FIXED INCOME RESEARCH > STRUCTURED PRODUCTS 20 October 2005

Mortgage Market Insights

http://research-and-analytics.csfb.com/

Contributors Satish Mansukhani CSFB’s Starter Kit for +1 212 325 5985 [email protected] Non-Agency Residential Mortgage-Backed Mutaz Qubbaj +1 212 325 0172 Securities [email protected]

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.

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. Mortgage Market Insights Table of Contents

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

2 20 October 2005 Mortgage Market Insights Table of Contents

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

20 October 2005 3 Mortgage Market Insights I. Introduction

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 1 outstanding balance of $3.9 trillion 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

$4,000 $3,897 $3,711 Agency RMBS $3,639

Non-Agency RMBS $3,268 $3,000 $2,935 $2,594 $2,397 $2,135 $1,952

$2,000 $1,843 $1,707 $1,585 $1,484 $1,305 $1,257 $1,140 $1,088 $1,000 $1,001 $683 $552 $496 $426 $399 $361 $280 $235 $208 $194 $176 $147 $98 $55 $0

4 5 2 3 Outstanding RMBS Balance ($Billions) Balance RMBS Outstanding 9 9 96 0 0 04 997 1990 1991 1992 1993 19 19 19 1 1998 1999 2000 2001 20 20 20 1H:05

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

4 20 October 2005 Mortgage Market Insights I. Introduction

Chart 2 Non-Agency RMBS* issuance volumes have recently surpassed those of Agency RMBS $2,500 Agency RMBS Non-Agency RMBS $2,131 $2,000 Billions)

$1,500 $1,443 $1,088 $1,084 $1,000 $1,019 $864 $856 $726 $685 $586 $568 $479 $455

$500 $414 $370 $368 $359 $268 $269 $267 $235 RMBS Issuance ($ RMBS $203 $148 $136 $119 $98 $89 $63 $70 $49 $49 $0 $24

0 3 4 8 9 3 * 91 92 96 97 00 01 02 * 9 9 9 9 0 0 0 5 199 1 1 199 199 1995 1 1 199 199 2 2 2 200 2004 0 20

*Non-Agency RMBS issuance volume includes prime jumbo, Alt-A and subprime and other non-Agency product including second liens, HELOCs, and high LTV loans. **2005 RMBS issuance numbers annualized based on actual 1H:05 issuance. Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

Conforming limit determines Agency or non-Agency label Loan balance and collateral attributes are key differentiating features leading to a loan being eligible for Agency or non-Agency securitization. The conforming limit set by the Office of Federal Housing Enterprise Oversight (OFHEO) determines if a loan can qualify for the Agency guarantee. Loans with balances below the conforming limit, currently $359,650, may be eligible for Agency securitization. The conforming limit is set every year, generally in October, and is based on annual home price increases. Fannie Mae and Freddie Mac can issue a guarantee only on loans below the conforming limit. The conforming limit has never declined and, as shown in Chart 3, in years when the rate of home price appreciation has been flat, the conforming limit has remained stable. Notably, as a result of the steady increases in the conforming limit, a loan that a year ago could have been classified as non-Agency today may be classified as Agency.

20 October 2005 5 Mortgage Market Insights I. Introduction

Chart 3 Conforming loan limit differentiates non-Agency from Agency RMBS

14% $400,000 Conf. Loan Limit Purchase HPI (LHS) $359,650 12% $350,000 $333,700 $322,700

10% $300,700 $300,000 $275,000

8% $252,700 $250,000 $240,000 $227,150 $214,600 $207,000 $203,150 $203,150 $203,150 6% $202,300 $200,000 $191,250 $187,600 $187,450 Index Increase Index $168,700 $153,100

4% $150,000 ($) Limit Loan Conforming $133,250 $115,300 $114,000 $108,300 $107,000 $98,500

2% $93,750 $100,000

0% $50,000 1979 1983 1987 1991 1995 1999 2003

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

N ew Ha mpsh ire $235 Median P rice ( $K) Ma i n e Washington $133 $230 to $422 $226 Vermont $158 to $230 No rth D akota $132 $133 to $158 Monta na $103 $121 to $133 Orego n $134 Minnesota $100 to $121 $19 0 Idaho $169 Mas sac husetts $126 Wisconsin $364 South Dakota $139 Ne w Y ork Rhode Is land Wyoming $100 Michiga n $129 $228 $265 Iowa $142 Pennsylvania Connecticut Nebras ka $13 5 $10 4 Oh i o New Jersey $237 Utah $118 Ne vada IllinoisIn diana $132 $314 De la wa re $284 $155 Colorado $109 $194 Virginia $158 $209 Kans as Mi s s ou ri Ma r yl a n d California Ke ntucky $23 0 $288 $12 5 $118 $422 $113 TennesseeNorth Carolina District of Columbia Ok l a h o ma $129 $139 $33 6 Arizona Arkansas West Virginia $177 New Mexico $103 S outh Carolina $118 $15 0 $100 $133 AlabamaGe or g i a Mississippi $124 $134 Texas $102 Florida $121 $207

Alaska Louisiana $176 $116

Ha wa i i $362 Top and Bottom Five States California $422K Arkansas $100K Massachusetts $364K South Dakota $100K Hawaii $362K Mississippi $102K District of Columbia $336K North Dakota $103K New Jersey $314K Oklahoma $103K

Source: Credit Suisse First Boston (US Mortgage Strategy), Census Bureau, NAR, Economy.com

6 20 October 2005 Mortgage Market Insights I. Introduction

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 2 3 of housing units along the East and West 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

Ne w Hamps hi re 0.6 Number of Units (MM) Wa shington Vermont 3.1 to 12.7 2.6 0.3 Mai ne 2.2 to 3.1 North Dakota 0.7 1.3 to 2.2 Mo nta na 0.3 0.7 to 1.3 0.4 Mi n n e s ot a Oregon 2.2 0.2 to 0.7 1.5 Idaho Wisconsin Massachusetts 0.6 2.7 South Dakota 2.4 Michiga n New York Wyoming 0.3 4. 4 7.8 Rh ode Is l an d 0.2 0.4 Iowa Pe nns ylva nia Connecticut Ne bras ka 5.4 Nevada 1.3 Ohi o 1.4 Utah 0.7 Ne w Je rs ey 0.9 IllinoisIndiana 4.9 Delaware 0.8 3.4 Col o rad o 5 2.7 0.4 California 2 Kans as Mi s s o u ri Maryland 12.7 Ke nt uc ky Virginia 1.2 2.5 1. 8 3.1 2.2 Tennessee North Carolina District of Columbia Ok l a h o m a 2. 6 3.8 0.3 Arizona Arkansas We s t V i rg in ia 2.4 New Mexico 1.6 South Carolina 0.8 1.2 Alab ama 1.9 0.9 2 Georgia Mississ ippi 3.6 Texas 1.2 Florida 8.7 7.8

Alaska 0.3 Louisiana 1.9 Hawaii 0.5 Top and Bottom Five States California 12.7MM Wyoming .2MM Tex as 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%).

20 October 2005 7 Mortgage Market Insights I. Introduction

Chart 6 From origination to securitization Origination Securitization

FNMA/FreddieFNMA/Freddie G - -Fees Fees

BanksBanks // 1 BorrowersBorrowers MortgageMortgage BrokersBrokers Conduits 1/Issuers/Issuers Broker/Dealers InvestorsInvestors MortgageMortgage BankersBankers

WarehouseWarehouse FNMA/FreddieFNMA/Freddie LendingLending PortfolioPortfolio

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) Minus 37.5bps servicing Non-Agency Security 5.275% Net WAC Minus 45bps g-fee Non-Agency Subordinates Agency Security 3.5% of deal at 10pt spread 4.825% Net WAC behind AAA

Indicated price of $100.62 Indicated price of $100.90 based on market pricing based on market pricing Minus Credit Cost $0.35 (3.5% subs * $10) Price of $100.55

Difference = $0.07

Favors Agency Securitization

Source: Credit Suisse First Boston (US Mortgage Strategy)

8 20 October 2005 Mortgage Market Insights I. Introduction

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.

20 October 2005 9 Mortgage Market Insights I. Introduction

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

Tier 1 Tier 2 Characteristic Prime Jumbo Subprime Characteristic Prime Jumbo Alt-As Alt-As

GreaterGreater than than GSE GSE Significantly lower LoanLoan Balance Balance Mix of <, > GSE limit Lower than GSE limit limitlimit than GSE limit Premium to Premium to Premium to Rate Premium None Tier 1 Tier 2 Rate Premium None Prime rates Alt-As Alt-As Increase in % of Increase in % of Loan-to-Value Und er 80% High % of LTV>80 Loan-to-Value Under 80% LTV>80 LTV>80

Average FICO Average FICO 720720 or or higher higher 700-720 640-690 <640

Purchase/Rate-TermPurchase/Rate-Term High % of cashout versus jumbo LoanLoan Purpose Purpose High % of cashout versus jumbo Cashout RefiRefi

LowLow % % of of full full doc doc versus versus DocumentationDocumentation Full Full Full jumbojumbo and and sub-prime sub-prime

LowLow % % of of owner-occupied owner-occupied versus versus OccupancyOccupancy Owner Owner Owner jumbojumbo and and sub-prime sub-prime

LowLow % % of of single-family single-family versus versus PropertyProperty Type Type Single-Family Single-family Single-Family jumbojumbo and and sub-prime sub-prime

Layered Risk

Source: Credit Suisse First Boston (US Mortgage Strategy)

10 20 October 2005 Mortgage Market Insights I. Introduction

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

$2,500 $350 Agency Fixed rate Subprime Fixed rate $300 $283 $1,925 $300 Alt-A Fixed rate $2,000 $250 Jumbo Fixed rate $204 $210 $1,338 $1,500 $200 $181 $1,041 $150 $1,000 $835 $125 $696 $657 $90 $91 $100 $427 $500 $326 $307 $52 $214 $50 $30 MBS Issuance ($Billions) Issuance MBS MBS Issuance ($Billions) Issuance MBS $0 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$500 $494 $250 Subprime Hybrid Agency Hybrid $206 $400 Alt-A Hybrid $200 $184 Jumbo Hybrid $300 $150 $123 $224 $100 $200 $55 $61 $56 $138 $45 $52 $50 $31 $28 $100 $32 $37 MBS Issuance Issuance ($Billions) MBS $23 MBS IssuanceMBS ($Billions) $14 $12 $14 $18 $0 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

Stability in originator, issuer, and underwriters has characterized the prime jumbo and Alt-A segments, both fixed and hybrid, of the non-Agency RMBS sector. Countrywide, Washington Mutual, Wells Fargo, Bank of America, and Chase Home Finance have consistently ranked among the top originators of prime jumbo and Alt-A mortgages (see Table 1). Greater consolidation is evident given that the share of the top five originators has increased to 56% in 2004 from 47% in 2002, while the share of the top ten originators has risen to 75% from 62% over the corresponding time frame.

20 October 2005 11 Mortgage Market Insights I. Introduction

Table 1 Top prime jumbo and Alt-A originators, 2002-2004 2004 2003 2002

Mkt Mkt Mkt Vol. Share Vol. Share Vol. Share Rank Lender ($Bn) (%) Lender ($Bn) (%) Lender ($Bn) (%)

1 Countrywide 85 17.2% Wells Fargo 93 14.2% Wells Fargo 81 14.9% 2 Washington Mutual 71 14.4% Washington Mutual 85 12.8% Washington Mutual 77 14.2% 3 Wells Fargo 68 13.8% Chase Home Finance 65 9.9% Chase Home Finance 37 6.9% 4 Bank of America 26 5.3% Countrywide 65 9.8% Countrywide 35 6.3% 5 Chase Home Finance 24 4.8% Bank of America 31 4.7% Bank of America 24 4.4% 6 CitiMortgage 24 4.8% Cendant Mortgage 23 3.4% Cendant Mortgage 22 4.0% 7 Golden West Financial 19 3.9% CitiMortgage 22 3.4% CitiMortgage 18 3.3% 8 GMAC Mortgage 18 3.7% ABN AMRO 19 2.9% GMAC-RFC 16 3.0% 9 GreenPoint Mortgage 18 3.6% GreenPoint Mortgage 17 2.5% GreenPoint Mortgage 15 2.8% 10 Cendant Mortgage 16 3.1% National City Mortgage 17 2.5% Golden West Financial 12 2.3% 2004 Total 495 2003 Total 660 2002 Total 544 2004 Top 5 275 55.5% 2003 Top 5 339 51.4% 2002 Top 5 254 46.7% 2004 Top 10 369 74.6% 2003 Top 10 437 66.2% 2002 Top 10 337 62.0%

Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

Countrywide and Bank of America have consistently featured in a ranking of the top five issuers between 2002-2004, with Bear Stearns, Lehman Brothers, and Wells Fargo rounding out this list in 2004 (Table 2). Notably, the share of the top ten issuers has declined from 79% in 2002 to 67% in 2004, which has largely been an outcropping of the growth in dealer conduit platforms. Among dealer conduits, Bear Stearns, CSFB, Lehman Brothers, and UBS have consistently featured in rankings of the top ten issuers between 2002-2004.

Table 2 Top prime jumbo and Alt-A issuers, 2002-2004 2004 2003 2002

Mkt Mkt Mkt Vol. Share Vol. Share Vol. Share Rank Issuer ($Bn) (%) Issuer ($Bn) (%) Issuer ($Bn) (%)

1 Countrywide 50 12.8% Countrywide 43 13.7% Washington Mutual 41 17.8% 2 Bear Stearns 33 8.4% Washington Mutual 34 10.8% Countrywide 27 11.8% 3 Lehman 30 7.6% Bank of America 26 8.5% GMAC-RFC 20 8.8% 4 Bank of America 27 6.8% UBS Warburg 22 7.2% CSFB 17 7.4% 5 Wells Fargo 27 6.8% Wells Fargo 22 7.1% Bank of America 15 6.7% 6 Impac 21 5.5% Lehman 20 6.3% Wells Fargo 15 6.5% 7 Washington Mutual 21 5.4% CSFB 20 6.3% Lehman 15 6.5% 8 UBS Warburg 21 5.2% GMAC-RFC 18 5.8% Bear Stearns 13 5.6% 9 CSFB 18 4.6% Bear Stearns 18 5.7% UBS Warburg 9 3.9% 10 IndyMac 14 3.5% Merrill Lynch 12 3.8% Goldman Sachs 9 3.7% 2004 Total 392 2003 Total 312 2002 Total 229 2004 Top5 166 42.4% 2003 Top 5 147 47.2% 2002 Top 5 120 52.5% 2004 Top 10 261 66.7% 2003 Top 10 234 75.2% 2002 Top 10 180 78.7%

Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

12 20 October 2005 Mortgage Market Insights I. Introduction

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

Mkt Mkt Mkt Vol. Share Vol. Share Vol. Share Rank Issuer ($Bn) (%) Issuer ($Bn) (%) Issuer ($Bn) (%)

1 Bear Stearns 75 19.1% Bear Stearns 49 15.7% Bear Stearns 40 17.3% 2 Lehman 41 10.5% Lehman 35 11.3% Lehman 32 14.0% 3 RBS Greenwich 41 10.5% CSFB 35 11.2% CSFB 31 13.7% 4 Bank of America 32 8.1% UBS Warburg 34 11.0% UBS Warburg 20 8.8% 5 CSFB 31 7.8% Countrywide 26 8.5% RBS Greenwich 19 8.4% 6 Countrywide 30 7.8% Bank of America 25 8.1% Goldman Sachs 16 7.1% 7 UBS Warburg 26 6.7% Goldman Sachs 24 7.6% Countrywide 15 6.5% 8 Goldman Sachs 24 6.2% Merrill Lynch 18 5.9% Bank of America 15 6.4% 9 Citigroup 19 4.8% RBS Greenwich 18 5.8% Salomon Smith Barney 10 4.5% 10 Merrill Lynch 18 4.6% Morgan Stanley 14 4.4% JP Morgan 8 3.5% 2004 Total 392 2003 Total 312 2002 Total 229 2004 Top 5 220 56.1% 2003 Top 5 180 57.7% 2002 Top 5 142 62.2% 2004 Top 10 338 86.1% 2003 Top 10 278 89.3% 2002 Top 10 207 90.3%

Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

20 October 2005 13 Mortgage Market Insights II. Collateral Characteristics

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 4 provided for a given characteristic. 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 5 characteristics 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.

14 20 October 2005 Mortgage Market Insights II. Collateral Characteristics

Table 4 2004 vintage 30-year fixed-rate collateral characteristics

Agency Non-Agency Prime Jumbo Product FNMA Fixed 30yr Alt-A Fixed 30yr 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 62 No 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 Prime Jumbo Product FNMA Fixed 15yr Alt-A Fixed 15yr 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 728 718 742 720 LTV (%) 61 65 58 62 SF / PUD (%) 96 77 95 92 2-4 Units (%) 4 14 0 2 Owner-Occupied (%) 92 45 92 90 Second Home (%) 4 3 7 5 Investor (%) 4 52 0 5 Full Doc (%) N/A 34 59 42 Low Doc (%) N/A 63 34 54 No Doc (%) N/A 2 6 4 Purchase (%) 18 23 20 24 Cashout Refi (%) N/A 45 18 36 Refi (%) 82 32 61 40 Purpose Other (%) N/A 0 0 0 Prepay Penalty (%) 0 8 0 10 Prepay Penalty Term (months) 0 43 38 40

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

20 October 2005 15 Mortgage Market Insights II. Collateral Characteristics

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.

16 20 October 2005

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

Bank of Goldman Bank of Goldman Countrywide America RFC Wells Fargo Sachs Countrywide America RFC Wells Fargo Sachs (CWHL) (BOAMS) (RFMSI) (WFMBS) (GSR) (CWHL) (BOAMS) (RFMSI) (WFMBS) (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 tation N/A 0 0 15 0 N/A 0 0 19 0 Documen- No Doc (%) 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 Type

Property 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

Purpose Refi (%) 33 44 50 48 34 51 60 75 62 59 Prepay Penalty (%) 0 12 2 0 1 0 0 1 0 0 Prepay Penalty Term (Months) N/A N/A 50 N/A N/A N/A N/A 36 N/A N/A California (%) 49 61 49 48 46 36 58 44 47 31 Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

II. Collateral Characteristics Mortgage MarketInsights

Mortgage Market Insights II. Collateral Characteristics

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 CL TV 85.01-90 NA NA NA 90.01-95 NA NA NA 95.01-100 NANANANANANANANANANA

>= 780 NA NA 720 - 779 NA NA 700 - 719 NA NA FICO 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 NANANANANA FICO < 660 <=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 FICO >= 660 <=40.00 NA NA 40.01-45.00 NA NA

Owner Occupied NA NA Occupancy Investor NA NA NA Second Home NA NA

Purchase NA NA Purpose Refinance NA NA Cashout NA NA NA

*A red cell indicates a payup, resulting from contributing weaker attributes. A blue cell indicates a paydown, resulting from contributing stronger attributes. Source: Credit Suisse First Boston (US Mortgage Strategy)

18 20 October 2005 Mortgage Market Insights II. Collateral Characteristics

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 CL TV 85.01-90 NA NA NA 90.01-95 NA NA 95.01-100

>= 780 720 - 779 700 - 719 FICO 680 - 699 660 - 679 640 - 659 620 - 639

DOC = Full DOC = Low DOC = No Income Verification NA DOC = No NA NA FICO < 660 <=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 FICO >= 660 <=40.00 40.01-45.00 45.01-50.00 >50 NA

Owner Occupied Occupancy Investor NA NA Second Home NA NA

Purchase Purpose Refinance Cashout NA

*A red cell indicates a payup, resulting from contributing weaker attributes. A blue cell indicates a paydown, resulting from contributing stronger attributes. Source: Credit Suisse First Boston (US Mortgage Strategy)

At the inception of the non-Agency RMBS sector, the lack of clear segmentation based on the credit quality of the underlying borrowers led to an entire range of mortgages across the credit continuum that did not fit the Agency eligibility requirements being included in non-Agency securitizations. However, the development of the Alt-A sector, beginning in 1995, and the subprime sector in 1997, provided a separate channel for these loans to be securitized, translating into an increasingly homogeneous prime jumbo segment. This homogeneity is reflected in an examination of the transitions in collateral characteristics displayed in Table 9 as well as through a comparison of the illustrative underwriting matrices for prime jumbo and Alt-A (compare Tables 7 and 8). We draw readers’ attention to specific combinations of collateral attributes, identified as “NA,” which are simply not permitted into prime jumbos. A visual comparison of the two easily illustrates the tighter criteria for inclusion of a loan in prime jumbo. Homogeneity in fixed-rate prime jumbo product is also reflected through an examination of collateral characteristics across a range of FICO buckets as illustrated against a comparison versus Alt-A product (see Tables 10 and 11). Prime jumbo product is characterized by significantly less variability in collateral characteristics relative to Alt-A, reflective of the more stringent standards for inclusion of a loan in this segment.

20 October 2005 19

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
tation 2
1
2
2


2
3
5
6
Documen- No Doc (%) 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
Type

Property 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

Purpose Refi (%) 40
47
55
41


59
68
72
60
Prepay Penalty (%) 3
2
2
4


1
1
2
0
Prepay Penalty Term (Months) 58
58
47
46


58
47
38
38
California (%) 44
47
50
49


33
39
42
41
Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

II. Collateral Characteristics Mortgage MarketInsights

Mortgage Market Insights II. Collateral Characteristics

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 (%) 30011111 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 (%) 7269696969696866 LTV > 80 & <= 90 (%)24432211 LTV > 90 (%)12111100 MI (%) 37542321 Investor (%)04333221 Full Doc (%)5292896461444646 Low Doc (%)487 9 1623272937 No Doc (%)01222112 Purchase (%)6225313435384150

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

Table 11 30-year fixed-rate Alt-A collateral characteristics by FICO distribution

Alt-A Fixed-Rate 30-year FICO Bucket <620 620-639 640-659 660-679 680-699 700-719 720-779 >=780 Avg. Loan Size ($K) 177 204 202 208 203 196 200 197 IO (%) 5 11 7 9 8 9 11 13 GWAC (%) 6.51 6.66 6.54 6.46 6.36 6.29 6.19 6.12 FICO 599 629 650 670 689 709 748 792 LTV (%) 7777777574747369 LTV > 80 & <= 90 (%)1214141311119 7 LTV > 90 (%) 10 14 13 9 8 9 7 4 MI (%) 2128262119191511 Investor (%)1415182123273135 Full Doc (%)3134372627293540 Low Doc (%)4653505960575348 No Doc (%) 0 10 9 10 9 9 8 9 Purchase (%)6437393943475358 Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

20 October 2005 21 Mortgage Market Insights III. Credit Enhancement

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.

22 20 October 2005 Mortgage Market Insights III. Credit Enhancement

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.

20 October 2005 23

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 Alt-A Credit Tranching (example deal) Non-OC Deal(example deals) OC Deal

'AA' 4.00% 'A A' 2. 20% 'AA' 1. 35 %

'AAA' 91.10% 'AAA' 95.10% 'AA A' 97 .35 %

'A' 1.05% 'A' 2.75% 'A' 0.50 %

'B BB' 0 .65% 'B BB' 0 .30 % 'BBB +' 1.20 %

'BB' 0.30% 'BB' 0.25% 'B' 0.40% 'BBB-' 0.9 5% 'B' 0.15% 'Subs+OC of 0.50% ' 9.40% 'OC' 0 .50% 'Subs' 4.90% ‘NR' 0.30% 'Subs' 2.65% ‘NR' 0.10% (fully f unde d)

Source: Credit Suisse First Boston (US Mortgage Strategy)

Mortgage MarketInsights III. Credit Enhancement

Mortgage Market Insights III. Credit Enhancement

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 Excess 11% Spread / OC 1%

Senior / Subordinate 88%

Source: Credit Suisse First Boston (US Mortgage Strategy), Inside MBS&ABS

In the example deal structure illustrated in Chart 12, rating agencies require 2.5% of the original balance of the mortgage collateral to be carved as subordinates. The remaining 97.5% of classes are assigned a AAA rating. Of the entire 2.5% of subordinates, 1.35% are AA-rated, 0.45% are A-rated, 0.25% are BBB-rated, 0.20% are BB-rated, 0.15% are B-rated, and the remaining 0.10% are unrated. Rating agencies, when arriving at the amount of credit enhancement required at each credit grade level, do so to try and assign similar default probabilities for a given rating level between RMBS and corporates. Hence, based on their methodologies and statistical analysis, a BBB-rated non-Agency RMBS should, in theory, be exposed to a probability of default similar to other BBB-rated corporates. Rating-agency-mandated subordination levels on prime jumbo RMBS have declined over time, most notably since the mid-90s (see Chart 13). This has resulted from a combination of factors including: • Development and increased use of credit scoring, which allows for more accurate evaluation of the credit worthiness of the underlying borrower. • Tiering of the non-Agency market along credit grades, which currently span across prime jumbo, various tiers of Alt-A, and on to subprime. • Risk-based pricing, which in conjunction with the two factors above has enabled originators to understand the various levels of risk at the individual loan level and thereby evaluate the rate at which the loan should be originated.

20 October 2005 25 Mortgage Market Insights III. Credit Enhancement

• 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

'AA' 1.35%

'AAA' 97.50% Losses Prepayments

'A' 0.45%

'BBB' 0.25%

'BB' 0.20%

'B' 0.15%

'Subs' 2.50% 'UR' 0.10%

Source: Credit Suisse First Boston (US Mortgage Strategy)

26 20 October 2005 Mortgage Market Insights III. Credit Enhancement

Chart 13 Subordination levels have steadily declined on prime jumbo RMBS*

Non-Agency Product Development Cycle 7 Inception of Alt-A 6 Inception UR of 5 B Subprime Tiering of 4 Alt-A BB 3 BBB 2 A AA

% of Deal at Issueof Deal % 1 - 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Issuance Year

*These subordination levels are specific to the Residential Funding Mortgage Securities Inc. (RFMSI) shelf. Source: Credit Suisse First Boston (US Mortgage Strategy)

Allocation of scheduled and unscheduled principal payments, interest payments, and credit losses Principal and interest cash flows in a senior/subordinate structure are allocated as follows: • Interest and scheduled principal cash flows are distributed on a pro-rata basis to the AAA and subordinate classes. • Unscheduled principal cash flows, i.e., principal prepayments, are initially directed entirely to the AAA classes. Subordinate classes are subject to a prepay lockout, whereby they do not receive their pro-rata share of prepayment cash flows during the first five years. Over the following five years, a declining percentage of their pro-rata share of prepayment cash flows is directed to the senior classes, leading to a shifting interest schedule. The subordinates’ share of prepayment cash flows directed to the seniors eventually declines to zero over a span of five years. • Interest cash flows are distributed pro rata to the AAA and subordinate tranches based on the coupon rate specified within the deal structure. Credit losses are allocated as follows: • Losses are first allocated to the lowest rated subordinate class offering protection to each higher-rated class. • Should losses generated on the underlying mortgage collateral result in the writedown of a lower-rated class, for example the unrated class, then subsequent losses are directed to the writedown of the next higher-rated class, eventually moving up the subordinate stack in reverse sequential order of rating. For a brief description of how credit losses occur on individual mortgage loans, please see the sidebar alongside titled How Credit Losses Occur.

20 October 2005 27 Mortgage Market Insights III. Credit Enhancement

How Credit Losses Occur

Stage (general time period) Servicer Action

Stage 1 Delinquency (15 days) Grace period (No additional fees incurred).

Late charge (mortgage late fee) assessed by lender and a "friendly Stage 2 Delinquency (16 days) 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.

Lender sends borrower notice of default giving borrower a specified Stage 5 Delinquency (60-90 days) amount of time (remedial period) to make loan status current.

Stage 6 After remedial period Documents sent to local attorney to begin foreclosure proceedings.

Special Servicer acts to bring loan current, secures and liquidates Stage 7 Foreclosure Proceedings (Up to 9 Months) 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.

Broker price opinions based on detailed property inspection, Stage 9 Sale of Property (Up to 120 Days) rehabilitation if necessary, marketing and sale of property.

Shifting Interest Schedule The shifting interest schedule in non-Agency deals calls for a portion of the pro-rata share of the prepayment cash flows that would have gone to the subordinates, known as the shift percentage, being directed to the AAA classes. This portion declines based on a standardized pre-determined schedule. This kicks in during the five years following the initial lockout period until the stepdown date (see Table 12). This period is referred to as the stepdown period, terminating once the subordinate classes begin to receive all due principal payments. The full stepdown schedule is displayed in Table 12.

Table 12 Senior/subordinate shifting interest schedule

Percentage of Subordinate Prepayments Percentage of Subordinate Prepayments Redirected to AAA Classes Passed Through to Subordinate Classes Period (Months) "Shift Percentage" "Stepdown Percentage" (1 - Shift Percentage) Period 0 - 60 100% 0% Period 61 - 72 70% 30% Period 73 - 84 60% 40% Period 85 - 96 40% 60% Period 97 - 108 20% 80% Period 108+ 0% 100%

Source: Credit Suisse First Boston (US Mortgage Strategy)

28 20 October 2005 Mortgage Market Insights III. Credit Enhancement

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 100%

80%

60% Accelerated amortization due to prepayment redirection from 40% subordinate classes AAA-Rated @ 0 CPR 20% AAA-Rated @ Pricing Speed

% of% Initial Principal Balance 0%

5 7 3 5 1 3 9 1 -0 0 -11 -1 1 -19 -2 2 -27 -2 3 n n n n n n a a a a a a Jan Jan- Jan-09 J J Jan- Jan-17 J J Jan- Jan-25 J J Jan- Jan-33

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 100%

80% Part of principal 60% Locked out from receiving redirected to senior principal prepayments for classes. 40% first 5 years. BBB-Rated @ 0 CPR 20% BBB-Rated @ Pricing Speed

% of% Initial Principal Balance 0%

5 7 3 5 1 3 9 1 -0 0 -11 -1 1 -19 -2 2 -27 -2 3 n n n n n n a a a a a a Jan Jan- Jan-09 J J Jan- Jan-17 J J Jan- Jan-25 J J Jan- Jan-33

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex This accelerated reduction of the AAA classes relative to the subordinate classes leads to credit deleveraging, i.e., the amount of credit support for a particular deal increases (see Chart 16). The faster the realized amount of prepayments, the greater the reduction in the outstanding balance of the AAA classes relative to the subordinate classes, thereby resulting in an increase in the amount of credit support to the AAA classes. Adverse selection, the process by which higher quality borrowers exit a pool at a faster pace than lower quality borrowers, may negatively affect the performance of subordinate bonds that remain outstanding in the deal for longer periods of time. As the credit

20 October 2005 29 Mortgage Market Insights III. Credit Enhancement

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

25

20 AAA Subordination @ 0PSA AAA Subordination @ 100PSA 15 AAA Subordination @ Pricing Speed (300PSA) AAA Subordination @ 500PSA 10

5

Subordination to AAA Class (%) Class AAA to Subordination 0

05 07 09 11 19 21 23 31 33 n- n- n- n- n-13 n-15 n- n- n- n-25 n-27 n- n- a a a a Ja Ja Ja Ja J J Jan-17 Ja Ja Ja J J Jan-29 Ja Ja

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Chart 17 Subordinates display less variability in WAL than seniors due to shifting- interest structure

25

20

15

10

5 AAA WAL BBB WAL

Weighted Average Lives (years) Lives Average Weighted 0 0 50 100 200 300 400 500 Prepayment Scenarios (%PSA)

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

30 20 October 2005 Mortgage Market Insights III. Credit Enhancement

Performance triggers incorporated in deals with shifting interest structure Performance triggers, specifically delinquency and loss triggers, within a shifting interest structure play an important role in impacting the WAL profile of classes in a prime jumbo deal. A shifting interest delinquency/loss trigger will fail after the stepdown date (month 60) if: • the six-month average of 60+-day delinquencies is greater than 50% of the outstanding subordinate certificate balances, or • cumulative losses as a percentage of the original subordinate bond balance are greater than the percentages provided in Table 13 during the corresponding periods.

Table 13 Cumulative loss trigger for prime jumbo senior/subordinate shifting interest structure

Period Cumulative Loss % of (months) Original Subordinate Balance 60 - 72 30% 73 - 84 35% 85 - 96 40% 97 - 108 45% 109 - 120 50% Source: Credit Suisse First Boston (US Mortgage Strategy)

Failing delinquency and loss triggers past the first five years within a deal with shifting interest structures has the effect of locking out subordinates from principal prepayments until such triggers pass. Failing delinquency/loss triggers shorten senior classes while extending subordinates In the event of a delinquency/loss trigger failing beyond the stepdown date, the subordinate classes’ share of prepayments will be redirected, in full, to the senior classes. The senior classes will, as a result, exhibit shorter average lives, due to the extension of the period of accelerated amortization past the stepdown date (Table 14).

Table 14 Senior class WAL decreases under trigger fail scenario while subordinate WAL increases

Scenario AAA WAL BBB WAL (%PSA) Trigger Pass Trigger Fail Trigger Pass Trigger Fail 0 19.2 19.2 19.2 19.2 50 14.4 14.3 16.4 19.2 100 11.2 11.0 14.4 19.2 200 7.4 7.2 11.8 19.2 300 5.5 5.3 10.3 17.4 400 4.4 4.2 9.3 14.5 500 3.6 3.5 8.6 12.1 Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

20 October 2005 31 Mortgage Market Insights III. Credit Enhancement

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

100% 2.0%

80% 1.5%

60%

1.0%

40%

0.5% 20% Outstanding as % of Original Balance of Original % as Outstanding Difference (Trigger Pass % - Trigger Fail %) Fail - Trigger % Pass (Trigger Difference 0% 0.0%

5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 0 0 0 1 1 1 1 1 2 2 2 2 2 -3 -3 n n Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Ja Ja

2A2 % of Original Balance @ 300PSA / Trigger Pass 2A2 % of Original Balance @ 300PSA / Trigger Fail Difference

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

The impact of a trigger fail is magnified on the subordinate classes (see Table 14). Under the extreme case of a constant trigger fail scenario, the difference in the amortized balance between the trigger fail and trigger pass scenarios reaches up to 57% of the subordinate class in the example deal, BOAMS 04-11, 2B3 class (Chart 19).

32 20 October 2005 Mortgage Market Insights III. Credit Enhancement

Chart 19 Subordinate classes pay down significantly slower under trigger fail scenarios due to redirection of subordinate share of prepayments

100% 60%

50% 80%

40% 60%

30%

40% 20%

20% 10% Outstanding as % of Original Balance of Original % as Outstanding Difference (Trigger Fail % - Trigger Pass %) Pass - Trigger % Fail (Trigger Difference 0% 0%

5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 -0 -0 -0 -1 -1 -1 n n n n n n a J Ja Ja Ja Ja Ja Jan-1 Jan-1 Jan-2 Jan-2 Jan-2 Jan-2 Jan-2 Jan-3 Jan-3

2B3 % of Original Balance @ 300PSA / Trigger Pass 2B3 % of Original Balance @ 300PSA / Trigger Fail Difference

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Mortgage defaults and losses Mortgage defaults are triggered by either a decline in borrower willingness to pay or inability to pay. Generally, both conditions are required to result in rising default rates, which may subsequently be translated into realized losses. Catalysts that reduce a borrower’s willingness to pay are generally triggered by declines in home prices, reduction in the value of the asset, and negative equity interest in the property whereby the amount owed on the outstanding mortgage exceeds the value of the underlying asset. Catalysts triggering an inability to pay include a change in the financial status of a household, often due to a change in the employment status leading to a reduction in income. The occurrence of defaults doesn’t necessarily imply the realization of losses. The magnitude of losses depends on the market value of the property at the time of liquidation and on the transaction costs incurred over the period that a servicer forecloses on a property up to the eventual disposal of the asset. These costs include servicer advances, legal fees, repairs to the property, sales commissions, etc. The ratio of the recovered balance, after these costs are covered, to the outstanding loan balance is the recovery rate. The ratio of the unrecovered balance to the outstanding loan balance is the severity rate.

20 October 2005 33 Mortgage Market Insights III. Credit Enhancement

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.

Table 15 Low historical loss rates on prime jumbo RMBS Fixed-Rate Jumbo 30-Year 15-Year

Original Current Loss (bp Original Current Loss (bp Balance Balance Current of Original Balance Balance Current of Original Vintage ($MM) ($MM) Factor Balance) ($MM) ($MM) Factor Balance) 1996 13,729 28 0.20% 8 1997 27,284 78 0.29% 4 1998 67,270 412 0.61% 3 10,736 49 0.46% 0 1999 37,988 312 0.82% 5 6,309 70 1.11% 1 2000 28,283 98 0.35% 4 2,215 15 0.68% 1 2001 72,265 1,720 2.38% 2 14,001 247 1.76% 0 2002 58,050 8,930 15.38% 1 24,676 5,028 20.38% 0 2003 56,304 37,048 65.80% 1 30,472 19,973 65.55% 0 2004 25,182 21,873 86.86% 0 3,140 2,718 86.56% 0 2005 3,592 3,543 98.64% 0 Total 391,201 74,045 18.93% 3 98,057 28,108 28.66% 0

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

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.

34 20 October 2005 Mortgage Market Insights III. Credit Enhancement

Chart 20 Fixed-rate prime jumbo default experience – 3-month CDRs on fixed-rate 30-year prime jumbo by vintage

0.25

Market Composite Fixed 30yr Prime 0.20 Jumbo 2001 Vintage Market Composite Fixed 30yr Prime 0.15 Jumbo 2002 Vintage Market Composite Fixed 30yr Prime 0.10 Jumbo 2003 Vintage Market Composite Fixed 30yr Prime 3-Month CDR (%) CDR 3-Month 0.05 Jumbo 2004 Vintage Market Composite Fixed 30yr Prime 0.00 Jumbo 2005 Vintage 0 6 12 18 24 30 36 42 WALA (Months)

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

6

5 Market Composite Fixed 30yr Prime Jumbo 2001 Vintage 4 Market Composite Fixed 30yr Prime Jumbo 2002 Vintage 3 Market Composite Fixed 30yr Prime Jumbo 2003 Vintage 2 Market Composite Fixed 30yr Prime

Original Balance) Jumbo 2004 Vintage 1

Cumulative Default (bp of (bp Default Cumulative Market Composite Fixed 30yr Prime 0 Jumbo 2005 Vintage 0 6 12 18 24 30 36 42 WALA (Months)

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

1.0

Market Composite Fixed 30yr Prime 0.8 Jumbo 2001 Vintage Market Composite Fixed 30yr Prime 0.6 Jumbo 2002 Vintage Market Composite Fixed 30yr Prime 0.4 Jumbo 2003 Vintage Market Composite Fixed 30yr Prime Original Balance) 0.2 Jumbo 2004 Vintage

Cumulative Losses (bp of Cumulative Market Composite Fixed 30yr Prime 0.0 Jumbo 2005 Vintage 0 6 12 18 24 30 36 42 WALA (Months)

Source: Credit Suisse First Boston (US Mortgage Strategy)

20 October 2005 35 Mortgage Market Insights III. Credit Enhancement

The constant CDR required to deliver the first dollar of loss to each credit grade of subordinate classes, presented in Table 16, illustrates the adequacy of credit enhancement levels (see Table 17 for illustrative current subordination levels). These constant lifetime CDR rates are multiples of peak short-term CDR observations presented in Chart 20.

Table 16 Constant CDR required to deliver first dollar of loss Lifetime CDR to First Loss* Pricing Date Pricing Speed AAA AA A BBB BB B

RFMSI 2004-S9 12/23/04 300PSA 2.79 0.80 0.49 0.31 0.19 0.06

WFMBS 2004-6 5/24/04 300PSA 2.54 0.94 0.57 0.35 0.18 0.07

CSFB 2004-8 Group 8 11/23/04 275PSA 3.10 0.87 0.52 0.32 0.20 0.09

* Intex run using following assumptions - 25% Loss Severity / 100% Servicer Advances / 12-Month Recovery Lag. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Table 17 Illustrative credit enhancement levels Subordination to Pricing Date AAA AA A BBB BB B

RFMSI 2004-S9 12/23/04 2.50 1.30 0.80 0.50 0.30 0.10

WFMBS 2004-6 5/24/04 2.65 1.30 0.80 0.50 0.25 0.10

CSFB 2004-8 Group 8 11/23/04 3.25 1.50 0.90 0.55 0.35 0.15

Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

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.

36 20 October 2005 Mortgage Market Insights III. Credit Enhancement

Table 18 Default-adjusted yields under various default scenarios % CDR (Using 25% Loss Severity) Deal Tranche Rating 0 0.125 0.25 0.375 0.5 0.625 0.75 0.875 1 1.5 WFMBS 04-6 A8 AAA 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% A12 AAA 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% B1 AA 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.3% 1.4% B2 A 5.8% 5.8% 5.8% 5.8% 5.8% 4.9% 1.0% -4.7% -15.8% -45.2% B3 BBB 6.3% 6.3% 6.3% 5.7% -1.3% -17.1% -30.1% -40.9% -50.1% -77.2% B4 BB 7.2% 7.2% 3.1% -16.1% -37.0% -52.5% -64.8% -74.9% -83.2% -106.3% B5 B 11.2% 5.5% -33.4% -60.1% -78.0% -91.0% -100.7% -108.3% -114.3% -129.6% B6 UR 21.1% -42.2% -82.3% -101.5% -112.2% -119.0% -123.6% -126.9% -129.5% -135.4%

* Intex run at 275PSA for AAAs and 300PSA for subordinates as of 08/11/05 close using following assumptions - 25% Loss Severity / 100% Servicer Advances / 12-Month Recovery Lag. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Credit rating transitions favor non-Agency RMBS over corporate bonds Rating transitions in 2004 within non-Agency RMBS (prime jumbo and Alt-A) highlights the stronger bias for rating stability and upgrades as compared to the corporate sector. Almost all non-Agency RMBS products maintained stable or attained higher ratings over 2004, whereas corporate issues experienced downgrades ranging from 1.5% up to 6.7% of the deals within individual credit ratings (see Tables 19 and 20). The rating transitions presented for RMBS are conservative because they include Alt-A product and are not based solely on the experience of the prime jumbo segment.

Table 19 RMBS annual rating transition matrix (2004) To Caa or Stable Rating / From Aaa Aa A Baa Ba B below 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 Caa or Stable Rating / 1-year Aaa Aa A Baa Ba B below 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

20 October 2005 37 Mortgage Market Insights IV. Nuances of Non-Agency RMBS

IV. Nuances of Non-Agency RMBS

Certain nuances of non-Agency RMBS are unique to the sector. We discuss these below. Discount/Premium loans in non-Agency deals and creation of WAC IOs and WAC POs The dispersion of mortgage rates on loans within a given securitized pool relative to the fixed-rate security issued with a specified coupon results in non-Agency RMBS loans being split into two buckets: discount and premium. For example, due to this dispersion, the underlying group of mortgage loans could have loans bearing either a higher or lower rate relative to the desired pass-through coupon rate of 5.5% on a security (see Table 21). In order to create a security bearing a 5.5% pass-through rate, a portion of the coupon needs to be stripped off the loans bearing a premium rate relative to this pass-through rate. The collective interest-only strip created is referred to as the WAC (weighted average coupon) IO. On the flip side, for those loans bearing a discount rate relative to this pass-through rate, the coupon needs to be grossed up by stripping off a portion of the principal balance necessary to achieve the target coupon rate. The portion of these non-interest-bearing, principal-only cash flows is referred to as the WAC (weighted average coupon) PO. There is an active secondary market in both WAC IO and PO issues which are generally priced to Agency Trust IO and PO issues.

Table 21 Premium/discount loans in non-Agency deals Pass-Through Loan WAC IO/PO Security

Premium Loan 5.75% Rate WAC IO of 25bp 5.5% Security

Discount Loan 5.25% Rate WAC PO of 4.54% of principal balance 5.5% Security (1 - 5.25%/5.50%)*

* WAC PO percent of principal amount is calculated as 1 – (loan rate / target coupon). Source: Credit Suisse First Boston (US Mortgage Strategy)

Optional Redemptions All non-Agency deals are subject to a call feature (referred to as an optional redemption/termination) held by an entity, often the issuer or servicer on the deal, which can exercise a call on the deal. Investors in the deal are effectively short this call option. The primary criteria to exercise the call requires that the collateral factor, defined as the ratio of the current balance to the original balance, be lower than a threshold amount (in most cases, 10%, but for some issuers this may be set at 5%). Once the current reported factor drops below this threshold, the holder of the option can exercise the call. The exercise price of the call is often set to par. Hence, the call option is likely to be exercised only if the collateral market value is sufficiently above par to provide an economic return, after transaction costs, to the holder. Given an exercise price of par, the coupon rate and default performance of the underlying pool of mortgages are the main drivers, whereby higher coupon rates and lower default rates increase the attractiveness, and thereby the probability, of exercising the call option.

38 20 October 2005 Mortgage Market Insights IV. Nuances of Non-Agency RMBS

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.

20 October 2005 39 Mortgage Market Insights IV. Nuances of Non-Agency RMBS

Table 22 Compensating interest policies vary across issuers

Bloomberg Issuer Shelf Name 2005 2004 2003 2002 2001 2000 1999

Residential Funding RFMSI 12.5 12.5 12.5 12.5 12.5 12.5 12.5 Corp Chase Mortgage Finance CHASE 12.5 12.5 12.5 12.5 12.5 12.5 12.5 Corp 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 BOAMS 25 25 25 25 25 25 25 Mortgage Securities MASTR Asset MASTR SF* SF* SF* SF* SF* SF* SF* Securitization Trust Washington Mutual WAMU ** ** ** ** ** ** ** CSFB Mortgage CSFB *** *** *** *** *** *** *** Securities Corp Wells Fargo Mortgage WFMBS 20**** 20**** 20**** 20**** 20**** 20**** 20**** Backed Securities Trust

SF = Servicing Fee * On loans serviced by WAMU, compensating interest is equal to the sum of the master servicing fee plus reinvestment income from prepayments in full on the 15th day of the preceding distribution month through the 14th day of the month of distribution plus interest payments received from full prepayments during the period from the 1st day through the 14th day of the month of distribution. ** For loans serviced by Washington Mutual Mortgage Securities Corp see WAMU under MASTR shelf, 25bp for loans serviced by Washington Mutual Bank, FA. In late 2004, WAMU changed the terms of coverage to cap it at the lesser of master servicing compensation and 12.5bp. *** For deals issued from 2001-2003, the three major servicers and their respective compensating interest limits are Chase Manhattan Mortgage Corp (25bp), Fairbanks Capital (25bp), and Washington Mutual Mortgage Securities Corp (4bp plus reinvestment income from prepayments in full from the 15th day of the preceding distribution month through the 14th day of the month of distribution plus interest payments received from full prepayments during the period from the 1st day through the 14th day of the month of distribution). Prior to 2001, the policy varies by issuer and servicer. For more recent CSFB deals, the two major servicers are Select Portfolio Servicing and Wells Fargo Bank with the majority of coverage on deals of up to 25bp. **** The lesser of 20bp or the available Master Servicing compensation as defined in the prospectus. Source: Credit Suisse First Boston (US Mortgage Strategy)

40 20 October 2005 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

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% Rate premium = 30bp

Jumbo 30-year Rate 5.85%

Rate premium = 35bp Conforming 30-year Rate 5.60%

Source: Credit Suisse First Boston (US Mortgage Strategy)

20 October 2005 41 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

Chart 24 30-year jumbo rate versus 30-year conforming rate

10 60

9 50 40 8 30 7 20 Rates (%) Difference (bp) Difference 6 10

5 - 4 5 6 9 9 9 7/97 7/98 7/99 7/00 7/01 7/02 /7/03

30-Year HSH Jumbo and Conforming Conforming and HSH Jumbo 30-Year 1/7/ 1/7/ 1/7/ 1/ 1/ 1/ 1/ 1/ 1/ 1 1/7/04 1/7/05

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.

42 20 October 2005 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

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 100 FNMA 30-year 80 Fixed 60 Jumbo 30-year Fixed 40 Conforming Alt-A

3 Month CPR 30-year Fixed 20 Non-Conforming 0 Alt-A 30-year Fixed

0 1 4 7 0 1 4 7 0 1 1 0 0 0 1 0 0 0 1 0 02 03 03 03 03 04 04 04 04 05 0 0 0 0 0 0 0 0 0 0 2002012002042002072 2 2 2 2 2 2 2 2 2 Month

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

In response to the historically low rates in 2003, record high prepayment speeds were observed on prime jumbos followed next by non-conforming balance Alt-As, Agency, and, finally, conforming-balance Alt-As. The general pattern, in terms of the initial acceleration and subsequent slowdown, in response to the backup in mortgage rates, are almost identical across these products and notably, between prime jumbo and Agency RMBS, except for differences in the level of sensitivity displayed. The prepayment sensitivity of non-conforming balance Alt-A 30-year fixed-rate RMBS is notably less than on prime jumbos, but more comparable to Agency RMBS, highlighting the impact of weaker collateral characteristics on subdued prepayment (and expected weaker credit) performance. Similarly, conforming balance Alt-As display more stable profiles relative to conforming balance Agency RMBS. Loan-level disclosure, a standard in the non-Agency RMBS sector, facilitates transparency in linking empirical performance to specific collateral attributes. To illustrate the impact of specific characteristics on prepayments, we profile the prepayment sensitivity for a select group of non-Agency and Agency RMBS from the 2002 vintage restricted to the 6.5%-7% mortgage (WAC) rate, controlling for loan size and credit (FICO) score. These profiles are presented in Charts 26 and 27. In each case, we observe the relationship between exhibited prepayments and the featured characteristic. This helps to further illustrate the value in loan level transparency of non-Agency RMBS essentially enabling investors to make better, informed decisions with knowledge of the collateral characteristics on a given non-Agency RMBS pool.

20 October 2005 43 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

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% 100 ALS $100-200 K

80 ALS $200-300K 60

40 ALS $300-400K

3 Month CPR 3 Month 20 ALS >=$600K 0

9 5 9 5 0 0 0 201 20 5 2 30 1 3 4 409 FNMA 30 Yr 0 00 0 0030 0 20 2 20 200 2 200 200401200 20 200501 Fxd;6.0<=Net Cpn Month <6.5;ALS:$165K

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

The greater prepayment sensitivity of higher-balance loans is a consequence of the greater dollar savings of refinancing on higher- relative to lower-balance loans. This is illustrated in Table 23, which highlights the higher dollar savings on a higher balance loan for the same magnitude of refinancing incentive.

Table 23 Loan balance is a key driver of prepayment speeds

Monthly Payment for Given Mortgage Rate Loan Size 7% 6% 5% 4%

30-Year Jumbo $472K $3,140 $2,830 $2,534 $2,253

Savings Vs $310 $606 $887 7% Pmt

30-Year Agency $161K $1,071 $965 $864 $769

Savings Vs $106 $207 $303 7% Pmt

Jumbo Vs Agency Savings $204 $400 $584

Source: Credit Suisse First Boston (US Mortgage Strategy)

Stronger prepayment response is also correlated to credit (FICO) scores, with more creditworthy borrowers usually having access to more credit and more easily qualifying for larger loans.

44 20 October 2005 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

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%

100

660-679 80

60 700-719

40 1 Month CPR1 Month 20 720-779

0

4 7 1 0 7 10 1 04 0 0 1 4 07 10 0 2 20 2 30 3 3 31 40 40 4 4 5 FNMA 30 Yr 00 0 0 0 0 00 0 0 0 0 0 00 2 20 20 20 20 2 20 20 20 20 20 2 Fxd;6.0<=Net Cpn <6.5;FICO: 718 Mo nth

Source: Credit Suisse First Boston (US Mortgage Strategy), LoanPerformance

Additional factors affecting prepayments of mortgages backing non-Agency RMBS are common to those backing Agency RMBS. We summarize these factors below, offer definitions of each, and examine the potential effect of this on non-Agency versus Agency RMBS. Broadly, aggregate prepayments are the function of housing turnover and refinancing-driven factors. Contributions to aggregate prepayments from housing turnover are impacted by aging, seasonality, and home price appreciation. Contributions to aggregate prepayments from refinancings are influenced by the aging effects of a loan, refinancing incentive (already discussed), curve shape, the media effect, and the cash-out or equity takeout effect. We define these below. Aging Effects Loan age affects both housing turnover and refinancings. Contributions to housing turnover increase as a loan seasons, and potential contributions from refinancing also increase as a loan seasons. This arises as borrowers backing a newly acquired property are unlikely to move soon thereafter; however, as time passes there is greater propensity for them to move and trade-up. Similarly, refinancing sensitivity increases as a loan seasons, as borrowers are more willing to incur transaction costs associated with a refinancing transaction as time passes but not too close in proximity to the high costs incurred upon initial purchase of a new property. Higher-balance loans backing prime jumbo pools have displayed shorter refinancing aging ramps due to the higher savings associated for the same rate incentive. Seasonality The school year cycle largely dictates the “busy” season for home purchases and sales in the United States. Seasonality of prepayments is observed through faster speeds during the spring and summer and slower speeds during the autumn and winter months.

20 October 2005 45 Mortgage Market Insights V. Prepayment Profiles of Prime Jumbo Fixed-Rate RMBS

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.

46 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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

Principal Window at WAL Pricing Speed Class Bond Type Pricing Speed (years)* 1A1 Last Cash Flow 05/2013 to 09/2034 12.97 1A2 Front Sequential 12/2004 to 05/2013 3.57 1A3 Intermediate Sequential 05/2013 to 11/2015 9.61 1A4 NAS 12/2009 to 09/2034 11.39 1A5 Intermediate Sequential 11/2015 to 01/2018 12.00 1A6 Last Cash Flow 01/2018 to 09/2034 17.29 1A7 Mezzanine NAS 12/2009 to 09/2034 11.39 1A8 Front Sequential Floater 12/2004 to 05/2013 3.57 6A1 15-Year Pass-Through 12/2004 to 06/2019 4.35 8A5 Z-Bond (Accrual Bond) 08/2013 to 10/2014 9.31 *As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy)

20 October 2005 47 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 28 Prime jumbo deals are tranched into a variety of structures – CSFB 2004- 8 Group 1

2,000,000 1,800,000 1A2 - Front Sequential 1,600,000 1A1 1,400,000 1A2 1A8 - Front Sequential Floater 1,200,000 1A3 1A4 1,000,000 1A4 - Non-Accelerated Senior (NAS) 1A5 1A3 - Intermediate Sequential 800,000 1A6 600,000 1A7 - Mezzanine NAS 1A7 1A5 - Intermediate Sequential 400,000 1A8 1A6 - Last Cash Flow 1A1 - Last Cash Flow Tranche Principal Payments ($) PrincipalTranche ($) Payments 200,000 0 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

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Pass-Throughs (Example: CSFB 2005-5 7A1) Pass-throughs are the simplest structure within prime jumbo securitizations. Features include: • A single AAA-rated security receiving all due principal and interest payments, akin to Agency pass-throughs. • As discussed in the section on credit enhancement, the AAA credit rating of the jumbo pass-through is achieved through a senior/subordinate structure, with the subordinate classes providing protection to the senior classes from credit losses. This compares to Agency pass-throughs that are guaranteed against realized credit losses by the issuing Agency. Chart 29 illustrates anticipated principal and interest distributions to the holder of a pass- through security, CSFB 2005-5 7A1, at the deal pricing speed of 300% PSA. Table 25 summarizes the weighted average life (WAL) profile of this security across a variety of prepayment scenarios.

Chart 29 Pass-through principal and interest distributions (CSFB 2005-5 7A1)*

2,000

1,600

1,200 Interest 800 Principal

400

0 at Pricing Speed ($K) Speed at Pricing

9 1 9 1 3 1 3 -05 -07 -0 1 -17 -1 -2 2 -29 -3 -3 n n n n n n n n

Principal and Cash flows Interest Principal u u u u u u u u Jun J J Jun- Jun-13 Jun-15 J J J Jun- Jun-25 Jun-27 J J J

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

48 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Table 25 Pass-through payment window and WAL profile as of deal pricing – CSFB 2005-5 7A1*

Prepayment Speed Principal Window Weighted Average Principal Window* (% PSA) Length (months) Life (Years) 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

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Chart 30 illustrates the yield and weighted average life profile of a representative 30- year AAA-rated non-Agency pass-through bond across varying prepayment scenarios.

Chart 30 Pass-through yield and WAL sensitivity, by prepayment speed scenario*

Prepay Scenarios (%PSA)

Yield (%)

Average Life (years) Spread to Treasury (bp)

*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

20 October 2005 49 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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)* 3,000 1A1: Front Sequential Group 1 Tranches have a 5.5% Coupon - Aggregate cashflows 2,500 equivalent to those of a 5.5% Pass-through 2,000 1A4 1A3 1,500 1A2: Intermediate Sequential 1A2 ($K) 1A1 1,000 1A3: Last Cash Flow Sequential 1A4: Non-Accelerated Senior (NAS) Aggregate 500

0

Principal Cash flows at Pricing Speed Cash flows at Pricing Principal 4 4 4 0 -0 -06 -08 -1 -16 -18 -2 -26 -28 -3 c c c c c c c c c c De De De Dec-10 Dec-12 De De De Dec-20 Dec-22 De De De De Dec-32

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

The principal window and WAL profiles for a three-tranche sequential structure are summarized in Table 26.

Table 26 Principal window and WAL profiles across FHASI 2004-7 Group 1 Sequentials

Front - FHASI 04-7 1A1 Intermediate - FHASI 04-7 1A2 Last Cash Flow - FHASI 04-7 1A3 Prepayment Speed Principal Principal Principal (%PSA) Window* WAL (Years)* Window* WAL (Years)* Window* WAL (Years)* 100% PSA 12/04 to 04/22 7.4 04/22 to 05/28 20.3 05/28 to 10/34 26.5 200% PSA 12/04 to 02/15 4.5 02/15 to 08/20 12.6 08/20 to 10/34 20.3 300% PSA (Pricing) 12/04 to 09/11 3.3 09/11 to 04/15 8.3 04/15 to 10/34 14.5 400% PSA 12/04 to 02/10 2.7 02/10 to 01/12 6.1 01/12 to 10/34 9.9 500% PSA 12/04 to 03/09 2.3 03/09 to 07/10 4.9 07/10 to 10/13 6.6 1000% PSA 12/04 to 06/07 1.5 06/07 to 12/07 2.8 12/07 to 06/08 3.3

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

50 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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 Scen ario s (%PSA)

Yield (%)

Average Life (years) Sp r e ad to Treasury (bp)

*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing unless stated otherwise. Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg (ii) Intermediate Sequential (Example: FHASI 2004-7 1A2) These securities are locked out from all principal payments – scheduled principal payments and prepayments – until the front sequential is paid off. However, as with all sequentials, the security is entitled to receive a pro-rata share of interest cash flow generated. Intermediate sequentials typically have a WAL of 5-7 years and cash flows are characterized by a tight principal payment window of about 2-3 years (Table 26). These securities hold appeal among money managers, who buy them as alternatives to pass-throughs, as well as banks seeking to enhance yield and/or extend duration without compromising on structural stability. Intermediate sequentials typically trade on a nominal spread basis to the interpolated Treasury curve. Chart 33 illustrates the yield and weighted average life profile of the representative intermediate sequential security across varying prepayment scenarios.

20 October 2005 51 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 33 Intermediate sequential yield and WAL sensitivity, by prepayment speed scenario

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 (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.

52 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 34 Last cash flow sequential yield and WAL sensitivity, by prepayment speed scenario

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

20 October 2005 53 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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) 1.4% Collateral principal cash PAC 1.2% flows at upper bound of 100% PSA PAC band 1.0% 250% PSA PAC cash flows are 0.8% equivalent to overlap of Collateral principal cash PAC band cash flows flows at lower bound of 0.6% (minimum principal cash PAC band flow available) 0.4%

0.2% (% of Original Principal Balance) 0.0% Principal Cash flows at Pricing Speed

1 3 5 7 1 3 7 1 9 7 9 3 7 1 5 1 2 3 49 6 7 85 9 33 45 81 93 41 65 89 37 49 109 12 1 1 157 16 1 1 205 21 22 2 25 2 27 2 30 313 32 3 3 Period (months)

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.

54 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 36 PAC cash flows are identical within the PAC band of 2%-353% PSA – CSFB 2005-5 2A8 (4-year PAC)*

100% 2% PSA 80% Principal cashcashflows flows areare identicalidentical withinwithin thethe PAC bands 100% PSA CashflowsCash flows for for 2%, 2%, 100%, 100%, 200%, 200%, 300%300% andand 353%353% PSAPSA 200% PSA 60% 1000% PSA 300% PSA 40% 353% PSA 500% PSA 500% PSA 20% 1000% PSA 0%

6 7 9 05 -0 0 -08 -08 -0 -11 -12 n- n c- n c n-10 (% of Original Principal Balance) of Original(% Principal ec-05 u e e ec-09 u Remaining PAC Principal Balance Principal Remaining PAC Ju D J Dec-06 Jun-07 D Ju D Jun D J Dec-10 Jun-11 Dec Jun

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Table 27 Stable WAL on PAC within the band - CSFB 2005-5 2A8 (PAC band: 2%- 353% PSA)* versus CSFB 2005-5 2A6 (support)

PAC (CSFB 05-5 2A8) Support (CSFB 05-5 2A6) Prepayment Speed Weighted Average Principal Weighted Average Principal (%PSA) Life (Years)* Window* Life (Years)* Window* 100% PSA 3.99 06/2005 to 10/2012 18.84 05/2013 to 02/2035 200% PSA 3.99 06/2005 to 10/2012 8.36 06/2005 to 02/2035 300% PSA 3.99 06/2005 to 10/2012 2.88 06/2005 to 02/2035 400% PSA 3.91 06/2005 to 12/2011 1.98 06/2005 to 01/2009 500% PSA 3.56 06/2005 to 09/2010 1.61 06/2005 to 03/2008 1000% PSA 2.27 06/2005 to 03/2008 0.94 06/2005 to 12/2006

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

As is the case for sequentials, PACs typically trade on a nominal spread basis to the interpolated Treasury curve. Chart 37 illustrates the yield and weighted average life profile of the representative PAC across varying prepayment scenarios.

20 October 2005 55 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 37 4-year PAC yield and WAL sensitivity, by prepayment speed scenario

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

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 1.4% Excess Cash flows at Upper Bound 1.2% Collateral principal cash Excess Cash flows at Lower Bound flows at upper bound of PAC Cash flows within the Band 1.0% PAC band Excess cash flows directed to support class leading to: 0.8% - faster amortization of the support - stable cashflows to the PAC over speeds within the PAC band 0.6% Collateral principal cash Outstanding 0.4% flows at lower bound of PAC band

Principal Cash flow as % of Cash flow as % Principal 0.2%

0.0%

1 9 5 1 37 5 73 91 27 63 99 35 71 89 07 25 43 109 1 145 1 181 1 217 2 253 2 2 3 3 3 Period (Months)

Source: Credit Suisse First Boston (US Mortgage Strategy)

56 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Prepayment speeds below the lower bound of the PAC band result in slower amortization of the support, as all cash flows are directed to the PACs, causing the supports to extend more than the PACs. Similarly, prepayment speeds higher than the upper bound of the PAC band result in contraction of the supports in excess of that of PACs. This volatility and heightened sensitivity of supports to prepayments is illustrated in Table 27, wherein we present the WAL profile of CSFB 2005-5 2A6 across varying prepayment scenarios. Chart 39 illustrates the yield and weighted average life profile of the representative support bond across varying prepayment scenarios.

Chart 39 Support class yield and WAL sensitivity, by prepayment speed scenario

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 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) 6 or floater/inverse structures . 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.

20 October 2005 57 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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

160% 140% 120% 100% 80% Principal window opens and 60% Interest is added (accreted) to distributions of both principal 40% prinicipal balance until principal and interest are made to the 20% window opens. investorZ-bond

(% of Original Balance) Original of (% 0%

Outstanding PrincipalBalance 5 6 7 0 1 /0 0 /0 /1 /1 0 0/ 0 0 3 /3 /3 /30/08 /3 /30 1/ 1 1 11/30/04 1 11 11 1 11/30/09 1 11 Original Principal Balance Cumulative Interest Accretion Outstanding Prinicipal Balance

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex The greater WAL variability of the Z-bond in comparison to the floater/inverse structure is illustrated in Table 28. In general, Z-bonds, especially discount-priced bonds, are attractive investments in a declining rate/fast prepayment environment, as the higher reinvestment rate on accrued interest and WAL shortening favor the Z-bond.

Table 28 WAL profile of Z-bond (2004-8 8A5) versus floater/inverse structure it supports – Greater WAL variability of Z-bond

Z-Bond (CSFB 04-8 8A5) Floater/Inverse (CSFB 04-8 8A6/8A7) Prepayment Speed Weighted Average Principal Weighted Average Principal (%PSA) Life (Years)* Window* Life (Years)* Window* 100% PSA 20.50 01/2024 to 11/2026 7.99 12/2004 to 01/2024 200% PSA 13.01 01/2017 to 10/2018 4.80 12/2004 to 01/2017 300% PSA 8.38 11/2012 to 09/2013 3.45 12/2004 to 11/2012 325% PSA 7.63 03/2012 to 11/2012 3.24 12/2004 to 03/2012 400% PSA 6.09 10/2010 to 03/2011 2.76 12/2004 to 10/2010 500% PSA 4.86 08/2009 to 11/2009 2.35 12/2004 to 08/2009 1000% PSA 2.67 07/2007 to 08/2007 1.46 12/2004 to 07/2007

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Chart 41 illustrates the yield and weighted average life profile of the Z-bond across varying prepayment scenarios.

58 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Chart 41 Z-bond yield and WAL sensitivity, by prepayment speed scenario

Prepay Scenarios (%PSA)

Yield (%)

Average Life (years) Spread to Treasury (bp)

*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing unless stated otherwise. Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

Non-Accelerated Seniors (NAS) (Example: CSFB 2004-8 1A4) A non-accelerated senior is a AAA-rated security created through the same process of creating subordinates through incorporation of the shifting interest structure. This shifting interest structure locks out the NAS bond from receiving principal payments for a fixed period of time, typically five years. The principal payment allocation of the NAS bonds during this period is redirected to “Accelerated Senior” (AS) classes. Once this five-year point is reached, the NAS security is entitled to a portion of principal payments determined by a standard schedule outlined in the deal prospectus. This schedule allocates an increasing percentage of principal cash flows generated from the collateral to the NAS class until this class is entitled to receive all principal cash flow generated without any redirection to other classes. Principal payments to the NAS bonds are distributed per the following formulas and shifting interest schedule in Table 29:

NAS Percentage = Bal(NAS) / Bal(NAS Group collateral)

Stepdown Percentage = 1 - Shift %

Priority Percentage = NAS Percentage * Stepdown Percentage

Prin(NAS) = Priority Percentage * Prin(NAS Group collateral)

where, Prin(NAS) = principal distribution to NAS

20 October 2005 59 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Prin(NAS Group collateral) = Total amount of principal payments, both amortization and prepayment, made on the NAS group Bal(NAS) = NAS class balance Bal(NAS Group collateral) = Balance of the NAS collateral group Shift % = Shift percentage = Percentage of NAS principal distributions redirected to AS classes according to the shifting interest schedule in Table 29. Principal cash flows, as governed by the shifting interest schedule, are illustrated for class CSFB 2004-8 1A4 in Chart 42 at the deal pricing speed of 275% PSA.

Table 29 NAS principal distribution is governed by a shifting interest schedule

Percentage of NAS Principal Distributions Percentage of NAS Principal Distributions Redirected to AS Class Passed Through to NAS Bond Period (Months) "Shift Percentage" "Stepdown Percentage" (1 - Shift Percentage) Period 0 - 60 100% 0% Period 61 - 72 70% 30% Period 73 - 84 60% 40% Period 85 - 96 40% 60% Period 97 - 108 20% 80% Period 108+ 0% 100%

Source: Credit Suisse First Boston (US Mortgage Strategy)

Chart 42 NAS principal distributions are governed by a shifting interest schedule – CSFB 2004-8 1A4

100% NAS receives Class 1A4 Principal Distributions increasing 80% percentage of principal cash flows per schedule after 60% lockout period

40% NAS locked out for first 5 years

(% of Original Balance) of (% 20%

Principal Cash flow Pricing at Speed 0% 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

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex Weighted average life stability is a notable attribute of NAS bonds as illustrated in Table 30. The shifting interest schedule protects the NAS bonds from fast prepayment speeds on collateral during the 5-year lockout period. Unscheduled principal prepayments, which would have otherwise accelerated the paydown of the NAS bonds, are redirected as a whole (over the first five years of distributions) or in part (over years six through ten) to the AS classes.

60 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Table 30 NAS bonds have wide principal windows and relatively stable WAL profiles – CSFB 2004-8 1A4 Prepayment Speed Principal Window Weighted Average Principal Window* (% PSA) Length (months) Life (Years)* 100% PSA 12/2009 to 09/2034 297 15.58 200% PSA 12/2009 to 09/2034 297 12.73 275% PSA (Pricing) 12/2009 to 09/2034 297 11.39 300% PSA 12/2009 to 09/2034 297 11.04 400% PSA 12/2009 to 09/2034 297 9.95 500% PSA 12/2009 to 09/2034 297 8.74 1000% PSA 02/2008 to 09/2009 19 3.83

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

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 3A19 Scenario WAL (Years) WAL (Years) 1) 0 %CPR 20.72 23.79 2) 10 %CPR 13.51 Stable 8.85 3) 20 %CPR for 1 year, 10 %CPR thereafter 13.51 WAL 10.75 4) 30 %CPR for 1 year, 10 %CPR thereafter 13.51 17.75 5) 40 %CPR for 1 year, 10 %CPR thereafter 13.51 25.95 6) 50 %CPR for 1 year, 10 %CPR thereafter 13.51 25.26 7) 60 %CPR for 1 year, 10 %CPR thereafter 13.51 20.84 8) 70 %CPR for 1 year, 10 %CPR thereafter 13.51 2.03 9) 80 %CPR for 1 year, 10 %CPR thereafter 10.85 0.82 WAL 10) 90 %CPR for 1 year, 10 %CPR thereafter 4.53 0.57 variability 11) 100 %CPR for 1 year, 10 %CPR thereafter 0.07 0.07

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

20 October 2005 61 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Table 32 NAS bonds provide better whipsaw protection than PACs – Analysis of NAS and PAC WALs under multiples of a defined “whipsaw” scenario "Whipsaw" Scenario Definition: 40 %CPR for 6 months, 10 %CPR for 6 months, 40 %CPR for 6 months, 10 %CPR thereafter

NAS PAC CSFB 2004-8 1A4 CSFB 2005-3 3A19 Scenario WAL (Years) WAL (Years) 1) 10 %CPR 13.51 8.85 2) 25% x "Whipsaw" Scenario 18.18 19.92 3) 50% x "Whipsaw" Scenario 16.23 18.48 WAL 4) 75% x "Whipsaw" Scenario 14.71 Stable 20.36 variability 5) 100% x "Whipsaw" Scenario 13.51 WAL 25.95 6) 125% x "Whipsaw" Scenario 12.56 20.91 7) 150% x "Whipsaw" Scenario 11.78 3.95 8) 200% x "Whipsaw" Scenario 5.66 1.24

*As of deal pricing. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

The larger the NAS as a percentage of the deal, the weaker its structural benefits, as a smaller portion of the deal will be comprised of accelerated seniors available to absorb the volatility of the collateral’s cash flows.

Chart 43 illustrates the yield and weighted average life profile of the representative NAS bond across varying prepayment scenarios.

Chart 43 NAS yield and WAL sensitivity, by prepayment speed scenario

Prepay Scenarios (%PSA)

Yield (%)

Average Life (years) Spread to 10yr Trsy (bp)

*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

62 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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:

Coupon = Multiplier * Index + Margin 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 8% Coupon

6% Cap = 7.50% when 1-month LIBOR = 7.10%

4% Coupon = 1-month LIBOR + 0.40% Coupon Floor = 0.40% when 1-month LIBOR = 0.00% 2%

0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Index: 1-month LIBOR

Source: Credit Suisse First Boston (US Mortgage Strategy)

20 October 2005 63 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

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

Index Margin Cap Floor

Prepay Scenarios (%PSA)

Discount Margin (bp)

Average Life (years)

*Bloomberg scenario WALs for this security differ from Intex scenario WALs due to differing run dates. Intex runs are as of deal pricing unless stated otherwise. Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

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.

64 20 October 2005 Mortgage Market Insights VI. Common AAA Structures within Securitized Prime Jumbo Deals

Table 33 Weighted average life profile across varying structures* Weighted Average Life (Years) WAL Range 100% 200% 300% 400% 500% 1000% 100-300% 300-500% 100-1000% Bond Type Example Bond PSA PSA PSA PSA PSA PSA PSA PSA PSA Pass-Through CSFB 2005-5 7A1 10.40 6.65 4.68 3.53 2.79 1.27 5.72 1.89 9.13 Change Versus 300% PSA WAL 5.72 1.97 -1.15 -1.89 -3.41

Front Sequential FHASI 2004-7 1A1 7.38 4.45 3.29 2.70 2.33 1.54 4.09 0.96 5.84 Change Versus 300% PSA WAL 4.09 1.16 -0.59 -0.96 -1.75

Intermediate Sequential FHASI 2004-7 1A2 20.26 12.64 8.27 6.08 4.90 2.80 11.99 3.37 17.46 Change Versus 300% PSA WAL 11.99 4.37 -2.19 -3.37 -5.47

Last Cash Flow FHASI 2004-7 1A3 26.47 20.33 14.50 9.93 6.60 3.28 11.97 7.90 23.19 Change Versus 300% PSA WAL 11.97 5.83 -4.57 -7.90 -11.22

PAC CSFB 2005-5 2A8 3.99 3.99 3.99 3.91 3.56 2.27 0.00 0.43 1.72 Change Versus 300% PSA WAL 0.00 0.00 -0.08 -0.43 -1.72

Support (Companion) CSFB 2005-5 2A6 18.84 8.36 2.88 1.98 1.61 0.94 15.96 1.27 17.90 Change Versus 300% PSA WAL 15.96 5.48 -0.90 -1.27 -1.94

NAS CSFB 2004-8 1A4 15.58 12.73 11.04 9.95 8.74 3.83 4.54 2.30 11.75 Change Versus 300% PSA WAL 4.54 1.69 -1.09 -2.30 -7.21

Z-bond CSFB 2004-8 8A5 20.50 13.01 8.38 6.09 4.86 2.67 12.12 3.52 17.83 Change Versus 300% PSA WAL 12.12 4.63 -2.29 -3.52 -5.71

*As of deal pricing for respective deals. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

Chart 46 Weighted average life profiles across common structures*

25 30-Year Pass-Through (CSFB 2005-5 7A1) Front Sequential 20 (FHASI 2004-7 1A1)

Intermediate Sequential 15 (FHASI 2004-7 1A2) Last Cash Flow (FHASI 2004-7 1A3) 10 PAC (CSFB 2005-5 2A8) 5 Support (Companion) (CSFB 2005-5 2A6) Weighted Average Life (years) Weighted Average NAS 0 (CSFB 2004-8 1A4) 100 200 300 400 500 600 700 800 900 1000 Z-bond Prepayment Speed (%PSA) (CSFB 2004-8 8A5)

*As of deal pricing for respective deals. Source: Credit Suisse First Boston (US Mortgage Strategy), Intex

20 October 2005 65 Mortgage Market Insights VII. Investment Opportunities

VII. Investment Opportunities

A diverse range of investors and investment opportunities characterize the fixed-rate non-Agency segment of the US RMBS sector. A wide variety of active institutional investors, each with distinct investment criteria, corresponds to the creation of a wide array of alternatives. This range of investment choices spans the yield curve, offering varying yield/duration/convexity profiles. Table 34 provides a summary of these investment choices.

Table 34 Range of structures offered in the prime jumbo segment Duration Non-Agency

Short CMO Floaters

Short PACs, Sequentials

Intermediate PACs, Sequentials, Pass-throughs

Long PACs, Sequentials, NAS, Mezzanine AAA NAS

Long Accrual Zs

Source: Credit Suisse First Boston (US Mortgage Strategy)

Because investment mandates vary among institutional investors, investor participation within the non-Agency sector is selective and directed toward specific classes of securities. A brief outline of the investment criteria for the major institutional investor categories is provided below. • Banks focus on shorter-duration product to effectively manage their asset- liability mix given the short duration of their liabilities, comprised mainly of interest-bearing deposits. • Money manager participation spans across the product range, given the variety of investment mandates most typically characterized by the objective to outperform a chosen benchmark index. • Hedge funds are typically involved in riskier product types that leverage exposure to a specific type of risk, convexity or credit. • Insurance companies and pension funds focus mainly on longer-duration products to effectively manage their asset-liability mix. The long tenure of their liabilities is often contingent on the retirement and mortality of subscribers to their offered insurance plans. • CDO managers focus on higher-yielding product which, for the most part, entails taking credit exposure.

66 20 October 2005 Mortgage Market Insights VII. Investment Opportunities

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 Insurance Hedge Company / Money Bank CDO Retail Fund Pension Manager Bo nd Type Comm ent Fund Pass Through YYYYYY 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 De riva tive Y Y NA S Call Protection Y Y Mezzanine NAS Call Protection Y Y Y Y Investment-Grade Subordinates Credit Y Y Y Y Sub-Investment Grade Subordinates Credit Y Y Y Y Long Sequential Long Duration Y Y Y Y Accrual Z Long Duration Y Y

Source: Credit Suisse First Boston (US Mortgage Strategy)

Pricing conventions for various investment choices within the non-Agency sector are provided in Table 36.

Table 36 Pricing conventions vary according to structure, maturity, and credit exposure considerations

Quotation Example Bond Pricing / Quotation* Structure Fixed-Rate Pass-Through Payback to Agency TBA** CSFB 2004-8 6A1 0-16 ticks back

Fixed-Rate Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A3 145 / Curve / 300PSA

Floating-Rate Discount Margin*** CSFB 2004-8 1A8 34DM @ Pricing Speed

Maturity Front Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A2 133 / Curve / 300PSA

Last Cash Flow Spread to Treasury at Pricing Speed CSFB 2004-8 1A1 140 / Curve / 300PSA

NAS Spread to 10-Year Treasury at Pricing Speed CSFB 2004-8 1A4 115 / 10-Year Trsy / 300PSA

Z-Bond Spread to Treasury at Pricing Speed CSFB 2004-8 8A5 183 / Curve / 300PSA

Credit AAA Pass-Through Payback to Agency TBA** CSFB 2004-8 6A1 0-16 ticks back

AAA Sequential Spread to Treasury at Pricing Speed CSFB 2004-8 1A3 145 / Curve / 300PSA

AA through B Subordinates Spread to 10-Year Treasury at Pricing Speed RFMSI 05-S2 M3 190 / 10-Year Trsy / 300PSA

Unrated Product Price Mutliple of Coupon RFMSI 2005-S2 B3 6.5 X Coupon

*As of 08/17/2005 close. **Agency TBA refers to a pass-through of similar coupon and term as the non-Agency pass-through. ***Discount margin refers to the spread to the base index rate such that the present value of cash flows is equal to the current market price. 34DM is equivalent to setting the discount rate on the floater to the underlying floater index + 34 basis points.

Source: Credit Suisse First Boston (US Mortgage Strategy)

The most quoted valuation metric for prime jumbo RMBS is the price payback on a AAA- rated non-Agency pass-through, in dollars, relative to a similar coupon Agency TBA pool. Recall, as discussed in the section on prepayment profiles, this often results in comparing

20 October 2005 67 Mortgage Market Insights VII. Investment Opportunities

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)

50 10

9 40 8 30 7 20 6

Price Payback to TBA (ticks) TBA to Payback Price 10 5 Basis Point Volatility (bp/day) Volatility Point Basis

1 3 3 3 4 4 -00 -0 -02 0 0 -0 0 -04 -0 -05 -05 c n-01 r-02 p c-02 r-03 n- p- c p e u a un-02 e e a u e ar D Mar-01 J Sep-01Dec M J S D M J Se De Mar- Jun S Dec-04 M Jun 30-Year Jumbo A Payback to TBA (ticks) 15-Year Jumbo A Payback to TBA (ticks) 6mx10y Bp Vol (bp/day) (RHS)

Source: Credit Suisse First Boston (US Mortgage Strategy)

Observed spread stability on the credit-sensitive subordinate classes reflects a combination of structural stability as well as a period of above trend growth in home prices, resulting in below trend default and loss rates. This spread stability is characteristic of both the investment and sub-investment grade credit tiers (see Charts 48 and 49). The appeal of attractive spreads offered relative to similarly rated corporates, structural benefits of non-Agency RMBS, and the transparency benefits of investing in these credit-sensitive assets enhance the participation of the investor base active in the subordinate sector.

68 20 October 2005 Mortgage Market Insights VII. Investment Opportunities

Chart 48 30-year prime jumbo investment-grade subordinate spreads to 10-year Treasury at pricing speeds

500

400

300

200

100

Spread to 10-Year Treasury Spread 10-Year to Treasury (bp) 0

6 1 3 95 98 00 0 01 02 02 0 n- n-96 n- n- c- - u u ec-9 ec- u ec Jun-94 Dec-94 J Dec-95 J D Jun-97 Dec-97 Jun-98 D Jun-99 Dec-99 J Dec-00 Ju De Jun- Dec- Jun-03 D Jun-04 Dec-04 AA A BBB

Source: Credit Suisse First Boston (US Mortgage Strategy)

Chart 49 30-year jumbo below investment-grade subordinate spreads to 10-year Treasury at pricing speeds

1,500

1,250

1,000

750

500

250

Spread to 10-Year Treasury (bp) 0

9 1 3 4 -95 -96 -97 97 98 9 99 -0 un un un ec- ec- ec ec-0 Jun-94 Dec-94 J Dec-95 J Dec-96 J D Jun-98 D Jun- Dec- Jun-00 Dec-00 Jun-0 Dec-01 Jun-02 Dec-02 Jun-03 D Jun-04 D BB B

Source: Credit Suisse First Boston (US Mortgage Strategy)

20 October 2005 69 Mortgage Market Insights VIII. Conclusions

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.

Reasons for investing in non-Agency RMBS Collateral BSource of loans and origination processes are identical to mortgages securitized as Agency BPrice execution determines if loan gets classified as either Agency or non-Agency BWell defined segments ranging from prime jumbo, “Tier 1” Alt-A, “Tier 2” Alt-A to subprime BWell channeled issuance with each of an issuer’s shelf specifically associated with specific segments of prime, Alt-A and subprime Credit BCurrent levels of credit protection are multiples of observed historical losses BNo AAA-rated class ever downgraded due to collateral performance issues BCredit 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 BRelatively 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 BHistorically superior ratings transitions relative to corporates as evidenced by observed upgrade/downgrade ratios BHigh level of performance transparency, unrivaled in other credit-sensitive sectors of the bond market Yield/Convexity BIncremental historical return has been earned for selling convexity. Excellent credit performance has only boosted realized returns BOpportunity to pick yield and add/sell convexity relative to Agency RMBS BCollateral 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 BSimilar range of structures as in Agency CMO sector, but generally offered at wider spreads

Purchase and post-purchase benefits BFull loan level data disclosure, not yet the established standard in Agency RMBS BMonthly availability of static performance data and issuer rankings accessible on Bloomberg (CSMB , at individual deal level for all CSFB deals, performance rankings for aggregate issuer level for major issuers in each product) BAggregate 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

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!

70 20 October 2005 Mortgage Market Insights VIII. Conclusions

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

20 October 2005 71 Mortgage Market Insights Appendix A – Securitization Deal Participants

Appendix A – Securitization Deal Participants

Seller: Owns the mortgage loans up until the point they are sold to the Depositor (often an affiliate and described below). Makes representations and warranties with regard to the mortgage loans satisfying rating agencies and underwriting guidelines. Depositor: Is a bankruptcy-remote entity organized for the sole purpose of aggregating the mortgage loans into a “pool” or “pools” and securitizing the mortgage loans. Purchases the mortgage loans from the Seller. Forms the Trust isolating the mortgage loan pool and from which the securities are issued. Servicer: Maintains direct interaction with individual borrowers. BFor Current Mortgage Loans: - Collects and processes monthly mortgage payments (principal and interest). - Aggregates and forwards cash received to Master Servicer (described below). BFor 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”). BFor 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. BFor ALL Mortgage Loans: - Aggregates, prepares and forwards loan-level data reports to Master Servicer. Special Servicer (not in all deals):

BEngaged 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. BMay be required to, or have the option to, directly service sub- and/or non-performing mortgage loans. BIf directly servicing, aggregates and forwards cash received and loan-level data reports to Master Servicer. Master Servicer (not in all deals): BCollects and reconciles monthly remittances and loan-level data reports from individual Servicers (and/or Special Servicer). BAggregates and forwards cash received and loan-level data reports to Trust Administrator (described below). BAdvances any cash not received from individual Servicers to Trust Administrator and pursues Servicers for reimbursement.

72 20 October 2005 Mortgage Market Insights Appendix A – Securitization Deal Participants

Securitization Deal Participants (continued)

BDepending 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): BCollects and reconciles monthly remittance and loan-level data reports from Master Servicer (often an affiliate). BApplies monies received pursuant to securitization cash flow rules. BPrepares monthly securitization remittance reports. BForwards monthly distribution amounts and reports to Trustee (described below) for distribution to security holders. BPrepares I.R.S. quarterly tax returns for the trust and prepares reports for the S.E.C. Trustee: BOversees the Trust formed by the Depositor and acts on the Trust’s behalf both at issuance and during the life of the securitization. BForwards monies and reports received from Trust Administrator to security holders. BAdvances any cash not received from the Trust Administrator and pursues Trust Administrator (or its Master Servicer affiliate) for reimbursement. BTakes possession of or finds new entity to perform Trust Administration (or Master Servicing) role.

20 October 2005 73 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Appendix B – Rating Agency Methodologies

Rating agencies play a significant role in the non-Agency RMBS market. Their functions include establishing methodologies to evaluate the credit quality of a wide range of prime to subprime borrowers, staggered across the credit continuum, examining the structural integrity of credit protection offered, on a deal-by-deal basis, and establishing credit enhancement levels for every individual deal carrying their rating. Each of the four rating agencies, Standard and Poor’s (S&P), Moody’s Investors Service, Fitch Ratings, and Dominion Bond Rating Service (DBRS), use proprietary models in their independent evaluation of credit risk for a given pool of mortgage loans. In this section, we profile the rating agency methodologies of S&P, Fitch Ratings, and DBRS for prime jumbo RMBS (the published methodology from Moody’s Investors Service was unavailable as of the time of publication of this report). While we excerpt key sections of each of their methodologies, we encourage readers to review these in entirety (available on their websites, Table 37) for comprehensive coverage. We also encourage readers to contact the individual analysts at each of the rating agencies for further details, especially as these methodologies and their individual views are subject to change as markets and products evolve.

Table 37 Rating agency websites

Rating Agency Web Site

Standard and Poor's www.standardandpoors.com Moody’s Investors Service www.moodys.com Fitch Ratings www.fitchratings.com Dominion Bond Rating Service www.dbrs.com

Common factors in the evaluation of RMBS by each of the rating agencies include: i. Default/foreclosure frequency, the probability that a loan will default, ii. Loss severity, the amount of loss realized on a defaulted loan, iii. Conservative scenarios, characterized by higher default frequencies and loss severities, to separately stress higher- versus lower-rated classes within a specific deal, and iv. Baseline default and loss severity assumptions, for a given collateral type, adjusted based on borrower characteristics and loan attributes of a given pool of loans.

74 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

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.

20 October 2005 75 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Table 39 Frequency of foreclosure varies according to loan characteristics Effect on FOF Characteristics (versus Base Case Assumption)* Impact Higher borrower credit quality is expected to result in better credit Borrower Credit Quality - performance. Higher LTVs have historically been associated with worse credit LTV Ratios + performance, as a result of less borrower equity in the property and a higher percentage of the home value at risk. Single-Family Detached (-) / Single Family Attached, Low-rise Condos, 2-Family Properties Risks associated with lower demand and higher price volatility of non- Property Type (+) / single-family properties making these riskier loans. High-rise Condos, Co-ops, 3-4 Family Properties (More +) Cash-out refinance loans are riskier because of difficulty associated with Purchase, Rate/Term Refinance (No adjustment) / Loan Purpose measuring the property’s market value as there is no actual sale price, Cash-out Refi (+) based on a specific buy/sell transaction. Higher probability of homeowner defaulting on investment property or a second home than on primary residence. Occupancy Status Non-Owner Occupied (+) / Investor Property (+) Rent, which may not be available, is needed to cover mortgage payments due on an investor property mortgage. Borrower's ability to pay generally improves over time. Mortgage Seasoning - The loan amortizes and the borrower builds equity in the home. As equity builds, the borrower's willingness to pay increases. 300+ loans (-) / Pools made up of 300+ loans ensure sufficient diversity and comfort with Pool Size <300 & >100 loans (+) / accuracy of loss assumptions. <100 loans (More +) Loans with higher loan balances are considered riskier because they are Loan Size + likely to suffer greater market value declines in downturns as a result of limited demand for higher-priced properties. Shorter terms and faster amortization translate to lower balances as a Loan Maturity + loan seasons. This subjects these to potentially lower credit issues as a loan proceed up the default ramp. For a given LTV range: Full Doc (-) / Reduced documentation introduces an added risk factor. (This may be Loan Documentation Low Doc (+) / offset by lower LTV requirements.) No Doc (More +) Lien Status (First vs. Second Lien (+) / Second lien mortgages allow equity extraction from a property and Second Lien) Combined LTV (+) 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

76 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

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 % of Loan Price 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.

20 October 2005 77 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Table 42 Loss severity varies with loan characteristics Effect on Loss Severity (versus Base Case Characteristics Assumption)* Impact

Higher LTVs have historically been associated with higher losses, LTV Ratios + given a higher % of the home’s value at risk. This is dependent on the ability of the insurer to pay claims, whereby Mortgage Insurance - an insurer with a rating of AA or above will be granted full credit by S&P for insurance coverage. Second lien mortgages are more sensitive to property value declines Lien Status (First vs. Second Lien (+) and absorb losses ahead of first lien mortgages, whereas first lien Second Lien) mortgages have the first claim to foreclosure proceeds. At $370K, the foreclosure period is assumed to be 12 months and Loan Balance >$370K (+) increases 1 month for every additional $10,000 up to 24 months, increasing costs and thereby loss severity. Shorter terms and faster amortization translate to lower balances as a Loan Maturity + mortgage seasons. This subjects a lower balance to credit issues as a loan progresses up the default ramp. Cash-out refi is riskier because of difficulty measuring property market Purchase, Rate/Term Refinance (No adjustment) / Loan Purpose value because there is no established price based on a buy/sell Cash-out Refi (+) transaction. Single-Family Detached (-) / Risks associated with lower demand/liquidity and higher price Property Type Single Family Attached, Low-rise Condos, 2-Family Properties (+) / volatility make non-single-family properties riskier. High-rise Condos, Co-ops, 3-4 Family Properties (More +) Higher probability of homeowner defaulting on investment property or Non-Owner Occupied (+) / a second home than primary residence. Rent, which may not be Occupancy Status Investor Property (+) paid, is needed to cover mortgage payments due on an investor property mortgage. Increased diversity implies less vulnerability to economic strength or Geographic Dispersion - weakness based on geographic dispersion. Borrower's ability to pay generally improves over time. Mortgage Seasoning - 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.

78 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Table 43 S&P servicer ranking definitions Ranking Qualifications

Servicer demonstrates the highest ability, efficiency, and competence in managing large and highly STRONG 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. Servicer demonstrates very high ability, efficiency, and competence in managing mid- to large-size ABOVE portfolios, as well as solid management experience, an acceptable track record, internal practices and AVERAGE policies that meet industry or regulatory standards, and a managed portfolio performance history similar to industry averages. Servicer demonstrates an acceptable track record, internal practices and policies that meet industry or AVERAGE regulatory standards, and a managed portfolio performance history similar to industry averages. BELOW Servicer demonstrates a lack of ability, efficiency, and competence, as well as an unfavorable track AVERAGE record, and below standard internal controls or computer systems. Servicer demonstrates a poor servicing track record, evidenced by recurring losses and a serious lack of WEAK 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.

20 October 2005 79 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Fitch Ratings (Fitch Residential Mortgage-Backed Securities Criteria – December 1998) Base case mortgage pool defined Fitch defines the base case mortgage for each of the prime, Alt-A, and subprime non- Agency sectors as: - 30-year fixed-rate, - based in New Jersey, and - originated in early 2003. Other loan attributes include documentation, loan purpose, occupancy status, property type, property value, mortgage coupon, and LTV differ across the three product types as illustrated in Table 44.

Table 44 Attributes used to create Fitch Ratings’ base default curves for a give pool

Loan Attribute Prime Alt-A Subprime

Doc Type Full Doc Low Doc Low Doc Loan Purpose Purchase Purchase Cash-out Occupancy Owner-occupied Investor property Owner-occupied Property Type Single family Single family Single family Property Value ($K) 536 467 150 Fixed-Rate Coupon (%) 5.5 6 8 LTV (%) 70 75 80

Source: Fitch Ratings

Frequency of foreclosure The frequency of foreclosure module is composed of three models, one each for prime, Alt-A, and subprime segments. Each of these models is built using independent datasets of collateral classified at the loan level on the basis of characteristics on the mortgage, borrower, and originator characteristics. At the aggregate pool level, this classification is generally done per the guidelines in Table 45.

Table 45 Fitch's classification criteria for non-Agency pools

Credit Score LTV Other Loan Attributes

Prime Strong FICO Lower LTV Very standard attributes Alt-A Lower FICO Higher LTV Variable attributes Subprime Lowest FICO Highest and lowest LTV Riskiest loan attributes Source: Fitch Ratings

80 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

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.

20 October 2005 81 Mortgage Market Insights Appendix B – Rating Agency Methodologies

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 Comment Component

This includes the unemployment rate, equity market performance and mortgage rates. Underlying Economic Drivers Higher-rated classes are subject to harsher economic environment assumptions. Fitch categorizes loans into five classes based on geography and historical housing Regional Equilibrium Trend price index (HPI) trends: Coastal, Inland, Fast Appreciating House Price Region, Slow (EQT) Appreciating House Price Region, and Florida. EQT is a function of HPI, per capita disposable income, and population demographics for a particular region. Fitch uses this to explain "irrational" price trends for a region, whereby home prices are Bubble Pricing and Home examined in the context of EQT, unemployment, and equity market movements on Price Volatility mortgage rates within a given region. The underlying assumption is that historically volatile markets are likely to be volatile in the future. These include property type (single family as standard), property tier Other Factors (richness/cheapness), occupancy status (owner-occupied as standard), and loan purpose (purchase as standard). Source: Fitch Ratings

Actual losses are subsequently calculated as the difference between the liabilities and the assets of the borrower at the time of property liquidation. Factors on the liability side of the equation include: - property taxes and property insurance, - unpaid interest and unpaid principal balances, and - foreclosure and carrying costs including legal fees, real estate broker fees, property maintenance. Factors on the asset side of the equation include: - resale value of the property, which is equal to Original Value of Property x (1 – MVD) x (1 – QSA), and - recoveries including mortgage insurance payments.

82 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Dominion Bond Rating Service (DBRS) (DBRS Rating Criteria for US Residential Mortgage-Backed Securities: Default – December, 2004, and DBRS Rating Criteria for US Residential Mortgage-Backed Securities: Loss Severity – July 2005) Base case mortgage pool defined DBRS defines the “vanilla” mortgage product used to create base default frequency assumptions as: - 30-year fixed-rate, - purchase money, - owner-occupied, - single-family, and - underwritten to a full documentation standard. Frequency of foreclosure Base frequency of foreclosure curves are constructed at each rating level by holding the credit score constant and varying the LTV under the following governing relationships: - The higher the LTV, the higher the default risk, as the borrower has less of an equity stake in the property. - The higher the credit score, the better the borrower’s financial management skills, suggesting that the borrower is financially savvy and likely to have additional financial resources on hand. This would support the borrower’s ability to make a larger down payment and maintain a financial cushion in the event of financial difficulties. Adjustments to base default frequency of foreclosure assumptions are based on variations in non-FICO and non-LTV drivers as summarized in Table 47.

20 October 2005 83 Mortgage Market Insights Appendix B – Rating Agency Methodologies

Table 47 Frequency of foreclosure varies with loan characteristics

Effect on Default Frequency Impact (versus Base Case Assumption)

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 Payment shock to IO borrower as principal becomes due maximum during first five years at year 5) / between 5 to 10 years (greatest default risk). Stable between 5 to 10 years with increasing opportunities to borrow or (unchanged versus value at year 5) / refinance. between 10 to 15 years (increases versus value at year 10)

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 - with higher grade Higher grades denote more creditworthy borrowers (see Table 48 for Standardized Borrower Borrower Grade Grade Definitions). Source: Credit Suisse First Boston (US Mortgage Strategy), DBRS

Table 48 DBRS standardized borrower grade definitions

Grade DBRS Borrower Description

Not more than 1X (one time) 30 days delinquent within the past year, no bankruptcy or foreclosure within past 7 A 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

84 20 October 2005 Mortgage Market Insights Appendix B – Rating Agency Methodologies

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.

20 October 2005 85 Mortgage Market Insights Appendix C - Glossary

Appendix C - Glossary

A (Prime) Credit A consumer with the highest credit rating, deserving the lowest financing rates that lenders offer. Accrual (Z) Bond A tranche from which due portion of interest cash flows are diverted until certain other classes are paid off. The interest is accrued and added to the principal balance of the class. The Z-bond becomes a current payer receiving full accrued interest and outstanding principal once these other classes are paid off. Accrued Interest Interest earned on a security that has not yet been paid to the tranche holder. Adjustable Rate Mortgage (ARM) A mortgage loan with a variable interest rate. The interest rate on an ARM adjusts with a pre-determined periodicity and is benchmarked to a defined index. Affordability A measure of a consumer's ability to afford a home. Agency CMO A Collateralized Mortgage Obligation backed by FNMA, FHLMC, or GNMA collateral. Agency RMBS A Residential Mortgage-Backed Security issued and guaranteed by FNMA, FHLMC, or GNMA. Alt-A (Alternative A) Mortgage A less than A (prime) credit quality loan, classified as such due to one or many non-standard features related to the borrower, property, or the loan. Amortization The reduction of an outstanding balance on a loan through monthly payments based on a pre-determined amortization schedule cast at the time of loan origination. Amortization schedule A pre-determined monthly payment schedule showing the amount of the monthly payment and its attribution to principal and interest payments. Amortization term The time period, in months or years, over which a mortgage loan would payoff to zero based on the amortization schedule cast at the time of loan origination. Application The process a borrower seeking mortgage financing undergoes to secure funds. This process provides information on the borrower’s savings, income, assets, and liabilities. Appraisal An estimated value of a property arrived at by a certified appraiser. Appreciation An increase in the value of a property. Balance The dollar amount of the original loan outstanding. This is equal to the original loan balance less the sum of all prior principal payments since loan origination. Basis Point 1/100th or .01 of 1 percent. Yield spreads and changes, thereof, are often expressed in basis points. Call Risk The risk borne by an investor in a security that experiences an amortization rate faster than expected. This faster amortization rate may be due to curtailments or refinancings.

86 20 October 2005 Mortgage Market Insights Appendix C - Glossary

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 Time-tranched securities collateralized by an underlying pool of either, (CMO) 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 The percentage of the outstanding mortgage loan’s principal balance (CPR) 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 An index based on the average yield of Treasury securities with a (CMT) 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 th Bank’s jurisdiction, such as the 11 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.

20 October 2005 87 Mortgage Market Insights Appendix C - Glossary

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 See “Prepayment.” 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.

88 20 October 2005 Mortgage Market Insights Appendix C - Glossary

Federal Home Loan Mortgage Freddie Mac is a private corporation, that trades on the New York Corporation (FHLMC), aka Freddie Stock Exchange (NYSE), with a credit line to the US Treasury. The Mac 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 A government mortgage insurance agency operating under the (FHA) 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 Fannie Mae is a private corporation, that trades on the New York Stock Association (FNMA), aka Fannie Exchange (NYSE), with a credit line to the US Treasury. The Fannie Mae 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 Ginnie Mae is a government-owned entity created by the US federal Association (GNMA), aka Ginnie government in 1968, separating it from Fannie Mae. Ginnie Mae 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.

20 October 2005 89 Mortgage Market Insights Appendix C - Glossary

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 The interest rate at which major international banks based in London Rate) 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.

90 20 October 2005 Mortgage Market Insights Appendix C - Glossary

Residential Mortgage-Backed A security supported by residential mortgages. Security (RMBS) 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.

20 October 2005 91 Mortgage Market Insights Appendix C - Glossary

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, Prepayment rates are often expressed in terms of a PSA rate. A referencing a prepayment speed prepayment rate of 100% PSA implies annualized prepayment rates of assumption 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 The balance remaining to be repaid. Balance)

92 20 October 2005 Mortgage Market Insights Appendix C - Glossary

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.

20 October 2005 93 Mortgage Market Insights Appendix C - Glossary

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 The time, expressed in number of months, expressing the weighted (WALA) 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.

94 20 October 2005 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Appendix D - Useful Bloomberg Pages

Chart 50 VAC (View All Classes) - View a list of all tranches for a given deal

Chart 51 SPA (Structure Paydown) - View a summary of tranche cash flows for a user-defined prepayment scenario

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

20 October 2005 95 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 52 DES (Description) - View a description of the security

Chart 53 DES2 (Collateral Description) - View a description of the collateral

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

96 20 October 2005 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 54 CLC (Collateral Composition) - 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) - View summary of collateral performance

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

20 October 2005 97 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 56 CPD (Class Paydown) - View history of actual monthly distributions of principal and interest to a given tranche

Chart 57 CGS (Collateral Group Statistics) - View collateral groups in a deal, the corresponding collateral type, tranches supported by the group, and prepayment performance

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

98 20 October 2005 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 58 CFG (Cash Flow Graph) - View a graph of a tranche’s principal and interest cash flows under a user-defined scenario

Chart 59 CFT (Cash Flow Table) - View projected cash flows for a given tranche under a user-defined prepayment scenario

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

20 October 2005 99 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 60 WALG (Weighted Average Life Graph) - View a graph of the weighted average life profile under user-defined scenarios

Chart 61 FCG (Coupon Graph) (for floating-rate tranches only) – View the coupon on a floater coupon under user-defined index values

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

100 20 October 2005 Mortgage Market Insights Appendix D - Useful Bloomberg Pages

Chart 62 RCHG (Rating Changes) - View the original rating and subsequent changes for a given tranche, by rating agency

Chart 63 CLAS (Class Description) - View Bloomberg’s nomenclature for defining various types of CMOs

Source: Credit Suisse First Boston (US Mortgage Strategy), Bloomberg

20 October 2005 101

STRUCTURED PRODUCTS RESEARCH

Gail Lee, Managing Director Bunt Ghosh, Managing Director Global Head of Structured Products Research Global Head of Fixed Income Research +1 212 325 1214 +44 20 7888 3042

NORTH AMERICA Eleven Madison Avenue, New York, NY 10010

Asset-Backed Securities (ABS) Rod Dubitsky, Managing Director Rajat Bhu, Vice President Chris Fenske, Vice President Jay Guo, Vice President Senior Strategist, Group Head +1 212 325 5410 +1 212 325 0369 +1 212 325 3565 +1 212 325 4740 [email protected] [email protected] [email protected] [email protected] Shumin Li, Vice President Lidia Dumitrascu, Associate Larry Yang, Associate Christopher Mellia, Analyst +1 212 325 2957 +1 212 325 5416 +1 212 325 2952 +1 212 325 3663 [email protected] [email protected] [email protected] [email protected]

Collateralized Debt Obligations (CDO) David Yan, Vice President Stephen Chow, Associate Neil Desai, Analyst Willie Green +1 212 325 5792 +1 212 538 5523 +1 212 325 1148 +1 212 325 1287 [email protected] [email protected] [email protected] [email protected]

Commercial Mortgage Backed Securities (CMBS) Gail Lee, Managing Director Paul Fitzsimmons, Vice President Luke Lu, Vice President Manish Rajguru, Vice President Senior Strategist, Group Head +1 212 538 8567 +1 212 325 2785 +1 212 325 4881 +1 212 325 1214 [email protected] [email protected] [email protected] [email protected]

Serif Ustun, Associate +1 212 538 4582 [email protected]

Mortgage Backed Securities — Residential (MBS) Satish Mansukhani, Director Mahesh Swaminathan, Director Adama Kah, Vice President Chandrajit Bhattacharya, Vice President Senior Strategist, Group Head +1 212 325 8789 +1 212 325 0318 +1 212 325 1546 +1 212 325 5985 [email protected] [email protected] [email protected] [email protected]

Sergei Ivanov, Vice President Arjune Budhram, Associate Mutaz Qubbaj, Associate +1 212 325 2872 +1 212 325 2128 +1 212 325 0172 [email protected] [email protected] mu’[email protected]

EUROPE – Structured Products (All) One Cabot Square, London E14 4QJ, United Kingdom

Recai Güneşdoğdu, Director Asim Qureshi, Vice President Tim Francis, Associate Michael Tian, Associate European Head +44 20 7888 3173 +44 20 7888 3969 +44 20 7883 4643 +44 20 7883 7978 [email protected] [email protected] [email protected] [email protected]

JAPAN – Structured Products (All) Izumi Garden Tower, 1-6 Roppongi 1-Chome, Minato-ku, Tokyo 106-6024

Kenji Toukaku, Director Japan Head + 81 3 4550 7172 [email protected]

For general inquiries or to be added to a distribution list, please contact: Angela Chuang ([email protected]) or Werner Pauliks ([email protected])

Disclosure Appendix

Analyst Certification I, Satish Mansukhani, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Important Disclosures CSFB's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to CSFB's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html CSFB’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including CSFB's total revenues, a portion of which are generated by CSFB's Investment Banking and Fixed Income Divisions. CSFB may trade as principal in the securities or derivatives of the issuers that are the subject of this report At any point in time, CSFB is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, CSFB acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department over the previous 12 months, please view the document at http://research-and- analytics.csfb.com/docpopup.asp?docid=35321113&type=pdf. CSFB clients with access to the Locus website may refer to http://www.csfb.com/locus. CSFB does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.

Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, CSFB policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of CSFB's engagement in an investment banking transaction and in certain other circumstances.

Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.

CSFB Credit Rating Definitions CSFB assigns rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk. CSFB's rating opinions do not necessarily correlate with those of the rating agencies.

Credit Suisse First Boston is the trade name for the investment banking business of Credit Suisse, a Swiss bank, and references in this report to Credit Suisse First Boston or CSFB herein include all of the subsidiaries and affiliates of Credit Suisse operating under the Credit Suisse First Boston division of Credit Suisse Group (“CSG”). For more information on our structure, please use the following link: http://www.creditsuisse.com/en/who_we_are/ourstructure.html. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CSG or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CSG, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CSG’s own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CSG’s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse First Boston (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in the United States and Canada by Credit Suisse First Boston LLC; in Switzerland by Credit Suisse; in Brazil by Banco de Investimentos Credit Suisse First Boston S.A; in Japan by Credit Suisse First Boston Securities (Japan) Limited; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse First Boston (Hong Kong) Limited, Credit Suisse First Boston Australia Equities Limited, Credit Suisse First Boston (Thailand) Limited, CSFB Research (Malaysia) Sdn Bhd, Credit Suisse Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse, Taipei Branch has been prepared by a registered Senior Business Person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse First Boston LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Copyright © 2005 CREDIT SUISSE and/or its affiliates. All rights reserved.

AMERICAS EUROPE ASIA PACIFIC 1 212 325 2000 44 20 7888 8888 852 2101 6000