Securitized Products Weekly 20110909

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SECURITIZATION RESEARCH 9 September 201

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 40

SECURITIZED PRODUCTS WEEKLY

Trends and issues 3

President Barack Obama’s long-awaited jobs speech on Thursday outlined a $447bn

package of tax cuts, infrastructure spending and transfer payments but lacked specifics

on a mortgage refinancing plan. While some changes to HARP have been proposed, the

agency MBS market will likely remain in a state of limbo absent further details. On the

economic front, mostly weak data have further focused attention on a potential monetary

policy easing at the Fed meeting in a couple of weeks. Fed Chairman Ben Bernanke’s

reiteration of the presence of a ‘range of tools’ to stimulate what he portrayed as a

gloomy economy reinforced expectations of an easing. Agency MBS continued to be

weighed down by government refi fears, even as non-agencies remained stable.

Prepayment commentary: Re-assessing refinancing risks 13

Total paydowns rose 13% m/m in the September report, mostly because of a three day

increase in day count. Bank of America’s exiting the correspondent business makes it

less likely that it will greenlight the HARP program. The proposed American Jobs Act

signals that a change to the HARP program is imminent. However, we expect the speed

impact from any immediate legislation to be moderate. Relative to conventionals, we

think GNs are less prone to policy risk.

CMBS: Trust implications of super-high loss severities 23

With liquidation volumes remaining elevated, increasing numbers of loans are reporting

severities north of 100%. We discuss some recent examples and examine the impact on

deal cash flows.

Consumer ABS: Relative value among prime retail auto loan ABS 27

We assess the collateral performance and credit enhancement of the largest prime retail

auto loan ABS issuers and identify relative value within the prime retail auto ABS sector.

Convexity/credit portfolio 33

The convexity portfolio lost 68bp over the week, bringing total ROE to 105.63%. Year-

to-date ROE stands at -0.18%. The credit portfolio gained 22bp this week. The overall

return since inception stands at 49.5%, and the year-to-date return is -0.78%.

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Ajay Rajadhyaksha

+1 212 412 7669

[email protected]

www.barcap.com





Barclays Capital | Securitized Products Weekly

9 September 2011 3

TRENDS AND ISSUES

Overview

President Obama delivered his much-awaited jobs speech on Thursday night, laying out a

$447bn package of tax cuts, infrastructure spending, and transfer payments. Although

there was a mention of easier refinancing options for responsible homeowners, mortgage

investors are likely to be disappointed by the lack of any specifics. The language in the

proposed bill states that the administration will work with the GSEs, FHFA, and industry

leaders to “remove barriers that exist in the current refinancing program (HARP).” To us,

that language indicates a lack of agreement among the various stakeholders on the course

of action. As we mentioned in Refi realities (August 26, 2011), we do not foresee any

changes to HARP that can boost refinancing for burdened borrowers without affecting

market participants in a significant way. The FHFA lawsuit against banks and a CBO report

discounting any economic benefits from large-scale refinancing programs add to the

headwinds facing any such proposal. As a result, agency MBS, especially in higher coupons,

is likely to remain in limbo until the administration comes out with a final proposal.

On the economic front, all eyes are now focused on the September 20-21 Fed meeting, as

most economic data continued to disappoint. Claims came in above expectations, on the

heels of last week’s flat payroll growth number, and there are also worrying signs of a

slowdown in US manufacturing exports. The ongoing crisis in the euro area, with seemingly

new adverse developments almost every day, continues to weigh on financial markets. In a

speech in Minnesota, Chairman Bernanke continued to paint a gloomy picture of the US

economy. He reiterated that a “range of tools” can be used. Markets are now dominated by

speculation about the nature of easing, with terms such as “twist” and ”torque” being

thrown around. Our economics team expects further policy easing at the meeting.

Within the securitized sector, agency MBS continued to be hurt by the uncertainties about

refinancing programs, with higher coupons bearing most of the pain. However, the low refi

index print remains a positive for the sector, along with the significant yield advantage over

Treasuries. Ginnies also outperformed conventionals, as they are seen to be less susceptible

to government-induced refi risk.

Non-agencies mostly remained stable on light volumes. The FHFA lawsuit against banks, as

well as an increase in investor-driven rep and warranty lawsuits, is likely to continue

weighing on the sector. CMBS also remained flat over the week on low volumes.

Agency MBS: Policy risk weighs on MBS

Risk aversion picked up sharply this week, as sovereign credit issues in Europe and weak

economic data weighed heavily on investor sentiment. The most recent shot across the bow

was the unchanged non-farm payroll number last Friday, which led to a sharp flattening of

the yield curve, sending 10y Treasury yields plunging to sub-2% levels. While low yields

have put pressure on MBS performance, the mortgage market continues to be plagued by

policy concerns.

On the refinancing front, it had been widely speculated that President Obama might unveil a

new refinancing initiative. While he did mention that “to help responsible homeowners,

we’re going to work with Federal housing agencies to help more people refinance”, he

stopped short of presenting any concrete initiatives. However, his mention of it in his

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9 September 2011 4

speech is significant in that it now appears that there will be some imminent changes to

stoke refinancing activity. Based on the FAQs of the Administration’s American Job’s act,1

the administration’s focus looks to be on working with the FHFA and the GSEs to remove

barriers in the existing HARP program. As we discussed in Refi realities, August 26, 2011,

we think that the most likely alternatives would be to remove loan level pricing adjustments,

remove the 125% LTV cap, and change the HARP eligibility date. These changes by

themselves should only have a moderate effect on refinancing activity. However, largersteps such as addressing rep and warranty relief could also be considered, although we

think this is less likely. In the absence of concrete details, higher coupons are likely to

remain under pressure. We recommend a down-in-coupon bias until there is more clarity.

On the monetary front, MBS could face other headwinds. Our colleagues in the Economics

team note that the Fed may try to push long term yields lower, which could cause further

volatility for the mortgage basis.

Given the policy-related uncertainty, most investors remained on the sidelines this week.

Flows remained light overall, and despite a let-up in origination, FN 4s were down 12 ticks

versus 10y Treasury hedges. The up-in-coupon move over the prior week reversed sharply,

as higher coupons bore the brunt of the uncertainty over new refinancing initiatives. FNCL5s through 6s were down 17-22 ticks over the week. On a Treasury curve- and vol-hedged

basis, the coupon stack showed a clear down-in-coupon trend (Figure 1), with 3.5s and 4s

down 3 ticks, while 5.5s and 6s were down 21-22 ticks.

Bank demand remains strong in lower coupon 15y mortgages. The DW 3 roll continues to

trade extremely special (about 6 ticks rich, assuming zero CPR), as bank demand is

particularly heavy in this coupon, but has been met with insufficient supply. GNs continued

to outperform relative to FNs over the week, reaching extremely high levels, with the GN/FN

4.5 swap closing at 2-26 on Thursday. As we have written before, this sector has benefited

from the recent talk about government-induced refis, as GNs considered relatively immune

to the risk.

1 The press release notes: “The President has instructed his economic team to work with Fannie Mae and Freddie Mac,their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancingprogram (HARP) to help more borrowers benefit from today’s historically low interest rates. This has the potential tonot only help these borrowers, but their communities and the American taxpayer, by keeping borrowers in theirhomes and reducing risk to Fannie Mae and Freddie Mac.” http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-american-jobs-act

Figure 1: Sharp widening in the coupon stack (ticks) Figure 2: GN/FN swaps march higher (ticks)

-25

-20

-15

-10

-5

0

FNMA

3.5s

FNMA

4s

FNMA

4.5s

FNMA

5s

FNMA

5.5s

FNMA

6s

vs 10y swap vs 10y Tsy vs Tsy curve and vol

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1-

Jun

15-

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29-

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13-

Jul

27-

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10-

Aug

24-

Aug

7-

Sep

GN/FN 4s GN/FN 4.5s GN/FN 5s

Note: Performance from Sep 1 to Sep 8 close. Source: Barclays Capital Source: Barclays Capital

https://live.barcap.com/go/publications/content?contentPubID=FC1742860





9 September 2011 5

Regular refinancing activity remained tepid, with applications heading lower this week. The

MBA refi index came in at 3,169, down 6.3% w/w. However, as an indication of last week’s

applications, this number does not reflect current mortgage rates (the Freddie Mac PMMS

no-point rate dropped 10bp to 4.3% this week). As we have written earlier, the falling refi

index was observed in last year’s refi episode as well, as newly incentivized borrower’s refi

away quickly. In addition to the slower-than-expected September prepayment print, this

remains a positive for agency MBS.

While mortgages do face near-term headwinds, at 60+bp L-OAS across the stack,

valuations appear attractive. Recent actions such as the FHFA lawsuit against banks lead us

to believe any drastic measures, such as rep and warranty relief, which may be perceived as

yet another bank bail-out, are extremely unlikely. Also, the working paper released by the

Congressional Budget Office casts doubt on the effective stimulus provided by any large-

scale refi program, likely creating headwinds for the implementations of any such effort.

That being said, we do think that near-term policy concerns argue for a rather conservative

stance and a strong down-in-coupon focus.

CBO pours cold water over benefits of large-scale agency refi programs

The CBO released a working paper on large-scale mortgage refinancing programs this week,in which it examined the macroeconomic effect of a streamlined refinancing program for

agency mortgages. Overall, it found that there is no significant economic benefit from

implementing such a program. The effect on housing is also unlikely to be significant.

CBO's stylized refinancing program

Using a combination of some key features of various recent streamlined refinancing

proposals, the CBO constructed a stylized refinancing program. It assumes no restrictions

on LTV and income, a fixed interest rate at the prevailing rate, a 30y maturity and guarantee

fee capped at previous levels. It is assumed to remain in effect for a year for all Fannie,

Freddie and FHA fixed rate loans that are current and have not had a 20-day delinquency in

the past 12 months. The CBO also caps origination fees at 1% of the balance or $1000. It

then used this custom model to predict prepayment rates on various cohorts bucketed bycoupon, vintage, product and FICO, in the base case and under the new program.

Costs of the program mostly overwhelm the benefits

On the benefits side, the CBO model projects about $7.4bn of direct cash flow savings for

borrowers in the first year. This is driven by the lower monthly payments. The GSEs and

FHA are expected to save about $3.9bn in guarantee losses due to better performance.

Additionally, there is some small potential for upside from lower default and foreclosure

levels that is not quantified. The fee upside for originators and other parties in the

origination chain is also assumed to be small, given the low cap on origination costs.

However, there are multiple costs that more or less overwhelm the benefits. First, the GSEs,

the Fed and Treasury are expected to lose about $4.5bn on their portfolio holdings due tofaster prepayments on premiums. Second, private investors are expected to lose $13-15bn

on their holdings due to faster prepayments. Finally, the CBO also assumes $100mn in

losses to the agencies due to the non-enforceability of rep and warranties on the refinanced

loans that eventually default.

Thus, there is no overall economic benefit from the program, as borrower savings are more

than offset by losses elsewhere. The CBO argues that some of that could be mitigated by

the fact that most of the costs are being borne by government entities and foreign

investors. This could keep some of the domestic stimulative effects intact. Likewise on the




9 September 2011 6

housing front, there is unlikely to be significant upside. Underwriting for purchase loans is

unlikely to be eased and refinancing by current borrowers will not lead to incremental

demand for homes. There is only a marginal benefit from slightly lower level of defaults.

No upside even with alternative programs

The CBO also presented a couple of alternative scenarios, including one in which delinquent

borrowers are also refinanced and the other in which origination costs are higher. Thoughthere is some reallocation of costs, the overall conclusion remains the same.

Additionally, it is worth mentioning that some of the CBO assumptions lean towards the

benign side. First, the rep and warranty relief cost of $100mn seems extremely low. The

potential opposition of banks to refis due to rep and warranty concerns, as well as estimates

from various lawsuits, clearly shows that the numbers involved are orders of magnitude

higher. Second, the analysis does not incorporate the potential for much higher mortgage

rates if investors are forced to stomach large losses. Third, the origination cost

assumption is much lower than what is evident in the market. Finally, the implicit revenue

loss for GSEs and FHA from not realizing higher g-fees or MIP from borrowers who would

refinance anyway is not incorporated.

The key takeaway is that the CBO does not expect any upside from these large-scale

refinancing programs, even using some benign assumptions. As a non-partisan agency that

carries significant weight in government circles, this report will work to further weaken the

case for such programs. In Refi realities, August 26, 2011 we examined various refinancing

approaches based on mortgage valuations. This report takes the analysis to the

macroeconomic level and concludes that there is no silver bullet hidden in most of these

proposals.

Residential credit: Markets remain volatile

Equity and credit markets continued to seesaw this week as markets continued to react to

the weak jobs report last Friday and the whims of European sovereign credit sentiment.

Prices in non-agencies were largely stable, with a slight rise in alt-A and jumbo fixed bonds

(0.5pt), while the rest of the market was flat. Volume picked up modestly as market

participants returned after very light August trading. ABX prices fell by around 0.5pt, mostly

in line with equity moves. PrimeX fell marginally on the week, with FRMs down 0.25pt and

ARMs nearly flat. We continue to believe that non-agencies look attractive on both a relative

and an outright basis and, in our opinion, are likely to outperform other risky assets, such as

credit, across a range of scenarios. We continue to favor high-coupon alt-A and jumbo

FRMs, with or without leverage, and subprime LCF/locked-out PAAAs that are near

crossover, though we caution that the latter trade is much more sensitive to the macro

environment. We also find value in seasoned mezzanine subprime bonds from deals in

which triggers will continue to fail and also like FHA/VA re-performer deals, which we think

offer stable return profiles.






9 September 2011 7

Figure 3: Non-agency prices

Price Current Δ1 week Δ1 month Δ3 month

Jumbo fix SS AAA 90 0.5 0 1

Jumbo hyb SS AAA 78 0 (1) (1)

Alt-A fix SS AAA 79 0.5 (1) 1

Alt-A hyb SS AAA 58 0 (2) (2)

MTA SS AAA 54 0 (2) (0)

ABX 06-2 PAAA 73 (0.7) 1.7 1.3

ABX 06-2 AAA 47 (0.2) (1.4) (0.1)

ABX 07-1 PAAA 46 (0.3) (0.6) 0.2

ABX 07-1 AAA 37 (0.7) (0.0) 0.4

PrimeX FRM.2 99 (0.2) (1.4) (3.8)

PrimeX ARM.2 94 (0.0) 0.5 (0.7)

Re-REMIC SSNR AAA S + 200-220 0 0 (10)

Re-REMIC SSNR A S + 260-275 0 (20) (30)

Note: Prices as of Sep 7, 2011, for cash bonds and September 8, 2011, for synthetic indices. Weekly changes areWednesday-Wednesday for cash bonds and Thursday-Thursday for the synthetic indices. Source: Barclays Capital

FHFA sues 17 banks for Securities Act violations

On September 2, 2011, the Federal Housing Finance Agency (FHFA) filed lawsuits against

17 financial institutions and some of their senior officers for allegedly having violated

securities law when they sold approximately $196bn of private-label RMBS to Fannie Mae

and Freddie Mac between 2005 and 2008. Although there are several causes of action listed

by the FHFA in each of the suits filed against the banks, the primary allegations involve

violations against the Securities Act of 1933 and state securities laws in Virginia and the

District of Columbia, as well as common law fraud and negligent misrepresentation. The

FHFA is claiming that by misrepresenting the quality of the loans that were placed into the

securitization trusts, the banks violated the Securities Act of 1933 when they underwroteand sold these securities. As such, it is demanding that the banks compensate the GSEs for

damages incurred on those bonds.

Signs of life on the AG Settlement?

News reports suggest that there has been some movement in the settlement talks between

banks and the state AGs and that banks have been offered a deal. The reports also claim

that although there has been some agreement over future standards of servicing, there has

been little agreement on the monetary aspects of the plan or on the legal liabilities from

which the banks want to be released. Details remain scant, but we continue to expect a deal

to be reached over the next 6-12 months and that liquidation timelines will start contracting

as that happens.

There has already been a pickup in the rate of foreclosure filing from loans that are 60+ days

delinquent and we expect the foreclosure to REO timelines to start shortening soon after a

deal is reached. These timelines should also go down as the recently filed foreclosures flow

through the system since they are expected to be cleaner than prior filings and will likely see

fewer legal challenges. It remains to be seen what the monetary component of this plan

amounts to and how much of that is likely to flow through to non-agency deals in the form

of partial prepayments on borrowers that get debt forgiveness/other mods as a result of the

settlement. Overall, unless some adverse details emerge, this plan should be a marginal

positive for non-agency valuations.




9 September 2011 8

Trustee rep and warranty lawsuits pickup

After US Bank filed a lawsuit on the HVMLT deal last week, another deal (MABS 2006-HE3)

was the subject of a rep and warranty related lawsuit filed by US Bank as trustee. In our

view, lawsuits are likely being driven by investors/investor groups that are alleging issues

with mortgage underwriting. It is unclear whether this is the beginning of a trend in which

US Bank as trustee systematically starts pursuing these lawsuits, or if these are one-off

cases. In any case, we expect such lawsuits/other repurchase activity/settlements to pick

up in the coming months, but these are unlikely to have a blanket effect on prices in the

space. We continue to believe that the proportion of deals with cash flows from such

repurchases/claims is likely to be small enough that the only way to profit from this as a

strategy is to purchase securities backed by organizations likely to pay, where the trustee is

more amenable to providing loan files and actively pursuing rep and warranty claims.

Figure 4: Top trade recommendations

Type Trade recommendation Rationale

Overall view Favorable Higher yields than other risky assets.

Strong demand, cheap leverage, supply coming

from strong sources that can afford to slowdown if needed.

Outright longs Leveraged or unleveragedalt-A FRM/PrimeX.FRM1

High yields across scenarios, steady carry,limited downside potential.

Enough support to protect principal, strongyields in stress scenarios, lower Libor forwards.

Recoveryoriented

2006-07 subprime pro rataLCF

Subprime 03-04 perma-failmezz M1/M2

High near-term severities hasten crossover,longer-term declines in severities benefit pricesat recent lows. Limited further worseningpossible because of supply pressures.

Enough support to protect principal, strongyield profiles; buy on any dips.

Collateralstories

Favor MTA negams versushybrid negams

Favor deals with amortizingIO loans in jumbo

MTAs amortizing versus hybrids will likely havesmaller payment shocks and, eventually, lower

severities than hybrid option ARMs.IO loans underperforming by 1.5-2.0x, butamortizing IOs will likely have lower paymentshocks and outperform.

Source: Barclays Capital

CMBS: Spreads flat over the week on low volume

Spreads bounced around during the week in line with broader markets but ended Thursday

roughly unchanged. Disappointing payroll numbers drew the benchmark GG10s wider by

nearly 25bp on Tuesday, before tightening gradually toward the end of the short week.

Overall spreads on 2007 LCF stayed at 320bp over swaps, and 2007 AMs were unchanged

as well, at S+710. Supply was light this week, and demand from insurance companies and

bank portfolios helped older vintage LCF and AMs tighten marginally. 2006 AMs ended theweek 5-10bp tighter, to finish at S+580. On the new issue side, despite reports of a new

CMBS conduit deal pricing in the coming days, spreads on 2.0 paper in the 10y AAA sector

also tightened slightly. Absent major upside surprises in economic data, we expect much of

the near-term spread action to be dependant on the market’s expectation of any potential

actions by the Fed. In a speech on Thursday, Chairman Bernanke once again indicated that

the Fed would “do all that it can to help restore high rates of growth and employment in a

context of price stability,” and our economics team believes that the FOMC is likely to take

accommodative steps at its September meeting.




9 September 2011 9

New CMBS conduit deal in the market

According to a Bloomberg report published on Thursday, a$1.5bn CMBS conduit deal (MSC

2011-C3) is being marketed. The pre-sale report published by Moody’s suggests that the A1

through A4 30% enhanced classes would be in the public format while the 20% enhanced

AJs and below would continue to be issued under SEC rule 144A. This is similar to the

previous deal, DBUBS 2011-LC3, in which the senior classes were also issued in the public

format. As we argued in CMBS Strategy Weekly , July 22, 2011, many investors might have

limited allocation for 144A paper, and as such, issuing in public format is critical in

stimulating demand. CMBS 2.0 spreads have widened over the prior months along with the

rest of the market, with 10y AAA paper now trading close to S+225 after touching the

S+100 mark in April/May.

The deal contains two GGP properties that were recently refinanced – Park City Center and

Oxmoor Center ( see GGP announces refinancing of five malls, June 7, 2011). As such, retail

remains the dominant property type, as is the case with most CMBS.2 issuance, with more

than 46% of the balance backed by retail properties.

CDO liquidation scheduled for next week

The Newbury Street CDO, consisting of close to $240mn in CMBS bonds, is scheduled to beliquidated next week, after shortfalls on the most senior bonds in recent months likely

pushed investors to vote in favor of the liquidation. Most of the underlying bonds are

mezzanine classes from the 2005-07 vintage, with one AJ position from the GCCFC 2007-

GG9 deal. While more seasoned mezzanines have attracted some interest in recent weeks,

trading volumes in the 06-07 mezzanine space have remained low as investors stay near the

top of the capital structure.

Dealer CMBX long protection positions continue to fall

As expected, weekly DTCC data showed another drop in dealer long protection positions on

the CMBX.AAA. The net long dollar notional on the AAA declined to $2.2bn in the week

ending September 2 from $2.6bn a week earlier. We track this data on a weekly basis in the

synthetic supplement section of the CMBS Strategy Weekly . We expect dealer long

protection positions in the CMBX indices to drop further when the conduit deals in the

pipeline close and warehouse hedges are taken off.

Beacon Seattle – 1616 North Fort Myer Drive sold

This is a reprint of an Instant Insight published on September 6, 2011

Based on a report published in the Washington Business Journal , TIAA-CREF has acquired

the 1616 N. Fort Myer Drive property from Beacon Capital Partners for $145.5mn. This is

the latest in a series of property sales from the modified Beacon-Seattle portfolio securitized

in six CMBS conduit deals and one CRE CDO (see CMBS Strategy Weekly , July 8, 2011, for

the pari passu structure and details about the modification). Previously, five properties had

been released from the portfolio, with the latest Liberty Place release reported in the July

remittance (see Liberty Place released , July 11, 2011).

As discussed in our July 8 publication, the release price from a property sale is not the same

as the sale price; as such, the securitized trusts could see a lower amount flowing in as deal

cash flows. For previous property sales from the Beacon Seattle portfolio, release prices

have been 31-75% of the sale price. As a result, we expect some interest shortfall

reimbursements and principal paydowns to hit the deals in the coming remittance periods.












9 September 2011 10

According to the modification template, excess proceeds from the sale of properties will be

used to build up the master reserve account until it reaches a cap of $100mn. Once this target

has been reached, the excess proceeds will go to hyper-amortize the principal balance of the

loan. After the Liberty Place release, the reserve account stood at almost $92mn. With the sale

and potential release of the 1616 N. Fort Myer Drive property, the reserve cap is likely to be

reached and the excess proceeds could be used to pay down the loan.

Figure 5: 2007 LCF CMBS spreads

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Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11

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bp bp


Consumer ABS

Bond selection rises in importance in prime retail auto loan ABS

The auto ABS new issue machine continues to chug along, with auto-related ABS primary

market transaction volume totalling $42.4bn year-to-date. Of this, $30.0bn has been backed

by retail auto loans, 66% of which were prime quality in nature. Recent vintage transactions

(eg, 2009-2011) have had credit enhancement requirements reduced since the depths of the

credit crisis. Subsequently, these transactions have been posting improved collateral

performance trends, most notably in the area of cumulative net losses. In “Relative value

among prime retail auto loan ABS” on page 27, we assess the collateral performance and

credit enhancement of the largest prime retail auto loan ABS issuers. We identify relative value

within the prime retail auto ABS sector among issuers and across vintages.

Market action

Primary market activity bounced back this week with three new auto transactions hitting

the market as investors returned to their desks after the Labor Day holiday. No credit card or

student loan transactions were marketed this week. The auto transactions from ALLYA,

AMCAR, and SDART were priced on Thursday. First up, AmeriCredit priced its fourth

transaction of the year, AMCAR 2011-4, totalling $900bn in senior and subordinate offered

notes. Shortly after, Santander priced its third retail auto transaction, the $900bn SDART

2011-3 senior/subordinate offering. Rounding out the week, Ally priced a $1.35bn

transaction, ALLYA 2011-4, of which only the senior classes totalling $1.26bn were offered.

Because of the lack of issuance (the last consumer ABS transaction priced in mid-August)

all transactions were greeted with strong demand for the senior classes, as well as healthy

investor interest in the subordinates.




9 September 2011 11

Secondary market activity was somewhat muted in a continuation of the summer trend.

Despite most investors returning to their seats after the Labor Day weekend, trading

volumes were relatively slow as investors likely concentrated more heavily on the new issue

calendar. FFELP secondary spreads continued to grind tighter, coming in about 5bp in the

3y, 5y, and 7y average life tenors. Secondary spreads of prime auto and fixed and floating

rate credit card transactions remained unchanged w/w.

Recommendations

We maintain our overweight on FFELP-backed student loan ABS because we believe the

tightening trend has further to run. S&P continues to review transactions directly linked to

the rating of the US government. However, we believe investors are rightly focusing on the

actual credit quality of the transactions, as opposed to S&P’s opinion (ie, rating). We also

remain overweight on retail auto and other auto-related sectors, including subordinates,

dealer floorplan and rental fleet securitizations. Despite continued supply in the sector

(really, the only game in town for significant volume of primary consumer ABS issuance), as

discussed in “Relative value among prime retail auto loan ABS” on page 27, we believe

credit quality has improved to levels that, at current spreads, represent attractive value

relative to other short-term consumer ABS. However, we are neutral on bank credit card

ABS, given tight spread levels, and our belief that further upside potential is more limited in

this asset class than others.

Figure 6: Retail auto ABS spreads (bp) Figure 7: Retail auto ABS spreads (bp), 12m detail

0

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Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

3yr AAA 3yr A 3yr BBB

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Sep-10 Dec-10 Mar-11 Jun-11 Sep-11


Source: Barclays Capital Source: Barclays Capital




9 September 2011 12

Figure 8: Credit card ABS spreads (bp) Figure 9: Credit card ABS spreads (bp), 12m detail

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Figure 10: FFELP student loan ABS spreads (bp) Figure 11: FFELP student loan ABS spreads (bp), 12m detail

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9 September 2011 13

PREPAYMENT COMMENTARY

Re-assessing refinancing risks

This is a reprint of the Instant Insight published on September 7, 2011.

FNCL speeds came in slightly below our expectation as the sharp rally in rates since the

beginning of August did not seem to have filtered into prepayments at all. Total pay-

downs increased 13% m/m, to $29.4bn (16.8 CPR), almost entirely because of the

three-day increase in day count. Aggregate prepayments are slightly below the August

10 report, when driving rates were more than 30bp higher. As lower rates continue to

filter into prepayments, speeds should inch higher over the next few months. However,

we believe 2010 highs will be reached only if rates rally below 4.1% (another 25bp

decline from today's levels and 35bp lower than last year's low).

The 2009/10 4.5s increased by 2.0/1.8 CPR, to 15.4/10 CPR (Figure 1), while the

2008/09/10 5s picked up by 2.4/2.1/0.9 CPR, reaching 25.7/16.9/10.9 CPR. The

2008/09 speed differential increased, to 6.7 CPR for 4.5s (from 4.7 CPR last month) and

8.8 CPR for 5s (from 8.3 CPR last month). Newly HARP-able collateral (ie, FNCL Q2 09

origination) did not show a particularly strong pick-up (Figure 3).

Higher coupons rose by 2-3 CPR for 5.5/6s because of the jump in day-count. However,

on a day-count neutral basis, these coupons remain the most rate-insensitive in the stack.

Chase-serviced pools, which have had elevated FNCL speeds since March, experienced a

stronger pickup than other servicers (Figure 2).

At an estimated zero-point rate of 4.33%, we expect the FNCL 2009 4.5/5s to peak at

26.3/23.1 CPR and the 2010 4.5/5s to reach 19.5/16.2 CPR.

After briefly touching 3900, the MBA refinance index has lost significant ground in recent

weeks, despite the no-point rate remaining below 4.4%. This highlights the difficulty of sustaining refinancing momentum and should lead to lower total pay-downs versus the

2010 high. However, certain cohorts, specifically new vintage 3.5-4.5s, could reach or

exceed last year's peak because they can take advantage of the new low in mortgage rates.

Bank of America's exit from the correspondent business should slow conventional

speeds modestly. More important, it signals continued risk aversion and decreases the

likelihood of a sudden embracing of HARP by BoA, something Chase did early this year.

President Barack Obama is unlikely to announce a sweeping refinancing program in his

speech on Thursday, but we do believe policymakers are adopting a more serious stance

towards resolving roadblocks to refinancing. However, any such plan must sufficiently

address put-back risk to be effective – an enormous and complicated task with no clear

solution, in our view.

GNMA seems less exposed to policy risks, given FHA's struggle to maintain self-

sustainability. Any threat to that is, in our view, politically unpalatable and would only

undermine FHA's ability to continue offering affordable loans to underserved borrowers.

Furthermore, a possible exit of overseas investors, the largest source of demand for GNs,

will likely make policymakers think twice before implementing any major changes.

Derek Chen

+1 212 412 [email protected]

Wei-Ang Lee

+1 212 412 5356

[email protected]

Nicholas Strand

+1 212 412 2057

[email protected]




9 September 2011 14

Prepayment outlook: Ain’t no rate low enough

Recent data are consistent with our view that refinancing risk remains very much contained,

despite the persistent rally in rates. As the zero-point mortgage rate dipped to an all-time

low, the MBA Refinancing Index initially picked up, briefly reaching 3915. However, as rates

stagnated around 4.3-4.4%, the refi index quickly lost its momentum, tumbling 19% over

the following three weeks. This resembles last year's experience, when mortgage rates

declined by 21bp between August 12 and October 28 while the refi index fell (Figure 4).

The pattern highlights today's extremely muted refinancing responsiveness, which stems

from exceptionally tight underwriting standards, onerous refinancing frictions and a

diminished media effect. When rates drop to new lows, a limited number of borrowers who

are both interested and able to refinance emerges. But as the fresh pool of borrowers

depletes, refinancing activity diminishes quickly.

Figure 1: Benchmark conventional speeds

FNCL CPR Gold CPRCoupon Vintage Diff Prev Curr Proj Diff Prev Curr Gold-FNCL

3.5 2010 1.5 2.7 4.3 4.0 0.7 2.9 3.6 -0.7

4 2010 1.7 4.8 6.6 7.6 1.5 4.9 6.5 -0.1

2009 1.6 8.7 10.3 11.9 1.3 8.8 10.1 -0.1

4.5 2010 1.8 8.2 10.0 12.3 1.9 9.3 11.2 1.2

2009 2.0 13.4 15.4 18.4 2.1 12.3 14.4 -1.0

2008 4.0 18.1 22.1 26.2 -2.3 22.8 20.5 -1.6

2003 3.5 16.6 20.0 21.0 3.0 17.0 19.9 -0.1

5 2010 0.9 10.0 10.9 12.5 1.6 10.2 11.8 0.9

2009 2.1 14.9 16.9 18.3 1.7 14.7 16.3 -0.6

2008 2.4 23.2 25.7 28.7 3.2 23.3 26.5 0.9

2007 1.6 20.8 22.3 24.4 1.9 18.3 20.1 -2.2

2006 4.8 19.2 24.0 22.5 3.4 19.1 22.5 -1.6

2005 2.4 19.4 21.8 22.4 2.5 19.3 21.8 0.02004 2.6 18.9 21.5 22.6 2.2 20.1 22.3 0.8

2003 2.4 20.2 22.7 24.2 1.6 19.9 21.5 -1.2

5.5 2009 2.7 13.9 16.6 15.5 2.5 14.9 17.3 0.8

2008 2.3 23.5 25.8 26.1 2.4 22.6 25.0 -0.8

2007 2.3 22.8 25.1 25.0 2.2 21.2 23.4 -1.7

2006 3.1 21.9 24.9 24.1 2.2 21.4 23.6 -1.3

2005 2.7 17.8 20.4 19.2 3.0 18.0 21.0 0.5

2004 1.5 18.6 20.1 20.3 2.7 19.1 21.8 1.7

2003 2.9 20.6 23.5 22.7 3.5 18.6 22.1 -1.4

2002 3.7 22.1 25.9 24.8 5.2 18.4 23.6 -2.2

6 2008 2.1 22.8 24.9 24.5 1.7 22.4 24.0 -0.9

2007 1.6 22.2 23.8 23.7 1.7 20.2 21.9 -1.9

2006 2.8 21.2 24.0 22.6 3.1 20.7 23.9 -0.2

2005 1.4 17.1 18.5 18.0 2.5 16.1 18.6 0.2

2004 2.2 16.7 18.9 17.8 2.0 17.9 19.9 1.0

2003 3.0 16.8 19.9 18.4 3.1 15.5 18.6 -1.3

2002 2.3 20.6 22.9 22.2 1.7 17.2 18.9 -4.0

6.5 2008 0.2 21.5 21.7 22.5 2.4 20.1 22.6 0.9

2007 2.2 20.4 22.6 21.3 1.1 20.2 21.2 -1.3

2006 1.1 20.5 21.7 21.4 1.0 19.3 20.3 -1.3

2002 2.8 18.1 20.9 19.3 3.2 14.6 17.8 -3.1

7 2008 1.9 21.3 23.1 22.0 -3.4 24.0 20.6 -2.5

2007 1.4 20.8 22.2 21.1 -0.9 23.0 22.1 -0.1

2006 0.4 20.3 20.6 20.7 -4.1 19.9 15.8 -4.8 Source: Fannie Mae, Freddie Mac, Barclays Capital




9 September 2011 15

The primary-secondary spread tells the same story. As discussed before, in today's

environment, this spread has become a gauge for the level of refinancing activity, rather

than a driver of it, given the capacity constraints faced by originators. Figure 5 shows that

this spread has tracked the refi index quite closely, widening when refinancing activity picks

up and narrowing when it subsides. The fact that the spread has narrowed substantially

over recent weeks suggests that refinancing applications have tapered off.

The past couple of years' experience and the recent behavior of the refi index and primary-

secondary spread suggest the following:

Mortgage rates have to keep rallying substantially week after week to keep the refi index

above 4000.

Since the refi index and primary-secondary spread are much lower than last year's

levels, total pay-downs should be materially lower than last year's peak.

Given these observations, we have updated our peak 1m CPR forecasts for major FNCL

cohorts under various mortgage rate scenarios (Figure 6). Specifically, for an unchanged

no-point mortgage rate of 4.33, we expect the refi index to sustain a level close to 3900,

similar to the September 2010 prepayment report but much lower than the last year's peak(December 2010 report).

Figure 2: FNCL speeds by issuer

Chase BoA Citi Wells Other

Cpn Orig Curr CPR M/m chg Curr CPR M/m chg Curr CPR M/m chg Curr CPR M/m chg Curr CPR M/m chg

5 2010 11.7 1.7 7.7 0.3 11.3 4.8 11.8 0.6 10.4 0.8

2009 19.3 2.8 15.2 1.3 18.7 3.0 20.5 0.9 15.7 2.3

2008 42.9 5.9 20.3 1.5 25.1 3.6 29.2 -0.2 24.0 2.5

2007 33.6 0.9 20.5 2.7 23.1 1.8 33.5 -2.9 20.4 1.3

2006 42.2 18.7 24.8 5.4 25.6 3.7 32.0 9.4 21.1 3.3

2005 29.4 -0.2 19.5 2.1 22.7 4.4 29.2 3.8 21.4 2.1

2004 32.6 8.6 18.9 3.0 20.7 2.9 27.0 -3.6 22.6 2.5

2003 30.7 2.9 18.0 1.8 19.5 0.0 24.9 2.2 23.3 2.7

5.5 2009 25.6 5.3 12.0 1.3 21.0 3.3 17.9 3.6 16.0 2.4

2008 40.7 5.4 20.9 0.6 28.0 4.9 31.1 1.4 23.7 2.5

2007 36.9 2.8 22.9 2.5 25.2 2.4 29.2 3.0 23.7 1.8

2006 35.7 7.1 23.7 3.3 27.3 3.6 29.2 2.3 23.7 2.9

2005 32.2 4.7 18.2 1.3 20.2 2.9 25.7 3.4 20.7 3.0

2004 33.5 4.7 17.4 0.4 18.7 3.1 29.6 5.8 21.2 1.8

2003 33.1 6.0 19.3 1.8 21.9 6.4 23.2 4.9 24.5 2.9

2002 33.0 5.0 23.1 4.3 20.4 4.0 0.2 0.2 26.3 3.5

6 2008 35.1 -0.2 20.9 0.6 25.1 4.0 29.4 1.6 23.9 3.2

2007 35.6 1.4 22.0 0.6 22.8 1.1 29.3 2.7 22.7 2.32006 37.6 6.7 21.7 0.6 25.1 3.4 30.3 2.0 23.5 3.4

2005 29.7 2.1 16.7 0.7 20.5 4.2 15.6 -2.9 18.5 1.5

2004 35.7 7.3 17.8 1.9 16.5 -1.4 18.4 5.5 19.3 2.4

2003 28.2 7.5 16.2 1.3 14.8 -1.5 11.8 -2.2 21.5 3.8

2002 32.6 2.9 19.7 2.8 21.1 4.9 6.0 -32.0 23.3 2.4

6.5 2008 33.5 3.0 18.6 -0.3 21.0 0.0 24.7 -0.5 20.8 0.3

2007 35.9 3.9 20.6 2.1 25.0 1.1 33.0 11.8 21.0 1.4

2006 33.8 -1.0 19.4 -0.5 23.0 3.4 25.5 -6.7 21.5 2.0

2002 23.2 -1.4 19.3 3.8 14.4 -5.7 0.5 0.1 21.7 3.4 Source: Fannie Mae, Barclays Capital




9 September 2011 16

That said, given today's rate (4.33%) 4.5s, 4s and 3.5s should all prepay close to or faster than

last year's peak given their pristine credit, large loan size, minimum burnout and a mortgagerate below last year's low. Combined with a lower expected overall prepayment volume, this

means that higher coupons should be much slower than late last year.

Figure 5: MBA refinance index versus the primary-secondary spread

0

1000

2000

3000

4000

5000

6000

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

50

60

70

80

90100

110

120

130

140

MBA refi Prim-sec spread

Source: MBA, Freddie Mac, Barclays Capital

Figure 3: The HARP effect on 4.5/5s Figure 4: MBA refi index versus the NP mortgage rate

-1

0

1

2

3

4

5

6

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

Origination month

M / m c h

g i n C P R

4.5 5

0

1000

2000

3000

4000

5000

6000

7000

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10

4.00

4.25

4.50

4.755.00

5.25

5.50

5.75

MBA refi NP 30yr Rate (Inverted)

Source: Fannie Mae, Barclays Capital Source: MBA, Freddie Mac, Barclays Capital




9 September 2011 17

Figure 6: Projected peak CPR for major FNCL cohorts by mortgage rate scenario

A ctual CPR by report date Projec ted Peak CPR by mortgage rate

Coupon Vintage WAC Bal ($bn) Sep 2010 Dec 2010 Aug 2011 5.00 4.50 4.33 4.20 4.00

4 2010 4.50 121 4.4 6.9 4.8 3.7 9.9 12.8 16.4 24.1

4 2009 4.58 102 7.3 14.4 8.7 6.0 12.3 17.3 22.1 31.8

4.5 2010 4.94 122 11.8 19.2 8.2 5.1 14.1 19.5 23.0 29.2

4.5 2009 4.94 226 18.8 26.6 13.4 8.6 21.7 26.3 30.7 38.4

4.5 2008 5.18 6 36.2 46.4 18.1 14.3 31.8 39.5 45.8 51.9

4.5 2003 5.06 16 23.1 33.5 16.6 11.4 22.2 27.2 31.7 39.9

5 2010 5.35 58 11.2 16.6 10.0 7.0 13.1 16.2 18.8 23.3

5 2009 5.43 57 26.3 28.6 14.9 10.7 20.1 23.1 26.6 32.8

5 2008 5.65 40 39.2 43.7 23.2 19.5 32.3 36.4 40.4 45.5

5 2007 5.75 9 29.3 35.9 20.8 17.8 26.5 29.3 32.5 38.3

5 2006 5.77 6 27.8 33.6 19.2 17.0 25.0 26.9 29.8 34.8

5 2005 5.63 54 27.4 32.9 19.4 15.5 23.5 26.1 29.1 34.4

5 2004 5.53 29 27.3 34.7 18.9 15.1 24.4 27.4 30.9 37.0

5 2003 5.49 69 28.0 35.8 20.2 15.7 25.8 29.1 32.8 39.5

5.5 2009 5.95 7 21.3 21.7 13.9 12.0 17.6 19.1 20.8 23.6

5.5 2008 6.03 60 34.1 38.1 23.5 22.7 30.1 31.0 33.5 37.8

5.5 2007 6.13 55 31.6 34.4 22.8 22.7 28.3 29.0 31.1 34.4

5.5 2006 6.15 25 29.7 33.5 21.9 23.0 27.8 28.4 30.2 33.2

5.5 2005 5.98 49 22.7 26.1 17.8 16.7 21.4 21.4 22.9 25.5

5.5 2004 5.93 38 23.2 27.7 18.6 16.7 21.9 22.5 24.5 27.6

5.5 2003 5.93 67 25.9 31.6 20.6 18.2 24.8 25.6 27.9 31.7

5.5 2002 6.00 14 30.7 36.5 22.2 19.7 28.3 29.3 32.2 37.1

6.0 2008 6.52 30 30.1 31.3 22.8 25.7 27.5 27.8 28.8 30.2

6 2007 6.56 65 28.0 28.4 22.2 24.3 26.1 26.3 27.3 28.8

6 2006 6.55 48 26.6 27.7 21.3 23.7 25.0 25.1 25.9 27.0

6 2005 6.49 12 19.5 20.6 17.1 18.2 19.5 19.5 20.2 21.2

6 2004 6.42 15 19.8 22.2 16.7 17.6 19.9 19.9 20.6 21.9

6 2003 6.47 12 19.4 21.4 16.9 18.1 21.1 21.3 22.5 24.4

6 2002 6.50 13 23.6 26.9 20.7 19.9 24.0 24.2 25.8 28.3

6.5 2008 6.98 8 27.3 25.6 21.7 23.7 24.2 24.5 25.2 26.0

6.5 2007 7.05 17 26.3 24.4 20.4 21.9 23.6 23.6 23.6 23.8

6.5 2006 7.01 19 23.6 23.2 20.6 21.6 22.7 22.7 22.9 23.5

No-point mortgage rate 4.75 4.45 4.68 5.00 4.50 4.33 4.20 4.00

Day count 22 20 20 21 21 21 21 21

MBA Refi Index 3964 4590 2619 *2200 *3500 *3900 *4200 *5500

Note: * estimated. Source: Fannie Mae, Barclays Capital

BoA’s exit from the correspondent channel should depress speeds further

Early this year, an abrupt jump in the speeds of Chase-serviced FNMA pools alarmed

investors with the possibility of other big servicers, such as Bank of America, suddenly

turning more aggressive toward HARP refinances and pushing up speeds. We argued

(Securitized Products Weekly , June 17, 2011) that such a development seemed rather

unlikely because: The poorer quality of the loans that BoA inherited from CountryWide makes them an

unfit target for the HARP program, given the new rep & warrant risks associated with

any refinancing transaction.

The bulk settlement between BoA and Freddie Mac early this year has largely relieved

the lender of the put-back risks on its legacy Countrywide loans. Because refinancing

these loans comes with new put-back risks, BoA has no incentive to do so.

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9 September 2011 18

The recent announcement by BoA to exit the correspondent channel has made a sudden

jump in its speeds even more unlikely. Rather, it should act to depress BoA's speeds further.

In short, correspondents are conduits that underwrite and fund loans only to sell them to

large banks such as BoA, who then rep & warrant the loans and deliver them to the GSEs.

Typically, there is a recourse clause such that if a loan is put back by the GSEs, the

correspondent has to reimburse the bank for the loss. However, if the correspondent is out

of business at the time of the put-back, the bank has to take the loss. Given the record level

of put-backs by the GSEs, the lack of control over how correspondents underwrite loans,

and the large of number of correspondents going out of business in recent years, we think

BoA is exiting this channel to protect itself from further credit losses.

In theory, if a correspondent cannot sell loans to BoA, it can still originate and sell them to

other banks such as Wells Fargo or Chase. However, selling to a different bank would likely

require complying with a new set of underwriting standards, which would probably

disqualify some existing loans from refinancing. In addition, a drop in total production of

correspondent loans should also reduce the refinance-ability of homeowners.

Figure 7 illustrates the possible effect on FNCL speeds. For recent vintages, roughly 25% of

the UPB is serviced by BoA, of which 23-48% is from the correspondent channel. All told,correspondent loans serviced by BoA account for 6-10% of recent FNCL vintages. If we

assume that BoA's correspondent loans prepay similarly to average BoA pools but will slow

50% in the future, total FNCL speeds should drop 0.5-1.5 CPR.

More important, the exit and other recent developments related to BoA signal that the

lender is focusing on strengthening its defence against GSE put-backs, rather than

increasing production or market share. With that mindset, it is unlikely to become more

aggressive with HARP refinances because that would bring more put-back risks.

Figure 7: CPR effect from exit of BoA correspondent business

Cpn Vintage

Cohort

($bn) BoA ($bn)

BoA Corr

($bn) Pct BoA Corr Cohort CPR Cohort CRR BoA CPR

Cohort CPR

impact

4.5 2010 120 25 12 10% 19 19.2 19.8 1.1

2009 248 58 24 10% 27 26.2 23.3 1.2

5 2010 60 16 4 6% 17 16.6 12.7 0.4

2009 64 14 6 10% 29 27.5 25.1 1.3

2008 50 15 4 8% 44 41.6 35.4 1.5

5.5 2008 75 21 7 9% 38 34.4 32.1 1.6

6 2008 37 8 3 8% 31 24.5 27.8 1.0

Note: Based on the December 2010 report. Source: Fannie Mae, Barclays Capital

For now, a government-induced refinancing wave still seems remote

Although refinancing activity has been muted, the MBS market is worried that a new

government program would soon push up speeds significantly and wreak havoc in a marketwhere almost every pool is priced above $102. It has been reported that a program could be

announced as early as tomorrow, when President Obama addresses Congress.

In Refi Realities, August 26, 2011, we discussed in detail the various options that might be

considered by policymakers. In short:

Although such drastic measures as removing the rep & warrant risk for lenders and

offering a universal 4% mortgage rate to all homeowners would be the most effective in

helping struggling borrowers, the complications and implied taxpayer burden make

them very unlikely.

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9 September 2011 19

A more likely measure, in our view, is fine-tuning the existing HARP program by

considering such options as increasing the LTV limit and removing the upfront delivery

fees. However, this represents only a moderate increase in refinance-ability and would

not pose a substantial increase in prepayment risk, in our view. Given the recent

cheapening in MBS, these changes have already been priced into the market.

Another possibility is to relax or eliminate the HARP origination date requirement, whichwould push up the speeds of 2009 and later vintages significantly. However, we think

the likelihood is lower than what is being priced into the market:

1. Since such a change would benefit only loans originated after May 2009, it would not

help struggling borrowers – those who are on the brink of default or owe more than

their homes are worth – to refinance, a central concern that has been voiced repeatedly

by policymakers and the media.

2. There is a reason why HARP had an origination date requirement to begin with. By

granting partial mortgage insurance (MI) waivers, HARP went against the GSE charter.

FHFA bypassed the conflict by framing HARP refinances as loss mitigations: pre-emptive

measures to help loans on the verge of default. While it is easier to make a case that

loans made before 2009 are collectively under stress and, therefore, that mass loss

mitigations are appropriate, it is not as clear that such is the case for newer production.

All in all, we do not expect a sweeping refinancing program to be included in President

Obama's speech tomorrow. That said, we believe that policymakers are aware of how put-

back risks are preventing homeowners from refinancing and are looking at ways to alleviate

this at a minimum cost. In this regard, we see two possibilities:

The Treasury brokers a deal with the MI companies and lenders such that they pay a

certain amount to the GSEs to cover all existing and potential loss claims. After that, loans

refinanced through the HARP program are no longer required to carry MI and are exempt

from put-back risks. The settlement can be paid in many instalments to minimize the

immediate hit to banks and MI companies, and one could argue that such a deal does notchange the eventual total loss to banks and MI companies but merely puts a closure to it.

After that, the interests of all parties should be realigned: the GSEs and banks are both

encouraged to refinance, while MI companies will not stand in the way.

Although this is conceptually feasible, it would face tremendous hurdles. Given the

significant difference in loan quality across lenders and MI companies, and intertwined

exposures among lenders, MI companies and the GSEs, negotiations could take years.

As discussed earlier, a major impediment is that every refinancing results in a new loan

that comes with fresh reps & warranties. Were it to default shortly thereafter, the GSEs

and MI companies would have an easier time faulting the lender for underwriting

defects. Hence, it is in the lender's interest not to refinance the loan: if it defaults, it will

have made several years' timely payments, bolstering the case that the default was notcaused by underwriting defects.

However, there is no reason for a refinance transaction to result in new rep & warrant

requirements since no new risk has been generated. Therefore, the GSEs could announce

that from now on, if a loan is refinanced, the lender is subject only to the rep & warrant

associated with the original loan but does not take on any new put-back risk.

For example, if a loan is refinanced at 36 WALA but defaults seven months later, the GSE

would decide whether to issue a repurchase request based on the underwriting documents




9 September 2011 20

of the original loan, and whether to take into consideration that the loan had made 43

payments before the default. This way, the lender will have more incentive to refinance

higher-risk loans to reduce the probability of default. The problem is that MI companies will

have to grant similar relief on put-backs for the program to deliver the full effect.

In summary, although we believe that the chance of a government-induced refinancing

wave remains very low, the fear will likely persist as long as MBS dollar prices are high,prepayment speeds slow, and economic conditions weak. Therefore, investors should keep

an eye on possible developments along the lines discussed above.

Why GNMA MBS are less prone to policy risks

Arguably, the GNMA/FHA program has done a good job of being countercyclical and

providing critical support to the housing market during times of distress. Being pretty

much the only line of credit available to homeowners with a less than perfect credit

profile, it accounts for about half of all purchase loans made today. Throughout its 77-

year history, it has never asked for money from taxpayers (in stark contrast to the GSEs),

and maintaining this self-sustainability is, in our view, critical for it to continue providing

support for the housing market. However, despite the recent tightening in underwriting

standards and increases in the insurance premiums, FHA is struggling to do so. Anychange (such as rolling back the insurance premium or relaxing underwriting) that

threats the self-sustainability this would, in our view, be politically unpalatable and only

undermine FHA's ability to continue offering affordable loans to underserved borrowers.

FHA is already shouldering more than its fair share of the housing market, and the

current loan limits are much too big for its intended goal of supporting lower-income

homeowners. It seems unlikely that the program will be expanded.

FHA/VA still has arguably some of the most streamlined refinancing programs,

something that is missing in conventional space.

The possible exit of overseas investors, the largest source of demand for GNMA MBS,

will likely make the administration think twice before implementing any major changes.

Thus, we believe that any administration initiative is more likely to be channelled through

the GSEs, which are already on public support, rather than the FHA.




9 September 2011 21

Figure 8: FNMA 30y short-term Barclays Capital forecasts

Actual FNMA Projected (report month)

Cpn Vintage WAC Bal ($bn) CPR 3M Sep-11 Oct-11 Nov-11 Dec-11

3.5 2010 4.14 22.5 3.3 4.3 5.1 5.6 6.1

4 2010 4.50 119.8 5.3 6.6 9.4 10.9 12.1

2009 4.58 101.0 8.7 10.2 13.0 14.7 16.0

4.5 2010 4.94 120.7 8.4 10.0 14.3 16.7 18.5

2009 4.94 222.9 13.4 15.4 20.1 22.8 24.82008 5.17 6.0 19.2 22.2 30.2 34.4 37.5

2003 5.07 16.6 17.4 20.0 22.5 24.1 25.4

5 2010 5.36 57.0 9.9 10.9 13.0 14.2 15.3

2009 5.42 55.8 15.4 16.9 19.1 20.6 21.8

2008 5.65 39.3 24.1 25.7 30.0 32.5 34.5

2007 5.75 9.2 20.7 22.3 24.7 26.3 27.6

2006 5.77 5.5 21.0 24.1 24.3 24.8 25.3

2005 5.63 53.1 19.9 21.8 22.8 23.7 24.5

2004 5.53 28.4 20.0 21.5 23.3 24.6 25.7

2003 5.49 67.9 21.2 22.7 24.7 26.1 27.3

5.5 2009 5.94 7.3 15.0 16.6 16.3 16.8 17.9

2008 6.03 58.7 24.4 25.8 25.9 27.0 29.3

2007 6.13 53.2 23.8 25.1 24.9 25.7 27.4

2006 6.15 24.1 23.3 24.9 24.5 25.2 26.8

2005 5.98 47.6 18.9 20.4 19.4 19.5 20.0

2004 5.93 37.5 19.1 20.1 19.5 19.9 21.0

2003 5.93 65.0 21.7 23.5 22.6 22.8 23.9

2002 6.00 13.9 23.6 25.9 25.3 25.9 27.6

6.0 2008 6.52 29.5 24.0 25.0 24.4 24.9 26.2

2007 6.56 63.3 23.2 23.8 23.2 23.7 24.9

2006 6.55 47.2 23.0 24.0 22.9 23.0 23.6

2005 6.49 12.0 17.9 18.5 17.7 17.9 18.3

2004 6.43 14.3 17.9 18.9 17.9 18.0 18.5

2003 6.47 11.7 18.9 19.9 18.9 19.1 19.9

2002 6.50 12.5 21.6 23.0 21.8 21.8 22.7

6.5 2008 6.98 7.9 22.2 21.8 21.3 21.9 23.1

2007 7.05 16.6 21.6 22.6 21.7 21.8 22.3

2006 7.01 18.7 21.2 21.7 20.7 20.8 21.3

2002 6.96 6.0 19.5 21.2 20.0 20.0 20.77.0 2008 7.49 2.7 22.5 23.3 22.6 22.8 23.2

2007 7.64 4.8 21.8 22.2 21.7 21.9 22.2

2006 7.61 3.3 20.6 20.7 19.9 20.1 20.5

No-point mortgage rate 4.75 4.71 4.52 4.33 4.30

Day count 22 23 21 20 20

Note: As of September 9, 2011, open mortgage rate at 4.30% (10y at 2.00%). Source: Barclays Capital




9 September 2011 22

Figure 9: FNMA 15y short-term Barclays Capital forecastsActual FNMA Projected (report month)

Coupon Vintage WAC Bal ($bn) CPR 3M Sep-11 Oct-11 Nov-11 Dec-11

3 2010 3.60 6.1 4.2 5.0 8.1 8.9 10.0

3.5 2010 3.93 42.7 9.4 12.2 17.5 18.8 20.7

4 2010 4.41 38.4 15.1 17.1 22.4 23.5 25.6

2009 4.48 37.1 22.3 27.6 33.4 34.6 37.0

2008 4.58 1.2 23.8 26.4 33.7 35.3 38.2

2003 4.55 8.1 18.7 19.9 21.7 22.0 22.9

4.5 2010 4.84 8.4 14.8 16.9 21.1 22.0 23.72009 4.89 15.8 21.8 25.1 30.7 31.8 34.1

2008 5.05 8.0 31.2 34.6 38.4 38.9 40.9

2007 5.25 0.4 26.7 24.7 29.1 30.0 31.9

2006 5.19 0.4 20.0 22.2 21.9 21.5 21.8

2005 5.12 3.4 21.6 23.3 24.1 24.0 24.7

2004 4.96 7.5 18.4 20.1 21.7 21.9 22.8

2003 4.96 26.7 18.7 20.5 23.4 23.9 25.2

5 2009 5.48 1.0 20.3 22.0 23.1 23.1 23.9

2008 5.56 6.4 27.1 28.6 30.3 30.3 31.5

2007 5.71 2.1 27.3 29.5 30.5 30.3 31.3

2006 5.67 1.3 24.0 26.0 25.9 25.5 26.0

2005 5.49 5.5 19.1 21.6 20.0 19.3 19.2

2004 5.42 5.5 17.6 18.9 17.5 16.9 16.8

2003 5.44 17.1 17.6 19.1 18.6 18.2 18.3

2002 5.50 7.1 20.0 21.9 21.2 20.7 20.9

5.5 2008 6.01 2.6 25.3 24.9 26.8 27.0 28.1

2007 6.07 3.5 23.0 24.7 25.1 24.9 25.5

2006 6.01 3.2 21.9 23.1 22.8 22.5 22.8

2005 5.91 2.0 16.9 19.4 18.2 17.6 17.66 2008 6.52 0.9 18.9 21.1 19.2 18.4 18.2

2007 6.52 2.6 20.9 22.3 20.9 20.2 20.2

2006 6.48 2.4 20.0 21.5 20.4 19.9 19.9

3.92 3.85 3.67 3.50 3.4822 23 21 20 20

Mortgage Rate

Day-Count

Note: As of September 9, 2011, open mortgage rate at 3.48% (10y at 2.00%). Source: Barclays Capital

Figure 10: GNMA 30y short-term Barclays Capital forecasts

GNMAI Prepayments GNMAII Prepayments

Actual Projected (report month) Actual Projected (report month)

Coupon Vintage WAC Bal ($bn)

3-month

CPR Sep Oct Nov Dec WAC Cbal

3-month

CPR Sep Oct Nov Dec

4 2010 4.5 34.2 4.4 3.8 5.5 6.0 6.1 4.38 34.1 4 3.6 5.1 5.6 5.6

2009 4.5 14.1 6.8 6 9.3 9.8 9.7 4.46 2.5 5.5 4.6 8.3 8.8 8.6

4.5 2010 5.00 57.6 7.5 7 10.2 10.7 10.7 4.87 80.6 7.1 6.7 8.6 9.0 8.9

2009 5.00 106.0 8.5 7.8 13.7 14.5 14.4 4.92 46.0 7.4 6.7 11.9 12.6 12.5

2008 5.00 0.4 10.9 8.3 22.8 23.9 24.0 4.98 0.3 12.4 10 16.5 17.3 17.32003 5.00 1.9 12.5 11.6 14.5 15.0 14.9 5.11 0.5 14.8 13.3 16.9 17.5 17.4

5 2010 5.50 15.2 10.4 9.1 14.9 15.8 15.9 5.29 33.3 10.9 9.7 13.8 14.5 14.6

2009 5.50 70.4 11.6 10.8 18.6 20.2 20.3 5.35 60.7 9.9 9.4 16.0 17.3 17.3

2008 5.50 10.5 16.4 16.4 24.7 26.0 26.1 5.52 2.7 17.3 17.9 24.0 25.2 25.3

2007 5.50 0.6 17.1 19.2 24.9 25.4 25.3 5.54 0.5 18.4 20.8 27.6 28.1 28.1

2006 5.50 0.6 17.7 14.8 19.5 20.2 20.2 5.64 0.8 15.7 14.5 20.4 21.2 21.1

2005 5.50 4.6 15.7 14.8 19.1 19.9 19.8 5.60 4.9 16.0 15.8 21.4 22.3 22.2

2004 5.50 2.8 14.4 13.1 16.0 16.8 16.7 5.57 2.4 14.9 14.6 17.1 17.8 17.8

2003 5.50 8.7 14.1 13.5 16.4 17.2 17.1 5.55 3.9 14.1 13.7 16.9 17.7 17.6

5.5 2009 6.00 8.2 16.3 15.0 23.4 25.1 25.3 5.87 6.4 15.4 13.9 20.7 22.1 22.2

2008 6.00 21.6 18.4 17.0 26.4 28.0 28.2 5.94 18.8 18.0 17.2 24.7 26.2 26.3

2007 6.00 3.1 21.1 19.6 26.8 28.0 28.0 6.02 3.5 20.2 19.8 26.3 27.3 27.4

2006 6.00 2.7 19.4 17.4 25.0 26.4 26.5 6.06 2.9 20.5 20.2 24.2 25.5 25.6

2005 6.00 4.8 17.0 16.4 20.9 21.6 21.6 5.97 5.7 16.2 15.7 20.8 21.6 21.6

2004 6.00 4.8 15.4 14.5 18.0 18.5 18.5 5.93 5.4 15.9 15.7 17.3 17.9 17.8

2003 6.00 9.8 15.1 15.1 18.2 19.1 19.1 6.01 4.3 13.9 13.6 16.0 16.7 16.6

2002 6.00 1.8 17.2 16.3 20.2 21.2 21.2 6.27 0.7 15.8 14.3 19.7 20.6 20.6

6.0 2008 6.50 15.4 19.6 17.9 26.8 28.0 28.1 6.44 10.0 20.4 19.3 26.1 27.3 27.4

2007 6.50 5.0 20.3 19.5 26.2 27.1 27.2 6.46 7.5 20.3 18.8 27.9 28.8 28.92006 6.50 4.6 20.7 20.4 25.7 26.3 26.3 6.46 4.3 21.5 20.5 25.0 25.6 25.5

2005 6.50 1.1 14.0 12.5 17.3 18.0 18.0 6.40 1.4 19.0 17.9 20.6 21.5 21.5

2004 6.50 2.0 14.1 13.5 17.1 17.9 17.8 6.37 2.5 15.3 14.1 17.5 18.3 18.2

2003 6.50 2.7 12.8 12.1 15.5 16.2 16.1 6.43 1.4 14.9 14.9 16.5 17.2 17.2

2002 6.50 2.5 15.2 14.9 18.3 18.9 18.8 6.76 1.0 15.0 15.2 16.2 16.7 16.6

6.5 2008 7.00 2.6 20.5 19.0 25.6 26.3 26.3 6.87 4.9 20.9 19.5 25.2 25.9 25.9

2007 7.00 1.5 18.8 16.9 23.2 24.3 24.4 6.90 2.5 19.6 18.7 26.0 27.1 27.2

2006 7.00 1.4 19.4 20.0 24.4 24.7 24.7 6.87 1.2 22.1 21.5 24.5 24.9 24.9

2002 7.00 1.4 13.9 13.6 15.0 15.6 15.5 7.23 0.4 12.7 12.4 13.4 13.9 13.8

2001 7.00 1.2 13.7 12.5 15.4 16.0 15.9 7.27 0.7 14.7 12.8 15.6 16.2 16.1

4.75 4.71 4.52 4.33 4.30 4.75 4.71 4.52 4.33 4.30

22 23 21 20 20 22 23 21 20 20

Mortgage Rate

Day-Count

Note: Incorporates BoA delinquency cleanup over three months. As of September 9, 2011, open mortgage rate at 4.30% (10y at 2.00%). Source: Barclays Capital




9 September 2011 23

CMBS

Trust implications of super-high loss severities

CMBS monthly liquidation volumes have stayed above the $1bn mark for most of 2011, a

sharp step up from earlier years (Figure 1). Liquidation volume has been boosted by anumber of note auctions in recent months, in which special servicers look to dispose of

smaller loans backed by distressed properties, as an alternative to going through a

potentially long and expensive foreclosure and REO process. At the same time delinquent

larger loans in Tier 1 centers have a lower probability of liquidation; usually receiving some

sort of workout, possibly through a modification or extension (Figure 2).2

A combined effect of these two trends had been a pick-up in loss severities. Fixed costs

arising out of legal, foreclosure, and other fees are a higher share of the liquidation proceeds

on smaller loans, leading to correspondingly higher severities. Combined with the need to

reimburse outstanding advances and ASERs at the time of loan liquidation, higher expenses

result in some loans reporting severities greater than 100%. Such instances were relatively

uncommon for much of 2007 to 2009, averaging about five cases per quarter. Since 2010,

however, the number of loans reporting severities in excess of 100% has grown to 20 per

quarter (we have been highlighting some of these instances in our monthly CMBS Credit

Handbook ). In some cases, these have had fairly significant effects on the deal cash flow

dynamics – resulting in interest shortfalls reaching up to the originally AAA-rated tranches,

and/or a diversion of principal cash flows.

Overall we identified 175 loans that were liquidated with severities exceeding 100% in the

conduit universe since 2007. As Figure 3 shows, the number has grown in recent years with

120 of these liquidations taking place in 2010 and 2011. A bulk of these have been

concentrated in loans that are $25mn or below; three of the largest loans reporting liquidation

severities at 100% were the $48m Holiday Inn Portfolio in GSMS 2007-GG10, the $46m

Eastland Mall in CASC 1998-D7, and the $31mn Connecticut Health in GMAC 1997-C1.

In addition to the Holiday Inn portfolio, the latest August remittance saw two other such

instances (Please see CMBS Credit Handbook for details). We expect liquidations to remain

elevated in the coming months and as such, the number of such instances of loans taking

losses north of 100% will likely increase.

2 We discuss this in more detail in the CMBS Strategy Weekly , July 15, 2011

Julia Tcherkassova

+1 212 412 5977 [email protected]

Keerthi Raghavan

+1 212 412 7947

[email protected]

Figure 1: Historical liquidations ($bn) Figure 2: Modified vs. liquidated (Share of specially serviced)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Ja n-08 Jul -08 Ja n-09 Jul-09 Ja n-10 Jul-10 Jan-11 Jul-11

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<$15mm $15-$100mm >$100mm

Modified Liquidated

Source: Intex, Barclays Capital Source: Intex, Barclays Capital










9 September 2011 24

Figure 3: Liquidations with severities exceeding 100%

0

5

10

15

20

25

07Q1 07Q3 08Q1 08Q3 09Q2 09Q4 10Q2 10Q4 11Q2

Number of loans with sev>100%

Source: Intex, Barclays Capital

Components of severity

Before discussing implications on deal and bond level cash flows, we start our analysis with

a more general question: why could severities on some loans be above 100%? In Figure 4,

we show a typical breakdown of overall losses realized on a liquidated loan.

When a loan is disposed of, liquidation fees (usually at about 100bp) are typically charged

as a percentage of net proceeds. Other fees, including special and master servicing fees, are

calculated on the outstanding balance of the loan. Deal remittances also report a rather

non-descriptive “other fees” column, which includes a range of expenses from legal costs to

broker fees and would typically include a large fixed component. Consequently, they form a

higher share of overall expenses on smaller loans

Once the fees have been reimbursed, liquidation proceeds are used to pay back the master

servicer for any P&I advanced on the loan. After the servicer has been reimbursed, the trustreceives any unpaid advances through reimbursements of ASERs and non-recoverable

advances. Only then does the trust receive any principal recovery on the loan. Therefore, if

liquidation proceeds do not cover the sum of expenses, servicer advances and ASER/non-

recoverable advances, severities typically will be reported at or above 100%.




9 September 2011 25

Figure 4: Components of severity

1) Servicer/Trustee fees

Liquidation Fee to SS on SS loan

Workout Fee on Corrected Mtg. loan

Master Servicing Fees (prior period)

Special Servicing FeesTrustee Fees

Other Fees

2) Advances

P & I Advances (net advanced)

Interest on Advances- P & I

3) Amounts held back for future payment

Other Unpaid Fees and expenses

Other amounts

4) Unadvanced interest

Cumulative Aser Amount

Deemed non-recoverable interest or Advances (prior shortfall)

Deemed non-recoverable interest or Advances (paid from trustprincipal)

Liquidation Expenses 1 through 4

Net Proceeds Proceeds-Liquidation Expenses


Some examples

In some instances, liquidations with severities exceeding 100% might lead to interest

shortfalls. This would typically happen if liquidation proceeds do not cover expenses and

servicer advances. A recent example was the 17320 Gale Avenue loan in COMM 2006-C8.The $13.6mn loan had accrued $337k in P&I advances and $625k in ASERs after being in

foreclosure since May 2009. When it was finally liquidated in August 2011, liquidation

proceeds were reported as only $10k.

Since the proceeds did not cover expenses and servicer advances, the servicer reimbursed a

total of $339k from the general trust interest cash flows resulting in interest shortfalls to the

trust reaching up to the originally AA rated tranche C.

In most cases where liquidation proceeds are this low, the special servicer would have

already deemed the loan as non-recoverable and stopped advancing any P&I prior to the

liquidation event. Nearly 85% of all loans reporting severities exceeding 100% since 2008

had been categorized as non-recoverable by the special servicer at some point prior to their

liquidation.

The Gale Avenue loan was unusual in that sense, as it had not been classified as non-

recoverable and the servicer was still advancing $32k of interest every month. This resulted

in a build-up of advances and an eventual large reimbursement from general interest

proceeds, leading to interest shortfalls.

In contrast to the above example, liquidations with severities exceeding 100% could also

lead to interest shortfalls reimbursements in some instances. The $19m Boscov’s

Monroeville Mall loan, in BACM 2006-3 was also liquidated in August with a severity




9 September 2011 26

reported in excess of 100%. The loan had been delinquent for nearly three years and had

been deemed non-recoverable since December 2009. Subsequently, P&I advances made by

the servicer were recovered from general interest proceeds in May and June of 2010 3. As a

result, outstanding advances dropped to zero.

When the loan was finally liquidated in August, there were some proceeds remaining after

paying various fixed expenses and servicer fees. Since ASERs and advances were already atzero, these were applied as a reimbursement of non-recoverable interest. This led to interest

shortfalls being paid down on the highest short-falling tranches in BACM 2006-3, despite

overall severities being greater than 100%.

Deal level effect of interest shortfalls resulting from high severities

Typically the loans liquidated with severities exceeding 100% are relatively small. However,

the interest shortfalls triggered by such liquidations could reach relatively high up in the

capital structure. We have already discussed the originally AA rated C tranche in COMM

2006-C8 that took a shortfall this month as a result of the Gale Avenue liquidation. In June

2011, MSC 2006-IQ12 AJ took interest shortfalls as a result of the liquidation of the

Chatham II loan. Though the loan had been deemed non-recoverable, P&I advances had not

been reimbursed earlier by the servicer. As a result, the proceeds from liquidation were notenough to reimburse the servicer fees and the advances, resulting in a shortfall.

On the flip side, since these shortfalls are linked to a single liquidation, they are usually

temporary. Using our example with IQ12, the AJ tranche recovered its shortfalls in the next

month following the liquidation. As such, we believe that when a shortfall on a tranche

positioned relatively high in the capital structure is caused specifically by liquidation of a

loan with severity exceeding 100%, it might present an opportunity to take a long position,

since such a shortfall is likely to be recovered in the short term. However, these

opportunities should be viewed as very deal specific because they depend on performance

of other loans securitized in the same pool.

3 Reimbursements can be made from principal or interest depending on the PSA language




9 September 2011 27

CONSUMER ABS

Relative value among prime retail auto loan ABS

The auto ABS issuance machine continues to chug along. Auto-related ABS primary

market transaction volume totals $42.4bn year-to-date, of which $30.0bn has beenbacked by retail auto loans.

Credit enhancement levels, after rising immediately post the Lehman failure, began

declining in 2010 and have now stabilized. Fittingly, transactions completed from

2009 to present have demonstrated improving collateral performance as measured

by cumulative net losses.

The majority of retail auto loan ABS traded in the secondary market were issued in

2009-2011. We assess collateral performance and credit enhancement of these post

credit-crisis transactions across vintages and identify relative value within the prime

retail auto ABS sector.

Retail auto ABS issuance remains strongYear-to-date, issuance of retail auto loan ABS totals close to $30bn, down 13% from the

first nine months of 2010 ($34.0bn). Including auto-related ABS transactions total volume

has reached $42.4bn in 2011 versus $50.5bn for the same period in 2010. By comparison,

retail auto loan securitization volume in 2010 totaled $41.1bn and total auto related was

$61.7bn. Despite the y/y decline, auto ABS issuance continues to outpace primary market

volume of other non-mortgage asset classes by a wide margin.

Figure 1: Retail auto loan ABS issuance ($bn)

0

2

4

6

8

10

12

14

16

18

20

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

FORDO BAAT HAROT ALLYA SDART AMCAR HART TAOT

NAROT CFAST CARMX MBART USAOT VALET WOART Other

Source: IFR Markets, Barclays Capital

Of the year-to-date total retail auto loan ABS volume, about 87% has been sold by a dozen

issuers, entities that comprise frequent, generally programmatic securitizers of auto ABS

(Figure 1). Together, these issues accounted for $25.7bn in new issue transactions through

September 9, 2011. Approximately two-thirds of the retail auto issuance has been backed

by prime quality collateral, with the remaining third supported by non-prime collateral.

Interestingly, two issuers, AMCAR and SDART, are responsible for 75% of the non-prime

issuance. For the balance of this article, we will focus on the prime segment of the retail

auto ABS market, leaving non-prime for a future analysis.

Joseph Astorina

+1 212 412 5435 [email protected]




9 September 2011 28

Credit enhancement declines have stabilized in 2011

Figure 2 details by quarter of issuance the initial credit enhancement levels for the top 12

issuers, by volume since 2009, of prime retail auto loan ABS. Also depicted, to provide historical

perspective, are enhancement levels for transactions from the same issuers completed prior to

the failure of Lehman Brothers in September 2008. We excluded non-prime deals because

credit enhancement prior to September 2008 was generally provided by a monoline insurance

policy, whereas post-crisis deals have been structured with senior/subordinate enhancement.

As such, hard credit enhancement for pre-2009 non-prime transactions was structured to a

BBB level, with the monoline wrap bringing the rating to AAA. In contrast senior/subordinate

non-prime auto loan deals have a much higher hard credit enhancement requirement, making

comparisons between pre- and post-crisis transactions tenuous. We also excluded from the

chart issuers that had no pre-crisis transactions (e.g., MBART).

Figure 2: Credit enhancement trends

0%

3%

6%

9%

12%

15%

18%

21%

Pre-09 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11

FORDO BAAT HAROT ALLYA HART TAOTNAROT CFAST CARMX USAOT VALET WOART

Source: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, Barclays Capital

Enhancement requirements for issuers such as ALLYA, CARMX, and NAROT have been

reduced by 350-450bp since hitting highs in Q4 09. Others, including FORDO, HAROT, and

USAOT, have experienced more modest declines. Regardless, the trend in Figue 2 is clear –

credit enhancement has declined from Q3 09 highs and has stabilized close to, or below, pre-

crisis levels for most issuers in 2011. In Consumer ABS Strategy Update: Assessing retail auto

loan ABS credit enhancement trends, November 19, 2010, we determined that most of the

reductions in credit enhancement levels were likely justified given collateral composition

and improved cumulative net loss performance metrics of recent transactions.

Figure 3 shows the average credit enhancement requirements for issuers in the pre-crisis

period and from 2009 to 2011. Issuers are listed in descending order of average initial credit

enhancement in 2010 and, in most instances, the rankings are the same for 2011. Notableexceptions include WOART, the enhancement for which was increased to 9.45% by S&P

because of the agency’s increased cumulative net loss expectation; and VALET and TAOT,

both of which had the enhancement reduced slightly for 2011 transactions.








9 September 2011 29

Figure 3: Average initial credit enhancement, by vintage (%)

Issuer Pre-2009 2009 2010 2011

CFAST 8.50% 13.93% 18.30% NA

HART 9.75% 13.60% 10.80% 10.55%

ALLYA 6.25% 6.13% 9.88% 7.45%

BAAT 8.30% 8.85% 7.98% NA

CARMX 9.26% 15.42% 7.92% 6.40%

FORDO 5.50% 6.10% 6.06% 6.00%

WOART 6.75% 11.75% 5.90% 9.45%

VALET 2.35% 5.60% 5.60% 3.60%

TAOT NA NA 5.33% 3.65%

NAROT 4.75% 7.30% 4.50% 4.50%

HAROT 3.15% 4.05% 3.33% 2.75%

USAOT 3.25% 3.00% 2.25% NA

Source: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, Barclays Capital

We note that many of the 2009 and 2010 transactions have deleveraged significantly,resulting in current credit enhancement that is much higher than the original level.

However, we believe a comparison of transactions based on original enhancement

requirements is more consistent and meaningful. In our view, the relative rankings based on

initial credit enhancement provide the first piece to the relative value puzzle.

Recent transaction collateral performance is improved

The second piece is transaction collateral performance. Cumulative net losses provide a

clear, observable comparison of performance trends among different transactions from the

same issuer, as well as across issuers, after controlling for variations in collateral pools.

Figures 4 to 15 detail the cumulative net loss performance for transactions from the largest

prime retail auto ABS issuers in 2009-11. We look at performance of recent transactions, as

well as deals issued as far back as 2007, to gain insight and perspective on changes insecuritized collateral performance through and after the depths of the credit crisis.

In general, we find that many shelves posted stable to slightly deteriorating credit performance

in 2007 and 2008 vintage transactions. However, post-crisis (i.e., 2009 and later) deals are

performing well, with successive deals from the same issuer reporting lower cumulative net

losses than previous transactions. In addition, cumulative net losses on recent vintage deals

are generally much better than 2007-08 vintages.

Specifically, the last CARAT transaction from 2008 is reporting cumulative net losses in line

with the early 2007 deals (Figure 4). However, the post-crisis (i.e., 2009 and later) ALLYA

deals are performing well, with cumulative net losses much lower than 2007-08 vintages.

Similarly, 2009-11 CARMX transactions (Figure 6) report improved performance over early

deals, as do those of CFAST (Figure 7). FORDO (Figure 8), HAROT (Figure 9), HART (Figure

10), and NAROT (Figure 11) are all reporting improved cumulative net losses in 2009-11

transactions as well. TAOT performance has always been exceptionally strong, with less

than 50bp in cumulative net losses historically (Figure 12). Each successive USAOT, VALET,

and WOART transaction since 2008 has reported lower cumulative net losses than the

previous (Figure 13 to Figure 15).




9 September 2011 30

Figure 4: CARAT/ALLYA cumulative net loss, % Figure 5: BAAT cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-1 2007-2 2007-32007-4 2008-1 2008-22009-A 2009-B 2010-12010-2 2010-3 2010-42010-5 2011-1 2011-22011-3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2008-1 2009-1 2009-22009-3 2010-1 2010-2


Figure 6: CARMX cumulative net loss, % Figure 7: DCAT/CFAST cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-1 2007-2 2007-32008-1 2008-2 2008-A2009-1 2009-2 2009-A2010-1 2010-2 2010-32011-1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-A 2008-A 2008-B2009-A 2009-B 2010-A


Figure 8: FORDO cumulative net loss, % Figure 9: HAROT cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-A 2007-B 2008-A2008-B 2008-C 2009-A2009-B 2009-C 2009-D2009-E 2010-A 2010-B2011-A 2011-B

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2008-1 2008-2 2009-12009-2 2009-3 2010-12010-2 2010-3 2011-1





9 September 2011 31

Figure 14: VALET cumulative net loss, % Figure 15: WOART cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2008-1 2008-2 2010-1 2011-1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-B 2008-A 2009-A2010-A 2011-A


Figure 10: HART cumulative net loss, % Figure 11: NAROT cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-A 2008-A 2009-A 2010-A2010-B 2011-A 2011-B

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2007-B 2008-A 2008-B 2009-12009-A 2010-A 2011-A


Figure 12: TAOT cumulative net loss, % Figure 13: USAOT cumulative net loss, %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2010-A 2010-B 2010-C 2011-A

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1 6 11 16 21 26 31 36 41 46

2008-1 2008-2 2008-32009-1 2009-2 2010-1





9 September 2011 32

Putting it all together

To complete our analysis, we meld the credit enhancement of specific transactions with

collateral performance and assess both against secondary trading levels. We measure

relative performance of transactions within a vintage by comparing cumulative net losses at

a given deal age. For example, for 2009 vintage transactions, we assess cumulative net

losses at 24 months of deal age, or if a transaction is not seasoned that much, at 18

months. For 2011 transactions, we rank deals by cumulative net losses at six months of deal

age, or current cumulative net losses for deals not aged at least six months.

The majority of retail auto loan ABS traded in the secondary market were issued in 2009-

2011. Most 2009 transactions have paid down to such an extent that there are only one or

two senior classes outstanding. The last cash flow class of 2009 deals has generally rolled to

become a 1y average life bond, while the penultimate payer is less than 0.4y in most

instances. Of outstanding 2009 vintage prime retail auto ABS transactions, we find the first

deals that year from CARMX, FORDO, and HART, as well as the second CFAST deal, to be

among the highest in cumulative net losses at 24 (or 18) months of deal age. However,

these transactions also have the highest levels of credit enhancement in this vintage. Given

relatively similar trading levels (i.e., within 2-3bp of each other) of bonds in this vintage, the

short average life, and the amount of credit enhancement relative to cumulative net losses,

we are generally indifferent among the major issuers of prime transactions in this vintage.

Transactions from 2010 generally have two or three senior classes outstanding, with the

last cash flow having rolled down to a 2y average life, and the penultimate to a 1y bond.

Cumulative net losses for transactions in this vintage are below 1%, with most deals

reporting under 0.5% cumulative net losses at 12 or 18 months of deal age. We find

penultimate and last cash flow ABS issued in 2010 from HART and ALLYA are attractive

given the double-digit initial credit enhancement and the highest spreads available among

the 2010 vintage.

In contrast to the 2009 and 2010 vintages, most 2011 prime auto ABS issues have all senior

classes outstanding (either three or four depending on issuer). Given credit enhancementand cumulative net loss levels in this vintage, at current spread levels we view ALLYA,

CARMX, and HART penultimate and last cash flow ABS as attractive. We also like FORDO

and WOART last cash flow ABS.




9 September 2011 33

CONVEXITY PORTFOLIO

Wider basis leads to losses

Mortgages widened sharply over the short week, and our long basis positions

underperformed. FNCL 4s lost 21bp versus 2y and 10y Treasuries, and FNCI 3.5s lost 16bp.Our 15s/30s trade offset some of these losses, as DW 3.5s gained 10.5bp versus CL 4.5s.

Bank demand remains strong in 15y 3s and 3.5s. Overall, the convexity portfolio was down

68bp on the week and is down 18bp year-to-date. ROE since initiation stands at 105.63%.

Figure 1: Convexity portfolio trade performance

Portfolio return statistics

Initial equity ($mn)

YTD P/L

($mn)

Total P/L

($mn)

YTD %

ROE

Total %

ROE

1-week

P/L ($mn)

1-week

% ROE

Convexity Portfolio 100 -0.37 105.63 -0.18% 105.63% -1.41 -0.68%

Convexity trades

Total

P/L (bp)

1 wk P/L

(bp)

Equity

($mn)

Avg. equity

($mn) Leverage

Total P/L

($’000) % ROE

1 wk P/L

($‘000) Start date

Long FNCL 4s vs Tsy curve -14.1 -21.1 30 30 20 -842 -2.8 -1,264 8/26/11

Long FNCI 3.5s vs Tsy curve 7.0 -16.5 30 30 20 425 1.4 -986 8/26/11

Long DW 3.5s/FNCL 4.5s 6.1 10.5 40 40 20 495 1.2 840 8/26/11

Note: The performance is from Thursday, September 1, 2011, close, to Thursday, September 8, 2011, close. Source: Barclays Capital

Figure 2: Current convexity portfolio trades

Trade

Long in face

value terms

Short in

face value terms

Hedge

details

Equity

($mn)

Lever

age Notional

Initiation

level

Current

level

Initiation

date

1 Long 30y 4s vs Tsycurve

600 FNCL 4s 290 2y Tsy, 23010y Tsy

Curve-neutral 30 20 600 105.6bpZV sprd

117.9bpZV sprd

8/26/11

2Long 15y 3.5 vs Tsycurve

600 FNCI 3.5s 316 2y Tsy, 12310y Tsy

Curve-neutral 30 20 600 85.6bp ZVsprd

91.2bp ZVsprd

8/26/11

3 Long DW 3.5s/FNCL4.5s

800 15y 3.5s, 23 10s 770 30y 4.5s, 1062s

Curve-neutral 40 20 800 104-03 vs105-16+

104-13+vs 105-27

8/26/11

4 Long GN 4.5/4 swap 450 GN 4.5s, 8 10s 315 GN 4.5s, 16 2s Curve-neutral 30 15 450 2-04+ 9/9/11

Cash 105.6

Note: Pricing is as of the close on September 8, 2011. Source: Barclays Capital




9 September 2011 34

Figure 3: Retired trades

Leveraged portfolio statistics

Retired trades Start date End date

P/L (bp)

total

Equity

($mn)Avg

Equity Leverage

P/L

($mn) % ROE

1 FN 4.5s vs Treasury 1/16/09 3/19/09 106 10 10 10 1.07 10.7

2 GN2/FN 5.0 swaps 1/16/09 8/6/09 94 20 12 20 2.24 18.0

3 FN 6.0 LLB vs 3y Treasury 1/16/09 3/12/09 198 10 10 10 1.98 19.8

4 FNT 379 vs TBA, 2s10s swaps 1/16/09 9/10/09 782 20 17 2 2.66 15.9

5 FN 5.5/5.0 1/29/09 4/2/09 48 10 10 10 0.49 4.9

6 Inverse IO vs 2s10s swaps 2/12/09 6/11/09 242 10 10 1 0.27 2.7

7 2005 FNCL 5.5 vs TBA 2/26/09 6/4/09 14 20 19 20 0.54 2.9

8 FNCI 4.0 vs FNMA 4.5 3/26/09 4/16/09 25 20 20 20 0.99 4.9

9 FN 5.5/4.5 4/2/09 5/7/09 -5 10 10 10 -0.05 -0.5

10 GN/FN 4.5 swaps 4/16/09 6/18/09 -16 20 20 20 -0.64 -3.2

11 Short FN 5s vs 10y Treasury 5/8/09 6/25/09 40 10 10 20 0.80 8.0

12 Short FN 4.5s vs 10y Treasury 5/27/09 6/25/09 113 10 10 20 2.26 22.6

13 Long FN 4.5s vs 5.0s 6/10/09 6/25/09 41 10 10 20 0.81 8.1

14 GN2/FN 4.5s swaps 6/18/09 8/6/09 2 20 20 20 0.07 0.4

15 FN 5.5/4.5 7/9/09 9/10/09 88 20 15 20 2.72 17.6

16 Short FN 4.5s vs 10y Treasury 8/5/09 8/20/09 55 10 10 20 1.10 11.0

17 Long GN/FN 5.0 swaps 8/6/09 9/24/09 -11 20 20 20 -0.42 -2.1

18 Long FNCI 4.0s vs FNCL 4.5s 8/20/09 9/24/09 18 20 20 20 0.71 3.5

19 Long 4.5s vs 10y swaps 9/10/09 10/29/09 67 20 20 20 2.67 13.3

20 Long FN 4.5 butterfly 9/10/09 11/19/09 -17 20 20 20 -0.68 -3.4

21 Synthetic vs TBA 5.0 10/15/09 12/3/09 80 5 5 1 0.2 4.0

22 Long GN inverse IO 9/17/09 12/3/09 116 8.4 8.4 1 1.16 13.8

23 Long FN 6.0/5.0 swap 9/10/09 1/21/10 106 10 10 20 2.14 21.4

24 Short FN 5.0 butterfly 9/24/09 1/21/10 -14 20 20 20 0.53 -2.7

25 Short FN 5.5 vs 10y Treasury 11/19/09 1/21/10 -86 20 20 20 -3.43 -17.2

26 Long FNS 399 vs 2s10s Treasury 12/3/09 2/10/10 -1.8 10 10 2 0.28 2.8

27 Short GN/FN 6.0 swap 12/3/09 2/10/10 12.9 20 20 20 0.53 2.6

28 Short FN 4.5 vs Treasury 1/21/10 2/10/10 -34.1 20 20 20 2.04 10.2

29 Long FN 6/4.5 swap 1/21/10 2/10/10 16.3 20 20 20 0.65 3.3

30 FNCI 4.5s vs FNCL 5.0s 9/24/09 2/11/10 -41.4 20 20 20 -1.64 -8.2

31 Short FN 6.5 Mar-Apr roll 2/10/10 3/5/10 107.8 20 20 20 8.63 43.1

32 Long Gold/FN 6.5 swap 2/10/10 3/5/10 93.8 20 20 20 3.75 18.8

33 Short Gold/FN 6.0 swap(May settle)

2/11/10 3/5/10 17.2 20 20 20 1.38 6.9

34 Long FH 6.5/4.5 swap 2/10/10 3/12/10 336.0 20 20 20 11.29 67.235 Long FN 6.5 Apr/May roll 3/12/10 3/25/10 64.8 20 20 20 2.60 13.0

36 Short FN 5.5 May/Jun roll 3/12/10 3/25/10 23.44 20 20 40 1.88 9.4

37 Short GN/FH 6.0 swap 2/10/10 4/2/10 28.9 20 20 20 1.16 5.8

38 Long synthetic 5.0s vs TBA 3/12/10 4/16/10 72.2 20 20 10 1.45 7.2

39 Short Gold/FN 6.5 swap 3/19/10 4/30/10 4.7 20 20 20 0.19 1.0

40 Long FNS 379 vs TBA 2/11/10 5/21/10 -54.3 10 10 3 -0.16 -1.6





9 September 2011 35

Figure 3: Retired trades (contd.)



P/L (bp)

total

Equity

($mn)Avg

Equity Leverage

P/L

($mn) % ROE

41 Long FN 2005 5.5s versus TBA 5.5s 3/12/10 5/21/10 -5.7 20 20 40 -0.45 -2.2

42 Short GN/FN 5.0s 5/27/10 6/10/10 7.8 20 20 40 0.63 3.143 Long FN 4.5s vs 2s10s 4/2/10 6/24/10 43.2 40 30 20 2.60 8.7

44 Long GN2/GN1 4.5s 6/4/10 7/1/10 0.8 20 20 40 0.07 0.3

45 Long credit impaired IIO vs short 6.5 IOS 6/4/10 7/1/10 192.3 10 10 2 3.85 38.5

46 FNCL 5/4.5 down-in-coupon swap 6/25/10 7/8/10 26.2 20 20 20 1.05 5.2

47 Long FNCI 4.5s vs FNCL 5s 6/18/10 7/23/10 3.6 20 20 20 0.15 0.8

48 Long FN 4.5s vs payer CMM 4/30/10 8/5/10 -0.9 20 20 20 -0.02 -0.1

49 Long IOS 5.5% vs down-in-coupon 5.5/5.0 6/11/10 8/5/10 73.8 20 20 20 2.96 14.8

50 Long IOS 5 vs down-in-coupon 5/4.5 swap 8/6/10 8/13/10 269 20 20 20 10.76 53.8

51 Short GN/FN 5.5 7/9/10 8/20/10 -53.9 20 20 40 -4.31 -21.5

52 Long FNCL 5.5 fly 7/9/10 8/20/10 -64.5 20 20 40 -5.15 -25.7

53 Short FN 4s hedged with Tsy 8/10/10 8/20/10 69.5 20 20 20 2.78 13.9

54 Short GN/FN 6.5 swap 4/30/10 9/10/10 -62.5 20 20 20 -2.47 -12.4

55 Up-in-coupon 5.5/5 swap 8/27/10 9/16/10 -2.3 20 20 20 -0.18 -0.9

56 Short FNCL 5.0 fly 8/6/10 9/23/10 84.0 20 20 40 6.72 33.6

57 Long GN 5.5 fly 8/20/10 10/7/10 -18.3 20 20 40 -1.46 -7.3

58 Long FN 4s hedged with swaps 8/20/10 10/15/10 71.2 20 20 40 5.71 28.5

59 MBX 6s vs MBS 5s 9/10/10 10/15/10 96.1 20 20 25 4.81 24.0

60 Long FNCL 5s vs FNCI 4.5s 10/8/10 10/29/10 47.1 20 20 20 2.36 11.8

61 Long GN/FN 4s vs GN/FN 4.5s 9/10/10 11/5/10 54.7 20 20 40 4.38 21.9

62 Long FN 5.5/4 swap 10/8/10 11/12/10 86.7 20 20 30 4.34 21.7

63 Long FNCL 5.5s versus swaps 10/15/10 11/12/10 81.6 20 20 30 4.90 24.5

64 Down-in-coupon FN 15y 4.5/3.5 7/30/10 1/7/11 99.9 20 20 20 4.02 20.1

65 Long IOS 5s vs TBA 4s 8/5/10 1/14/11 286.2 20 20 20 11.47 57.466 Short FN 5 fly 12/3/10 1/14/11 -2.3 20 20 30 -0.14 -0.7

67 Down-in-coupon 5/4.5 swap 1/7/11 2/4/11 11.4 15 15 20 0.34 2.3

68 FN 4s + IOS 4.5 vs FN 4.5s 11/5/10 2/11/11 -67.5 20 20 20 -2.69 -13.4

69 Long FN 4s vs swaps 11/12/10 2/11/11 -77.8 15 18 20 -3.27 -17.7

70 Long FN 3.5s vs swaps 1/14/11 2/11/11 -31.8 15 15 20 -0.95 -6.3

71 Down-in-coupon FNCL 5.5/4.5 2/4/11 2/18/11 -40.4 15 15 20 -1.21 -8.1

72 Long FN 4.5s vs swaps 2/11/11 3/4/11 65.9 15 15 20 1.98 13.2

73 Long FN 5s vs swaps 2/11/11 3/18/11 79.8 15 15 20 2.40 16.0

74 Down-in-coupon DW 4.5/4 swap 1/28/11 3/18/11 -20.7 15 15 20 -0.62 -4.1

75 Down-in-coupon FNCL 4.5/4 swap 3/11/11 3/18/11 16.7 15 15 20 0.50 3.4

76 Long FN 4s versus swaps 3/18/11 3/21/11 11.4 15 15 20 0.34 2.3

77 Long Gold/FN 5.5s 2/11/11 3/24/11 -9.4 20 20 40 -1.09 -5.4

78 Down-in-coupon FNCL 5.5/4 swap 3/25/11 4/8/11 -27.2 15 15 20 -0.81 -5.4

79 Short GN/FN 4s 1/28/11 4/15/11 -57.4 15 15 20 -1.71 -11.4

80 Down-in-coupon FNCL 5/4 3/21/11 4/29/11 -54.3 20 20 20 -2.17 -10.8

81 GN/FN 4/5 box trade 2/25/11 5/6/11 -33.6 15 15 20 -1.00 -6.7

82 Down-in-coupon DW 4.5/4 swap 4/15/11 5/6/11 10.2 5 5 20 0.10 2.1

83 Long IOS 6s vs TBA 4s 1/14/11 5/13/11 239.2 20 20 20 9.58 47.9

84 Down-in-coupon DW 4.5/3.5 swap 3/18/11 5/20/11 -32.2 15 15 20 -0.96 -6.4





9 September 2011 36

Figure 3: Retired trades (contd.)



P/L (bp)

total

Equity

($mn)Avg

Equity Leverage

P/L

($mn) % ROE

85 Long Gold/FN 5s 3/25/11 5/20/11 16.4 20 20 40 1.32 6.6

86 Long 30y 4.5s/15y 4s 5/6/11 6/9/11 -4.1 20 20 20 -0.16 -0.887 Long IOS 2010 5s vs TBA 4s 4/1/11 6/17/11 256.6 15 15 15 5.78 38.5

88 Long GN2/GN1 4.5s 4/15/11 6/24/11 -10.5 20 20 40 -0.84 -4.2

89 Long IOS 5.5 03 vs 08 4/15/11 6/24/11 52.5 20 20 20 2.11 10.5

90 Long synthetic 4.5s vs swaps 6/3/11 6/30/11 -61.5 20 20 20 -2.46 -12.3

91 Long 30y 5s vs swaps 5/6/11 7/15/11 2.0 20 20 20 0.09 0.4

92 Long FNCL 5/4 swap 5/6/11 8/5/11 36.9 20 20 20 1.48 7.4

93 Short FNCL 5.5/5 swap 6/10/11 8/5/11 25.4 20 20 20 1.02 5.1

94 Long GN2/GN1 4s 6/24/11 8/11/11 32.4 20 20 40 2.60 13.0

95 Short FN 4.5 fly 7/15/11 8/18/11 60.2 20 20 20 2.41 12.1

96 Long IOS 5 09 vs IOS 4.5 09 6/17/11 8/25/11 -1.8 15 15 15 -0.04 -0.2

97 Short DW 4s/FNCL 4.5s 8/5/11 8/25/11 1.6 40 40 20 0.13 0.3

98 Long FN 4.5s vs 10y Tsy 8/10/11 8/25/11 -83.6 50 50 15 9.38 -18.8

99 Long FN 5s vs 10y Tsy 8/10/11 8/25/11 -99.5 50 50 15 9.09 -18.2


Figure 4: RoE since inception

-20

0

20

40

60

80

100

120

140

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11





9 September 2011 37

CREDIT PORTFOLIO

Portfolio stays level

Our portfolio gained 22bp this week as both CMBS and non-agency markets stayed stable.

Non-agency cash bonds gained modestly, with alt-A and jumbo fixed bonds up 0.5pt and jumbo and alt-A ARMs flat. PrimeX fell marginally, with decreases of around 1/4pt. ABX 07-

1 AAA fell 3/4pts, in line with equities. Our CMBS cash positions were flat, with only carry

gains coming into the portfolio. Our hedged alt-A positions gained, as alt-A increased

modestly and credit hedges rose. The total return on the credit portfolio since inception is

49.5%, and the year-to-date return is -0.78%.

Figure 1: Credit portfolio trade performance,

Portfolio return statistics

YTD

P/L ($mn)

Total

P/L

($mn)

YTD

% ROE

Total

% ROE

1 week

P/L

($mn) 1 week

% ROE

Credit portfolio -1.17 49.5 -0.78 49.5 0.33 0.22

Credit trades

Total P/L

(bp)

1-wk P/L

(bp)

Equity

($mn)

Avg. EQ

($mn)

1 week P/L

($ ‘000)

Total P/L

($ ‘000)

%

ROE

Start

date

Long 2007 Alt-A Hybrid MEZZ 8,780 11 2.8 3.0 3 2,624 87.80 7/10/20

Long Alt-A Fixed WAC pass-through SSNR vsbasket of shorts

5,102 300 6.2 7.0 187 3,612 51.02 7/31/20

Long Alt-A ARM WAC pass-through SSNR vsbasket of shorts

3,429 219 6.9 7.5 151 2,636 34.29 7/31/20

Long 2007 Alt-A Hybrid SSNR 2 4,136 12 4.7 4.9 5 2,026 41.36 11/13/20

Long 2007 Jumbo FIX WAC pass-thoughSSNR (repo-levered)

6,304 106 5.2 4.6 55 2,873 63.04 1/7/201

Long Snr mezz off Prime/Alt-A re-REMIC 2,603 9 5.0 5.0 4 1,301 26.03 3/12/20

Long PrimeX FRM.2 5,720 (140) 3.8 4.4 (54) 2,503 57.20 5/6/201

Long PrimeX FRM.1 13,210 (382) 4.3 4.9 (165) 6,425 132.10 5/21/20

Long Alt-A Fixed SSNR 3,059 82 4.5 4.8 37 1,465 30.59 6/3/201

Long back end re-remics off 2007 GG10 A4s (5,176) 63 1.0 1.0 6 (518) (51.76) 2/4/201

Long 2007 CMBS AMs (8,373) 57 3.0 3.0 17 (2,512) (83.73) 2/4/201

Long 2007 CMBS PAC IOs 9,308 328 1.0 1.0 33 931 93.08 2/4/201

Long 2007 CMBS AMs (2) (8,914) 57 3.0 3.0 17 (2,674) (89.14) 2/24/20

Long 2007 Alt-A Fixed Levered 2,026 312 7.2 7.3 225 1,487 20.26 3/17/20

Long ABX 07-1 AAA unlevered (1,517) (156) 7.4 7.4 (115) (1,126) (15.17) 3/17/20

Long 2007 AJ unlevered (3,816) 14 10.0 10.0 14 (3,816) (38.16) 3/17/20

Long CMBX AA 2 (3,249) 44 5.0 5.0 22 (1,625) (32.49) 4/8/201

Long ABX 07-1 AAA unlevered (2) (1) (156) 7.4 7.5 (116) (0) (0.01) 6/8/201

Long PrimeX ARM.1 225 (107) 1.9 2.0 (21) 44 2.25 6/23/20Long 2006 AM 46 41 5.0 5.0 20 23 0.46 8/8/201

Long 2007 DUPER 280 11 5.0 5.0 6 140 2.80 8/8/201

Note: The performance is from Friday, September 2, 2011, close, to Thursday, September 8, 2011, close. Cash non-agency positions are marked on Wednesday andindices and cash CMBS positions are marked on Thursday. Source: Barclays Capital




9 September 2011 38

Figure 2: Active credit portfolio

Trade

Long

notional

(mn)

Short

notional

(mn)

Hedge

ratio

Equity

($mn) Leverage

Long

current

level

Long

initiatio

n level

Short

current

level

Short

initiation

level

Initiation

date

1 Long 2007 Alt-A hybrid MEZZ 23 2.8 1 8 11 7/10/09

2 Long Alt-A fixed WAC pass-through SSNR

vs basket of shorts

7.7 12.9 6.2 1 79.5 63 86.3* 88.5* 7/30/09

3 Long Alt-A hybrid WAC pass-throughSSNR vs basket of shorts

9.3 15.5 6.9 1 57.6 54 86.3* 88.5* 7/30/09

4Long Alt-A hybrid WAC pass-through SSNR

9.6 4.7 1 57.6 54 11/13/09

5 Long 2007 jumbo FIX WAC pass-throughSSNR (repo-leveraged)

23 5.2 1.7 90.2 86 1/8/10

6 Long sr mezz of prime/alt-A re-REMIC 6.25 5 1 91.5 80 3/12/10

7 Long PrimeX FRM.2 50 3.8 10 99.0 100 5/6/10

9 Long PrimeX FRM.1 50 4.3 22 105.8 105.5 5/21/10

10 Long 2007 Alt-A fixed SSNR 7.7 4.5 1 69.5 65 6/3/10

11 Long back end re-REMICs off 2007 GG10A4s (repo-leveraged and duration hedged)

5 1 1 5 S + 515 S + 270 2/4/11

12 Long 2007 AMs (repo-leveraged andduration hedged)

15.1 1 3 5 S + 710 S + 250 2/4/11

13 Long 2007 PAC IOs (repo-leveraged andduration hedged)

500 1 1 5 T + 450 T + 400 2/4/11

14 Long 2007 AMs (repo-leveraged andduration hedged)

14.9 1 3 5 S + 710 S + 235 2/24/11

15 Long 2007 Alt-A fixed (repo-levered) 36.6 7.2 4 79.5 82 3/17/11

16 Long ABX 2007-1 AAA (cash basis) 17.3 7.4 1 36.9 43.25 3/17/11

17 Long 2007 AJ (duration hedged) 12.7 1 10 1 S+1530 S+800 3/17/11

18 Long CMBX.AA.2 6.27 5 1 53.7 79.75 4/8/11

19 Long ABX 2007-1 AAA (cash basis) 20.38 7.5 1 36.9 36.8 6/8/11

20 Long PrimeX ARM.1 48 1.9 24 103.5 104.1 6/23/11

21 Long 2006 AM (duration hedged) 5.3 1 5.0 1 S + 580 S + 600 8/8/11

22 Long 2007 DUPER ( duration hedged) 4.9 1 5.0 1 S + 320 S + 375 8/8/11

Equity invested 100.4

Cash available 26.4

Note: * Levels are calculated for a basket of shorts consisting of 1 part CMBX AJ.4 and 3 parts CDX.HY. The performance is from Friday, September 2, 2011, close, toThursday, September 8, 2011, close. Cash non-agency positions are marked on Wednesday and indices and cash CMBS positions are marked on Thursday.Source: Barclays Capital




9 September 2011 39

Figure 3: Retired trades

Trade

Equity

($mn) Leverage

Initiation

date

Initiation

level Closing date

Closing

level

Total PL

($’000)

Total ROE

(%)

1 Long ABX 07-1 PAAA vs 07-1 AAA 0.9 1 1/15/09 2.5 3/5/09 6.5 400 44.49

2 Long 2007 Alt-A FRM SSNR 10 1 3/4/09 43 4/30/09 58 3702 37.02

3 Long 2007 Alt-A FRM sr mezz 2.5 1 3/4/09 13 4/30/09 20 1566 62.65

4 Long 1H06 and prior CMBS AM 4.3 1 3/24/09 41.3 5/7/09 55.2 1225 28.32

5 Long 2006 option ARM SSNRs from XS OC deals 9 1 1/15/09 44 6/4/09 41 (251) (2.8)

6 Long 2007 subprime 3rd CF from imp pro-rata deals 6.6 1 1/15/09 32 6/4/09 31 (381) (5.8)

7 Short CMBX.BBB-.1 10 1 5/15/09 22 6/18/09 15 690 8.85

8 Long 2005 vintage LCF super duper

(hedged with swaps)

8.7 1 6/29/09 S+495 7/10/09 S+300 bp 1057 12.14

9 Long recent vintage CMBS A2 classes 7.79 1 1/15/09 78 7/14/09 96 2295 24.4

10 Long ABX 06-2 PAAA 7.5 1 3/5/09 60 7/15/09 64 1022 13.1

11 Long 2006 option ARM SSNRs from XS OC deals

Mar 2009

9 1 3/12/09 34 7/23/09 49 4580 50.9

12 Long 2007 alt-A ARM SSNR 4.8 1 5/28/09 48 10/2/09 60 1538 31.9

13 Short CMBX.A.3 2 3.4 1 9/25/09 32.2 10/26/09 21.3 545 16.0

14 Long ABX 06-2 AAA vs PAAA 10 1 10/22/09 28.5 2/12/09 24.75 1193 11.93

15 Long CMBX.AJ.2, short CMBX.AM.2 5 1 2/9/10 16.4 4/16/10 8.9 1193 14.9

16 Long CMBX.AJ2 vs short CMBX.AJ.5 5 1 11/20/09 5.3 5/10/10 16.7 1076 21.5

17 Short CMBX.A.3 7.9 1 7/30/09 21.5 6/24/10 27.04 (957) (9.57)

18 Short CMBX.A.4 vs CMBX A.3 10 1 7/16/09 0.4 6/24/10 3.13 852 8.52

19 Long ABX 07-2 AAA 3 1 1/7/10 36.3 7/01/10 40.83 1,131 11.31

20 Long 2007 jumbo hybrid SSNR 10 1 5/28/09 59 8/25/10 80 3,140 49.38

21 Long 2006 CMBS AM 11.7 1 7/15/10 85.1 9/29/10 94.4 1,291 12.91

22 Long PrimeX ARM.1 vs short ARM.2 10 1 4/29/09 7.5 10/13/10 7.7 254 2.54

23 Long 2006 CMBS AJ 10 1 8/5/10 74.8 10/20/10 86.3 1539 15.39

24 Long Basket TALF-eligible consumer ABS 3.5 12.4 6/3/09 100 2/16/11 115.2 1545 43.1

25 Long Basket 2009 TALF-eligible ABS 2 1.9 12.7 7/7/09 100 2/16/11 118.9 1196 60.8

26 Long basket 2009 TALF-eligible ABS 3 1.6 13.1 8/13/09 100 2/16/11 116.9 998 62.8

27 Long basket 2009 TALF-eligible ABS 4 3.9 12.1 9/2/09 100 2/16/11 116.4 2536 65.2

28 Long CMBX.AM2 vs short CMBX.AM.5 10 1 5/10/10 4.1 4/6/11 3.1 (464) (4.64)

Note: The initiation long price levels are the offer-side marks for the cash bonds as of the initiation date; the long current level is the bid-side mark for the cash bond atthe current reporting date. Similarly, the initiation short price is the offer-side mark for protection at the initiation date, and the short current level is the bid-side markfor protection at the current reporting date. We will assume appropriate bid offers as observed in the market for our trade initiation and termination dates.Source: Barclays Capital

Figure 4: ROE since inception (%)

-10

0

10

20

30

40

50

60

70

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11





9 September 2011 40

US SECURITISATION STRATEGY ANALYSTS

Ajay RajadhyakshaHead of US Fixed Income andSecuritised Products Strategy+1 212 412 [email protected]

Joseph AstorinaABS Strategy+1 212 412 5435

[email protected]

Sandeep BordiaUS RMBS and CMBS Strategy+1 212 412 [email protected]

Mukul ChhabraAgency MBS Strategy+1 212 412 [email protected]

Derek ChenAgency MBS Strategy+1 212 412 [email protected]

Sandipan DebUS RMBS and CMBS Strategy+1 212 412 [email protected]

Aaron HaanUS RMBS+1 212 412 [email protected]

Sarah JohnsABS Strategy+1 212 412 [email protected]

Shweta KapadiaAgency MBS Strategy+1 212 412 [email protected]

Dennis LeeUS RMBS and CMBS Strategy+1 212 412 [email protected]

Wei-Ang LeeAgency MBS Strategy+1 212 412 [email protected]

Keerthi RaghavanUS RMBS and CMBS Strategy+1 212 412 [email protected]

Siddarth RamkumarAgency MBS Strategy+1 212 412 [email protected]

Nicholas StrandAgency MBS Strategy+1 212 412 [email protected]

Robert TayonABS Strategy+1 212 412 [email protected]

Julia TcherkassovaUS RMBS and CMBS Strategy+1 212 412 5977

julia. [email protected]

Jasraj P. VaidyaUS RMBS and CMBS Strategy+1 212 412 2265

[email protected]



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