U.S. RMBS Rating Update

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U.S. RMBS Rating Update

• Glenn CostelloManaging Director
• August 2007

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Agenda
New Surveillance Criteria And The Under
Analysis List
Revised Criteria For Rating New Issue RMBS
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Agenda
New Surveillance Criteria And The Under
Analysis List
Revised Criteria For Rating New Issue RMBS
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Understanding Fitch SMARTView

• Each month, monitoring criteria determines deals
  that are selected for review
• The Under Analysis deals are posted on the
  website and a press release is issued. All other
  deals are marked as not being selected for review
  that month
• Under Analysis is not the same as Rating
  Watch. Whole deals are placed under analysis,
  and only after analysis is completed are
  individual tranches upgraded/downgraded/put on
  Watch, or affirmed
• Separate lists are posted for subprime and
  Alt-A/prime
• Fitchs goal is to process all deals under review
  within 30 days

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The July 2007 Subprime Under Analysis List

• 170 Transactions
• Vintage Distribution 2006 106 2005 27
  Older - 37
• Ratings Distribution by Tranches (2005 and 2006
  Deals)
• AAA 611
• AA/A 812
• BBB 339
• BB/B 126
• Stressed Vintage Selection Criteria
• Deals from 2H 2005 and 2006
• Estimated loss expectation of 8 or greater
  Estimated BBB Loss Coverage less than 1.25

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Fitchs Approach On Under Analysis List

• Develop enhanced criteria for evaluating stressed
  vintages
• Conduct rating committees for each transaction
• Publish Rating Action Commentaries with detailed
  information on analysis of each rated security.

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Risk Factors For Stressed Vintages

• High Combined Loan-To-Value Ratios
• Limited/No Borrower Documentation
• Payment Shock At ARM Reset
• Declining Home Prices
• Fitch RMBS model estimates 6-8 from peak
  prices

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Criteria Changes For Expected Loss Projection

• Greater weight to early performance in projecting
  lifetime performance. This can add several points
  of pool balance expected to default.
• e.g. Prior expectation of 15, New Expectation of
  20
• Increased default expectations for 2/28 hybrid
  ARM loans.
• 1.2x prior default expectation if the ARM does
  not have a piggy-back second-lien
• 1.5x prior default expectation if the ARM does
  have a piggy-back second-lien
• Combined multiples for analyzed pools range from
  around 1.15x to around 1.35x
• Results in 2 to 4.5 of additional pool balance
  expected to default

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Default Performance Adjustment Can Be Substantial
Sample Deal Default Rate (CDR)
Source Fitch, Intex
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Criteria Changes For Expected Loss Projection
(cont.)

• Capture impact of second liens
• The worst performing first-lien RMBS contain
  substantial percentages of second liens, 5-10.
• Loss severity estimates reflect the impact of
  second-liens over time
• The net impact of the changes described above
  generated expected lifetime losses for the Under
  Analysis stress vintage transactions ranging
  from 6 to 17 of the original pool balance.

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Early Loss Severity Reflects Second-Lien
Charge-Off
Sample Deal Loss Severity
Source Fitch, LoanPerformance
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Projected Loss Accounts For 2nd Lien Loss Timing
Sample Deal Monthly Loss Amounts
Source Fitch, Intex
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Under Analysis Expected Loss Ranges
Projected Expected Remaining Loss by Deal Age
Source Fitch
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Cash Flow Modeling Prepayment Assumptions

• Fitchs cash flow model employs standard
  prepayment assumptions for various mortgage
  products
• Stressed vintage analysis incorporates the slow
  observed speeds, but reverts to the faster
  standard speeds over time
• This approach avoids undue credit to excess
  spread during peak loss periods

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Prepayment Speeds Reflect Recent Slowing
Sample Deal Prepayment Speed (CPR)
Source Fitch, Intex
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Minimum Loss Coverage Ratios

• The Fitch surveillance model indicates
  recommended actions based on Break Loss (BL) and
  Loss Coverage Ratio (LCRs) analysis.
• The BL is the amount of mortgage pool loss a bond
  can sustain without incurring a principal loss.
• Example Class A BL 32 ( of outstanding pool
  balance)
• The LCR is the ratio of the Break Loss to the
  Expected Loss.
• Example EL 12, Class A BL 32, Class A LCR
  2.67
• To maintain a rating, each class must meet
  minimum LCR requirements
• Specific minimum LCRs have been established for
  the stressed vintages

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Minimum Loss Coverage Ratios
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Rationale For Minimum Loss Coverage Ratios

• The expected loss represents a stressed
  environment. The probability of extreme stress is
  still remote, so a more compressed multiple for
  higher rating categories is warranted, relative
  to new issue.
• To remain investment grade, a class should not
  default in the expected case, even if it is
  stressed. Investment grade classes therefore have
  multiples greater than 1.0.
• Fitch believes the Minimum LCR framework and
  disclosure of BL and LCR data for each rated
  class creates a clearer picture of the relative
  strength of each rating category.
• Note Classes which pay-off in 60 months or less
  in the Expected Loss scenario are not recommended
  for downgrade based on LCR.

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Results From Applying New CriteriaAs of August
6, 2007

• Transaction Reviews Completed 90 of 170
• Affirmations 850 classes, 74 billion par
• Downgrades 491 classes, 9 billion par
• Ratings Distribution After Actions
• AAA 430 classes, 61 billion par
• Investment Grade (including AAA) 1,076
  classes, 79.3 billion par
• Below Investment Grade 265 classes, 3.5 billion
  par

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Rating Transitions For Under Analysis
ActionsAs Of August 3, 2007
Source Fitch
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New Ratings Reflect Loss Coverage Ratio As Of
August 3, 2007
Source Fitch
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Conclusions and Next Steps

• The average loss expectations for the poor
  performing deals on the Under Analysis list is
  around 11 of original balance. Analysis of all
  deals in these vintages should yield lower
  average losses
• Highly-rated AAA and AA RMBS demonstrate
  ability to withstand high multiples to expected
  loss
• The expected case will be monitored closely
  against actual performance, and additional action
  will be taken if warranted
• We will apply the methodology against all 2005,
  2006 and 2007 YTD ratings

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Agenda
New Surveillance Criteria And The Under
Analysis List
Revised Criteria For Rating New Issue RMBS
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The Fitch ResiLogic Default and Loss Model

• ResiLogic is a loan-level model used to project
  expected case losses for mortgage pools, as well
  as Loss Coverage levels for each rating category.
  
• The ResiLogic model was introduced late in 2006.
• ResiLogic is designed to analyze prime, Alt-A and
  subprime pools.
• The changes announced yesterday represent the
  first major revision to ResiLogic

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Enhancements/Revisions To ResiLogic

• Greater weight to regional economic indicators
• increases default expectations around 20
• Increased default expectations for Hybrid ARM
  mortgages
• 22 increase for 2-year hybrid ARMs
• Greater differentiation among documentation
  programs through a new Low documentation
  category. Impact varies by program
• Use back-end versus front-end DTI ratios with a
  missing value default of 50 DTI for subprime.
  Generally minor impact, varies based on data
  quality
• No benefit for recent vintage loans that are 2 or
  more months seasoned. Minor impact.

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Increased Regional Risk Weighting

• Fitch started using University Financial
  Associates (UFA) state-level default multipliers
  with the introduction of ResiLogic
• Observing the UFA forecasts through the current
  downturn has supported their effectiveness
• Fitch believes that continued home-price weakness
  is the greatest risk to new RMBS. A more dynamic
  approach to regional risk can help mitigate that
  risk.
• Greater weighting to the UFA multipliers supports
  this goal.

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Performance Is Deteriorating For Good Subprime
Defaults of Subprime First-Liens With Full-Doc,
No Piggy-Back
Source Fitch, LoanPerformance
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UFA Multipliers Rising Sharply For Some Regions
California UFA Default Multiplier
Source Fitch, UFA
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Increased Regional Risk Weighting Implications

• ResiLogic will be updated quarterly with new UFA
  multipliers
• Expected Loss rates will rise or fall accordingly
• Fitch will publish the updated multipliers with
  an impact analysis
• Impacts Alt-A and Prime, not just Subprime

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ARM Default Rate Adjustments

• Many large lenders have abandoned 2/28 and other
  2-year ARM products.
• Interagency guidance requires qualification at
  the fully indexed rate
• Existing hybrid ARM borrowers with teaser rates
  may have severely curtailed refinancing options
• A mass of existing hybrid ARM originations is yet
  to be securitized
• Fitchs adjustment reflects the increased payment
  shock risk to these products. 2/28 default rate
  expectations are increased 22.

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ARM Resets Without Home Price Growth Will
Increase Defaults
Source Fitch, LoanPerformance
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Impact Of Revisions ABX.HE 07-1 Example

• Estimated Initial Expected Losses For ABX.HE 07.1
  Collateral Pool
• Prior Model 5.65
• New Model 8.23
• Difference 2.58
• Components of Change UFA 1.20, ARM 1.10,
  Other 0.30
• Notes
• Fitch did not rate 10 of the 20 reference
  entities
• Actual ratings did not utilize ResiLogic
• Based on current UFA multipliers, not those
  prevailing when deals were originated.

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What Is Not Changing Cash Flow Analysis

• Dynamic interest-rate risk methodology introduced
  in 2006. No-arbitrage approach to swap analysis.
• New loss timing and prepayment curves introduced
  in 2006 in conjunction with Intex-based cash flow
  modeling.
• Updated (slower) prepayment curves in early 2007.
• We remain very comfortable with our approach. All
  curves are published on our website.
• Further commentary coming on impact of
  modifications

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Whats Next Additional Enhancements To ResiLogic

• Expansion to MSA-level UFA forecasts
• Application of UFA forecasts to expected case
  Loss Severity

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Q A