Professional Documents
Culture Documents
ABS Research
Chris Flanagan AC Head, Global Structured Finance Research (1-212) 270-6515 christopher.t.flanagan@jpmorgan.com Edward Reardon (1-212) 270-0317 edward.j.reardon@jpmorgan.com Amy Sze, CFA (1-212) 270-0030 amy.sze@jpmorgan.com Brynja Sigurdardottir (1-212) 270-0967 brynja.x.sigurdardottir@jpmorgan.com
Agenda
Page
1 11 35 53 86
I N V E S TI N G
I N
AS S E T
B AC K ED
ABS outstanding
Asset-backed Asset-backed Securities Securities Outstanding Outstanding ($ ($ billions) billions)
2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800
A B S
1Q08 1Q08 year year end end outstanding outstanding by by collateral collateral
2472 2480
Student Loan
2130 1955 1828 1694 1543
10%
Equip
1281 1072 901 732 536 404
2%
600 400 96
T O
98
00
02
04
06
1Q08
I N T R O D U C TI O N
500 402
529
Other Total
Other includes Floorplan, Motorcycle, Small Business Loans, Time Share, Aircraft, Franchise, and other miscellaneous assets. As of Aug 1, 2008. Source: JPMorgan, IGM CorporateWatch, and Bloomberg.
Outstanding Outstanding ($1,552bn ($1,552bn total total as as of of year year end end 2007) 2007)
Student Loans $244 16% MH $27 Home Equity $586 37%
Sources: JPMorgan, SIFMA
Other $102 7%
A B S
2%
I N T R O D U C TI O N
T O
Phase I & II
Bank portfolios Insurance companies Total return accounts Bank trust departments State funds Credit unions Corporations Govt Agencies Asset swap investors
I N T R O D U C TI O N
T O
A B S
Access Foreign and US Capital Markets Access Different Areas of the Yield Curve Transfer Risks to Investors
I N T R O D U C TI O N
T O
Represent ownership interest in a pool of receivables sold by originators into a special purpose
seller/servicer
Feature credit enhancements which lead to high credit ratings
I N T R O D U C TI O N
T O
Bankruptcy Remote
Internal Excess Spread Subordination Reserve Fund Spread Account Overcollateralization External AAA-rated Monoline
Vehicle
Insulates Investor from
Insurer
AAA Loss allocation (bottom up) ($800 million) Seniority (top down)
AA ($90 million) A ($50 million) BBB ($30 million) OC* ($30 million)
A B S
T O
I N T R O D U C TI O N
* OC = Overcollateralization (or Assets > Liabilities). Reserve account may be used in addition to or instead of OC.
Excess spread
Excess spread is the first line of defense against losses in ABS Gross Portfolio Yield
(Revenue: interest earned on asset) (Credit losses on assets) (Liability cost of ABS debt) (Other expenses) (Net income)
I N T R O D U C TI O N
T O
A B S
AAA ABS spreads recently gave up most of the years earlier gains
3 3 year year AAA AAA spreads spreads spread spread to to LIBOR LIBOR (bp) (bp)
190 170 150 130 110 90 70 50 30
A B S
Credit Card
Prime Auto
UK RMBS
95
135
90
190
158
10 -10 4/00 10/00 4/01 10/01 4/02 10/02 4/03 10/03 4/04 10/04 4/05 10/05 4/06 10/06 4/07 10/07 4/08
I N T R O D U C TI O N
T O
10
Agenda
Page
1 11 35 53 86
I N V E S TI N G
I N
AS S E T
B AC K ED
11
Retail Retail / / Private Private Label Label Credit Cards Credit Cards
y Revolving, can only
purpose
purpose
Monthly Principal
Examples
y Visa
y Bloomingdales
y AMEX Green
Corporate Cards
C R E D I T
C AR D
12
a market rate
Co-branded cards Visa / MasterCard jointly marketed with a retailer that often provide rewards at
C R E D I T
C AR D
13
2007 2007 floating-rate floating-rate supply supply by by WAL WAL ($bn) ($bn)
40 30 20 10 0 3 4 5 WAL (yr) 7 10 5 6 6 30
25
34 40 23 21 20 20
16
0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
C AR D
As of Aug 1, 2008 Source: JPMS, IGM CorporateWatch, Bloomberg.
4.0 3 W AL (yr) 10
C R E D I T
14
Issuer Chase Bank of America (MBNA) Citibank Capital One American Express Discover Card GE Capital Washington Mutual HSBC ADVANTA Nordstrom First National National City Turquoise Cabela's WFN (Wachovia) Conn Funding Others Total
As of Aug 1 2008 Source: JPMS, IGM CorporateWatch, Bloomberg.
Tickers CHAIT BACCT CCCIT COMET AMXCA, AEIT DCENT GEMNT WMMNT HMNT ABCMT NDCCM FNMNT NCCMT HCARD CABMT WFNMT CONN
2005 13,445 9,450 8,875 5,930 6,600 5,579 2,619 2,208 1,084 1,275
2006 9,625 17,495 10,500 9,100 3,499 3,442 973 4,250 1,000 1,915
2007 20,635 18,140 16,090 8,875 7,842 6,698 4,183 2,925 1850 1,450 850 850
247
600 250
425
374 500
C R E D I T
C AR D
15
C R E D I T
16
Master Trust
Collateral Certificates
subordinates
Public issuance of notes allows unrestricted
Issuance Trust
Class A AAA
Class B A
Class C BBB
Subclass A1,A2,...
C AR D
Subclass B1,B2,...
Subclass C1,C2,...
C R E D I T
17
transaction
It is followed by the controlled amortization or accumulation period Monthly principal collections are used to purchase new receivables Revolving period can be terminated early if certain early amortization events occur
C R E D I T
C AR D
18
accumulation period
Example Three-year expected maturity with five-year legal final
Revolving Period Months 1-33 No Yes Yes No Accumulation Period Months 34-36 No Yes After Accum Yes Principal Repaid Month 36 Paid in Full Yes After Accum Yes
Soft Bullet Cash Flow Structure Principal Payments Interest Payments Purchase of Receivables Principal Accumulation
C R E D I T
C AR D
19
Collateral: Collateral: Credit Credit card card accounts, accounts, monthly monthly principal principal and and interest interest receipts receipts
Collateral balance ($)
6
Source: JPMS.
12
18
Revolving period
24
30
Accumulation period
36
C R E D I T
C AR D
20
Servicing fee to servicer (typically 2.00%) Interest income Net recoveries on charged off assets Interchange Fee income Interest payment on Class A Notes Interest payment on Class B Notes Interest payment on Class C Notes Deposit to the spread account Excess spread to residual holder
Cover interest shortfalls on each class of Notes Cover servicing fee shortfalls Make targeted deposit to Class A principal Principal collections
funding account
Make targeted deposit to Class B principal
C AR D
funding account
Make targeted deposit to Class C principal
C R E D I T
funding account
Excess paid to residual holder
21
Class A
Rating AAA
CE
Deal Structure
86.50% 13.50%
6.75% 6.75%
6.75%
1.00% 6.00%
interest in the trust with payment rights subordinate to higher rated tranches
Collateral invested amount (CIA) / Class C
Generally rated A
Principal collections will be allocated to
C AR D
Base Rate WA Bond Coupon - 5.50% Servicing Fee - 2.00% Excess Spread 6.50%
Class B only after Class A is paid and Class C only after the Class A and B are paid
Insurer wrap (rare, on subprime receivables)
C R E D I T
22
Issuer Advanta American Express Charge American Express - Credit Bank of America Cabela Capital One Chase CHAIT Citibank CCCIT Discover GE HSBC HSBC Private Label National City Nordstrom WaMu
Source: JPMorgan, Deal Documents.
AAA 17.00% 7.00% 12.00% 14.00% 13.50% 17.00% 11.50% 12.25% 12.50% 18.75% 20.50% 24.00% 12.50% 16.50% 27.00%
A 8.50% 4.00% 6.50% 6.50% 6.50% 8.00% 5.75% 7.00% 7.50% 9.50% 12.00% 12.50% 6.50% 8.00% 16.50%
3-month Excess Spread % 4.50% or greater 4.00 - 4.49% 3.50 3.99% 3.00 3.49% 2.50 2.99% 2.00 2.49% 0.00 1.99% < 0.00%
Spread Account Funding % 0.00% 1.00% 1.50% 2.50% 4.00% 5.00% 5.75% 5.75%
Source: Chase 8K filing March, 1, 2007 Note: The Spread Account schedule is issuer specific. Above for Chase only.
Excess spread first line of defense against losses AAA and A benefit from subordination BBB credit enhancement from spread account Funding schedule of spread account aims to be fully collateralized versus the par BBB bond
C AR D
C R E D I T
23
extended exposure to deteriorating asset quality. If an early amortization event occurs, deal begins to pay out immediately.
All principal collections become allocable to investors immediately and cash on
Failure or inability to make required deposits or payments Failure or inability to transfer receivables to the trust when necessary False representations or warranties Certain events of default, bankruptcy, or receivership of the seller or servicer
Legal
Trust becomes classified as an investment company under the Investment Company Act of 1940
Performance
Three-month average excess spread falls below a minimum level (i.e., zero) Sellers participation falls below the required level Portfolio principal balance falls below the invested amount
C R E D I T
C AR D
24
Chase - CHAIT 3,200.0 76,407 1,902 4,050 11,421 94 16.7% 25.71% 28.40% 46.24% 7.90% 16.16% 75.86% 0.00% 12.27% 12.12% 11.59% 64.02% 12.25% 5.97% 6.87%
08-6 A Prosup, May 08
BofA (BACCT) 58.0 100,380 1,732 4,359 14,110 96 12.3% 22.10% 26.20% 51.80% 7.20% 16.10% 76.70% 0.70% 1.80% 6.70% 10.80% 70.20% 13.60% 8.30% 6.70%
08-6 A Prosup, Apr 08
Capital One 30.0 44,767 1,492 2,275 6,396 62 22.9% 49.71% 25.70% 24.67% 33.71% 18.91% 47.39% 5.92% 11.81% 11.40% 12.49% 58.38% 12.40% 6.50% 6.37%
08-4 A Prosup, Mar-08
Citi - CCCIT 38.5 77,816 2,021 3,994 11,721 17.2% 25.14% 25.87% 49.09% 7.07% 13.96% 78.97% 4.33% 5.45% 6.19% 6.89% 77.14% 14.98% 6.69% 8.05%
08-A7 Prosup, Mar-08
Discover 31.2 38,145 1,222 2,733 8,924 13.7% 37.80% 39.10% 23.20% 10.70% 33.90% 55.40% 2.60% 5.70% 5.30% 4.40% 82.00% 9.70% 6.10% 8.30%
08-4A Prosup, May-08
C R E D I T
25
National City 1.2 2,111 1,795 3,054 11,402 147 15.7% 34.40% 37.50% 28.10% 8.70% 23.10% 71.80% 0.00% 0.00% 8.10% 7.30% 84.70%
WaMu 7.6 16,913 2,225 2,897 6,294 58 35.4% 41.86% 43.02% 15.17% 23.96% 41.29% 34.74% 1.92% 20.42% 10.57% 11.89% 55.20% 16.57% 7.28% 7.14%
25.70% 21.10% 53.30% 5.30% 9.80% 58.30% 1.10% 10.40% 11.60% 10.90% 66.00% 17.08% 8.73% 6.85%
08-5 Prosup, May 08
C R E D I T
26
Advanta 1.6 6,004 3,643 6,665 15,818 42 23.0% 14.41% 23.10% 62.58% 5.10% 11.47% 83.43% 19.96% 24.09% 15.01% 6.78% 34.16% 15.53% 8.25% 6.16%
08-A3 Prosup, May 08
Cabelas 1.6 1,778 1,121 1,880 7,806 14.4% 58.43% 33.21% 8.50% 13.14% 64.20% 22.65% 12.15% 13.37% 11.38% 10.40% 52.70% 5.04%
GE 46.8 17,081 365 621 1,983 90 18.4% 92.59% 6.26% 1.17% 79.84% 17.11% 3.05% 14.58% 11.28% 9.75% 8.27% 56.12% 9.68% 6.76% 10.15%
HSBC Private Label 12.4 8,434 680 3,998 46 17.0% 74.25% 17.97% 7.78% 57.00% 26.97% 16.03% 38.54% 16.40% 8.90% 29.53% 13.28% 8.16%
07-1 Prosup, Dec-06
Nordstrom 4.7 1,413 298 1,106 6,436 72 4.6% 67.40% 23.74% 8.86% 42.03% 23.81% 34.16% 7.15% 8.62% 12.75% 18.87% 52.61% 36.85%
C R E D I T
27
Chase CHAIT % of Accounts Making Min. Payment * % of Accounts Making Full Payment * % Accounts with No Payment Due % of Accounts Making Min. Payment (excl. Accounts with No Payment Due) % of Accounts Making Full Payment (excl. Accounts with No Payment Due) As Of Date
4% 18% 52% 8% 37% Mar-08
BofA (BACCT)
4% 8% 62% 9% 22% Mar-08
Capital One
7% 15% 35% 11% 22% Mar-08
Citi - CCCIT
4% 21% 49% 8% 41% Dec-07
Discover**
4% 15% 57% 10% 35% May-08
AmexCredit Card
4% 20% 60% 11% 50% May-08
National City
8% 24% 42% 15% 42% Mar-08
GE % of Receivables Making Min. Payment % of Receivables Making Full Payment As Of 4% 51% Apr-07
Metrics in bold are reported, italics are derived * This metric is calculated based on all accounts in the trust, including those that have a credit balance or zero balance and therefore do not have a payment due. ** Reported payment percentages are based on averages from the beginning of the calendar year. Source: Moodys, Static Pool reports
C R E D I T
C AR D
28
Master Trust No score < 560 560-659 660-699 700-759 >=760 < 660 (excl. no score) As Of
* Based on sample only. Source: Moodys, Deal Documents
C R E D I T
C AR D
29
S&P S&P BBB BBB credit credit card card breakeven breakeven deeper-recession deeper-recession scenario scenario (%) (%)
Yield From 18.8% to 14.1% over 15 months Charge-offs Breakeven 9.3% Payment Rate* From 20.0% to 15.0% over 15 months
* Assume an average 28 months between expected and legal final maturity Source: S&P
Note: S&P deeper-recession scenario coincides with S&P economists view of potential loses exceeding 9% by spring of 2009 in such a scenario. In this scenario, excess spread starts trapping in the fourth month and early amortization triggered due to negative excess spread in tenth month.
Over 15 years of S&P credit card performance index history, charge-offs never
exceeded 7.6%, and yield never fell below 16.8%. Payment rate never under 15% for 10 years.
Fitch Fitch credit credit card card breakeven breakeven stress stress analysis: analysis: base base case* case*
C R E D I T
C AR D
30
Steady State Stress Case (starting from 24-month average actual performance)
* 12-month period ended November 30, 2007 100% Purchase Rate Stress Performance (12-Month Variable Yield Monthly Payment Rate Chargeoffs Purchase Rate Average)* 17.40% 22.22% 3.50% 100.00% AAA Stress 35.00% 55.00% 5.51x 100.00% Output 11.31% 10.00% 19.29% 0.00% A Stress 25.00% 45.00% 3.18x 100.00% Output 13.05% 12.22% 11.13% 0.00% BBB Stress 20.00% 30.00% 1.53x 100.00% Output 13.92% 15.55% 5.36% 0.00% Timing Down Overnight Down Overnight Six-Month Ramp
C AR D
C R E D I T
31
Bank Card ABS performance: Excess spread offers robust credit protection. Portfolio yield should stay relatively flat. Payment rate slows as home equity withdrawal declines
Charge-offs and and 3-month 3-month excess excess spread spread Charge-offs
10% 9% 8% 7% 6% 5% 4% 3% Bankcard Charge-offs Excess Spread (3-month Average)
C R E D I T
32
Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Regulators (OCC, FDIC, OTS) Senior Management Experience Servicing Platform (FDR/TSYS) Collections
C AR D
C R E D I T
33
Structure Type Cashflow Priorities Shared Excess Seller / Servicer / Trustee Tranche sizes Currency Ratings Fixed or Floating / Benchmark Expected average life Principal payment window or bullet date Legal final maturity Credit enhancement Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets) Other structural features (e.g., series-
Yield Charge-offs Lagged Charge-offs Payment Rate Delinquencies Excess Spread Pool Balance Sellers Interest Recoveries Managed Portfolio vs. Master Trust
Performance
34
Agenda
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I N V E S TI N G
I N
AS S E T
B AC K ED
35
purchases
Receivables carry a fixed interest rate and are usually originated for 36, 48, or 60
Chase, USAA
Specialty Finance Companies
AU T O M O BIL E
A B S
36
Closed End Lease At termination, Lessee can return or purchase New Excellent
Coupon Coupon
0%-8%
8%-13%
13%-20%
8%-12%
Originators Originators
Captives, Banks
Captives, Banks
A B S
0.75% - 3%
1.5% - 5.0%
AU T O M O BIL E
37
2.0 1.2
80
Money Mkt
60
2007 2007 Fixed Fixed Rate Rate Issuance Issuance ($BN) ($BN)
25 20 15 10 5 0
A B S
14 44 26 49
59 57 44
10.4
11.9
20 10 0
10 14
54
50 35 31
20 23 2 16 18 16 19 14 12 10
Money Mkt
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Total = $__mm
Source: JPMS, IGM CorporateWatch, Bloomberg.
AU T O M O BIL E
38
Issuer GMAC Ford Honda USAA CarMax DaimlerChrysler Nissan World Omni AmeriCredit Capital One Hyundai Merrill Lynch Goldman Sachs Wachovia JPMorgan (JPMART) Franklin Auto Chase Other Total
A B S
2005 3.04 9.68 7.70 4.53 1.59 4.00 4.23 1.73 1.50 0.77 1.77 1.29 2.90 0.35 3.62 5.17 53.88
2006 6.05 8.94 4.08 5.24 1.27 6.58 3.41 1.84 2.25 1.88 0.85 1.30 0.56 0.36 2.33 3.15 50.09
2007 7.56 5.04 2.91 2.56 2.15 2.10 2.06 2.00 2.00 1.75 0.86 0.77 0.66 0.65 0.45 0.33
Issuer AmeriCredit Capital One Drive Wachovia Triad CPS HSBC automotive UPFC Long Beach Prestige Drive Time Credit Acceptance First Investors WFS Wells Fargo Total
2005 5.50 7.20 0.18 2.85 2.01 0.59 0.66 1.40 0.70 0.42 0.15 5.73 27.39
2006 4.70 7.00 0.19 2.70 2.84 2.83 0.62 0.91 1.60 0.95 0.49 0.20 0.24 25.27
2007 5.00 4.25 2.30 1.95 1.37 0.90 0.86 0.50 0.49 0.33 0.32 0.20
18.46
33.86
AU T O M O BIL E
39
event of default
Credit enhancement protect investors from resulting losses Typical Auto ABS Deal Characteristics Pricing Benchmarks Coupon Type Typical New Issue Size
A B S
Swaps, EDSF, LIBOR Fixed or Floating $1.5 - $2.0 billion (Prime) $0.5 - $1.0 billion (Non Prime)
AU T O M O BIL E
40
retiring that portion of principal that is attributable to the loan that has prepaid
Prepayments measured by Absolute (ABS) prepayment model
Standard measure of prepayments for automobile loan backed securities, which calculates monthly prepayments as the percent of the original dollar balance of receivables. Prime auto ABS typically prices using 1.5% ABS assumption.
The small collateral balance and relatively short maturity for the typical auto loan
contract reduces the incentive to refinance because monthly payment saving would be minimal
A B S AU T O M O BIL E
41
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 De al Age
Underlying Underlying Asset Asset Cashflows: Cashflows: Retail Retail auto auto installment installment contracts, contracts, 60 60 mo mo term, term, monthly monthly P&I P&I
Principal
A B S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 De al Age
AU T O M O BIL E
42
Class B Certs A
Investors
Investors
Investors
Investors
Investors / Retained
AU T O M O BIL E
A B S
43
Collateral payments Principal Interest Net recoveries on charged off assets Servicer advances Proceeds of repurchases of receivables by the
Servicing fee to servicer (typically 0.50%-1.00%) Interest payment on Class A Notes Interest payment on Subordinated Notes Principal payment on Class A Notes Sequentially from A-1 through A-4 Principal payment on Subordinated Notes Trustee fees Remaining funds to certificateholder (excess
servicer
Reserve fund
spread)
AU T O M O BIL E
A B S
44
Class
Rating
Deal Structure
3.00%
monoline insurance company which guarantees timely payment of interest and ultimate repayment of principal
A B S
Common on Non-prime Auto Yield Supplement for Subvented Loans Used to increase the yield on the
AU T O M O BIL E
underlying collateral (APR) to match the coupon required on the issued bonds
45
AU T O M O BIL E
46
COPAR 2007-1 06/14/07 $1,250 mn 67,151 $17,491 7.54% 61 55 6 CA 18% TX 10% FL 8% 736 57% 4.25% 1.00% 3.25% 8.50%
CarMax 2007-3 09/07/07 $500 mn 40,413 $12,867 10.39% 63 58 6 TX 16% FL 12% CA 10% 679 97% 6.25% 0.50% 0.50% 7.25%
FORD 2007-A 06/19/07 $1,992 mn 102,246 $21,761 4.39% 63 60 3 TX 12% CA 11% FL 9% 705 13% 5.00% 0.50% -2.00% 3.50%
CARAT 2007-1 05/31/07 $2, mn 99,653 $20,999 4.48% 63 53 10 CA 12% TX 11% FL 7% 702 13% 5.25% 0.50% 0.25% 6.00%
HAROT 2007-1 02/21/07 $1,211 mn 69,274 $18,071 6.05% 56 50 6 CA 17% TX 8% NJ 7% 740 15% 3.25% 0.50% N/A 3.75%
NAROT 2007-A 02/15/07 $1,023 mn 55,724 $19,221 5.67% 62 53 9 CA 13% TX 13% FL 9% 750 10% 4.50% 0.50% 0.00% 5.00%
USAA 2007-1 06/11/07 $1,222 mn 64,604 $18,916 6.73% 62 58 4 TX 15% CA 9% FL 7% 723 34% 2.75% 0.80% N/A 3.55%
World Omni 2007-A 02/13/07 $1,100 mn 48,011 $19,873 7.17% 65 61 4 FL 42% GA 20% NC 18% 730 13% 2.75% 0.25% 0.00% 3.00%
05/24/07 $1,000 mn 46,539 $20,188 10.35% 78 68 10 CA 13% TX 13% FL 11% 709 56% 12.75% 1.00% 0.50% 14.25%
AU T O M O BIL E
47
COAFT 2007-B 04/30/2007 $2,000 mn 89,253 $15,723 11.81% 67 60 6 CA 17% FL 9% IL 6 % 661 61% MBIA 0.00% 1.50% 7.50% 9.00%
HSBC 2007-1 01/23/2007 $859 mn 67,842 $17,473 14.28% 68 59 8 TX 17% CA 13% FL 12% 614 71% N/A 0.00% 1.00% 27.50% 28.50%
Long Beach 2007-A 03/13/2007 $486 mn 22,141 $18,686 12.27% 69 65 4 CA 41% FL 10% AZ 10% 635
Prestige 2007-1 07/25/2007 $325 mn 16,937 $17,344 17.44% 70 63 6 TX 25% AZ 17% UT 13% N/A 83%
Triad 2007-A 05/22/2007 $775 mn 54,169 $15,638 16.23% 70 63 7 TX 21% CA 11% FL 7% 573 80% FSA 0.00% 2.00% 8.50% 10.50%
WALOT 2007-1 05/30/2007 $1,950 mn 119,849 $16,687 12.42% 67 60 7 CA 32% AZ 5% WA 5% 638 72% N/A 14.25% 0.25% 0.00% 14.50%
Total
Source: JPMorgan, Deal Documents
AU T O M O BIL E
48
2/06
2/07
2/08
Recoveries Recoveries
2005 2006 2007 2008 70% 50% 30% 10% 2005 2006 2007 2008
2001
13
19
25
31
37
1/05
1/06
1/07
1/08
AU T O M O BIL E
49
4/05
4/06
4/07
4/08
4/04
4/05
4/06
4/07
4/08
Recoveries Recoveries
2005 2006 2007 2008 80% 70% 60% 50% 40% 30% 20% 2004 2005 2006 2007 2008
2001
13
19
25
31
37
43
AU T O M O BIL E
50
Company Type (Captive, Bank or Specialty Finance) Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Market Share Use of Incentives
A B S
Borrower Credit Prime/Mid Prime/Subprime Underwriting Standards Sourcing (Indirect/Dealer/Retail) Auto Type New / Used Make / Models Loan Characteristics Simple Interest Balloon Deferred APR & Subvention Term (36-, 48-, 60- months) Seasoning Geographic/demographic diversification Portfolio growth Credit Scores
AU T O M O BIL E
51
Charge-offs Prepayment Rate Delinquencies Recoveries Excess Spread Managed Portfolio vs. ABS Performance
Wrap vs. Senior Sub Subordinate lockouts Reserve Fund Targets / Step-ups / Floors Yield Supplement Accounts
Seller / Servicer / Trustee Tranche sizes Ratings Fixed or Floating / Benchmark Expected average life Principal payment window or bullet date
A B S
Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)
AU T O M O BIL E
52
Agenda
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I N V E S TI N G
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AS S E T
B AC K ED
53
Higher costs and rising enrollments have led to increase in student loan financing needs
Cost Cost of of attendance attendance Constant Constant (inflation-adjusted) (inflation-adjusted) dollars dollars
$35,000
Past Past and and projected projected undergraduate undergraduate enrollments enrollments 2-year 2-year and and 4-year 4-year institutions institutions ('000) ('000)
$32,307
$30,000
$25,000
$20,000
$15,000
$13,589
(F F E L P )
$10,000
11,000 10,000
1990 1993 1996 1999 2002 2005 2008 2011 2014 Actual Projected
A B S
Private Four-Year
Source: Trends in College Pricing, The College Board
Public Four-Year
L O AN
S T U D EN T
54
60
10.4
15 8
10 8.3 8
9.7
50 6 40 4 30 56 41 33
(F F E L P )
6 4.7
5.0 4.0
51
48
20
4 2.4
3.1
10 2 1994 3 10 1996 13 10 9
16
19 10
24
1998 FFELP
2000
2002
2004
2006
2008
A B S
10
12
15
Private Credit
WAL (years)
L O AN
S T U D EN T
55
Tickers SLMA NSLT SLC CEDLT (COELT) GCOE GOAL ACCSS COLLE NEF BRHEA WSLT PHEAA STSLT SCSLC KSLT
2005 23,690 6,865 4,350 2,700 1,230 1,000 1,324 2,700 1,020 3,544 1,800 800 700 294 3,892 55,909
2006 26,403 5,733 4,822 2,143 1,585 1,007 1,700 1,289 1,611 1,249 765 500 91 0 48,896
2007 23,438 3,936 3,092 1,222 1,213 1,200 1,179 1,100 628 303
(F F E L P )
10,312 47,623
L O AN
A B S
S T U D EN T
2,805 4,308
7,958
56
FY2007 FY2007 holders holders of of FFELP FFELP loans loans ($ ($ millions) millions)
Origination Volume 9,002 4,764 3,262 3,065 2,955 2,934 1,493 1,333 1,304 1,125 1,062 1,020 948 891 839 716 662 647 624 567 12,146 51,907
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Lender Sallie Mae Citibank Student Loan Corporation National Education Loan Network (NELNET) Brazos Group Wells Fargo Education Financial Services Pennsylvania Higher Education (PHEAA) Wachovia Education Finance JP Morgan Chase Bank College Loan Corporation Education Lending Group Goal Financial GCO-ELF Access Group Northstar Guarantee Missouri Higher Education (MOHELA) Bank of America EdAmerica/Edsouth Suntrust Bank College Foundation Inc. South Carolina Student Loan Corp Other Total Industry Holder Volume 128,088 28,038 25,770 14,391 11,996 11,984 10,964 10,250 10,242 10,130 7,541 6,413 5,562 4,959 4,544 4,541 3,334 3,170 2,870 2,653 55,079 362,518
Lender Sallie Mae Citibank Bank of America JP Morgan Chase Bank Wells Fargo Education Financial Services Wachovia College Loan Corp US Bank EdAmerica Access Group Northstar Guarantee Education Lend Group Suntrust Bank Pittsburg National Corp National Education Loan Network (NELNET) Citizens Bank Education Finance College Foundation Inc. Regions Pennsylvania Higher Education Assistance Fifth Third Others Total Industry
14 15 16 17 18 19 20
L O AN
A B S
S T U D EN T
Source: www.finaid.org
57
Sallie Mae National Education Loan Network (NELNET) Next Student Affinity Direct JP Morgan Chase Bank Education Lending Group Citibank Student Loan Corporation Wells Fargo Education Financial Services College Loan Corporation PA Higher Education (PHEAA) Graduate Leverage Pacific Loan Proc Goal Financial Erie Processing Missouri Higher Education (MOHELA) Wachovia Education Finance Academic Loan Group FinanSure Student Loan Brazos Group EdAmerica/EdSouth Others Total Industry
Consolidation Volume 12,554 4,529 3,021 2,108 1,825 1,731 1,586 1,428 1,269 1,258 1,095 1,090 743 675 674 654 630 628 622 557 8,614 47,290
Consolidation volume dropped to $47.3bn in FY2007 from $72.4bn in FY2006, a 35% decline
14 15 16 17 18 19 20
L O AN
A B S
S T U D EN T
Source: www.finaid.org
58
2009 (Prohibits such loan purchases from resulting in any cost to the federal government)
Clarify EDs authority as lender of last resort with capital
Authorizes Secretary of Education to advance funds to guaranty agencies acting as lender of last resort Include parent borrowers in lender-of-last-resort program for those unable to obtain loans
Allow deferment of PLUS loans until 6 months after graduation
(F F E L P )
Increase annual loan limit by $2k and aggregate limit to $31k/$57.5k for
dependent/independent undergraduates
Authorizes lenders, for loans made from July 2008 through June 2009, to
A B S
S T U D EN T
determine that borrowers of PLUS, who are no more than 180 days delinquent on their home mortgages, and no more than 89 days delinquent on the repayment of any other debt, meet a specified extenuating circumstances requirement which makes them eligible for such loans despite having an adverse credit history
59
L O AN
Reductions to lenders in the FFELP program (College Cost Reduction and Access Act of 2007)
Eliminate the "Exceptional Performer" status that allows lenders that meet certain
requirements established by the Secretary of Education to receive higher insurance rates on defaulted loans
Reduce the insurance paid by the federal government to lenders on defaulted loans from 97
percent to 16 percent
Reduce the special allowance payments (SAP) from the Department to lenders based on their
(F F E L P )
tax status. For-profit lenders would receive a 55 basis point SAP reduction and non-for-profit lenders would receive a 40 basis point SAP reduction. To ensure that only nonprofit lenders benefit from the increased subsidization, nonprofit lenders that are owned in-whole or in-part by a for-profit entity would not be eligible for the reduced subsidy reductions. Nonprofit lenders that are purchased by for-profit entities would also lose their higher subsidization rates on the date of the sale
Increase the loan fee paid to the Department by lenders - that cannot be passed on to
borrowers - from 0.5 percent to 1 percent of the principal amount of each newly originated loan made on or after October 1, 2007
Decrease the account maintenance fees paid by the Department to guarantors from .10 percent
L O AN
A B S
S T U D EN T
60
Since 1993, securitization has been a cost effective alternative to secondary market financing
With the explosive growth of ABS market and the recognition of student loans as high quality
company is the largest Student Loan ABS issuer (accounting for roughly half of supply)
Student Student Loan Loan ABS ABS Outstanding Outstanding ($bn) ($bn)
200
(F F E L P )
199
A B S
2003
2004
2005
2006
2007
L O AN
S T U D EN T
61
FFELP overview
Established in 1965, the Family Federal Education Loan Program (FFELP) has helped
private sector
FFELP volume nationwide total approximately $85bn in fiscal year 2006 FFELP loan benefit from U.S. Government guarantee 97% (initial loan disbursement 7/06 and after), 98% (10/93 to 6/06) or 100% (pre
Interest subsidies during in school period on some loans Deferment/forbearance allows borrower to temporarily stop payments if they
S T U D EN T
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A B S
62
Subsidized: To students demonstrating financial need Unsubsidized: To students who either do not demonstrate need or require supplement to Subsidized loan
PLUS: To graduate and professional students and or parents of undergraduates (in excess of
Stafford
Consolidation loans: Consolidation multiple loans under FFELP into one for the borrower
S T U D EN T
L O AN
A B S
(F F E L P )
63
Variable interest rate, reset annually, capped at 8.25% 91-day T-bill + 1.7% during in-school, grace and deferment periods; 91-day T-bill + 2.3% during repayment 10 years Year 1: Year 2: Years 3/4: Graduate: $2,625 $3,500 $5,500 $8,500
Variable interest rate, reset annually, capped at 9.00% 91-day T-bill + 3.1%
Fixed interest rate for life of loan, capped at 8.25% Weighted average of interest rates of loans consolidated, rounded up to nearest 1/8th of one percent
Formula Formula
(F F E L P )
Max Max Repayment Repayment Period Period Max Max Annual Annual Loan Loan
L O AN
A B S
For loans distributed after July 1, 1998 and before July 1, 2006 , subject to a maximum interest rate of 8.25%. The cap is offset by Special Allowance Payments (SAP) by the ED to lenders.
S T U D EN T
64
S T U D EN T
L O AN
A B S
(F F E L P )
65
S T U D EN T
L O AN
A B S
(F F E L P )
66
Consolidation loans
Consolidation Consolidation loan loan benefits benefits Maximum Maximum term term by by debt debt burden burden
Total Educational Debt < $7,500 $7,500-$9,999.99 $10,000-$19,999.99 $20,000-$39,999 $40,000-$59,999 > $60,000 Max Term (years) 10 12 15 20 25 30
locking in the interest rate for the life of the loan. Interest rate is the weighted average of the rates on the student loans, rounded to the nearest 1/8th.
For borrowers with multiple lenders, allows the
borrower to make only one single payment to one lender. Payment to the single lender begins 60 days after disbursement. There is no grace period.
S T U D EN T
L O AN
A B S
(F F E L P )
67
Borrower
Lender
A B S
L O AN
Consolidation Loans
Available for PLUS loans when
S T U D EN T
68
Date of first disbursement From 10/1/92 through 6/30/95 From 7-1/98 through 6/30/98 From 7/1/98 through 12/31/99
Special Allowance Margin 3.10% 2.50% for Stafford loans that are In-School, Grace or Deferment 3.10% for Stafford Loans that are in Repayment and all other loans 2.20% for Stafford Loans that are In-School, Grace or Deferment 2.80% for Stafford Loans that are in Repayment 3.10% for PLUS, SLS and Consolidation Loans
From 1/1/00
1.74% for Stafford Loans that are In-School, Grace or Deferment 2.34% for Stafford Loans that are in Repayment 2.64% for PLUS and Consolidation Loans
S T U D EN T
L O AN
A B S
(F F E L P )
69
Guarantors
Private non-profit corporations Act as middle men between lenders and
participate in FFELP
Receive fees for insurance, default aversion,
Yes US Dept of Education pays claim or reassigns guarantor Claim cured No Credit enhancement absorbs losses
S T U D EN T
least 270 day delinquent Guarantor must review and pay claim within 90 days after the lender filed it Guarantor will pay the lender accrued interest for up to 450 days delinquent Guarantor must file reimbursement claim with Dept of Ed within 30 days of paying default claim to lender
L O AN
A B S
70
Capable servicing: a key component in ensuring the Department of Education (ED) guarantee
Adherence to ED servicing guidelines is critical to maintain guarantee Servicers are audited regularly by an independent firm to verify servicing quality and
Claim Package
Reinsurance claim
Servicer
(F F E L P )
Guarantor
98% reimbursement Reinsurance $
US Department of Education
S T U D EN T
L O AN
A B S
71
Servicer
Securitization trust
$$$
(F F E L P )
Student borrower
ABS investors
Interest subsidy payments are paid on qualifying loans to the loan holders while students
A B S
are in school
L O AN
Special Allowance Payments are paid to holders of student loans to ensure they receive a
S T U D EN T
Loans remain eligible for ED guaranty so long as servicers follow specified diligence
72
Moodys/S&P/Fitch, respectively 10% clean-up calls and auction calls are used
Investors
(F F E L P )
S T U D EN T
or 91-day T-Bills (1.3%) Interest rate is capped at 6%. The cap matures in 1 year Credit enhancements include: 3.00% subordination 0.25% reserve fund Capitalized interest account of $10 million Excess spread available
or 91-day T-Bills (9.8%) The securities were not subject to a cap, and as a result of the underlying CP collateral, the uncapping was achieved structurally Credit enhancements include: 3.0% subordination 0.25% reserve fund Excess spread available
L O AN
A B S
73
Servicing fee to servicer (typically 2.00%) Interest income Net recoveries on charged off assets Interchange Fee income Interest payment on Class A Notes Interest payment on Class B Notes Interest payment on Class C Notes Deposit to the spread account Excess spread to residual holder
(F F E L P )
Cover interest shortfalls on each class of Notes Cover servicing fee shortfalls Make targeted deposit to Class A principal Principal collections
A B S
funding account
Make targeted deposit to Class B principal
L O AN
funding account
Make targeted deposit to Class C principal
S T U D EN T
funding account
Excess paid to residual holder
74
Credit Enhancement
Government guaranty FFELP loans benefit from a 95-100%
Typical Typical Credit Credit Enhancement Enhancement Structure Structure
Share of Assets 97.00% 2.75% 0.25% 0.75% Credit Enhanc ement 3.00% 0.25%
Deal Structure
covered by guaranty
Excess funds from the interest paid on the
A B S
S T U D EN T
L O AN
75
Spread over index Servicing fee Administration fee Estimated losses CP-LIBOR differential Weighted spread on SLABS Excess spread
Spread over index Servicing fee Administration fee Estimated losses CP-LIBOR differential Weighted spread on SLABS Excess spread
College Cost Reduction and Access Act of 2007 decreased lender profitability.
Reduced the special allowance payment (SAP) margin to lenders based (for-
S T U D EN T
L O AN
A B S
76
higher funding costs; some deals will be unable to build parity if ARS market does not recover
College College Loan Loan Corp Corp 2007-1 2007-1 (low (low initial initial parity parity of of 97.4%, 97.4%, high high ARS ARS funding of 59% ) funding of 59% )
97 97
A B S
S T U D EN T
L O AN
Note: Term ABS 41% at weighted average spread of +6bp Source: Deal documents
77
2008-1 Assets Initial Parity Senior Total Pricing Speed (CPR) Liabilities Initial Estimated Excess Spread
Source: JPMorgan, Deal documents
103.60% 98.40% 22% for Stafford & Plus; 2-10% over 10 years for Consolidation 88% Term ABS; 12% Auction Rate 115bp
S T U D EN T
L O AN
A B S
(F F E L P )
78
S T U D EN T
L O AN
Defaults Claim rejects Claim cures Loan documentation Servicing infrastructure Collections Disaster recovery Proper guarantee documentation Servicer audits
A B S
Repayment mix School concentrations Loan type Delinquencies, losses, & prepayments Seasoning Applicable margin ED guarantee level
(F F E L P )
Payment structure Legal structure Tranching and turboing Maturity, legal final Reserve fund Interest carryover Overissuance
79
30% 75.0% yr. 1 12.5% yr. 2 12.5% yr. 3 95% on 98% loans 97% on 100% loans 2x historical 3x historical Capitalize all interest on balance 100 bps in year 1 6 month spikes up to 300 bps for 5 years, reverting back to 100 bps 60 days 60 days
19% 75.0% yr. 1 12.5% yr. 2 12.5% yr. 3 97% on 98% loans 99% on 100% loans Historical Historical Capitalize all interest on balance 75 bps in year 1 6 month spikes up to 120 bps for 5 years, reverting back to 75 bps 60 days 60 days
Reimbursements Reimbursements
L O AN
A B S
Payment Payment Lags Lags Student Student SAP SAP & & ISP ISP
S T U D EN T
80
initial prepayments than other loan types. This would be the case of a student graduating and choosing to prepay/consolidate his/her loan or cannot find a job and defaults
School type (e.g., vocational, 2-year, 4-year), borrower age/indebtedness and
81
Sallie Sallie Mae Mae life-to-date life-to-date prepayment prepayment speeds speeds for for FFELP FFELP (LTD (LTD CPR) CPR)
40% 1995-1 1997-1 35% 1999-1 2001-3 30% 2004-4 2006-1 25% 1996-1 1998-1 2000-4 2002-1 2005-1 2007-2
8.0
7.0
6.0
20%
5.0
15%
4.0
(F F E L P )
10%
3.0
5%
A B S
L O AN
S T U D EN T
82
Cumulative Cumulative defaults* defaults* (SLM (SLM ABS) ABS) % % of of original original balance balance
10% 9% 8% 7% 6% 2002-1 2006-1 2004-4 2007-2 2005-1
5%
4%
5% 4% 3%
3%
2%
(F F E L P )
2% 1% 0%
1%
A B S
14
20
26
32
38
44
50
56
62
68
S T U D EN T
L O AN
83
Plus)
Underwriting Standards Appraisal & Compliance Review Process Loan Characteristics Credit Grade FICO School Type Term Rate Margin/Index/Caps Co-signers Repayment Status Loan Type Balance Guarantor Disbursement Date Portfolio growth
Designation
Corporate Rating Liquidity / Cash Position / Profitability Growth / Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management
(F F E L P )
Competitive Position Legal/Regulatory Oversight / Compliance HEA Reauthorization Senior Management Experience Servicing / Collections
S T U D EN T
L O AN
A B S
84
Losses Claim rejection rate Prepayment Rate Delinquencies Forbearance/deferral Excess Spread
Expected average life Principal payment window Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)
S T U D EN T
L O AN
A B S
85
Agenda
Page
1 11 35 53 86
I N V E S TI N G
I N
AS S E T
B AC K ED
86
1st Lien Subprime B&C Credit Impaired 1st 80%-85% 7%-8% 600-625 Ameriquest Countrywide Option One RFC Alt-B Near Prime Alt-A Prime Documentation Property Type 1st 75% 6.5% 715 Countrywide IndyMac RFC (RALI) PrimeJumbo A Prime
Prime Near Prime 2nd 2nd: 90% HLTV: 115% 2nd: 8%-10% HLTV: 12% 690-715 Countrywide CSFB (HEMT) GMAC RFC (RFMS2)
E Q U I T Y
AB S
Mortgage Backed
HO M E
87
AA 10%
A 5% BBB 3% BB 0%
AAA 82%
2.9 1.9
4 WAL Bucket
4 WAL Bucket
E Q U I T Y
HO M E
88
Top Top HEL HEL ABS ABS issuers issuers by by Volume Volume ($ ($ mn) mn)
Parent Countrywide Merrill Lynch Ticker CWL MLMI FFMER FFML SURF MSAC SAST CMLTI CRMSI Lehman Brothers SASC BNCMT SAIL 28,684 6,541 12,705 8,470 9,619 13,127 5,745 9,292 3,843 2,859 13,224 14,438 2,172 11,281 17,951 4,470 18,847 3,508 7,120 23,597 6,164 20,273 2,558 11,352 2,031 16,328 1,636 11,950 5,935 17,633 11,983 16,410 8,810 17,632 11,904 6,567 2,539 12,675 10,010 8,259 10,180 7,619 7,428 7,364 7,210 6,477 6,233 4,495 367 3,577 1,187 4,658 4,180 2005 40,165 15,047 2006 36,031 31,459 2007 26,576 4,832 8,462 6,195 1,499 12,203 2,739 11,327 1,535 7,733 2,811
Total = $77 bn
Option One Deutsche Barclays Greenwhi ch Bear Stearns JPMorgan Goldman Sachs C-Bass GMAC RFC
OOMLT ACE SABR SVHE BSABS JPMAC GSAMP CBASS FMIC RASC RAMP WMHE HASC
AB S
10%
Total = $107 bn
Source: JPMorgan, IGM CorporateWatch, Bloomberg.
WaMu HSBC
HO M E
E Q U I T Y
89
AB S
Organization Name Wells Fargo Home Mortgage HSBC (Household) New Century Financial Corp. Countrywide Financial Corp. WMC Mortgage Corp. Fremont Investment & Loan Option One Mortgage Corp. First Franklin Financial Washington Mutual Ameriquest Mortgage Corp. CitiFinancial Homecomings (GMAC-RFC ) Accredited Home Lenders BNC Mortgage, Inc. Chase Home Finance NovaStar Mortgage, Inc. Mortgage Lenders Network Ownit EMC Mortgage ResMAE Estimated Industry
Source: National Mortgage News, JPMorgan.
2005 40,013 47,339 56,096 44,637 31,795 36,016 39,093 29,511 34,491 60,635 20,509 27,535 16,583 16,079 9,655 9,267 4,082 8,297 8,952 6,858 804,900
2006 74,249 55,886 51,600 40,596 32,146 31,838 29,811 27,725 26,837 25,578 23,500 18,144 15,603 13,725 11,548 10,968 10,221 9,376 8,763 7,438 722,260
Organization Name Countrywide Chase ResCap (GMAC) Option One CitiFinancial Ameriquest Ocwen Wells Fargo National City Litton (C-Bass) WaMu HSBC Homeq New Century (Carrington) Morgan Stanley/Saxon Select Portfolio Servicing Fremont EMC (Bear Stearns) NovaStar Wilshire Estimated Industry
3/31/07 125,137 83,130 82,092 67,262 65,000 58,000 55,200 52,386 49,955 47,918 47,402 46,659 45,494 40,000 33,045 30,795 27,000 22,959 16,164 15,000 $1.3 trillion
3/31/06 117,847 75,445 72,381 75,695 60,278 113,500 42,151 45,509 39,913 44,670 41,940 48,925 44,824 36,800 26,615 24,557 23,200 23,338 15,062 12,900
E Q U I T Y
Subprime loan originations in first three quarters of 2007 was approximately $170bn and
HO M E
90
Servicer ratings
Subprime Subprime primary primary servicer servicer ratings ratings
Moodys Accredited AMC (Ameriquest) Aurora Chase CitiMortgage Countrywide EMC Fremont GreenTree HomeComings (GMAC) HomeEq (Wachovia) IndyMac SQ3+ SQ1 SQ2 SQ1SQ1SQ4 SQ3 SQ2Average Strong Above Average Strong Above Average Average Above Average Strong Strong Strong SQ4+ S&P Fitch RPS3RPS3+ RPS2 RPS1 RPS1RPS1 RPS1 RPS4 RPS3+ RPS2+ RPS1 RPS2+ Litton National City New Century NovaStar Ocwen Option One Popular Saxon Select Portfolio WaMu Wells Fargo Wilshire SQ2SQ2 SQ3+ SQ2+ SQ2SQ2 SQ1 SQ1Above Average Strong Strong Strong Strong Above Average Average Above Average Strong Strong Moodys SQ2 S&P Strong Fitch RPS4 RPS3+ RPS2 RPS1 RPS2RPS2+ RPS2+ RPS2+ RPS1 RPS1 RPS4 RPS3+
As of Dec 2007 Source: Moodys (SQ1 to SQ5), S&P (Strong, Above Average, Average, Below Average, Weak), Fitch (RPS1 to RPS5)
HO M E
E Q U I T Y
AB S
91
179,757,299,673 Fixed (back by majority FRMs) 2000 2001 2002 2003 2004 2005 2006 2007
AB S
HO M E
E Q U I T Y
92
Deal Structure
insurance company or Fannie/Freddie which guarantees timely payment of interest and ultimate repayment of principal
Mortgage Insurance (Lender Paid)
AB S
E Q U I T Y
HO M E
93
*Senior/subordinate only, no MI, Moody's rated only. Enhancement based on lowest of three agencies Source: JPMorgan, deal documents.
HO M E
E Q U I T Y
AB S
94
payments.
Loans may prepay in advance of the scheduled maturity Voluntary prepayment
Refinancing or sale of home Involuntary prepayment Repossession or loss of home When a prepayment occurs, principal is paid through to the security holders, thus retiring that portion of principal that is attributable to the loan that has prepaid Prepayment measured by Constant prepayment model (CPR)
Home Equity loans exhibit much less negative convexity as compared to Conforming and Jumbo
MBS.
Typical HEL ABS Deal Characteristics Pricing Benchmarks
HO M E
E Q U I T Y
AB S
Swaps, EDSF, LIBOR Coupon Type Fixed or Floating Typical New Issue Size $750 million - $2 billion Tranched by credit rating and maturity
95
prepayment assumption (PPC) which varies for FRM and ARM loans. For example
FRM: 100% PPC (4.00% - 20.00% CPR over
40 30 20 10 0 0 2 4 6
8 10 12 14 16 18 20 22 24 26 28 30
Constant Prepayment Rate (CPR), which measures monthly prepayments as a percentage of the previous months outstanding principal balance.
Variation in prepayments from those
0%
Source: JPMS.
HO M E
E Q U I T Y
96
quality borrowers tend to be more sensitive than lower quality borrowers due to the increased quantity of refinancing options.
Home Price Appreciation Housing Market: Price appreciation may allow borrowers to take additional equity
HO M E
E Q U I T Y
AB S
97
Y structure: two separate groups backing separate senior tranches; both groups backing subordinated tranches
H H structure structure WAL Class (Yrs)
AF-1 AF-2 AF-3 AF-4
AB S
Collateral FRM group FRM group FRM group FRM group FRM group FRM group FRM group FRM group
Type Sequential Sequential Sequential Sequential Sequential NAS Sequential Sub Sequential Sub
FX/ FL FX FX FX FX FX FX FX FX
Collateral ARM conforming ARM non-conf ARM non-conf ARM non-conf ARM groups ARM groups ARM groups
Type Pass-through Sequential Sequential Sequential Sequential Sub Sequential Sub Sequential Sub
FX/FL FL FL FL FL FL FL FL
1 2 3 5 7 6 6 6
E Q U I T Y
BF 6 BBB FRM group Sequential Sub FX H structure: two groups each with its own senior/subordinated structure
HO M E
98
Structure: Stepdown
Sample Sample target target credit credit support support percentages percentages
Initial Credit support Senior Certificates (AAA) M-1 (AA+) M-2 (AA) M-3 (AA-) M-4 (A+) M-5 (A) M-6 (A-) M-7 (BBB+) M-8 (BBB) M-9 (BBB-) M-10 (BB+) 17.90% 14.80% 12.85% 11.05% 9.40% 7.85% 6.45% 5.20% 4.20% 3.15% 2.00% After Stepdown Date Target Credit Support 35.80% 29.60% 25.70% 22.10% 18.80% 15.70% 12.90% 10.40% 8.40% 6.30% 4.00%
Subordinated bonds locked out (i.e., do not receive principal) prior to the stepdown date Stepdown date typically set at the earlier of 1) AAAs paid off or 2) the latter of
i) 36 months from deal closing and ii) when senior credit enhancement reaches target
On or after the stepdown, subordinated bonds receive principal only is the triggers are passing
HO M E
E Q U I T Y
AB S
99
Structure: Triggers
Performance triggers are embedded in the transaction typically to increase credit enhancement
in the face of weaker than expected credit performance If performance triggers fail, principal that would have otherwise have gone to pay down the overcollateralization, mezzanine and subordinate bonds are redirected to pay senior bonds. Bonds revert to sequential pay. Trigger typically will shorten senior bonds and extend subordinate bonds
Usually compares credit enhancement with delinquencies or based on life-to-date cumulative
Distribution Date
July 2007 June 2008 3.00% July 2008 June 2009 4.75% July 2009 June 2010 6.00% July 2010 6.75%
AB S
60+ Delinquent loans including loans in foreclosure, bankruptcy and REO > 40% * credit enhancement for prior distribution date
down
Deal will pay sequentially Sub bonds extend, OC
HO M E
E Q U I T Y
100
Home Equity Equity Principal Principal Cashflow Cashflow Fail Fail Triggers Triggers Home
AAA pass through AAA 1yr AAA 3yr AAA 7yr AA A BBB BB+
AB S
20
40
60
80 M onths
100
120
140
160
180
HO M E
E Q U I T Y
101
HO M E
E Q U I T Y
AB S
102
Predominantly pays fixed interest for first 2-3 years (due to fixed and hybrid ARM loans) Floating interest typically references 6-mo LIBOR Bonds typically pay floating interest referencing 1-mo LIBOR
Interest Rate Caps and Swaps Reference 1-mo LIBOR Amortizing notional amounts Constant or changing strike rates Interest Rate Caps Require an initial cash outlay at deal closing Protect from rise in interest rates above strike Interest Rate Swaps Alter cashflow characteristics to match those of the assets and liabilities Counterparties agree to swap periodic payments (trust pays fixed, receives floating)
AB S
HO M E
E Q U I T Y
103
HEL HEL ABS ABS ARM ARM delinquencies delinquencies by by loan loan age age (60+ (60+ delinquencies) delinquencies)
25% 2000 2004 20% 2001 2005 2002 2006 2003 2007
50%
40%
15%
30%
10%
20%
5%
10%
AB S
0% 3 5 7 9 11 13 15 17 19 21 23
0% 1 3 5 7 9 11 13 15 17 19 21 23
HO M E
E Q U I T Y
104
Company Type (Bank or Specialty Finance) Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Regulatory Oversight / Compliance Predatory Lending/HUD/FTC/OCC/OTS
AB S
Loan Type Subprime/HELOC/2nd/High LTV Underwriting Standards Appraisal & Compliance Review Process Sourcing (Broker/Retail/Correspondent) Loan Characteristics Credit Grade LTV Rate Lien Property Type Prepay Penalty DTI Geographic Portfolio growth
HO M E
E Q U I T Y
105
Structure Cashflow Priorities Triggers Caps Cross Collateralization Mortgage Insurance Interest Only Strips Prepayment Penalty Cashflow Credit Enhancement
Fixed or Floating / Benchmark Expected average life Principal payment window Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)
Wrap vs. Senior Sub Company Guaranty Cross-over date Overcollateralization Spread Holidays / Fully funded Target / Step-up / Step-down
Performance Performance
Charge-offs Prepayment Rate Delinquencies Recoveries Excess Spread Roll Rates Time to Liquidation
HO M E
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