CSFB Non-Agency MBS Starter Kit

FOR IMPORTANT DISCLOSURE INFORMATION relating to analyst certification, the Firm’s rating system, and potential

conflicts of interest regarding issuers that are the subject of this report, please refer to the Disclosure Appendix.

FIXED INCOME RESEARCH > STRUCTURED PRODUCTS

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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

[email protected]

Mutaz Qubbaj

+1 212 325 0172

[email protected]

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


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.


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.


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


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


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


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


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%).


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


Borrowers Borrowers

FNMA/Freddie Portfolio


Conduits 1/IssuersConduits 1/IssuersBanks /

Mortgage Bankers

Banks /

Mortgage BankersMortgage BrokersMortgage Brokers Broker/Dealers Broker/Dealers InvestorsInvestors

Warehouse

Lending

Warehouse

Lending



Borrowers Borrowers



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



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



Non-Agency Security5.275% Net WAC



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



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.


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


jumbo and sub-prime



jumbo and sub-prime


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


Premium to

Prime rates

Increase in % of

LTV>80

700-720

Tier 1

Alt-As


Premium to

Prime rates

Increase in % of

LTV>80

700-720

Tier 2

Alt-As


Premium to

Tier 1

Alt-As

Increase in % of

LTV>80

640-690

Tier 2

Alt-As


Premium to

Tier 1

Alt-As

Increase in % of

LTV>80

640-690


jumbo and sub-prime



jumbo and sub-prime


jumbo and sub-prime


jumbo and sub-prime



jumbo and sub-prime


jumbo and sub-prime

Layered Risk


jumbo and sub-prime



jumbo and sub-prime


jumbo and sub-prime


jumbo and sub-prime



jumbo and sub-prime


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



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


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.


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%


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 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%



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 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%


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.


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



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.

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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



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.



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.


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.

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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-

pancy

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��



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


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


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.


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%



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%


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.


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



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.


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.


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%



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.


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


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 @ Pricing Speed (300PSA)



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



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%


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



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


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).


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


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.


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



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


Jumbo 2002 Vintage


Jumbo 2003 Vintage


Jumbo 2004 Vintage


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)


Jumbo 2001 Vintage


Jumbo 2002 Vintage


Jumbo 2003 Vintage


Jumbo 2004 Vintage


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

)


Jumbo 2001 Vintage


Jumbo 2002 Vintage


Jumbo 2003 Vintage


Jumbo 2004 Vintage


Jumbo 2005 Vintage



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.


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



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.


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).


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.


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.


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.


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



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.


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


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.


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


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


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.


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


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.


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.



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



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




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)



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


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



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




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)




(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



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)




(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.


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)





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


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.


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





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









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 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.


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)




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


flows at upper bound of

PAC band


flows at lower bound of PAC

band



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


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)




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.


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



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



Chart 41 illustrates the yield and weighted average life profile of the Z-bond across

varying prepayment scenarios.


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)




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


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%


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



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.


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









Stable

WAL

WAL

variability



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




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







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



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)





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%


Coupon = Multiplier * Index + Margin


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




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.


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


Intermediate Sequential FHASI 2004-7 1A2 20.26 12.64 8.27 6.08 4.90 2.80 11.99 3.37 17.46


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


PAC CSFB 2005-5 2A8 3.99 3.99 3.99 3.91 3.56 2.27 0.00 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


NAS CSFB 2004-8 1A4 15.58 12.73 11.04 9.95 8.74 3.83 4.54 2.30 11.75


Z-bond CSFB 2004-8 8A5 20.50 13.01 8.38 6.09 4.86 2.67 12.12 3.52 17.83


*As of deal pricing for respective deals.


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.


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


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.


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


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.


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


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)


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.


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


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


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


Appendix A – Securitization Deal Participants

72 20 October 2005


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.



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.


Appendix B – Rating Agency Methodologies

74 20 October 2005


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.



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.



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



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.



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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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.



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Fitch Ratings (Fitch Residential Mortgage-Backed Securities Criteria – December 1998)


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


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




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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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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).


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.



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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)


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.


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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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



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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.


Appendix C - Glossary

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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.



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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.



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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.



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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.



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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.



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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.



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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.



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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.



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.


Appendix D - Useful Bloomberg Pages

9520 October 2005


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




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




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




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




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




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




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


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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.

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