7% Pmt$106 $207 $303
Jumbo Vs Agency Savings $204 $400 $584
Source: Credit Suisse First Boston (US Mortgage Strategy)
Stronger prepayment response is also correlated to credit (FICO) scores, with more
creditworthy borrowers usually having access to more credit and more easily qualifying
for larger loans.
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
20 October 2005 45
Chart 27 Credit scores are a differentiator of prepayments Prime jumbo 30yr, by FICO, versus FNMA 30yr prepayments 2002 vintage, Prime jumbo 30yr: 6.5%<=WAC<7.0%
0
20
40
60
80
100
200204
200207
200210
200301
200304
200307
200310
200401
200404
200407
200410
200501
Month
1 M
on
th C
PR
660-679
700-719
720-779
FNMA 30 Yr
Fxd;6.0<=Net Cpn
<6.5;FICO: 718
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance
Additional factors affecting prepayments of mortgages backing non-Agency RMBS are
common to those backing Agency RMBS. We summarize these factors below, offer
definitions of each, and examine the potential effect of this on non-Agency versus
Agency RMBS. Broadly, aggregate prepayments are the function of housing turnover
and refinancing-driven factors.
Contributions to aggregate prepayments from housing turnover are impacted by aging,
seasonality, and home price appreciation. Contributions to aggregate prepayments
from refinancings are influenced by the aging effects of a loan, refinancing incentive
(already discussed), curve shape, the media effect, and the cash-out or equity takeout
effect. We define these below.
Aging Effects Loan age affects both housing turnover and refinancings. Contributions to housing
turnover increase as a loan seasons, and potential contributions from refinancing also
increase as a loan seasons. This arises as borrowers backing a newly acquired
property are unlikely to move soon thereafter; however, as time passes there is greater
propensity for them to move and trade-up. Similarly, refinancing sensitivity increases as
a loan seasons, as borrowers are more willing to incur transaction costs associated with
a refinancing transaction as time passes but not too close in proximity to the high costs
incurred upon initial purchase of a new property. Higher-balance loans backing prime
jumbo pools have displayed shorter refinancing aging ramps due to the higher savings
associated for the same rate incentive.
Seasonality The school year cycle largely dictates the “busy” season for home purchases and sales
in the United States. Seasonality of prepayments is observed through faster speeds
during the spring and summer and slower speeds during the autumn and winter months.
Mortgage Market InsightsV. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS
46 20 October 2005
Home Price Appreciation Higher home price appreciation is correlated with higher contributions to housing
turnover and refinancings. Rising value of a home creates an incentive for borrowers to
extract gains and cash-out (defined below) or trade up into a larger home. In contrast,
falling home prices create a disincentive for borrowers as their equity declines and,
depending on the extent of a decline, they could find themselves in a negative equity
position, essentially owing more on the outstanding mortgage than the value of the
underlying property. Varying levels of home price appreciation for different price tiers
distinctly impact turnover rates and their contribution to total prepayment speeds for
Agency and non-Agency RMBS.
Additionally, turnover rates have been rising since 1997 due to the change in US tax laws,
allowing married couples filing a joint return to extract capital gains, tax-free, on a primary
residence up to a $500K limit as long as they have lived in the property for two years.
Curve Shape and Mortgage Product Innovation The popularity of mortgage products that are today staggered across the entire range of
the yield curve, ranging from adjustable-rate mortgages that are priced off the very short
end of the yield curve to hybrids that range from having 3-, 5-, 7-, and 10-year fixed
terms through to 15- and 30-year fixed rate mortgages, has imparted a strong curve
effect to prepayments of both Agency and non-Agency RMBS. This is evidenced
through a strong incentive to roll down the curve in steep yield curve environments,
choosing ARMs and hybrids, and to extend out to the long end of the curve in flat yield
curve environments, favoring the relative certainty of longer term fixed financing.
Based on the refinancing incentive offered by these alternative products, the extent of
this rolldown effect could vary between Agency and non-Agency RMBS due to varying
levels of savings offered.
Media Effect New lows in rates induce a strong refinancing response among borrowers. This is
magnified by media focus, thereby causing what is termed a “media effect.” The
magnitude of the media effect depends on the recency of a certain attractiveness level
of interest rates, and is a function of the time since a similar rate attractiveness level
was last observed. Hence, a 6% mortgage rate may in and of itself not be a historical
low, but could trigger sufficient refinancing volumes if that rate has not been
experienced for three years, for example. The magnitude of the media effect varies
between Agency and non-Agency RMBS, especially due to the greater focus by brokers
and originators on large balance loans because of the higher fee earning potential.
Cash-out or Equity Takeout Effect Appreciating home values result in embedded equity in the underlying property, offering
borrowers a chance to tap into this positive equity and apply for a cash-out or equity
takeout loan. Taking cash out in this manner results in a prepay in full of an existing
loan as a new loan is originated. This results in a higher contribution to refinancing
speeds. The greater the amount of home price appreciation, the greater the potential
volume of cash-out refinancings.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 47
VI. Common AAA Structures within Securitized
Prime Jumbo Deals
AAA-rated cash flows in the prime jumbo segment of the non-Agency RMBS sector are
offered either as pass-throughs or as collateralized mortgage obligations (CMOs).
Structuring technology used to create these CMOs is similar to that utilized in the creation
of Agency CMOs. Through a CMO structure, investors can obtain tailored mortgage cash
flows to more effectively target their asset/liability management criteria and purchase
securities with a variety of risk/return profiles across the maturity spectrum
In addition to pass-throughs, common non-Agency CMO structures include sequentials,
planned amortization classes (PACs), support/companion bonds, non-accelerated
seniors (NAS), Z-bonds, and floating-rate securities. With the exception of NAS bonds,
the aforementioned structures are also common within the Agency CMO sector.
Non-Agency deals are typically created by tranching the AAA portion of cash flows into
a variety of structures as illustrated in Table 24 and Chart 28 for an illustrative CSFB
deal, CSFB 2004-8. We discuss and profile notable features of each of these commonly
found structures below.
Table 24 Non-Agency deals are often tranched into a variety of structures – Examples from the CSFB 2004-8 deal
Class Bond Type
Principal Window at
Pricing Speed
WAL Pricing Speed
(years)*
1A1 Last Cash Flow 05/2013 to 09/2034 12.97
1A2 Front Sequential 12/2004 to 05/2013 3.57
1A3 Intermediate Sequential 05/2013 to 11/2015 9.61
1A4 NAS 12/2009 to 09/2034 11.39
1A5 Intermediate Sequential 11/2015 to 01/2018 12.00
1A6 Last Cash Flow 01/2018 to 09/2034 17.29
1A7 Mezzanine NAS 12/2009 to 09/2034 11.39
1A8 Front Sequential Floater 12/2004 to 05/2013 3.57
6A1 15-Year Pass-Through 12/2004 to 06/2019 4.35
8A5 Z-Bond (Accrual Bond) 08/2013 to 10/2014 9.31
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
48 20 October 2005
Chart 28 Prime jumbo deals are tranched into a variety of structures – CSFB 2004-8 Group 1
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
12
/25
/04
12
/25
/06
12
/25
/08
12
/25
/10
12
/25
/12
12
/25
/14
12
/25
/16
12
/25
/18
12
/25
/20
12
/25
/22
12
/25
/24
12
/25
/26
12
/25
/28
12
/25
/30
12
/25
/32
Tra
nch
e P
rin
cip
al P
aym
en
ts (
$)
1A1
1A2
1A3
1A4
1A5
1A6
1A7
1A8
1A2 - Front Sequential
1A8 - Front Sequential Floater
1A4 - Non-Accelerated Senior (NAS)
1A3 - Intermediate Sequential
1A5 - Intermediate Sequential
1A6 - Last Cash Flow 1A1 - Last Cash Flow
1A7 - Mezzanine NAS
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Pass-Throughs (Example: CSFB 2005-5 7A1) Pass-throughs are the simplest structure within prime jumbo securitizations. Features
include:
• A single AAA-rated security receiving all due principal and interest payments, akin
to Agency pass-throughs.
• As discussed in the section on credit enhancement, the AAA credit rating of the
jumbo pass-through is achieved through a senior/subordinate structure, with the
subordinate classes providing protection to the senior classes from credit losses.
This compares to Agency pass-throughs that are guaranteed against realized credit
losses by the issuing Agency.
Chart 29 illustrates anticipated principal and interest distributions to the holder of a pass-
through security, CSFB 2005-5 7A1, at the deal pricing speed of 300% PSA. Table 25
summarizes the weighted average life (WAL) profile of this security across a variety of
prepayment scenarios.
Chart 29 Pass-through principal and interest distributions (CSFB 2005-5 7A1)*
0
400
800
1,200
1,600
2,000
Jun-05
Jun-07
Jun-09
Jun-11
Jun-13
Jun-15
Jun-17
Jun-19
Jun-21
Jun-23
Jun-25
Jun-27
Jun-29
Jun-31
Jun-33
Pri
nc
ipa
l a
nd
In
tere
st
Ca
sh
flo
ws
at
Pri
cin
g S
pe
ed
($
K)
Interest
Principal
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 49
Table 25 Pass-through payment window and WAL profile as of deal pricing – CSFB 2005-5 7A1*
Prepayment Speed
(% PSA)
100% PSA 06/2005 to 11/2033 341 10.40
200% PSA 06/2005 to 11/2033 341 6.65
300% PSA (Pricing) 06/2005 to 11/2033 341 4.68
400% PSA 06/2005 to 11/2033 341 3.53
500% PSA 06/2005 to 11/2033 341 2.79
1000% PSA 06/2005 to 08/2009 50 1.27
Principal Window*Weighted Average
Life (Years)
Principal Window
Length (months)
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Chart 30 illustrates the yield and weighted average life profile of a representative 30-
year AAA-rated non-Agency pass-through bond across varying prepayment scenarios.
Chart 30 Pass-through yield and WAL sensitivity, by prepayment speed scenario*
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
50 20 October 2005
Sequentials (Example: FHASI 2004-7 1A1, 1A2, 1A3) Sequentials are created through a fairly simple structuring process. This entails time
tranching of the AAA cash flows such that all prepayments in addition to scheduled
principal cash flows are directed in sequential order to a series of sequential tranches,
typically comprised of three tranches, a front, intermediate, and last cash flow
sequential. The tranche with the shortest weighted average life is the front sequential
(typically 3 years in most non-Agency deals), while the last cash flow tranche has the
longest WAL (typically 15 years), at deal pricing speeds. All of the sequential tranches
receive their pro-rata share of interest payments, while principal cash flows are directed
in sequential order. Chart 31 illustrates the principal cash flows of an example of a
three-tranche sequential structure.
Chart 31 Example fixed-rate non-Agency sequential structure (FHASI 2004-7 Group 1)*
0
500
1,000
1,500
2,000
2,500
3,000
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Dec-16
Dec-18
Dec-20
Dec-22
Dec-24
Dec-26
Dec-28
Dec-30
Dec-32
Pri
ncip
al
Cash
flo
ws
at
Pri
cin
g S
peed
($K
)
1A4
1A3
1A2
1A1
Aggregate
1A1: Front Sequential
1A2: Intermediate Sequential
1A3: Last Cash Flow Sequential
1A4: Non-Accelerated Senior (NAS)
Group 1 Tranches have a 5.5%
Coupon - Aggregate cashflows
equivalent to those of a 5.5%
Pass-through
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
The principal window and WAL profiles for a three-tranche sequential structure are
summarized in Table 26.
Table 26 Principal window and WAL profiles across FHASI 2004-7 Group 1 Sequentials
Front - FHASI 04-7 1A1 Intermediate - FHASI 04-7 1A2 Last Cash Flow - FHASI 04-7 1A3
Prepayment Speed Principal Principal Principal
(%PSA) Window* WAL (Years)* Window* WAL (Years)* Window* WAL (Years)*
100% PSA 12/04 to 04/22 7.4 04/22 to 05/28 20.3 05/28 to 10/34 26.5
200% PSA 12/04 to 02/15 4.5 02/15 to 08/20 12.6 08/20 to 10/34 20.3
300% PSA (Pricing) 12/04 to 09/11 3.3 09/11 to 04/15 8.3 04/15 to 10/34 14.5
400% PSA 12/04 to 02/10 2.7 02/10 to 01/12 6.1 01/12 to 10/34 9.9
500% PSA 12/04 to 03/09 2.3 03/09 to 07/10 4.9 07/10 to 10/13 6.6
1000% PSA 12/04 to 06/07 1.5 06/07 to 12/07 2.8 12/07 to 06/08 3.3
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 51
Notable features and characteristics of sequential classes are summarized as follows:
(i) Front Sequential (Example: FHASI 2004-7 1A1)
These securities have the shortest weighted average life, typically three years,
since all prepayment and scheduled principal payments are first directed to this
class. Short, front sequentials hold appeal for short-duration portfolio mandates,
including those of banks, given the short duration of their liabilities. Front
sequential CMOs will always pay off more rapidly in comparison to pass-throughs,
due to the direction of all principal cash flows from the underlying collateral first to
this class while it remains outstanding (Table 26).
Short sequentials typically trade on a nominal spread basis to the interpolated
Treasury curve. Chart 32 illustrates the yield and weighted average life profile of
a representative front sequential security across varying prepayment scenarios.
Chart 32 Front sequential yield and WAL sensitivity, by prepayment speed scenario
Prepay
Scenarios (%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios (%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
(ii) Intermediate Sequential (Example: FHASI 2004-7 1A2)
These securities are locked out from all principal payments – scheduled principal
payments and prepayments – until the front sequential is paid off. However, as
with all sequentials, the security is entitled to receive a pro-rata share of interest
cash flow generated. Intermediate sequentials typically have a WAL of 5-7 years
and cash flows are characterized by a tight principal payment window of about 2-3
years (Table 26). These securities hold appeal among money managers, who
buy them as alternatives to pass-throughs, as well as banks seeking to enhance
yield and/or extend duration without compromising on structural stability.
Intermediate sequentials typically trade on a nominal spread basis to the
interpolated Treasury curve. Chart 33 illustrates the yield and weighted average
life profile of the representative intermediate sequential security across varying
prepayment scenarios.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
52 20 October 2005
Chart 33 Intermediate sequential yield and WAL sensitivity, by prepayment speed scenario
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
(iii) Last Cash Flow (Example: FHASI 2004-7 1A3)
The last cash flow (LCF) sequential receives principal payments after the front
and intermediate sequential tranches are entirely paid off. As with intermediate
sequentials, LCF sequentials receive interest during the principal lockout period.
LCF sequentials typically have a WAL of 15 years and cash flows are
characterized by wide principal payment windows (Table 26). Given their longer
durations and higher yields, LCF sequentials are often added to insurance and
pension portfolios. Long WALs on these securities result in these being priced off
the long end of the yield curve, thereby offering attractive yields especially in a
steep yield curve environment.
Last cash flow securities typically trade on a nominal spread basis to the
interpolated Treasury curve, similar to their shorter WAL counterparts. Chart 34
illustrates the yield and weighted average life profile of the representative last
cash flow sequential bond across varying prepayment scenarios.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 53
Chart 34 Last cash flow sequential yield and WAL sensitivity, by prepayment speed scenario
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
54 20 October 2005
Planned Amortization Class (PAC) (Example: CSFB 2005-5 2A8) PACs are a common form of CMO structure characterized by relatively stable cash
flows as evidenced through predictable WALs in comparison to a sequential CMO. A
PAC band, typically between 100-250% PSA, is the range of speeds, as of original deal
pricing, wherein the PAC class exhibits stable WAL and payment windows. This WAL
and prepayment certainty is achieved by creating a support (or companion) tranche that
absorbs the prepayment volatility of the collateral’s cash flows. Hence, PACs are a
vehicle to add convexity to a portfolio and as such, trade at tighter spreads in
comparison to sequentials. Similar to sequentials, PACs can be short, intermediate,
and long WAL bonds.
Chart 35 illustrates a hypothetical PAC security created using a 5.50% coupon pass-
through, with a band of 100%-250% PSA. The shaded area represents the overlap of
the collateral’s principal cash flows over the range of speeds between and including
100% and 250% PSA, setting the boundaries of the PAC band. The range of the PAC
band determines the size of the PAC class. The wider the band, the lower the overlap
of collateral cash flows, thereby the smaller the size of the PAC, and vice versa.
Chart 35 PAC Cash flows off 30-year 5.5% coupon pass-through (PAC bands: 100%-250% PSA)
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
11325
37
49
6173
85
97109121133145157169181193205217229241253265277289301313325337349
Period (months)
Pri
ncip
al C
ash
flo
ws a
t P
ricin
g S
pe
ed
(% o
f O
rig
inal
Pri
ncip
al B
ala
nce) PAC
100% PSA
250% PSA
Collateral principal cash
flows at upper bound of
PAC band
Collateral principal cash
flows at lower bound of
PAC band
PAC cash flows are
equivalent to overlap of
PAC band cash flows
(minimum principal cash
flow available)
Source: Credit Suisse First Boston (US Mortgage Strategy),
The principal cash flows and WAL of CSFB 2005-5 2A8 are identical at speed levels
within the PAC band of 2%-353% PSA (Chart 36 and Table 27). At prepayment speeds
below 2% PSA, the WAL of the PAC slightly extends and at speeds above 353% PSA,
the WAL of the PAC contracts.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 55
Chart 36 PAC cash flows are identical within the PAC band of 2%-353% PSA – CSFB 2005-5 2A8 (4-year PAC)*
0%
20%
40%
60%
80%
100%
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Re
ma
inin
g P
AC
Pri
nc
ipa
l B
ala
nce
(% o
f O
rig
ina
l P
rin
cip
al
Ba
lan
ce)
2% PSA
100% PSA
200% PSA
300% PSA
353% PSA
500% PSA
1000% PSA
Principal cashflows are identical within the PAC bands
Cashflows for 2%, 100%, 200%, 300% and 353% PSA
500% PSA
1000% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
0%
20%
40%
60%
80%
100%
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Re
ma
inin
g P
AC
Pri
nc
ipa
l B
ala
nce
(% o
f O
rig
ina
l P
rin
cip
al
Ba
lan
ce)
2% PSA
100% PSA
200% PSA
300% PSA
353% PSA
500% PSA
1000% PSA
Principal cashflows are identical within the PAC bands
Cashflows for 2%, 100%, 200%, 300% and 353% PSA
500% PSA
1000% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
Principal cash flows are identical within the PAC bands
Cash flows for 2%, 100%, 200%, 300% and 353% PSA
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Table 27 Stable WAL on PAC within the band - CSFB 2005-5 2A8 (PAC band: 2%-353% PSA)* versus CSFB 2005-5 2A6 (support)
PAC (CSFB 05-5 2A8) Support (CSFB 05-5 2A6)
Prepayment Speed Weighted Average Principal Weighted Average Principal
(%PSA) Life (Years)* Window* Life (Years)* Window*
100% PSA 3.99 06/2005 to 10/2012 18.84 05/2013 to 02/2035
200% PSA 3.99 06/2005 to 10/2012 8.36 06/2005 to 02/2035
300% PSA 3.99 06/2005 to 10/2012 2.88 06/2005 to 02/2035
400% PSA 3.91 06/2005 to 12/2011 1.98 06/2005 to 01/2009
500% PSA 3.56 06/2005 to 09/2010 1.61 06/2005 to 03/2008
1000% PSA 2.27 06/2005 to 03/2008 0.94 06/2005 to 12/2006
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
As is the case for sequentials, PACs typically trade on a nominal spread basis to the
interpolated Treasury curve. Chart 37 illustrates the yield and weighted average life
profile of the representative PAC across varying prepayment scenarios.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
56 20 October 2005
Chart 37 4-year PAC yield and WAL sensitivity, by prepayment speed scenario
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Support/Companion (Example: CSFB 2005-5 2A6) The creation of support (or companion) securities goes hand-in-hand with the creation of
PAC classes. The support class shields the latter from the volatility of the collateral’s cash
flows. At prepayment speeds within the PAC band, cash flow stability of the PAC is
achieved as excess principal payments are absorbed by the support classes (see Chart
38 for an illustration of the hypothetical 5.5% PAC with a band of 100-250% PSA). Hence,
support classes exhibit greater WAL variability and worse negative convexity profiles
versus comparable PACs and sequentials, consequently trading at wider spreads.
Chart 38 Excess principal cash flows are diverted to the support class
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
119
37
55
73
91
109
127
145
163
181
199
217
235
253
271
289
307
325
343
Period (Months)
Pri
ncip
al C
ash
flo
w a
s %
of
Ou
tsta
nd
ing
Excess Cash flows at Upper Bound
Excess Cash flows at Lower Bound
PAC Cash flows within the Band
Excess cash flows directed to support class leading to:
- faster amortization of the support
- stable cashflows to the PAC over speeds within the PAC band
Collateral principal cash
flows at upper bound of
PAC band
Collateral principal cash
flows at lower bound of PAC
band
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 57
Prepayment speeds below the lower bound of the PAC band result in slower
amortization of the support, as all cash flows are directed to the PACs, causing the
supports to extend more than the PACs. Similarly, prepayment speeds higher than the
upper bound of the PAC band result in contraction of the supports in excess of that of
PACs. This volatility and heightened sensitivity of supports to prepayments is illustrated
in Table 27, wherein we present the WAL profile of CSFB 2005-5 2A6 across varying
prepayment scenarios.
Chart 39 illustrates the yield and weighted average life profile of the representative
support bond across varying prepayment scenarios.
Chart 39 Support class yield and WAL sensitivity, by prepayment speed scenario
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Accrual/Z (Example: CSFB 2004-8 8A5) Z-bonds are a form of support bond typically used to limit the extension risk of shorter
WAL tranches, such as sequentials, PACs, VADMs (Very Accurately Defined Maturity)
or floater/inverse structures6. This stability is extended by directing the interest cash
flows due to the Z class to pay down higher priority tranches. This unpaid interest
accrues to the principal balance of the Z class. Reinvestment income on interest also
accrues to the principal balance. Once higher priority tranches are paid off, Z-bonds
receive both principal and interest until the tranche is paid off in full.
Jump Z classes, a special form of this class of securities, also extend protection from
contraction risk by “jumping” ahead of shorter WAL securities. This protection is
extended by this Z class absorbing prepayment cash flows at speeds above a pre-
determined rate.
CSFB 2004-8 8A5 is an example of a Z-bond supporting a floater/inverse structure
(tranches 8A6 and 8A7, respectively). Assuming a speed of 325% PSA (pricing speed
6 We address floaters later in this section.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
58 20 October 2005
at issuance), the Z-bond has a WAL of 5.33 years in comparison to 2.3 years for the
inverse/floater combination, and does not receive payments until the floater/inverse
combination pays off in March 2012 (Chart 40).
Chart 40 Outstanding balance of the Z-bond increases until principal window opens – Outstanding balance of CSFB 2004-8 8A5 at pricing speed of 325% PSA
0%
20%
40%
60%
80%
100%
120%
140%
160%
11/30/04
11/30/05
11/30/06
11/30/07
11/30/08
11/30/09
11/30/10
11/30/11O
uts
tand
ing P
rin
cipa
l B
ala
nce
(% o
f O
rigin
al B
ala
nce)
Original Principal Balance Cumulative Interest Accretion Outstanding Prinicipal Balance
Interest is added (accreted) to
prinicipal balance until principal
window opens.
Principal window opens and
distributions of both principal
and interest are made to the
investor
and interest are
Z-bond
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
The greater WAL variability of the Z-bond in comparison to the floater/inverse structure
is illustrated in Table 28. In general, Z-bonds, especially discount-priced bonds, are
attractive investments in a declining rate/fast prepayment environment, as the higher
reinvestment rate on accrued interest and WAL shortening favor the Z-bond.
Table 28 WAL profile of Z-bond (2004-8 8A5) versus floater/inverse structure it supports – Greater WAL variability of Z-bond
Z-Bond (CSFB 04-8 8A5) Floater/Inverse (CSFB 04-8 8A6/8A7)
Prepayment Speed Weighted Average Principal Weighted Average Principal
(%PSA) Life (Years)* Window* Life (Years)* Window*
100% PSA 20.50 01/2024 to 11/2026 7.99 12/2004 to 01/2024
200% PSA 13.01 01/2017 to 10/2018 4.80 12/2004 to 01/2017
300% PSA 8.38 11/2012 to 09/2013 3.45 12/2004 to 11/2012
325% PSA 7.63 03/2012 to 11/2012 3.24 12/2004 to 03/2012
400% PSA 6.09 10/2010 to 03/2011 2.76 12/2004 to 10/2010
500% PSA 4.86 08/2009 to 11/2009 2.35 12/2004 to 08/2009
1000% PSA 2.67 07/2007 to 08/2007 1.46 12/2004 to 07/2007
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Chart 41 illustrates the yield and weighted average life profile of the Z-bond across
varying prepayment scenarios.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 59
Chart 41 Z-bond yield and WAL sensitivity, by prepayment speed scenario
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
Treasury (bp)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Non-Accelerated Seniors (NAS) (Example: CSFB 2004-8 1A4) A non-accelerated senior is a AAA-rated security created through the same process of
creating subordinates through incorporation of the shifting interest structure. This
shifting interest structure locks out the NAS bond from receiving principal payments for a
fixed period of time, typically five years. The principal payment allocation of the NAS
bonds during this period is redirected to “Accelerated Senior” (AS) classes.
Once this five-year point is reached, the NAS security is entitled to a portion of principal
payments determined by a standard schedule outlined in the deal prospectus. This
schedule allocates an increasing percentage of principal cash flows generated from the
collateral to the NAS class until this class is entitled to receive all principal cash flow
generated without any redirection to other classes.
Principal payments to the NAS bonds are distributed per the following formulas and
shifting interest schedule in Table 29:
NAS Percentage = Bal(NAS) / Bal(NAS Group collateral)
Stepdown Percentage = 1 - Shift %
Priority Percentage = NAS Percentage * Stepdown Percentage
Prin(NAS) = Priority Percentage * Prin(NAS Group collateral)
where,
Prin(NAS) = principal distribution to NAS
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
60 20 October 2005
Prin(NAS Group collateral) = Total amount of principal payments, both amortization and
prepayment, made on the NAS group
Bal(NAS) = NAS class balance
Bal(NAS Group collateral) = Balance of the NAS collateral group
Shift % = Shift percentage = Percentage of NAS principal distributions redirected to AS
classes according to the shifting interest schedule in Table 29.
Principal cash flows, as governed by the shifting interest schedule, are illustrated for
class CSFB 2004-8 1A4 in Chart 42 at the deal pricing speed of 275% PSA.
Table 29 NAS principal distribution is governed by a shifting interest schedule
Percentage of NAS Principal Distributions Percentage of NAS Principal Distributions
Redirected to AS Class Passed Through to NAS Bond
Period (Months) "Shift Percentage" "Stepdown Percentage" (1 - Shift Percentage)
Period 0 - 60 100% 0%
Period 61 - 72 70% 30%
Period 73 - 84 60% 40%
Period 85 - 96 40% 60%
Period 97 - 108 20% 80%
Period 108+ 0% 100%
Source: Credit Suisse First Boston (US Mortgage Strategy)
Chart 42 NAS principal distributions are governed by a shifting interest schedule – CSFB 2004-8 1A4
0%
20%
40%
60%
80%
100%
12
/25
/04
12
/25
/06
12
/25
/08
12
/25
/10
12
/25
/12
12
/25
/14
12
/25
/16
12
/25
/18
12
/25
/20
12
/25
/22
12
/25
/24
12
/25
/26
12
/25
/28
12
/25
/30
12
/25
/32
Pri
ncip
al C
ash
flo
w a
t P
ricin
g S
pe
ed
(% o
f O
rig
ina
l B
ala
nce
)
Class 1A4 Principal Distributions
NAS locked
out for first 5
years
NAS receives
increasing
percentage of
principal cash
flows per
schedule after
lockout period
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Weighted average life stability is a notable attribute of NAS bonds as illustrated in Table
30. The shifting interest schedule protects the NAS bonds from fast prepayment speeds
on collateral during the 5-year lockout period. Unscheduled principal prepayments,
which would have otherwise accelerated the paydown of the NAS bonds, are redirected
as a whole (over the first five years of distributions) or in part (over years six through
ten) to the AS classes.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 61
NAS bonds provide better protection from “whipsaw” prepayment scenarios than PACs
The five-year lockout feature on NAS bonds provides better protection from “whipsaw”
prepayment scenarios. This is a result of the redirection of unscheduled principal
payments to the AS classes under the shifting interest structure.
In contrast, in the case of a PAC bond, the absence of a lockout structure in the
distribution of principal payments subjects the PAC class to the volatility of the
collateral’s cash flows once the supports have paid down. This is illustrated in scenarios
characterized by very fast initial speeds, resulting in greater weighted average life
variability on the PAC, or conversely, through less prepayment protection offered in
such “whipsaw” scenarios. (See Tables 31 and 32 for a comparison of the NAS WAL
profile versus a 9-year PAC example, CSFB 2005-3 3A19.)
Table 31 NAS bonds provide better “whipsaw” protection than PACs – Analysis of NAS and PAC WALs under initial elevated speed followed by slower speeds
NAS PAC
CSFB 2004-8 1A4 CSFB 2005-3 3A19Scenario WAL (Years) WAL (Years)
1) 0 %CPR 20.72 23.79
2) 10 %CPR 13.51 8.85
3) 20 %CPR for 1 year, 10 %CPR thereafter 13.51 10.75
4) 30 %CPR for 1 year, 10 %CPR thereafter 13.51 17.75
5) 40 %CPR for 1 year, 10 %CPR thereafter 13.51 25.95
6) 50 %CPR for 1 year, 10 %CPR thereafter 13.51 25.26
7) 60 %CPR for 1 year, 10 %CPR thereafter 13.51 20.84
8) 70 %CPR for 1 year, 10 %CPR thereafter 13.51 2.03
9) 80 %CPR for 1 year, 10 %CPR thereafter 10.85 0.82
10) 90 %CPR for 1 year, 10 %CPR thereafter 4.53 0.57
11) 100 %CPR for 1 year, 10 %CPR thereafter 0.07 0.07
Stable
WAL
WAL
variability
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Table 30 NAS bonds have wide principal windows and relatively stable WAL profiles – CSFB 2004-8 1A4
Prepayment Speed
(% PSA)Principal Window*
Principal Window
Length (months)
Weighted Average
Life (Years)*100% PSA 12/2009 to 09/2034 297 15.58
200% PSA 12/2009 to 09/2034 297 12.73
275% PSA (Pricing) 12/2009 to 09/2034 297 11.39
300% PSA 12/2009 to 09/2034 297 11.04
400% PSA 12/2009 to 09/2034 297 9.95
500% PSA 12/2009 to 09/2034 297 8.74
1000% PSA 02/2008 to 09/2009 19 3.83
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
62 20 October 2005
Table 32 NAS bonds provide better whipsaw protection than PACs – Analysis of NAS and PAC WALs under multiples of a defined “whipsaw” scenario
NAS PAC
CSFB 2004-8 1A4 CSFB 2005-3 3A19
Scenario WAL (Years) WAL (Years)
1) 10 %CPR 13.51 8.85
2) 25% x "Whipsaw" Scenario 18.18 19.92
3) 50% x "Whipsaw" Scenario 16.23 18.48
4) 75% x "Whipsaw" Scenario 14.71 20.36
5) 100% x "Whipsaw" Scenario 13.51 25.95
6) 125% x "Whipsaw" Scenario 12.56 20.91
7) 150% x "Whipsaw" Scenario 11.78 3.95
8) 200% x "Whipsaw" Scenario 5.66 1.24
40 %CPR for 6 months, 10 %CPR for 6 months, 40 %CPR for 6 months, 10 %CPR thereafter
"Whipsaw" Scenario Definition:
Stable
WAL
WAL
variability
*As of deal pricing.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
The larger the NAS as a percentage of the deal, the weaker its structural benefits, as a
smaller portion of the deal will be comprised of accelerated seniors available to absorb
the volatility of the collateral’s cash flows.
Chart 43 illustrates the yield and weighted average life profile of the representative NAS
bond across varying prepayment scenarios.
Chart 43 NAS yield and WAL sensitivity, by prepayment speed scenario
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
10yr Trsy (bp)
Prepay
Scenarios
(%PSA)
Yield (%)
Average
Life (years)
Spread to
10yr Trsy (bp)
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 63
Sequential Floater (Example: CSFB 2004-8 1A8) Floaters, created off prime jumbo fixed-rate collateral, are structured to create short-
duration securities that reset monthly. Floaters are typically indexed to one-month
LIBOR and trade at a margin above the index and are priced at par on issue. Creating a
floater tranche typically involves the creation of a corresponding inverse floater tranche,
a leveraged tranche, absorbing the volatility of cash flows and supporting the stability
and short duration profile characteristic of a floater.
Floaters can be created off either pass-through or CMO – sequential, PAC, or support –
classes.
The coupon on a floater is determined through the following formula:
The multiplier on floaters is usually 1. The margin is the spread to the reference index
expressed in basis points.
In the case of CSFB 2004-8 1A8, the multiplier, index, margin, and floater formula are 1,
1-month LIBOR, 40bp to give a coupon rate determined by 1*1-month LIBOR + 40bp,
respectively.
Coupon rates on floaters are bound on the upper end by a cap that limits the maximum
coupon to be paid out on any particular distribution date (7.50% in the case of CSFB 2004-8
1A8 struck when 1-month LIBOR is greater than or equal to 7.10%), and on the lower end
by a floor that limits the minimum coupon to be paid out on a distribution date (coupon rate
equates to the margin of 0.40% when 1-month LIBOR is equal to 0.00%). Chart 44
illustrates the floating rate coupon range corresponding to levels of 1-month LIBOR.
Chart 44 Floater coupons are bound by caps and floors
0%
2%
4%
6%
8%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Index: 1-month LIBOR
Coupon
Coupon
Floor = 0.40% when 1-month LIBOR = 0.00%
Cap = 7.50% when 1-month LIBOR = 7.10%
Coupon = 1-month LIBOR + 0.40%
Source: Credit Suisse First Boston (US Mortgage Strategy)
Coupon = Multiplier * Index + Margin
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
64 20 October 2005
Chart 45 illustrates the yield and weighted average life profile of the representative
sequential floater across varying prepayment scenarios.
Chart 45 Front sequential floater yield and WAL sensitivity, by prepayment speed scenario
Prepay
Scenarios
(%PSA)
Discount
Margin (bp)
Average
Life (years)
Index Margin Cap Floor
Prepay
Scenarios
(%PSA)
Discount
Margin (bp)
Average
Life (years)
Prepay
Scenarios
(%PSA)
Discount
Margin (bp)
Average
Life (years)
Index Margin Cap Floor
*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing
unless stated otherwise.
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Weighted average life profile across varying structures – A composite view The weighted average life profiles of the most common structures discussed in this
section within prime jumbo deals are summarized in Table 33 and Chart 46.
Mortgage Market InsightsVI. Common AAA Structures within Securitized Prime Jumbo Deals
20 October 2005 65
Table 33 Weighted average life profile across varying structures*
Weighted Average Life (Years) WAL Range
Bond Type Example Bond
100%
PSA
200%
PSA
300%
PSA
400%
PSA
500%
PSA
1000%
PSA
100-300%
PSA
300-500%
PSA
100-1000%
PSA
Pass-Through CSFB 2005-5 7A1 10.40 6.65 4.68 3.53 2.79 1.27 5.72 1.89 9.13
Change Versus 300% PSA WAL 5.72 1.97 -1.15 -1.89 -3.41
Front Sequential FHASI 2004-7 1A1 7.38 4.45 3.29 2.70 2.33 1.54 4.09 0.96 5.84
Change Versus 300% PSA WAL 4.09 1.16 -0.59 -0.96 -1.75
Intermediate Sequential FHASI 2004-7 1A2 20.26 12.64 8.27 6.08 4.90 2.80 11.99 3.37 17.46
Change Versus 300% PSA WAL 11.99 4.37 -2.19 -3.37 -5.47
Last Cash Flow FHASI 2004-7 1A3 26.47 20.33 14.50 9.93 6.60 3.28 11.97 7.90 23.19
Change Versus 300% PSA WAL 11.97 5.83 -4.57 -7.90 -11.22
PAC CSFB 2005-5 2A8 3.99 3.99 3.99 3.91 3.56 2.27 0.00 0.43 1.72
Change Versus 300% PSA WAL 0.00 0.00 -0.08 -0.43 -1.72
Support (Companion) CSFB 2005-5 2A6 18.84 8.36 2.88 1.98 1.61 0.94 15.96 1.27 17.90
Change Versus 300% PSA WAL 15.96 5.48 -0.90 -1.27 -1.94
NAS CSFB 2004-8 1A4 15.58 12.73 11.04 9.95 8.74 3.83 4.54 2.30 11.75
Change Versus 300% PSA WAL 4.54 1.69 -1.09 -2.30 -7.21
Z-bond CSFB 2004-8 8A5 20.50 13.01 8.38 6.09 4.86 2.67 12.12 3.52 17.83
Change Versus 300% PSA WAL 12.12 4.63 -2.29 -3.52 -5.71
*As of deal pricing for respective deals.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Chart 46 Weighted average life profiles across common structures*
0
5
10
15
20
25
100 200 300 400 500 600 700 800 900 1000
Prepayment Speed (%PSA)
We
igh
ted
Avera
ge L
ife (
yea
rs)
30-Year Pass-Through
(CSFB 2005-5 7A1)
Front Sequential
(FHASI 2004-7 1A1)
Intermediate Sequential
(FHASI 2004-7 1A2)
Last Cash Flow
(FHASI 2004-7 1A3)
PAC
(CSFB 2005-5 2A8)
Support (Companion)
(CSFB 2005-5 2A6)
NAS
(CSFB 2004-8 1A4)
Z-bond
(CSFB 2004-8 8A5)
*As of deal pricing for respective deals.
Source: Credit Suisse First Boston (US Mortgage Strategy), Intex
Mortgage Market InsightsVII. Investment Opportunities
66 20 October 2005
VII. Investment Opportunities
A diverse range of investors and investment opportunities characterize the fixed-rate
non-Agency segment of the US RMBS sector. A wide variety of active institutional
investors, each with distinct investment criteria, corresponds to the creation of a wide
array of alternatives. This range of investment choices spans the yield curve, offering
varying yield/duration/convexity profiles. Table 34 provides a summary of these
investment choices.
Table 34 Range of structures offered in the prime jumbo segment
Duration Non-Agency
Short CMO Floaters
Short PACs, Sequentials
Intermediate PACs, Sequentials, Pass-throughs
Long PACs, Sequentials, NAS, Mezzanine AAA NAS
Long Accrual Zs
Source: Credit Suisse First Boston (US Mortgage Strategy)
Because investment mandates vary among institutional investors, investor participation
within the non-Agency sector is selective and directed toward specific classes of
securities. A brief outline of the investment criteria for the major institutional investor
categories is provided below.
• Banks focus on shorter-duration product to effectively manage their asset-
liability mix given the short duration of their liabilities, comprised mainly of
interest-bearing deposits.
• Money manager participation spans across the product range, given the variety
of investment mandates most typically characterized by the objective to
outperform a chosen benchmark index.
• Hedge funds are typically involved in riskier product types that leverage
exposure to a specific type of risk, convexity or credit.
• Insurance companies and pension funds focus mainly on longer-duration
products to effectively manage their asset-liability mix. The long tenure of their
liabilities is often contingent on the retirement and mortality of subscribers to
their offered insurance plans.
• CDO managers focus on higher-yielding product which, for the most part,
entails taking credit exposure.
Mortgage Market InsightsVII. Investment Opportunities
20 October 2005 67
We illustrate investor participation across the most common types of security offerings
within the prime jumbo RMBS segment in Table 35.
Table 35 Non-Agency investor participation, by product type
Investor Type
Bond Type Comment
Bank CDOHedge
Fund
Insurance
Company /
Pension
Fund
Money
ManagerRetail
Pass Through Y Y Y Y Y Y
Floater Short Duration Y Y
Front Sequential Short Duration Y
Mezzanine Front Sequential Short Duration Y
WAC IO Sell Convexity Y Y
WAC PO Buy Convexity Y
Inverse IO Derivative Y Y
NAS Call Protection Y Y
Mezzanine NAS Call Protection Y Y Y Y
Investment-Grade Subordinates Credit Y Y Y Y
Sub-Investment Grade Subordinates Credit Y Y Y Y
Long Sequential Long Duration Y Y Y Y
Accrual Z Long Duration Y Y
Source: Credit Suisse First Boston (US Mortgage Strategy)
Pricing conventions for various investment choices within the non-Agency sector are
provided in Table 36.
Table 36 Pricing conventions vary according to structure, maturity, and credit exposure considerations
Quotation Example Bond Pricing / Quotation*
Structure
Fixed-Rate Pass-Through Payback to Agency TBA** CSFB 2004-8 6A1 0-16 ticks back
Fixed-Rate Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A3 145 / Curve / 300PSA
Floating-Rate Discount Margin*** CSFB 2004-8 1A8 34DM @ Pricing Speed
Maturity
Front Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A2 133 / Curve / 300PSA
Last Cash Flow Spread to Treasury at Pricing Speed CSFB 2004-8 1A1 140 / Curve / 300PSA
NAS Spread to 10-Year Treasury at Pricing Speed CSFB 2004-8 1A4 115 / 10-Year Trsy / 300PSA
Z-Bond Spread to Treasury at Pricing Speed CSFB 2004-8 8A5 183 / Curve / 300PSA
Credit
AAA Pass-Through Payback to Agency TBA** CSFB 2004-8 6A1 0-16 ticks back
AAA Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A3 145 / Curve / 300PSA
AA through B Subordinates Spread to 10-Year Treasury at Pricing Speed RFMSI 05-S2 M3 190 / 10-Year Trsy / 300PSA
Unrated Product Price Mutliple of Coupon RFMSI 2005-S2 B3 6.5 X Coupon
*As of 08/17/2005 close.
**Agency TBA refers to a pass-through of similar coupon and term as the non-Agency pass-through.
***Discount margin refers to the spread to the base index rate such that the present value of cash flows is equal to the current market
price. 34DM is equivalent to setting the discount rate on the floater to the underlying floater index + 34 basis points.
Source: Credit Suisse First Boston (US Mortgage Strategy)
The most quoted valuation metric for prime jumbo RMBS is the price payback on a AAA-
rated non-Agency pass-through, in dollars, relative to a similar coupon Agency TBA pool.
Recall, as discussed in the section on prepayment profiles, this often results in comparing
Mortgage Market InsightsVII. Investment Opportunities
68 20 October 2005
an Agency pass-through with a higher gross mortgage rate on the underlying mortgages
versus the non-Agency pool. A history of these price paybacks, expressed in units of
dollars and 32nds, for 30- and 15-year non-Agency pass-throughs is presented in Chart
47. The historical trend shows a correlation to market volatility levels. This is due to the
higher value of embedded options sold by investing in a prime jumbo balance pool relative
to in an Agency pass-through. This arises from the convexity differences attributed to the
higher loan balance and other characteristics of more creditworthy borrowers associated
with the prime jumbo segment of non-Agency RMBS.
Chart 47 Price paybacks on prime jumbo to Agency TBA (monthly average)
10
20
30
40
50
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Pri
ce P
ay
ba
ck
to
TB
A (
tic
ks)
5
6
7
8
9
10
Ba
sis
Po
int
Vo
lati
lity
(b
p/d
ay
)
30-Year Jumbo A Payback to TBA (ticks) 15-Year Jumbo A Payback to TBA (ticks)
6mx10y Bp Vol (bp/day) (RHS)
Source: Credit Suisse First Boston (US Mortgage Strategy)
Observed spread stability on the credit-sensitive subordinate classes reflects a
combination of structural stability as well as a period of above trend growth in home
prices, resulting in below trend default and loss rates. This spread stability is
characteristic of both the investment and sub-investment grade credit tiers (see Charts
48 and 49).
The appeal of attractive spreads offered relative to similarly rated corporates, structural
benefits of non-Agency RMBS, and the transparency benefits of investing in these
credit-sensitive assets enhance the participation of the investor base active in the
subordinate sector.
Mortgage Market InsightsVII. Investment Opportunities
20 October 2005 69
Chart 48 30-year prime jumbo investment-grade subordinate spreads to 10-year Treasury at pricing speeds
0
100
200
300
400
500
Jun-94
Dec-94
Jun-95
Dec-95
Jun-96
Dec-96
Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Sp
read
to
10-Y
ea
r T
reasu
ry (
bp
)
AA A BBB
Source: Credit Suisse First Boston (US Mortgage Strategy)
Chart 49 30-year jumbo below investment-grade subordinate spreads to 10-year Treasury at pricing speeds
0
250
500
750
1,000
1,250
1,500
Jun-94
Dec-94
Jun-95
Dec-95
Jun-96
Dec-96
Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Sp
read
to
10-Y
ea
r T
reasu
ry (
bp
)
BB B
Source: Credit Suisse First Boston (US Mortgage Strategy)
Mortgage Market InsightsVIII. Conclusions
70 20 October 2005
VIII. Conclusions
This report serves as a “starter kit” for investors interested in exploring opportunities within
the non-Agency sector. We summarize the main motivations for investing in the non-
Agency RMBS sector in the sidebar entitled Reasons for investing in non-Agency RMBS.
Our objective in preparation of this report has been to provide investors with the
necessary foundational knowledge to ask the right questions as this material is put into
practice. With this goal in mind, we leave readers with a cheat sheet of questions. We
present this in the sidebar entitled Keys to non-Agency valuation. Happy investing and
welcome to one of the most innovative, rapidly growing, and fascinating sectors of the
US fixed-income markets!
Reasons for investing in non-Agency RMBS
Collateral
��Source of loans and origination processes are identical to mortgages securitized as Agency
��Price execution determines if loan gets classified as either Agency or non-Agency
��Well defined segments ranging from prime jumbo, “Tier 1” Alt-A, “Tier 2” Alt-A to subprime
��Well channeled issuance with each of an issuer’s shelf specifically associated with specific segments of prime, Alt-A
and subprime
Credit
��Current levels of credit protection are multiples of observed historical losses
��No AAA-rated class ever downgraded due to collateral performance issues
��Credit support is adjusted according to the credit quality of the collateral. This allows for the creation of senior-rated
classes with adequate credit protection incorporated through structure despite relatively weak credit quality of the
collateral
��Relatively high recovery rates in RMBS compare to low recovery rates in other credit sensitive assets (corporates,
high-yield, emerging markets), in the event of default
��Historically superior ratings transitions relative to corporates as evidenced by observed upgrade/downgrade ratios
��High level of performance transparency, unrivaled in other credit-sensitive sectors of the bond market
Yield/Convexity
��Incremental historical return has been earned for selling convexity. Excellent credit performance has only boosted
realized returns
��Opportunity to pick yield and add/sell convexity relative to Agency RMBS
��Collateral can be a source of adding convexity based on characteristics. Hence, opportunity to add convexity also
available through structure. This results in simpler structures in non-Agency relative to Agency CMOs
��Similar range of structures as in Agency CMO sector, but generally offered at wider spreads
Purchase and post-purchase benefits
��Full loan level data disclosure, not yet the established standard in Agency RMBS
��Monthly availability of static performance data and issuer rankings accessible on Bloomberg (CSMB <GO>, at
individual deal level for all CSFB deals, performance rankings for aggregate issuer level for major issuers in each
product)
��Aggregate market and individual CSFB/other issuer shelf level prepayment and default performance indices, and
deal level disclosure on all CSFB deals are also available on LOCuS, CSFB’s fixed-income analytic platform.
Analytic capability provided to analyze product/performance comparisons at individual deal, vintage, product,
issuer, and market levels
Mortgage Market InsightsVIII. Conclusions
20 October 2005 71
Keys to non-Agency valuation
Determine Collateral Type and Structure
• Classify the collateral type:
o jumbo A or Alt-A
o fixed or hybrid
o amortizing or IO
• What is the appropriate gross WAC adjustment to allow comparison with Agency pass-throughs?
• Classify the balance:
o conforming or non-conforming
• What is the geographic distribution of the collateral pool?
o California versus non-California
• Classify the credit sector:
o super senior
o senior
o mezzanine
o subordinate
• What is the cleanup call feature and does it affect the bond being analyzed?
o cleanup call at 5% or 10%
o bonds trading at premium or discount
o bonds are amortizing seniors or locked-out subordinates
• What is the NAS percentage?
o A high NAS percentage may indicate higher volatility in cash flows of accelerated seniors in the deal as a result of the shifting interest structure
• Is the pricing ramp reasonable?
o within context of historical prepayment speeds
o within context of projected interest-rate environment
Relative Value of Non-Agency Product Versus Agency CMOs and Pass-Throughs
• What is the price spread versus an Agency CMO with the same coupon?
• For a given structure, compare both base case average life and WAL extension/contraction profile
• There are no Street median speeds for non-Agency collateral
• Adjust for settlement date differences (non-Agency pass-throughs typically settle end of month whereas TBAs settle mid-month)
• Compare financing between Agency and non-Agency product:
o repurchase rates
o haircuts
• How does carry look versus TBA roll? (The TBA roll market factors in the coupon, financing, prepayment expectations, and market supply and demand technicals to establish the price difference between TBAs settling on two different dates. This price difference, termed the roll, should be compared to the carry on non-Agency product.)
• How does liquidity compare with corresponding Agency sector?
o size of market
o issuance trends
o bid/ask spread across product types
Mortgage Market Insights
Appendix A – Securitization Deal Participants
72 20 October 2005
Appendix A – Securitization Deal Participants
Seller:
Owns the mortgage loans up until the point they are sold to the Depositor (often an affiliate and described below).
Makes representations and warranties with regard to the mortgage loans satisfying rating agencies and underwriting
guidelines.
Depositor:
Is a bankruptcy-remote entity organized for the sole purpose of aggregating the mortgage loans into a “pool” or “pools”
and securitizing the mortgage loans.
Purchases the mortgage loans from the Seller.
Forms the Trust isolating the mortgage loan pool and from which the securities are issued.
Servicer:
Maintains direct interaction with individual borrowers.
��For Current Mortgage Loans:
- Collects and processes monthly mortgage payments (principal and interest).
- Aggregates and forwards cash received to Master Servicer (described below).
��For Delinquent Mortgage Loans:
- Pursues borrower to obtain delinquent monthly mortgage payments.
- Commences foreclosure proceedings to obtain ownership of mortgaged property.
- Takes title to mortgage property (“REO” or “Real Estate Owned”).
- Aggregates and advances equivalent of delinquent or unpaid monthly mortgage payments to Master
Servicer (until deemed “non-recoverable”).
��For REO Mortgage Loans:
- Maintains REO property in preparation for sale.
- Coordinates with Mortgage Insurance provider, if any, in preparation for claim filing.
- Coordinates with realtor and attorneys for REO property sale.
- Aggregates and forwards liquidation proceeds together with any mortgage insurance proceeds to Master
Servicer.
��For ALL Mortgage Loans:
- Aggregates, prepares and forwards loan-level data reports to Master Servicer.
Special Servicer (not in all deals):
��Engaged from the point of original securitization and over the entire life of the securitization to provide expertise
in maximizing cash flow or liquidation proceeds from sub- and/or non-performing mortgage loans.
��May be required to, or have the option to, directly service sub- and/or non-performing mortgage loans.
��If directly servicing, aggregates and forwards cash received and loan-level data reports to Master Servicer.
Master Servicer (not in all deals):
��Collects and reconciles monthly remittances and loan-level data reports from individual Servicers (and/or
Special Servicer).
��Aggregates and forwards cash received and loan-level data reports to Trust Administrator (described below).
��Advances any cash not received from individual Servicers to Trust Administrator and pursues Servicers for
reimbursement.
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Appendix A – Securitization Deal Participants
7320 October 2005
Securitization Deal Participants (continued)
��Depending on the role (if any) of the Special Servicer, takes possession of servicing from Servicers in default of
obligations.
Trust Administrator (not in all deals):
��Collects and reconciles monthly remittance and loan-level data reports from Master Servicer (often an affiliate).
��Applies monies received pursuant to securitization cash flow rules.
��Prepares monthly securitization remittance reports.
��Forwards monthly distribution amounts and reports to Trustee (described below) for distribution to security
holders.
��Prepares I.R.S. quarterly tax returns for the trust and prepares reports for the S.E.C.
Trustee:
��Oversees the Trust formed by the Depositor and acts on the Trust’s behalf both at issuance and during the life of
the securitization.
��Forwards monies and reports received from Trust Administrator to security holders.
��Advances any cash not received from the Trust Administrator and pursues Trust Administrator (or its Master
Servicer affiliate) for reimbursement.
��Takes possession of or finds new entity to perform Trust Administration (or Master Servicing) role.
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
74 20 October 2005
Appendix B – Rating Agency Methodologies
Rating agencies play a significant role in the non-Agency RMBS market. Their functions
include establishing methodologies to evaluate the credit quality of a wide range of
prime to subprime borrowers, staggered across the credit continuum, examining the
structural integrity of credit protection offered, on a deal-by-deal basis, and establishing
credit enhancement levels for every individual deal carrying their rating.
Each of the four rating agencies, Standard and Poor’s (S&P), Moody’s Investors
Service, Fitch Ratings, and Dominion Bond Rating Service (DBRS), use proprietary
models in their independent evaluation of credit risk for a given pool of mortgage loans.
In this section, we profile the rating agency methodologies of S&P, Fitch Ratings, and
DBRS for prime jumbo RMBS (the published methodology from Moody’s Investors
Service was unavailable as of the time of publication of this report). While we excerpt
key sections of each of their methodologies, we encourage readers to review these in
entirety (available on their websites, Table 37) for comprehensive coverage. We also
encourage readers to contact the individual analysts at each of the rating agencies for
further details, especially as these methodologies and their individual views are subject
to change as markets and products evolve.
Table 37 Rating agency websites
Rating Agency Web Site
Standard and Poor's www.standardandpoors.com
Moody’s Investors Service www.moodys.com
Fitch Ratings www.fitchratings.com
Dominion Bond Rating Service www.dbrs.com
Common factors in the evaluation of RMBS by each of the rating agencies include:
i. Default/foreclosure frequency, the probability that a loan will default,
ii. Loss severity, the amount of loss realized on a defaulted loan,
iii. Conservative scenarios, characterized by higher default frequencies and loss
severities, to separately stress higher- versus lower-rated classes within a
specific deal,
and
iv. Baseline default and loss severity assumptions, for a given collateral type,
adjusted based on borrower characteristics and loan attributes of a given pool
of loans.
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
7520 October 2005
Standard and Poor’s (S&P) (US Residential Subprime Mortgage Criteria – May 2000)
Base case mortgage pool defined
S&P defines the base case, prime quality pool comprised of mortgages with the
following characteristics:
- fixed-rate,
- fully-amortizing,
- owner-occupied,
- level payment,
- first liens on single-family detached homes,
- well dispersed geographically, in areas with strong economic bases,
- loan balances that do not exceed $400,000 and represent no more than 80% of
the value of the home,
- underwriting guidelines which require that the borrower have no history of
delinquent payments and a minimum FICO score of 660,
and
- at least 300 loans in count within a given pool to boost statistical confidence.
Frequency of foreclosure
S&P’s methodology uses different levels of frequency of foreclosure for each credit
grade within a prime jumbo deal (see Table 38). These are higher for the stronger
rating levels since higher-rated classes should, by definition, be able to withstand higher
levels of defaults and losses.
Table 38 S&P base frequency of foreclosure assumptions for a prime quality pool
Rating Level Frequency of Foreclosure (%)
AAA 15
AA 10
A 8
BBB 6
BB 3
B 1.5
Source: S&P
S&P attributes variations in frequency of foreclosure assumptions, from those defined
above, on prime fixed-rate mortgage pools to differences in loan characteristics,
including borrower credit quality, LTV ratios, property type, loan purpose, occupancy
status, mortgage seasoning, pool size, loan size, loan maturity, loan documentation,
and lien status. Table 39 summarizes adjustments to the base case FOF assumptions
corresponding to variations in these characteristics.
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Appendix B – Rating Agency Methodologies
76 20 October 2005
Table 39 Frequency of foreclosure varies according to loan characteristics
Characteristics
Effect on FOF
(versus Base Case Assumption)* Impact
Borrower Credit Quality -
Higher borrower credit quality is expected to result in better credit
performance.
LTV Ratios +
Higher LTVs have historically been associated with worse credit
performance, as a result of less borrower equity in the property and a
higher percentage of the home value at risk.
Property Type
Single-Family Detached (-) /
Single Family Attached, Low-rise Condos, 2-Family Properties
(+) /
High-rise Condos, Co-ops, 3-4 Family Properties (More +)
Risks associated with lower demand and higher price volatility of non-
single-family properties making these riskier loans.
Loan Purpose Purchase, Rate/Term Refinance (No adjustment) /
Cash-out Refi (+)
Cash-out refinance loans are riskier because of difficulty associated with
measuring the property’s market value as there is no actual sale price,
based on a specific buy/sell transaction.
Occupancy Status Non-Owner Occupied (+) / Investor Property (+)
Higher probability of homeowner defaulting on investment property or a
second home than on primary residence.
Rent, which may not be available, is needed to cover mortgage payments
due on an investor property mortgage.
Mortgage Seasoning -
Borrower's ability to pay generally improves over time.
The loan amortizes and the borrower builds equity in the home. As equity
builds, the borrower's willingness to pay increases.
Pool Size
300+ loans (-) /
<300 & >100 loans (+) /
<100 loans (More +)
Pools made up of 300+ loans ensure sufficient diversity and comfort with
accuracy of loss assumptions.
Loan Size +
Loans with higher loan balances are considered riskier because they are
likely to suffer greater market value declines in downturns as a result of
limited demand for higher-priced properties.
Loan Maturity +
Shorter terms and faster amortization translate to lower balances as a
loan seasons. This subjects these to potentially lower credit issues as a
loan proceed up the default ramp.
Loan Documentation
For a given LTV range:
Full Doc (-) /
Low Doc (+) /
No Doc (More +)
Reduced documentation introduces an added risk factor. (This may be
offset by lower LTV requirements.)
Lien Status (First vs.
Second Lien)
Second Lien (+) /
Combined LTV (+)
Second lien mortgages allow equity extraction from a property and
increased use of borrower leverage.
*A ‘+’ sign in this column indicates that the frequency of foreclosure assumption is adjusted upward for a higher value/greater degree of the specific characteristic in question, and vice
versa for a ‘-‘ sign.
Source: Credit Suisse First Boston (US Mortgage Strategy), S&P
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
7720 October 2005
Loss severity S&P’s loss severity assumptions factor in an assumed market value decline specific to each
credit grade level. A foreclosure cost equivalent of 25% of the property value is also
assumed (see Table 40).
Table 40 S&P base loss severity, market value decline, and foreclosure cost assumptions for a prime quality pool
Rating Level Loss Severity (%) Market Value Decline (%) Foreclosure Costs* (%)
AAA 43 34.5 25
AA 40 32 25
A 35 28 25
BBB 34 27.2 25
BB 33 26.4 25
B 33 26.4 25
* Foreclosure costs include an interest carry component assuming a 12% mortgage rate, 5% brokerage fees, 3% legal fees, 3% taxes, and
other costs (2%).
Source: S&P
Table 41 illustrates the loss severity calculation at the AAA-rating level using S&P’s
assumptions for market value declines and foreclosure costs.
Table 41 Calculating loss severity using S&P's assumptions for market decline and foreclosure costs at the AAA level*
% of Purchase
Price
% of Loan
Value Dollars ($)
Purchase Price of Home (Home Px) 100,000
Loan Balance (Loan Bal) 80% 80,000
Market Value Decline (MVD) 34.5% 34,500
Market Value at Foreclosure (FCL Val = Home Px - MVD) 65,500
Market Loss (Mkt Loss = FCL Val - Loan Bal) 14,500
Foreclosure Costs (FCL Cost) 25% 20,000
Total Loss (Mkt Loss + FCL Cost) 34,500
Loss Severity (Total Loss / Loan Bal) 43%
*Assumes first-lien mortgage loan, owner-occupied, single-family detached property, with an LTV of 80%. The ‘AAA’ category assumes a
34.5% market value decline in an economic depression.
Source: S&P
S&P attributes variations in loss severity on prime, fixed-rate mortgage pools to
differences in loan characteristics, including LTV ratios, mortgage insurance, lien status,
loan balance, loan maturity, loan purpose, property type, occupancy status, geographic
dispersion, and mortgage seasoning. Table 42 summarizes adjustments to these base
loss severity assumptions corresponding to variations in each of these characteristics
per S&P’s methodology.
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
78 20 October 2005
Table 42 Loss severity varies with loan characteristics
Characteristics
Effect on Loss Severity (versus Base Case
Assumption)* Impact
LTV Ratios +
Higher LTVs have historically been associated with higher losses,
given a higher % of the home’s value at risk.
Mortgage Insurance -
This is dependent on the ability of the insurer to pay claims, whereby
an insurer with a rating of AA or above will be granted full credit by
S&P for insurance coverage.
Lien Status (First vs.
Second Lien) Second Lien (+)
Second lien mortgages are more sensitive to property value declines
and absorb losses ahead of first lien mortgages, whereas first lien
mortgages have the first claim to foreclosure proceeds.
Loan Balance >$370K (+)
At $370K, the foreclosure period is assumed to be 12 months and
increases 1 month for every additional $10,000 up to 24 months,
increasing costs and thereby loss severity.
Loan Maturity +
Shorter terms and faster amortization translate to lower balances as a
mortgage seasons. This subjects a lower balance to credit issues as
a loan progresses up the default ramp.
Loan Purpose Purchase, Rate/Term Refinance (No adjustment) /
Cash-out Refi (+)
Cash-out refi is riskier because of difficulty measuring property market
value because there is no established price based on a buy/sell
transaction.
Property Type
Single-Family Detached (-) /
Single Family Attached, Low-rise Condos, 2-Family Properties (+) /
High-rise Condos, Co-ops, 3-4 Family Properties (More +)
Risks associated with lower demand/liquidity and higher price
volatility make non-single-family properties riskier.
Occupancy Status Non-Owner Occupied (+) /
Investor Property (+)
Higher probability of homeowner defaulting on investment property or
a second home than primary residence. Rent, which may not be
paid, is needed to cover mortgage payments due on an investor
property mortgage.
Geographic Dispersion -
Increased diversity implies less vulnerability to economic strength or
weakness based on geographic dispersion.
Mortgage Seasoning -
Borrower's ability to pay generally improves over time.
The loan amortizes and the borrower builds equity in the home. As
equity builds, the borrower's willingness to pay increases.
*A ‘+’ sign in this column indicates that the loss severity assumption will be adjusted upward for a higher value/greater degree of the characteristic in question, and vice versa for a ‘-‘ sign.
Source: Credit Suisse First Boston (US Mortgage Strategy), S&P
Servicer quality
S&P evaluates a servicer’s ability to carry out its basic functions by designating a ranking
of STRONG, ABOVE AVERAGE, BELOW AVERAGE, or WEAK. Table 43 summarizes
the definition of these rankings. A servicer’s involvement in the management, monitoring,
and maintenance of a mortgage loan’s performance plays an important role in assessing
the potential for maximizing recoveries. A servicer’s past performance influences the
required credit enhancement for a specific rating level. Historically lackluster performance
has resulted in higher subordination levels, and vice versa.
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Appendix B – Rating Agency Methodologies
7920 October 2005
Table 43 S&P servicer ranking definitions
Ranking Qualifications
STRONG
Servicer demonstrates the highest ability, efficiency, and competence in managing large and highly
diverse asset portfolios, as well as a proven track record of strong and stable management, state-of-the-
art computer technology, and excellent internal controls, policies, and procedures.
ABOVE
AVERAGE
Servicer demonstrates very high ability, efficiency, and competence in managing mid- to large-size
portfolios, as well as solid management experience, an acceptable track record, internal practices and
policies that meet industry or regulatory standards, and a managed portfolio performance history similar
to industry averages.
AVERAGE
Servicer demonstrates an acceptable track record, internal practices and policies that meet industry or
regulatory standards, and a managed portfolio performance history similar to industry averages.
BELOW
AVERAGE
Servicer demonstrates a lack of ability, efficiency, and competence, as well as an unfavorable track
record, and below standard internal controls or computer systems.
WEAK
Servicer demonstrates a poor servicing track record, evidenced by recurring losses and a serious lack of
internal controls.
Source: S&P
Servicers may be removed to protect investor interests if credit performance on loans
they service leads to failing certain loss triggers on a deal. Loss triggers can bring to
light the excessively deteriorating performance of loans within a servicer’s portfolio and
signal the need for servicer replacement.
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
80 20 October 2005
Fitch Ratings (Fitch Residential Mortgage-Backed Securities Criteria – December 1998)
Base case mortgage pool defined
Fitch defines the base case mortgage for each of the prime, Alt-A, and subprime non-
Agency sectors as:
- 30-year fixed-rate,
- based in New Jersey, and
- originated in early 2003.
Other loan attributes include documentation, loan purpose, occupancy status, property
type, property value, mortgage coupon, and LTV differ across the three product types as
illustrated in Table 44.
Table 44 Attributes used to create Fitch Ratings’ base default curves for a give
pool
Loan Attribute Prime Alt-A Subprime
Doc Type Full Doc Low Doc Low Doc
Loan Purpose Purchase Purchase Cash-out
Occupancy Owner-occupied Investor property Owner-occupied
Property Type Single family Single family Single family
Property Value ($K) 536 467 150
Fixed-Rate Coupon (%) 5.5 6 8
LTV (%) 70 75 80
Source: Fitch Ratings
Frequency of foreclosure
The frequency of foreclosure module is composed of three models, one each for prime,
Alt-A, and subprime segments. Each of these models is built using independent
datasets of collateral classified at the loan level on the basis of characteristics on the
mortgage, borrower, and originator characteristics. At the aggregate pool level, this
classification is generally done per the guidelines in Table 45.
Table 45 Fitch's classification criteria for non-Agency pools
Credit Score LTV Other Loan Attributes
Prime Strong FICO Lower LTV Very standard attributes
Alt-A Lower FICO Higher LTV Variable attributes
Subprime Lowest FICO Highest and lowest LTV Riskiest loan attributes
Source: Fitch Ratings
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
8120 October 2005
Fitch Ratings’ classification process also takes into account the “risk premium” for each
loan, defined as the difference between the mortgage rate on a particular loan versus a
market benchmark, such as the Freddie Mac primary mortgage market survey (PMMS)
rate. The “risk premium” provides an indication of the risk attributed to this loan by the
lender, whereby the higher this premium, the riskier the loan is perceived to be.
Fitch Ratings’ FOF module is composed of two parts:
- likelihood of defaults occurring over the life of a mortgage,
and
- timing of defaults.
To address the likelihood of default, Fitch follows the procedures outlined below.
A subset of the loans making up each dataset are classified as “bad” loans, identified by
Fitch Ratings as loans that are 90 days delinquent or worse within:
- three years of origination for subprime and Alt-A,
and
- four years of origination for prime.
To predict the likelihood of default, this subset is used to examine the distribution of
“bad” loans across ranges in values of LTV, FICO score, and “risk premium.” Base
default curves are constructed across various combinations of these characteristics for
each credit segment.
To address the timing of defaults, seasoning curves are constructed by examining the
frequency of “bad” loan occurrences at a given age. These seasoning curves depict the
portion of “bad” loans occurring at a given age as a percentage of the total number of
“bad” loans within a given credit segment.
Fitch Ratings combines the likelihood and timing of default assumptions to derive model
default curves for each credit segment in the non-Agency RMBS sector.
Fitch Ratings’ methodology also uses “relative regional foreclosure risk” to adjustment
these default curves in accordance with regional market indicators, such as housing
starts and unemployment, which reflect prevailing market conditions.
Loss severity
Fitch’s loss severity module is used to calculate the lifetime loss expectation for each
mortgage as follows:
- Assuming the life of a mortgage is equal to ten years, the loss in dollar terms is
calculated for every quarter.
- The loss in dollar terms at each quarter is multiplied by the probability of that
loss occurring to obtain an estimated quarterly loss for each quarter.
- The estimated quarterly losses are aggregated to obtain a lifetime loss
expectation, expressed in dollar terms. This loss amount as a percentage of
the original balance is used to indicate the credit enhancement required.
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Appendix B – Rating Agency Methodologies
82 20 October 2005
The main drivers of loss severity within Fitch’s module include:
- Property resale value, under the pretext that gains on resale value are
impossible. This factor depends on the rating category whereby more
conservative assumptions are used on higher- versus lower-rated classes, as
well as the volatility of home prices. Assumptions relating to resale value fall
under the “market value decline” (MVD) element of the loss severity module, the
components of which are described in greater detail in Table 46. MVD
assumptions are generated for 80 geographic regions for each rating category;
- “Quick sale adjustment” (QSA) penalty that reflects the liquidation of property at
a lower value associated with distressed sale conditions, and ranges from 15 to
25%.
Table 46 Market value decline components per Fitch's loss severity module
Market Value Decline
Component Comment
Underlying Economic Drivers
This includes the unemployment rate, equity market performance and mortgage rates.
Higher-rated classes are subject to harsher economic environment assumptions.
Regional Equilibrium Trend
(EQT)
Fitch categorizes loans into five classes based on geography and historical housing
price index (HPI) trends: Coastal, Inland, Fast Appreciating House Price Region, Slow
Appreciating House Price Region, and Florida. EQT is a function of HPI, per capita
disposable income, and population demographics for a particular region.
Bubble Pricing and Home
Price Volatility
Fitch uses this to explain "irrational" price trends for a region, whereby home prices are
examined in the context of EQT, unemployment, and equity market movements on
mortgage rates within a given region. The underlying assumption is that historically
volatile markets are likely to be volatile in the future.
Other Factors
These include property type (single family as standard), property tier
(richness/cheapness), occupancy status (owner-occupied as standard), and loan
purpose (purchase as standard).
Source: Fitch Ratings
Actual losses are subsequently calculated as the difference between the liabilities and
the assets of the borrower at the time of property liquidation.
Factors on the liability side of the equation include:
- property taxes and property insurance,
- unpaid interest and unpaid principal balances, and
- foreclosure and carrying costs including legal fees, real estate broker fees,
property maintenance.
Factors on the asset side of the equation include:
- resale value of the property, which is equal to
Original Value of Property x (1 – MVD) x (1 – QSA), and
- recoveries including mortgage insurance payments.
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
8320 October 2005
Dominion Bond Rating Service (DBRS) (DBRS Rating Criteria for US Residential Mortgage-Backed Securities: Default –
December, 2004, and DBRS Rating Criteria for US Residential Mortgage-Backed
Securities: Loss Severity – July 2005)
Base case mortgage pool defined
DBRS defines the “vanilla” mortgage product used to create base default frequency
assumptions as:
- 30-year fixed-rate,
- purchase money,
- owner-occupied,
- single-family, and
- underwritten to a full documentation standard.
Frequency of foreclosure
Base frequency of foreclosure curves are constructed at each rating level by holding the
credit score constant and varying the LTV under the following governing relationships:
- The higher the LTV, the higher the default risk, as the borrower has less of an
equity stake in the property.
- The higher the credit score, the better the borrower’s financial management
skills, suggesting that the borrower is financially savvy and likely to have
additional financial resources on hand. This would support the borrower’s
ability to make a larger down payment and maintain a financial cushion in the
event of financial difficulties.
Adjustments to base default frequency of foreclosure assumptions are based on
variations in non-FICO and non-LTV drivers as summarized in Table 47.
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Appendix B – Rating Agency Methodologies
84 20 October 2005
Table 47 Frequency of foreclosure varies with loan characteristics
Effect on Default Frequency
(versus Base Case Assumption)
Impact
Mortgage Product Type
Term to Maturity + Shorter-term product has historically performed better than longer-term product. Fifteen-year
FRM borrowers tend to be more creditworthy than 30-year and 15-year FRMS tend to have
lower LTVs.
Amortization IO (+) Borrowers may face payment shock as the borrower backing an interest-only loan starts to
make principal payments.
Interest-Only Periods up to 5 years (max + and declines to value
at year 5) / between 5 to 10 years
(unchanged versus value at year 5) /
between 10 to 15 years (increases versus
value at year 10)
Payment shock to IO borrower as principal becomes due maximum during first five years
(greatest default risk). Stable between 5 to 10 years with increasing opportunities to borrow or
refinance.
Loan Characteristics
Loan Purpose Refi (+) Refinance is riskier due to lack of "true" property valuation & no down payment required,
effectively turning the home into a financing vehicle.
Documentation - Less certainty with lower levels of documentation with the exception of pre-screened originator
programs qualifying prime borrowers with minimal requirements.
Occupancy Status Investor & Second home (+) Owner occupancy indicates financial commitment to the property and its maintenance needs.
Investor-owned and second homes are more likely to experience default, with properties
constituting a secondary commitment on the part of the mortgagor.
Property Type 2-4 Family (+) / Condo & Co-op (+) Co-dependency inherent to condo & co-op creates additional default risk. In case of 2-4 family
residences, there may be a single owner with higher dependence on rental income.
Borrower Characteristics
Standardized
Borrower Grade
- with higher grade Higher grades denote more creditworthy borrowers (see Table 48 for Standardized Borrower
Grade Definitions).
Source: Credit Suisse First Boston (US Mortgage Strategy), DBRS
Table 48 DBRS standardized borrower grade definitions
Grade DBRS Borrower Description
A
Not more than 1X (one time) 30 days delinquent within the past year, no bankruptcy or foreclosure within past 7
years.
A- As much as 2X 30 days delinquent, but not 60 days delinquent, no bankruptcy or foreclosure within past 5 years.
B As much as 1X 60 days delinquent, no bankruptcy or foreclosure within 2 years.
C Been 1X 90 days delinquent (or worse), declared bankruptcy, or suffered a foreclosure within past year.
Source: DBRS
Mortgage Market Insights
Appendix B – Rating Agency Methodologies
8520 October 2005
Loss severity
DBRS’ methodology equates loan losses to the difference between the amounts owed
on the loan obligation, on one hand, and recoveries from the sale of the property, and
mortgage insurance proceeds.
Drivers of the liability side of the equation - the amount owed on the loan - include:
- Loan age at default, whereby the remaining balance on a particular loan will
depend on the principal amortized from loan origination until the time of default;
- Loan product type, whereby the longer the amortization term and the higher the
rate that the mortgage carries, all else being equal, the higher the remaining
principal balance on a loan at any point after origination; and
- Amount of unpaid interest, accruing from the borrower’s last payment up to the
liquidation date. This is determined by the outstanding loan balance at the time
of delinquency leading up to default, and the time to liquidation of the property
(known as the carrying time, and estimated using state foreclosure timelines, a
four-month pre-foreclosure delinquency period and a six-month REO marketing
period). This also includes other liquidation costs, including servicer advances
and costs incurred during the delinquency, foreclosure, and resale processes.
Drivers for estimating recoveries include:
- Borrower credit score, as an indication of property resale value, which would
rely on a variety of factors such as attractiveness of the neighborhood and the
borrower’s level of commitment to the property’s appearance and salability;
- Property type, whereby a measure of market risk is associated with each
property type. Single family homes, considered to be the least risky property
type, are used to construct a baseline loss factor and adjustments are made to
this loss factor for a given property type corresponding to its perceived risk
profile versus single-family properties;
- Property price tier, which is a measure of the volatility of a property’s value in
the context of a region’s home price distribution. Affordability, desirability, and
the availability of comparable appraisal benchmarks drive this measure. Values
at the extremity of price ranges are penalized, while median priced properties
are projected to experience less severe declines because of potentially deeper
resale markets; and
- Other recoveries such as mortgage insurance, which generally exist on high
LTV (higher than 80% LTV) loans in the prime market.
Mortgage Market Insights
Appendix C - Glossary
86 20 October 2005
Appendix C - Glossary
A (Prime) Credit A consumer with the highest credit rating, deserving the lowest financing rates that lenders offer.
Accrual (Z) Bond A tranche from which due portion of interest cash flows are diverted until certain other classes are paid off. The interest is accrued and added to the principal balance of the class. The Z-bond becomes a current payer receiving full accrued interest and outstanding principal once these other classes are paid off.
Accrued Interest Interest earned on a security that has not yet been paid to the tranche holder.
Adjustable Rate Mortgage (ARM) A mortgage loan with a variable interest rate. The interest rate on an ARM adjusts with a pre-determined periodicity and is benchmarked to a defined index.
Affordability A measure of a consumer's ability to afford a home.
Agency CMO A Collateralized Mortgage Obligation backed by FNMA, FHLMC, or GNMA collateral.
Agency RMBS A Residential Mortgage-Backed Security issued and guaranteed by FNMA, FHLMC, or GNMA.
Alt-A (Alternative A) Mortgage A less than A (prime) credit quality loan, classified as such due to one or many non-standard features related to the borrower, property, or the loan.
Amortization The reduction of an outstanding balance on a loan through monthly payments based on a pre-determined amortization schedule cast at the time of loan origination.
Amortization schedule A pre-determined monthly payment schedule showing the amount of the monthly payment and its attribution to principal and interest payments.
Amortization term The time period, in months or years, over which a mortgage loan would payoff to zero based on the amortization schedule cast at the time of loan origination.
Application The process a borrower seeking mortgage financing undergoes to secure funds. This process provides information on the borrower’s savings, income, assets, and liabilities.
Appraisal An estimated value of a property arrived at by a certified appraiser.
Appreciation An increase in the value of a property.
Balance The dollar amount of the original loan outstanding. This is equal to the original loan balance less the sum of all prior principal payments since loan origination.
Basis Point 1/100th or .01 of 1 percent. Yield spreads and changes, thereof, are often expressed in basis points.
Call Risk The risk borne by an investor in a security that experiences an amortization rate faster than expected. This faster amortization rate may be due to curtailments or refinancings.
Mortgage Market Insights
Appendix C - Glossary
8720 October 2005
Cash-Out Refinance A mortgage refinancing undertaken with the motivation to extract equity. This is also commonly referred to as an equity take-out. A cash-out refinancing results in a new loan having a higher balance than the existing loan being refinanced. High volume of cash-out refinancings follows periods of high rates of home price appreciation.
Collateral Property, or other assets, pledged by a borrower against an outstanding loan. In the event of the borrower’s failure to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs refers to residential mortgage-backed securities or mortgage loans.
Collateralized Mortgage Obligation (CMO)
Time-tranched securities collateralized by an underlying pool of either, residential mortgage-backed securities or mortgage loans.
Combined Loan-to-Value (CLTV) The sum of all mortgage loans against a property, expressed as a percentage of the appraised value. For example, a $240,000 first mortgage and a $30,000 second mortgage, on a home appraised at $300,000, would equal to 90% CLTV (240,000+30,000=270,000, which is 90% of 300,000).
Companion Tranche A CMO tranche that absorbs the volatility of cash flows generated from the underlying collateral to stabilize the principal payment schedule for a PAC (Planned Amortization Class) tranche in the same deal by absorbing a degree of prepayment variability on the collateral.
Conditional Prepayment Rate (CPR)
The percentage of the outstanding mortgage loan’s principal balance that is prepaid. This is expressed as an annualization of the SMM (Single Monthly Mortality), which reflects the outstanding mortgage loan’s principal balance that is prepaid in one month.
Condominium (Condo) A structure of two or more units wherein the tenants own an individual unit, but common areas are owned collectively by all tenants.
Conforming Loans A mortgage loan that does not exceed the conforming loan limit.
Constant Maturity Treasury Index (CMT)
An index based on the average yield of Treasury securities with a constant maturity corresponding to the index, i.e., 1-year CMT, 3-year CMT. The series is published by the Federal Reserve.
Conventional Mortgage A mortgage that is not insured or guaranteed by the US government.
Convexity The rate of change of duration on a security. Convexity expresses the expected price profile of a security under varying interest rate scenarios. For example, in a rallying interest-rate environment, the price of a negatively convex security appreciates at a slower rate than does the price appreciation on a security with no convexity. The prepayment option on a mortgage imparts negative convexity on RMBS.
Cooperative (Co-op) An ownership structure wherein tenants of a multi-unit housing complex own shares in a corporation that owns the property. Each tenant buys stock in the corporation, and in return for paying monthly dues to cover maintenance, property, real estate taxes and insurance, is given the right to occupy a specific unit.
Cost of Funds Index (COFI) An index reflecting the weighted average cost of funds of savings institutions that are generally members of a given Federal Home Loan Bank’s jurisdiction, such as the 11
th District COFI.
Coupon Rate Stated annual percentage of interest paid on a fixed-income security.
Credit History The collective record of an individual's management of personal credit.
Mortgage Market Insights
Appendix C - Glossary
88 20 October 2005
Credit Report A report prepared by a credit bureau summarizing the borrower’s credit history. Three major credit bureaus in the United States maintain this record. These reports are reviewed by lenders to determine a specific borrower’s creditworthiness.
Credit Score (FICO Score) A numerical score quantifying an individual’s credit worthiness based on his/her credit history. FICO takes its name after the Fair Isaac Company, that devised the underlying methodology.
Current Face The remaining outstanding balance on a mortgage security.
Curtailment, aka Partial Prepayment
See “Prepayment.”
CUSIP number A unique nine-digit identification number permanently assigned to each publicly traded security by the Committee on Uniform Securities Identification Procedures at the time of issuance.
Default An event signaling a failure of a borrower to make a scheduled payment by a certain time.
Default Risk The exposure a holder of an asset bears to losses generated from the underlying collateral.
Delinquency A mortgage loan on which a due payment has not been made by the due date.
Depreciation A decline in the value of a property.
Documentation Type The level of documentation available on an individual borrower verifying employment, income and/or assets. Documentation provided is used to evaluate the financial picture of a borrower.
Down Payment The portion of the purchase price of a property that a borrower funds himself/herself. The remaining portion is financed through securing mortgage financing.
DTI (Debt-to-Income) Ratio The ratio of a borrower’s monthly obligations to the gross monthly income. The “front-end” ratio is defined as the ratio of the borrower’s monthly mortgage payment to their monthly income. The “back-end” ratio is defined as the ratio of all of the borrower’s outstanding monthly debt obligations (housing expenses, recurring debts, and obligations) to their monthly income. Lenders use a combination of the “front-end” and “back-end” ratios to approve mortgages.
Duration The expected price sensitivity of a security to interest rates. For a given change in interest rates, long-duration securities experience larger price changes than short-duration securities.
Equity A borrower's stake in a property, equating to the difference between the fair market value of the property and the amount still owed on an outstanding mortgage, if any.
Extension Risk The risk born by an investor in a security that experiences an amortization of the principal balance slower than expected. Extension risk is generally triggered by a rise in interest rates.
Face Value The outstanding balance or par value of a security.
Factor The ratio of the outstanding principal balance of a mortgage security to the original principal balance.
Mortgage Market Insights
Appendix C - Glossary
8920 October 2005
Federal Home Loan Mortgage Corporation (FHLMC), aka Freddie Mac
Freddie Mac is a private corporation, that trades on the New York Stock Exchange (NYSE), with a credit line to the US Treasury. The Federal Home Loan Mortgage Act of 1970 led to the foundation of Freddie Mac. Securities issued by Freddie Mac are its own corporate obligations and are not backed by the full faith and credit of the US government. Freddie Mac buys loans and securities for its own portfolio.
Federal Housing Administration (FHA)
A government mortgage insurance agency operating under the purview of the Department of Housing and Urban Development (HUD). It insures lenders against losses arising from borrower default on residential properties.
Federal National Mortgage Association (FNMA), aka Fannie Mae
Fannie Mae is a private corporation, that trades on the New York Stock Exchange (NYSE), with a credit line to the US Treasury. The Fannie Mae Charter Act of 1938 led to the foundation of Fannie Mae. Securities issued by Fannie Mae are its own corporate obligations and are not backed by the full faith and credit of the US government. Fannie Mae buys loans and securities for its own portfolio.
FHA Mortgage A mortgage insured by the Federal Housing Administration. The borrower pays a mortgage insurance premium.
Fixed-Rate Mortgage (FRM) A mortgage loan with a fixed interest rate.
Floating-rate CMO (Floater) A tranche which bears an adjustable coupon rate. This rate is tied to a benchmark index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI). The coupon rate on a floater moves in the same direction as the benchmark index.
Foreclosure The process through which a mortgage property is acquired by the servicer once a borrower has defaulted. This process is generally initiated once the servicer has determined low likelihood of a borrower’s willingness or ability to continue making mortgage payments.
Full Documentation (Full Doc) A mortgage application wherein a borrower’s income and assets are fully documented. This generally includes two years of employment verification as well as verification of income and assets.
Government National Mortgage Association (GNMA), aka Ginnie Mae
Ginnie Mae is a government-owned entity created by the US federal government in 1968, separating it from Fannie Mae. Ginnie Mae performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for making home loans. However, with one key difference, it funds loans that are insured or guaranteed by the FHA or VA. Ginnie Mae securities are the only RMBS backed by the full faith and credit of the US government, guaranteeing investors timely payment of interest and principal.
Guarantee Fee (g-fee) A fee assessed by Fannie Mae and Freddie Mac in compensation for the extension of their guarantee of timely payment of principal and interest to investors.
Hedge Positions established to offset risks arising from sensitivity of a security or portfolio to interest rate or credit related factors.
Hybrid ARM An ARM on which the interest rate resets after an initial fixed-rate period. Subsequent periodic adjustments to this rate are benchmarked to the reference index.
Mortgage Market Insights
Appendix C - Glossary
90 20 October 2005
Index A published benchmark interest rate, such as the prime rate, LIBOR, CMT rates, or the COFI index. These are often used to determine interest rates on ARMs, hybrids, and CMO floaters.
Interest-Only Mortgage A mortgage on which monthly payments consist only of the interest portion of the full monthly principal and interest payment. The loan balance remains unchanged over the period such interest-only payments are made.
Inverse Floater A CMO tranche that pays an adjustable coupon rate that moves in the opposite direction of movements in an index. In contrast to a CMO floater, the coupon rate on an inverse floater moves in the opposite direction to movements of the reference index.
Investor Property A property that is not owner-occupied. The motivation of the borrower is typically to purchase the property with the aim to rent it or profit from a re-sale.
IO (Interest Only) A security supported by interest-only mortgages.
Issue Date The date on which a security is issued.
Issuer The issuing entity.
Jumbo Loans Loans with balances that exceed the conforming loan limit.
Lender An institution providing funds to borrowers.
LIBOR (London Interbank Offered Rate)
The interest rate at which major international banks based in London lend dollars to each other.
Loan A borrowed sum of money subject to specified repayment terms.
Loan Origination The process through which the terms of a mortgage loan agreement (loan size, interest rate, term, payment amounts, penalties etc.) are agreed upon and binding to both, the lender and borrower resulting in a transfer of funds from the lender to the borrower.
Loan Servicing The execution of a servicer’s responsibilities spanning from mailing of monthly statements, collecting and processing these payments, identifying delinquent borrowers and pursuing them through collection efforts, and ensuring insurance and property tax payments are made on the property.
Loan-to-Value (LTV) The balance of a mortgage loan expressed as a percentage of the property’s appraised value. For example, a $200,000 loan on a home appraised at $250,000 has an LTV of 80% ($200,000 / $250,000).
Lockout period The period of time during which an RMBS security does not receive principal payments.
Low Documentation (Low Doc) A mortgage application wherein a borrower either provides reduced level of documentation (12 months of bank statements) or low documentation, requiring verification of income, no statement of assets OR verification of assets, NO verification of income.
Margin The amount, generally expressed in basis points, added to a reference index to determine the mortgage or coupon rate on an ARM, hybrid or CMO floater.
Maturity The date on which the entire principal balance on a loan or RMBS security becomes due and payable in full.
Mortgage A legal document that establishes the agreed upon terms binding the borrower’s use of funds to purchase a specific property as collateral against a specific loan.
Mortgage Market Insights
Appendix C - Glossary
9120 October 2005
Residential Mortgage-Backed Security (RMBS)
A security supported by residential mortgages.
Mortgage Banker An entity that originates mortgage loans.
Mortgage Insurance (MI) Insurance that protects a mortgage lender against losses in the event of borrower default. The borrower pays the mortgage insurance premium (MIP) either to a government agency or a private mortgage insurance company.
Mortgage Loan A loan secured by a mortgage
Mortgage Pass-Through Security A security wherein payments on an underlying pool of loans are “passed through” directly to security holders on a pro-rata basis. Principal and interest payments by homeowners are passed through as principal and interest payments to security holders. However, the interest payments from the homeowners are subject to servicing and guarantee fees, if any.
Multifamily Housing A housing unit with more than four residential units.
Negative Convexity The prepayment option on US RMBS impart negative convexity. The security holder experiences a faster return of principal than expected in a declining interest rate environment (termed “call risk”) or slower return of principal than expected in a rising interest rate environment (termed “extension risk”). Negative convexity imparts a distinct price profile to RMBS; a slower rate of appreciation in rallying interest-rate environments and a faster rate of depreciation in a rising interest-rate environment.
No Documentation Loan (No Doc) A mortgage application wherein a borrowers does not provide any verification of employment, income and assets.
Non-Agency RMBS RMBS that are neither issued nor guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.
Non-Conforming Loans Includes “Jumbo Loans” as well as conforming-balance loans with non-standard feature(s) making them ineligible for either Fannie Mae or Freddie Mac’s guarantee.
Option Adjusted Spread (OAS) A theoretical measure of the value of the cash flows on a security held to maturity considering any embedded optionality to interest-rates or credit.
Original Face The original principal amount of a security on its issue date.
Owner-Occupied Property The property is the owner's primary residence.
Par A price on a security, expressed as 100%.
Payment Date The date on which principal and interest payments are transferred to the holder, as of record, of a security.
Payment Period The period during which the borrower is scheduled to make payments, typically expressed in months.
Planned Amortization Class (PAC) A CMO tranche structured to protect an investor from volatility of the underlying collateral’s cash flow under a specified variability over a range of prepayment speeds. Support (companion) tranches absorb most of this variability.
Planned Unit Development (PUD) An ownership structure wherein individuals own the building or unit in which they reside, but common areas are owned jointly, as for a condo, or owned separately.
Mortgage Market Insights
Appendix C - Glossary
92 20 October 2005
Principal Only (PO) A security receiving no interest rates and bearing a coupon rate of zero. Its payments are derived solely from the principal payments on the underlying mortgages.
Pool A collection of mortgage loans aggregated to serve as collateral for an RMBS security.
Prepayment A principal payment made that is over and above the scheduled principal portion of the monthly mortgage payment in a specific period. A “prepayment in full” occurs if the additional payment pays off the entire balance; otherwise, it is classified as a “partial prepayment” or “curtailment.”
Prepayment Penalty A charge levied on a borrower for either a prepayment in full or a curtailment greater than a specified amount. The penalty is typically expressed as a function of the interest-rate on the mortgage and balance of the loan.
Public Securities Association, referencing a prepayment speed assumption
Prepayment rates are often expressed in terms of a PSA rate. A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.2% CPR increases every month thereafter until the thirtieth month, when the rate reaches 6%. 100% PSA equals 6% CPR thereafter. The Public Securities Association is now called the Bond Market Association.
Price The dollar amount to be paid for a security, stated as a percentage of its face value.
Primary Residence A home that the borrower intends to occupy as the principal residence. Owner-occupied properties are primary residences.
Prime Rate The interest rate that banks charge their preferred customers.
Principal The portion of the monthly mortgage payments used to pay down the outstanding principal balance of the mortgage.
Principal And Interest (P&I) The term collectively referring to mandated scheduled principal and interest payments based on the amortization schedule, plus prepayments, on a mortgage.
Principal Balance The outstanding balance due on a (mortgage) loan.
Private Label A mortgage security issued by an entity other than Ginnie Mae, Fannie Mae, or Freddie Mac. Private label issuers may be independent private financial institutions including subsidiaries of investment banks.
Purchase Money Mortgage A mortgage used to fund the original purchase of a property. A transfer of title occurs from one individual to another.
Rate & Term Refinance A transaction entailing the refinance of a mortgage wherein the new mortgage amount is limited to the outstanding principal balance of the existing mortgage plus any closing costs. The motivations of the borrower is to change (generally reduce) the rate and/or change the term of the loan.
Ratings Assignment of specific credit grades by any one of the national rating agencies, Standard and Poor’s (S&P), Moody’s Investors Service, Fitch Ratings, and Dominion Bond Rating Service (DBRS).
Real Estate Owned (REO) The process through which a foreclosed property is eventually disposed off with the objective of collecting proceeds to maximize pay-off of the outstanding mortgage balance on the property.
Remaining Balance (Outstanding Balance)
The balance remaining to be repaid.
Mortgage Market Insights
Appendix C - Glossary
9320 October 2005
Remaining Term The period, expressed in months, required to ensure payoff of the remaining outstanding balance of the loan.
Scenario Analysis Examination of the expected performance of a security holding or portfolio under a range of possible scenarios.
Scheduled Mortgage Payment The pre-determined amount a borrower is obliged to pay monthly (including interest, principal) under the terms of the mortgage contract. Paying less than the scheduled amount results in a delinquent status; paying more results in a partial prepayment.
Secondary Mortgage Market The market previously issued securities.
Senior A CMO tranche having a higher claim to collateral cash flows over "subordinate" tranches. In a senior/subordinate structure, senior tranches are protected by the subordinate classes which are first in line to absorb losses.
Sequential A CMO structure wherein tranches receive monthly interest payments, but the collateral’s principal cash flows are directed in sequential order. Once the first tranche in this sequence is fully paid-off, the principal cash flows from the collateral are applied to the next tranche in sequence until it is fully retired, and so on.
Servicer An entity with responsibilities for servicing mortgage loans. These responsibilities include mailing of monthly statements, collecting and processing these payments, identifying delinquent borrowers and pursuing them through collection efforts, and ensuring insurance and property tax payments are made on the property.
Servicing Fee The pre-determined amount that compensates the servicer for execution of their responsibilities.
Settlement Date An agreed upon date by parties to a transaction for the delivery of securities and payment of funds.
Single Family A home designed for use by only one family.
Single Monthly Mortality (SMM) The percentage of the outstanding mortgage loan principal that prepays in one month, expressed in unites of the outstanding loan balance at the start of the month.
Subordinate A CMO tranche with lower priority to collateral cash flows relative to "senior" tranches. Subordinate tranches are the first to absorb credit losses within a senior/subordinate structure.
Subprime Mortgage Loan A loan made to a borrower, typically with weak to poor credit history relative to prime and Alt-A borrowers.
Super Senior Tranche A CMO tranche created by splitting AAA cash flows into two portions such that one is subordinate to the other. The subordinate tranche (termed the mezzanine AAA portion) provides additional protection against credit losses to the more senior class (termed the super senior).
Support Tranche See “Companion Tranche.”
Tranche An individual RMBS issued in a CMO structure.
Trustee An entity with legal responsibility for assets held on behalf of another.
Two-to-Four Family Properties A property designed for use by two to four families. Ownership of the property is evidenced by a single deed.
Mortgage Market Insights
Appendix C - Glossary
94 20 October 2005
Underwriter For a single mortgage loan, the underwriter is the entity evaluating the loan package and deciding on extension of funding to a specific borrower.
For a specific RMBS or other security, the underwriter is typically an investment bank or broker/dealer arm of a financial institution that is responsible for issuing a specific security.
Underwriting The process of evaluating a loan package to determine the level of risk involved for the lender. Underwriting involves an analysis of the borrower, loan, and property along the dimensions of the capacity, credit, and collateral.
VA Mortgage A mortgage, issued under the purview of the Veterans Administration. The lender is insured against loss by the Veterans Administration on loans available only to ex-servicemen and women. Typically, no down payment is required on these loans.
Veterans Administration (VA) An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services.
Volatility The relative rate at which interest rates move, expressed as the standard deviation of daily interest rate changes. This is generally represented in basis points or percentage terms.
Weighted Average Coupon (WAC) The weighted average coupon rate of loans in a mortgage pool. The gross WAC corresponds to the weighted average mortgage rate on the loans. The net WAC refers to the coupon passed to a security holder, after payment of the servicing fee (and guarantees fee in the case of Agency collateral).
Weighted Average Life (WAL) The weighted average amount of time, expressed in years, for the full return of the principal balance of a security from the date of purchase.
Weighted Average Loan Age (WALA)
The time, expressed in number of months, expressing the weighted average number of months since the date of the loan origination of a pool of mortgages.
Weighted Average Maturity (WAM) The remaining term to maturity of a pool of mortgage loans expressed as a weighted average in months.
Whole Loan See “Private Label.”
Whole Loan CMO A CMO backed by a pool of mortgages.
Window The period of time between the expected first payment of principal and the expected last payment of principal in a CMO security.
Yield The expected rate of return on an investment over a specified time, expressed in bond equivalent terms. The realized return is affected by the price paid for the investment as well as the timing of cash flows associated with an investment.
Yield Curve A graphical representation of the relationship between short-term and long-term interest rates. In a "steep" yield curve, long-term rates are higher than short-term rates. In a "flat" yield curve, long-term and short-term rates are relatively close. In an "inverted" yield curve, long-term rates are lower than short-term rates.
Yield to Maturity The annual percentage rate of return on an investment, assuming it is held to maturity.
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
9520 October 2005
Appendix D - Useful Bloomberg Pages
Chart 50 VAC (View All Classes) <GO> - View a list of all tranches for a given deal
Chart 51 SPA (Structure Paydown) <GO> - View a summary of tranche cash flows for a user-defined prepayment scenario
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
96 20 October 2005
Chart 52 DES (Description) <GO> - View a description of the security
Chart 53 DES2 (Collateral Description) <GO> - View a description of the collateral
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
9720 October 2005
Chart 54 CLC (Collateral Composition)<GO> - View collateral characteristics - Loan Purpose, Occupancy, Property Type, Loan Origination Year, Amortization Term & Type and distributions by Geography, mortgage rate, loan-to-value, loan size, maturity, age, FICO score, percentage of interest-only loans
Chart 55 CLP (Collateral Performance) <GO> - View summary of collateral performance
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
98 20 October 2005
Chart 56 CPD (Class Paydown) <GO> - View history of actual monthly distributions of principal and interest to a given tranche
Chart 57 CGS (Collateral Group Statistics) <GO> - View collateral groups in a deal, the corresponding collateral type, tranches supported by the group, and prepayment performance
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
9920 October 2005
Chart 58 CFG (Cash Flow Graph) <GO> - View a graph of a tranche’s principal and interest cash flows under a user-defined scenario
Chart 59 CFT (Cash Flow Table) <GO> - View projected cash flows for a given tranche under a user-defined prepayment scenario
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
100 20 October 2005
Chart 60 WALG (Weighted Average Life Graph) <GO> - View a graph of the weighted average life profile under user-defined scenarios
Chart 61 FCG (Coupon Graph) <GO> (for floating-rate tranches only) – View the coupon on a floater coupon under user-defined index values
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
Mortgage Market Insights
Appendix D - Useful Bloomberg Pages
10120 October 2005
Chart 62 RCHG (Rating Changes) <GO> - View the original rating and subsequent changes for a given tranche, by rating agency
Chart 63 CLAS (Class Description) <GO> - View Bloomberg’s nomenclature for defining various types of CMOs
Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg
STRUCTURED PRODUCTS RESEARCH
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Disclosure Appendix
Analyst Certification I, Satish Mansukhani, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures CSFB's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to CSFB's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html CSFB’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including CSFB's total revenues, a portion of which are generated by CSFB's Investment Banking and Fixed Income Divisions. CSFB may trade as principal in the securities or derivatives of the issuers that are the subject of this report At any point in time, CSFB is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, CSFB acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?docid=35321113&type=pdf. CSFB clients with access to the Locus website may refer to http://www.csfb.com/locus. CSFB does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, CSFB policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of CSFB's engagement in an investment banking transaction and in certain other circumstances.
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CSFB Credit Rating Definitions CSFB assigns rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk. CSFB's rating opinions do not necessarily correlate with those of the rating agencies.
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