507068

Securitized Products Research | Americas
MGM Mirage Securitized Products Weekly Credit Research | United States

0 6 AP R I L 2 0 1 2
Agency MBS: Market Overview and Relative Value

During the past week, 30-year production coupon mortgages were on spread to marginally tighter versus their Treasury hedges but outperformed their swap hedges by 5-6 ticks. The monthly Foreclosure prevention and refinance report released by the FHFA showed that HARP refinancing volume more than doubled from 23k loans in December to 56k loans in January which seems to be due to front running of LLPAs increase. Agency MBS spreads versus Treasuries have been remarkably stable even as the 10-year Treasury had moved in a wide range over the past few weeks, which is probably an indication that there is very little conviction in the market on the direction of MBS spreads. We continue to suggest investors remain neutral and wait for a better entry point to overweight agency MBS. We continue to recommend an underweight on 15-year MBS versus 30-year MBS and shorting the GN II 4.0s butterfly. Fixed Income Research
Contributing Research Strategists
Ohmsatya Ravi
+1 212 667 2338 ohmsatya.ravi@nomura.com
Gaetan Ciampini
+1 212 667 2408 gaetan.ciampini@nomura.com
Dhivya Krishna
+1 212 667 2183 dhivya.krishna@nomura.com
Agency MBS: March Prepayment Commentary

30-year Fannie and Freddie prepayment data for March were released yesterday which showed that speeds increased by 4-5% month-over-month and were significantly slower than our projections for a 20% increase. The two short-term factors that we had incorporated in our forecast the impact of the g-fee increase and daycount- didnt seem to have impacted prepays materially. We discuss the possibility of attributing the slower than expected overall speeds to TPO originations and lower pull through rates later in this article.
Arun Manohar
+1 212 667 9360 arun.manohar@nomura.com
Ankur Mehta
+1 212 667 2330 ankur.mehta@nomura.com
Mortgage Credit: Home Price Outlook and Analysis of Current Pay Bonds
In the non-agency market, flows were relatively light this week and prices remained firm despite increased macro volatility. We discuss our latest home price outlook and expectations for shadow inventory liquidations and investor demand. We continue to expect nationwide home prices to fall by 3% through 1Q2013 in our base case scenario. Separately, we analyze historical returns and various metrics for calculating carry on current-pay bonds.
Paul Nikodem
+1 212 667 2130 paul.nikodem@nomura.com
Lea Overby
+1 212 667 9479 lea.overby@nomura.com
Steven Romasko
+1 212 298 4854 steven.romasko@nomura.com
Consumer ABS
Despite the shorter week and broader market volatility, the consumer ABS market held firm with generic spreads remaining flat. There were three new issue deals that were upsized due to investor demand remaining firm in the sector. FFELP released its updated rating criteria for FFELP loans and has put $7.5bn worth FFELP bonds on downgrade watch.
Kunal Singal
+1 212 667 1814 kunal.singal@nomura.com
Sean Xie, CFA

+1 212 667 9081 sean.xie@nomura.com
CMBS: Loan Performance at Maturity

CMBS spreads widened significantly on the week led by macroeconomic concerns in Europe and a hawkish Fed statement. In the news, we highlight Red Lion Hotels. We also include an analysis of loan performance at maturity in our Special Topics section.
Table of Contents
Agency MBS: Overview Agency MBS: Prepays Mortgage Credit Consumer ABS CMBS Market
Page
2 7 11 23 26
Nomura Securities International Inc.
See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
Nomura | Securitized Products Weekly
06 April 2012
Agency MBS: Market Overview and Relative Value

Recent Performance and Market Flows
During the past week, 30-year production coupon mortgages were on spread to marginally tighter versus their Treasury hedges but outperformed their swap hedges by 5-6 ticks (Thursday-Thursday closes). Swap spreads have widened 4-6bp, implied volatilities in interest rate options markets have declined 2-4bp and LOASs of production coupon mortgages have tightened 5-6bp over the week. The lower coupon GN/FN swaps have appreciated by 2-3 ticks due to the pickup in buying of GNMA MBS by overseas investors. Although the week-over-week changes in interest rate levels were fairly small, there was high volatility in the rates market this week first due to the release of the minutes of the March FOMC meeting and then due to renewed concerns about Euro-area growth and the weaker than expected nonfarm payrolls number released this morning. On prepayments front, 30-year Fannie and Freddie prepayment data for March were released yesterday which showed that speeds increased by 4-5% month-over-month and were significantly slower than our projections for a 20% increase. The two short-term factors that we had incorporated in our forecast the impact of the g-fee increase and daycount didnt seem to have impacted prepays materially. Surprisingly, even though the MBA refi index was trending higher, overall speeds actually declined after adjusting for the higher day-count in March versus February. On the positive side, the latest prepay print gives us more confidence around our longer-term prepayment views related to HARP 2.0. The total pay-downs to be received by the Fed in April due to paydowns in March are equal to $27.2bn. The gross and net issuances of agency MBS in March were $155bn and $23bn, respectively. Over the past few trading sessions, the April/May dollar rolls on higher coupon 30-year MBS passthroughs (FN 4.5s-6.0s) have declined by about 1.0-1.5 ticks. There was a similar decline in Mar/Apr rolls as well last month as we got closer to the TBA settlement date and a few investors are wondering if the recent decline in dollar rolls of higher coupon MBS is overdone. In Figure 1, we show the current levels of Apr/May rolls, implied B/E speeds and actual 1-mo and 3-mo speeds from March through-the-box reports. Based on historical speeds on pools delivered towards TBA in March and the expected prepay speeds in April, we think that the recent decline in dollar rolls of higher coupons is justified and, if anything, there is potentially more downside.
Ohmsatya Ravi +1 212 667 2338
ohmsatya.ravi@nomura.com
Ankur Mehta +1 212 667 2330

ankur.mehta@nomura.com
Dhivya Krishna +1 212 667 2183

dhivya.krishna@nomura.com
Arun Manohar
Fig. 1: April/May Dollar Roll Levels and Implied B/E Speeds
TBA FNCL 4.5s FNCL 5.0s FNCL 5.5s FNCL 6.0s
April/May Dollar Roll 4.875 5.250 5.000 4.750
Implied B/E Speed 34.0 31.5 33.5 34.5
March TTB Report 1-mo CPR 3-mo CPR 44.0 39.0 33.0 31.0 46.0 40.0 47.0 37.0
Source: Nomura Securities International. The data quoted under March TTB Report are our estimates based on numbers reports by a sample of dealers. We believe these numbers to be a reasonable representation of TBA deliverable speeds. The assumed funding rate is 20bp.
While we have been arguing for a few months that long-term supply/demand technicals are strongly We YieldBook, the agency MBS market even without QE 3 involving agency MBS, we are mindful of the positive for Ginnie Mae, Nomura Securities International short-term impact of the changing expectations for QE 3 involving agency MBS on agency MBS spreads. On Tuesday, the Fed released minutes of the March FOMC meeting which led to a sharp selloff in the rates market and MBS spread widening. Specifically, our rates strategists highlight the following change in the language of the FOMC statement from January to March. In the January minutes, there was a statement "A few members observed that, in their judgment, current and prospective economic conditionsincluding elevated unemployment and inflation at or below the Committees objective could warrant the initiation of additional securities purchases before long".
06 April 2012
That changed in March to saying "A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate consistent rate of 2 percent over the medium run". Thus, it appears that there is a clear shift in stance where in status-quo no longer requires easing. In addition, we thought that the this statement set up the market to sell-off further into NFP and beyond if the employment number came in above expectations. However, due to renewed concerns about the Euro-area growth and the weak March employment print, the 10-year treasury rallied by 22bp (close to 2.08%) and increased the probability of QE 3 again. In addition, the mortgage market moved comfortably away from the likely point of the onset of convexity related flows and it is hard to see agency MBS widening meaningfully at current rate levels. It is worth highlighting that agency MBS spreads versus Treasuries have been remarkably stable even as the 10-year Treasury had moved in a wide range over the past few weeks, which is probably an indication that there is very little conviction in the market on the direction of MBS spreads. We continue to suggest investors remain neutral and wait for a better entry point to overweight agency MBS.
FHFA Reports Doubling of HARP Volumes in January1

FHFA released their monthly Foreclosure prevention and refinance report for January earlier this week. Figure 2 shows the time series of borrowers that have refinanced through the HARP program, and borrowers that have used the GSE streamline refinance program (borrowers that satisfy the HARP cutoff date but have an LTV less than 80%) as reported by FHFA. The following points are worth highlighting about the January data: Overall HARP Volume: The report showed that HARP refinancing volume more than doubled from 23k loans in December to 56k loans in January- very close to the 50k number 2 quoted by HUD Secretary Shaun Donovan at the end of February . The total HARP volume in January was close to the record volume seen in December 2010. Fannie vs. Freddie: The percentage increase in HARP loan closings was more in Freddie (283% month-over-month increase) versus Fannie (211% increase). Streamline Refinancings: Although HARP loan volume increased substantially, the volume of streamline refinance loans (borrowers that satisfy the HARP cutoff date but have an LTV less than 80%) declined from 82k in December to 63k in January (23% decline).The decline was more prominent for Freddie (~28%) than Fannie (~20%).
Fig. 2: HARP and Streamline Refinance loan volume though Fannie and Freddie
70,000
60,000
50,000
# of Loans
40,000
30,000
20,000 10,000
Fannie HARP Fannie Streamline

Source: FHFA, Nomura Securities International
Freddie HARP Freddie Streamline
1 A majority of this section is a reprint of the short notes published on April 4, 2012 2 Please see the short note titled Re-assessing the HARP 2.0 Prepay Risk published on March 1, 2012 for details. 3
06 April 2012
What surprised us the most about the sharp increase in HARP volume reported by FHFA is the fact that January prepayments did not really show a corresponding increase in speeds on high LTV loans. Figure 3 shows speeds on HARP eligible Fannie and Freddie MBS for pools with current LTV less than and greater than 80%. We also show the speeds on HARP eligible loans implied by the FHFA 3 report in Figure 4 . Prepayments on high LTV pools (current LTV greater than 80%) saw a 0-2%CPR month-over-month decline in January for both Fannie and Freddie MBS. At the same time, the prepayments implied by the FHFA report actually indicate a 4%-7%CPR jump in speeds on HARP eligible pools. Prepayments on pools with current LTV less than 80% were more consistent with the decline in streamline refinance applications shown in the FHFA report.
Fig. 3: Prepays on HARP Eligible Pools by Current LTV

40%
Fig. 4: Estimated Prepays Attributed to HARP Refinancings

14% 12% 10% 8% 6% 4% 2% 0%
Sep-10 Mar-11 Sep-11 Jul-10 Jan-11 Jul-11 Nov-11
Nov-10
35%
30%
CPR (%)
25% 20%
15%
10% 5%
LTV>80 speeds flat to slightly down
Freddie <=80 LTV Fannie <=80 LTV
May-11
Freddie >80 LTV Fannie >80 LTV
Freddie HARP CPR
Source: Fannie Mae, Freddie Mac, FHFA, Nomura Securities International Estimates
We think that the factor that most convincingly explains this decoupling is related to the LLPA reduction that took place as part of HARP 2.0. Basically, the GSEs reduced the LLPA cap on HARP loans from 2% to 75bp starting January 1st, 2012. This reduction in LLPAs was based on when the loans were sold to the GSEs. It is possible that even though the rate of HARP loan closings was roughly the same in December and January (as reflected by the prepayments on pools with current LTV greater than 80% which stayed more or less unchanged in the two months), lenders held on to a large portion of these loans in December and sold them to the GSEs in January once the lower LLPAs became effective. In other words, the HARP loan closings remained unchanged between January and December but the volume of loans sold to the GSEs was artificially lower for the month of December and higher for the month of January. For example, any HARP borrower with an LTV>97% was being charged an LLPA of 1% or higher by Fannie and Freddie till January 1st, 2012. If the lender would have held on to this loan in their portfolio and sold it after January 1st, 2012, they would have had to pay the GSEs an LLPA of no more than 75bp. We estimate that 40-50% of HARP loans had an LTV greater than 97% towards the end of last year. Overall, we estimate that 50-60% of HARP loans were impacted by the reduction in LLPAs as part of HARP 2.0. This would explain the 35-37% drop in HARP volumes in December and the sharp reversal in January. The front-running of LLPAs explains both the trends seen in prepayments, and in the volume of HARP loans sold to the GSEs as reported by FHFA. To adjust for this whipsaw, we think it is more appropriate to compare the average HARP volume in December/January (~40k) to the volume in November (~36k) to see the impact of HARP. This suggests an increase of only 9% in HARP volumes.
These estimates use the FHFA HARP volume numbers for 80-125%LTV loans to arrive at HARP prepays 4
May-11
Sep-10
Mar-11
Sep-11
Mar-12
Jan-11
Nov-11
Nov-10
Jan-12
Fannie HARP CPR
Jan-12
0%
Jul-10 Jul-11
CPR (%)
06 April 2012
GNMA MBS: Underweight GN 4.0s versus GN 3.5s and 4.5s4

Trade #1: Short GN II 4.0s Butterfly (Since 4/3/2012)
The GN I 4.0s butterfly has spiked up from 1-03 to 1-20+ and the GN II 4.0s butterfly has spiked up from 0-28 to 1-21+ since the beginning of the year and, at their current price levels, both GN I and GN II 4.0s butterflies are looking quite rich to our models (Figure 5). We now recommend an underweight on GN 4.0s versus GN 3.5s and GN 4.5s across the GNMA coupon stack for real money investors and will track the performance of GN II 4.0s fly starting with its current level of 1-19+ for May settlement for this trade (the GN I and GN II 4.0s flies have positive carry of 2.0 ticks per month at the moment). Although a portion of the recent richening of GN 4.0s butterflies could be attributed to markets nervousness about the possibility of changes to MIP on streamline refinancing of pre-May 2009 originated FHA collateral adversely impacting GN 4.5s valuations, this is true only for GN I 4.5s. The outstanding true float of pre-May 2009 GN II 4.5s is very limited and GN II 4.5s TBA is unlikely to be impacted by any changes in MIP structure for streamlined refis of pre-May 2009 collateral. Consequently, we are choosing to put this trade in GN II 4.0s fly instead of in GN I 4.0s fly. The primary risk to this trade is that GN 4.0s flies could spike another 3-5 ticks higher if buying of GNMAs by overseas investors turns out be stronger than anticipated in April (Japan's new year). Note that shorting the GN II 4.0s fly is exactly the same trade we initiated on March 2 and recommended taking the 7.5 ticks profit on March 21. As GN 4.0s butterflies have spiked higher again since then, we are reinitiating the short GN II 4.0s butterfly trade.
Fig. 5: Recent Price History of GN I and GN II 4.0s Butterflies
70.0
60.0
Price (ticks)
50.0
40.0
30.0
20.0
10.0
0.0
GN I 4.0s Butterfly
Source: YieldBook, Nomura Securities International
GN II 4.0s Butterfly
Relative Value in the Agency Passthrough Market

Trade #1: Short DW 3.5s versus FN 4.0s and FN 4.5s (Since 3/21/2012) Trade #2: Short DW 4.0s versus FN 4.5s and FN 5.0s (Since 3/21/2012) Trade #3: Take Profits on Long 30-year GD/FN 3.5s Swap (Since 02/02/2012)
This trade was initiated in a short report published on April 3 when the GN II 4.0s fly was bid at 1-21+. As of now, the GN II 4.0s fly seems to be trading at around 1-23/1-24. 5
06 April 2012
Figures 6 and 7 show valuations of the 30-year and 15-year coupon stacks on our models as of yesterdays close (the results from YieldBook models adjusted to reflect our expectations for prepayment speeds). Across both the 15-year and 30-year coupon stacks, lower coupon passthroughs are looking slightly cheaper than higher coupon passthroughs but we view down-incoupon trades as only marginally attractive at this point. The main relative value opportunity within the passthrough market we like is to be short 15-year/30-year coupon swaps. Although 15-year MBS have lagged 30-year MBS by 2-3 ticks since we first recommended shorting 15-year/30-year swaps on March 21, we believe that the 15-year MBS sector still quite rich and the continue to recommend shorting DW 3.5s and DW 4.0s versus FN 4.0s-5.0s. The current rates environment (the 10-year Treasury is back at 2.08% which is good for carry trades) and the possibility of QE 3 expectations increasing following the weaker than expected employment print released this morning are additional positives for shorting 15-year/30-year coupon swaps. Our strategy team recommended buying the GD/FN 3.5s swap on February 2 when this swap was offered at -8.25 ticks for March settlement. The same swap is being bid at -7 ticks at the moment and also offered a positive carry of 0.5-0.75 ticks from March/April dollar rolls. We now recommend taking profits on this trade (1.75-2.0 ticks including carry) as the upside to this trade is very limited and GD/FN swaps typically take a long-time to realign close to their fair value. However, real money investors looking for adding lower coupon MBS should still buy Golds instead of FNMA MBS.
Fig. 6: Valuations of the 30-year Coupon Stack (as of April 5, 2012)

Security FNCL 3.5s FNCL 4.0s FNCL 4.5s FNCL 5.0s FNCL 5.5s FNCL 6.0s TBA Assumption (Apr) 2 WALA, 4.05 GWAC, $280 K 16 WALA, 4.50 GWAC, $280 K 28 WALA, 5.00 GWAC, $280 K 34 WALA, 5.50 GWAC, $260 K 43 WALA, 6.05 GWAC, $230 K 43 WALA, 6.52 GWAC, $230 K Yield 2.92% 2.44% 1.94% 1.82% 1.34% 1.46% Tsy ZV (bp) Swap ZV (bp) Tsy OAS (bp) LOAS (bp) 78 89 79 71 39 43 Duration 5.48 2.95 1.43 1.09 0.68 1.44 Convexity -2.53 -4.12 -3.32 -3.44 -2.35 -0.86 1-yr Speed 6.0 23.8 33.8 33.3 35.1 34.3
85 100 95 89 63 67
20 20 17 17 10 30
11 7 1 0 -12 8
Fig. 7: Valuations of the 15-year Coupon Stack (as of April 5, 2012)

Security FNCI 2.5s FNCI 3.0s FNCI 3.5s FNCI 4.0s FNCI 4.5s TBA Assumption (Apr) 2 WALA, 3.16 GWAC, $260 K 2 WALA, 3.45 GWAC, $260 K 16 WALA, 3.95 GWAC, $250 K 20 WALA, 4.45 GWAC, $240 K 26 WALA, 4.95 GWAC, $210 K Yield 2.16% 2.14% 1.80% 1.75% 1.63% Tsy ZV (bp) Swap ZV (bp) Tsy OAS (bp) 26 38 41 43 42 LOAS (bp) -2 -5 -8 -5 6 Duration 4.68 3.59 1.73 1.32 1.23 Convexity -1.12 -2.41 -2.92 -2.60 -1.97 1-yr Speed 5.0 7.7 24.7 31.3 32.9
43 55 62 64 65
16 13 13 16 29
06 April 2012
Agency MBS: March Prepayment Commentary5

30-year Fannie and Freddie prepayment data for March were released yesterday which showed that speeds increased by 4-5% month-over-month and were significantly slower than our projections for a 20% increase. The two short-term factors that we had incorporated in our forecast the impact of the g-fee increase and daycount- didnt seem to have impacted prepays materially. Surprisingly, even though the MBA refi index was trending higher, overall speeds actually declined after adjusting for the higher day-count in March versus February. We discuss the possibility of attributing the slower than expected overall speeds to TPO originations and lower pull through rates later in this article. Some important themes from the latest prepay release were as follows: Lower Coupons: Prepay speeds on lower coupon 30-year Fannie Mae MBS (4.0s and 4.5s) increased by 5-6%. Higher Coupon Speeds and HARP 2.0: Higher coupon 30-year Fannie Mae speeds (5.5s and 6.0s) increased by 6-8%. Although this speed increase seems to be fairly muted at an aggregate level, after adjusting for buyouts, voluntary speeds on higher coupons increased by 15-35% month-over-month. Fannie vs. Freddie Speeds: The overall increase in 30-year speeds was fairly consistent across Fannie and Freddie, but speeds increased a lot more for higher coupon Freddie MBS while the speed increase for lower coupon Freddie MBS was less when compared to equal coupon Fannie MBS. For example, speeds on Gold 6.0s and 6.5s increased 13-14% whereas speeds on similar coupon FNMA MBS increased by 8-9%. On the other hand lower coupon (4.0s and 4.5s) Golds were flat to up 4% whereas Fannies were up 5-6%. We think that the sharper increase in Gold speeds took place as Gold speeds for Citi and Bank of America increased much more to catch up with the Fannie speeds for these two servicers. Servicer Distribution: Speeds increased across the big four servicers with the most significant increase occurring for Bank of America and Citi Gold pools. 15-years: Speeds on 15-yr Fannie Mae MBS increased by 5%. The speed increases were more concentrated in lower coupons with 15-year 3.0s increasing 13% and 3.5s-5.0s increasing 4-7%. GNMA: 30-year GN I and II speeds increased by 11% and 13% respectively. Some of the increase in higher coupon speeds seems to have occurred due to buyouts by Bank of America. Fed Paydowns: Fed paydowns were $27.2bn for the month of March.
Ankur Mehta +1 212 667 2330

ankur.mehta@nomura.com
Dhivya Krishna +1 212 667 2183

dhivya.krishna@nomura.com
Arun Manohar
Explaining the Slower than Expected Prepayments

As discussed previously, speeds came out much slower than Street's expectations. Market participants were expecting speeds to increase 15-20% as a result of higher day count, some impact of the g-fee increase and an increase in the MBA refi index. Although there was probably some disagreement on the magnitude of the impact of the first two factors, it was generally agreed upon that they would lead to a short-term boost to prepayment speeds. This suggests that speeds actually slowed down by at least 5% after adjusting for these two factors (assuming day count alone increased speeds by 10%). This is baffling as the MBA refi index alone suggests that speeds should have increased by around 8%. We explore three different possibilities:
A majority of this section is a reprint of the short note published earlier today.
7
06 April 2012
Is the MBA Index Artificially Higher? Both the MBA and originators have been highlighting the sharp increase in HARP applications since the HARP 2.0 program was rolled out late last year. Note that a surge in HARP applications has a more profound impact on the MBA refinancing index as the survey only includes retail applications and HARP loans typically tend to be processed through this channel. Another factor that could be potentially causing the MBA index to overstate refinancing activity recently is a decline in TPO volume. To highlight the impact of TPO %, let us focus on Figure 1 where we consider two hypothetical indices the Total Refi Index which reflects overall refi activity (TPO and retail) and the Retail Refi Index, which, similar to the MBA index, only captures retail activity. Let us assume that the total refi volume remains unchanged from month 1 to month 2 as reflected by the 8000 points on the survey but the TPO% declines from 50% to 40%. In this scenario, even though overall activity has remained unchanged, the Retail Refi Index shows a 20% increase showing how a change in the TPO percentage can artificially distort the index. Figure 1 shows the percentage of loans that have been originated through the TPO channel by origination month. This ratio has declined from a high of around 48% to 39% recently. Although the decline has not been a one month phenomena, it does show that TPO percentage has been declining, which could have inflated the MBA index readings for certain weeks.
Fig. 1: Assessing the Impact of a Change in TPO % on the Refi Index
Month 1 Month 2
Total Refi Index 8000 8000
TPO % 50% 40%
Retail Refi Index Change in Retail Refi Index 4000 4800 20%
Source: Nomura Securities International
Fig. 2: TPO Percentage for Fannie and Freddie MBS by Origination Month
50%
48%
46% 44%
TPO (%)
42%
40%
38%
36% 34%
32%
30%
Source: Fannie Mae, Freddie Mac, Nomura Securities International
Decline in Pull-through Rates The pull through rate indicates what percentage of mortgage applications eventually close. The average pull through rate has recently been between 60-70%. Presumably, this pull through rate is different for loans with good credit quality and low LTV, versus HARP loans which typically tend to be of higher risk. Anecdotally, we have heard that HARP 2.0 applications are being declined for reasons ranging from high LTV ratios to high debt ratios of the borrower. At the same time, MBA and lenders have been reporting that they have seen a surge in HARP applications over the past couple of months since HARP 2.0 was announced. This could have not only led to the artificial increase in the refinancing index (as highlighted before), but could have also resulted in lower overall pull through rates which slowed down prepayments. Although this may explain the more muted increase in speeds for the HARP eligible collateral, it does not convincingly explain the lower than expected increase on lower coupon speeds (non-HARP collateral).
06 April 2012
Capacity and Loan Size Two other factors that could have caused speeds to be slower than expected are: 1) capacity constraints and 2) reduction in average loan size. However, even if we assume that originators were at capacity last month (February), speeds should still have increased by at least 10% as indicated by day count. Further, the larger portion of HARP loans that closed in March should have led to more capacity as these loans are easier to underwrite. A quick look at the average loan size of paid off loans shows no significant difference from the prior month indicating that the slower than expected speeds cannot be explained by loan size variation either.
HARP Continues to Increase Higher Coupon Speeds

Figure 3 shows voluntary prepay speeds on 30-year Fannie and Freddie MBS. After adjusting for buyouts, 30-year higher coupon speeds increased by 15-35%. The speed increase in Golds was higher than the increase seen in FNMA MBS.
Fig. 3: Voluntary Speeds on 30-year Fannie and Freddie MBS
Freddie
Coupon 4 4.5 Vintage 2010 2009 2010 2009 2005 5 2010 2009 2008 2007 2005 5.5 2009 2008 2007 2006 2005 6 2008 2007 2006 2005 6.5 2008 2007 2006 Apr-12 21.3 35.5 26.8 36.0 35.4 18.9 28.3 39.2 30.2 31.9 19.7 32.1 29.9 31.2 28.9 28.0 24.8 28.8 22.4 20.0 19.8 24.3 Mar-12 21.0 32.9 26.6 33.9 34.7 17.9 25.8 36.9 27.0 29.0 20.3 30.4 24.9 25.5 24.9 23.9 21.0 22.5 17.8 18.5 15.6 18.0 Change 1% 8% 1% 6% 2% 6% 10% 6% 12% 10% -3% 6% 20% 22% 16% 17% 18% 28% 26% 8% 27% 35% Apr-12 22.7 33.6 25.2 35.3 33.5 17.7 25.5 36.3 32.1 28.8 19.0 30.8 29.6 28.1 22.3 25.1 22.1 23.2 14.5 18.7 15.8 17.4
Fannie
Mar-12 21.5 29.7 24.3 33.1 31.2 16.3 24.1 36.2 28.1 26.2 16.2 28.7 26.1 25.4 19.8 21.7 18.8 19.8 12.0 15.2 12.9 13.1
Change
5% 13% 4% 7% 7% 9% 6% 0% 14% 10% 18% 8% 13% 11% 13% 16% 18% 17% 20% 23% 23% 33%
Source: Fannie Mae, Freddie Mac, Nomura Securities International
Servicer Level Trends

Figure 4 shows prepay speeds by servicer for 2006-08 vintage 30-year Gold loans. Prepays continued to increase for all the major servicers with the sharpest increases occurring for Citi and Bank of America. The increase in speeds for BofA serviced Gold pools now brings them in line with speeds observed on Fannie pools last month. Although we do not have servicer level data for Citi, it seems that Fannie Citi loans were paying 10%CPR faster than Golds last month and there was a catch up this month for Citi as well. The convergence in Gold and Fannie Bank of America and Citi speeds seem to have led to a faster increase in Gold speeds.
06 April 2012
Fig. 4: Prepay Speeds on 2006-08 Vintage 30-year Gold Loans by Servicer

60
50
40
CPR (%)
30
20 10
Bank of America
Chase
Citi
Wells Fargo
Source: Freddie Mac, Nomura Securities International
GNMA: Bank of America buyout

Figure 5 shows the speeds for last month and this month by issuer for GN 1 pools. The sharp increase in speeds for 6s and 6.5s for Bank of America issued pools stands out. It is very likely that a 6 significant portion of this increase was due to the buyout of delinquent loans . However, it is interesting that the buyouts were only concentrated in the higher coupons.
Fig. 5: Prepay Speeds on GN I pools by Coupon and Issuer

60% 50% 40%
CPR (%)
30% 20% 10% 0%
4.0 4.5 5.0 5.5 6.0 6.5 4.0 4.5 5.0 5.5 6.0 6.5 4.0 4.5 5.0 5.5 6.0 6.5
BofA Mar-12
Source: Ginnie Mae, Nomura Securities International
Chase Apr-12
Wells
We do not have buyout related data available for GNMAs yet.

10
06 April 2012
Mortgage Credit
Market Overview
In subprime, there was a pick-up in volumes mid-week and prices remained firm despite increased volatility in broader markets. Flows were concentrated in levered seasoned mezzanine bonds that traded at strong levels on the back of strong retail demand. There was also meaningful activity in the Option ARM market despite the shorter week and broader market weakness. Total BWIC volumes were approximately $1.2bn in subprime and $500mn in Option ARM. In prime and Alt-A, flows were relatively muted throughout the week, although prices remained firm despite the increased macro volatility and the sell-off in index products. There were notable flows in seasoned hybrids and dented floaters. Total BWIC volumes were approximately $220mn in prime and $500mn in Alt-A. A summary of trading volumes from TRACE is provided later in this section.
Paul Nikodem
+1 212 667 2130

paul.nikodem@nomura.com
Sean Xie, CFA
+1 212 667 9081

sean.xie @nomura.com
Arun Manohar
+1 212 667 9360

arun.manohar@nomura.com
News Overview
Home Prices (CoreLogic, Trulia): The CoreLogic Home Price Index (excluding distressed sales) was up 0.7% in February over the previous month, but was 0.8% down year-on-year. Including distressed sales, the index declined approximately 2% on the year and 1% relative to the previous month. According to Trulias recently launched Price Monitor, the seasonally-adjusted asking price on forsale homes increased 1.4% in 1Q2012. Month-over-month, the asking price increased by nearly 1% in March. According to the metric, Miami, Phoenix and Pittsburgh rank amongst the top 5 MSAs with highest year-over-year increases while Seattle, Sacramento and Las Vegas rank in the bottom 5. Rent Prices (Trulia): Nationally, asking rents were 5% higher over the previous year. Amongst the largest MSAs, the most aggressive rent growth was experienced in Miami (+12%), San Francisco (+11%), Denver (+10%), Seattle (+10%), San Jose (+9%) and Boston (+9%); while New York and Chicago experienced an annual growth rate of 6%. Improving Housing Markets (NAHB): According to NAHBs Improving Market Index, the list of housing markets that showed improvement for at least six consecutive months in housing permits, employment and home process, expanded to 101 in April from 99 in March. A total of 35 states are represented in the April list with at least 1 improving market, with Texas and Florida accounting for 12 and 9 markets respectively. Delinquencies & Foreclosure Starts & Sales (LPS): National delinquency rates dropped by 5% month-over-month in February to 7.6% and were 14% lower compared to last year. The foreclosure rate was almost flat over the previous month at 4.1%. In February, foreclosure starts declined 15% to 176k and foreclosure sales were 19% down on the month, after a sharp increase in January. The foreclosure inventory in judicial states remains at 6.5% of all homes compared with 2.4% of all homes in non-judicial states. The national pipeline ratio, defined as the number of homes in D90+ delinquencies and foreclosures divided by the 6-month average of foreclosure sales rates, is currently at 84 months in judicial states, with New York and New Jersey ranking as the worst states with 846 and 772 months respectively. This compares to an average pipeline rate of 33 months for non-judicial states. Construction Spending (Census Bureau): Construction spending in February was at a seasonally adjusted annual rate of $809bn, approximately 1% lower than in January and 6% higher than February 2011. Private construction accounted for $530bn of this amount, and nearly $250bn was spent on residential construction.
Kunal Singal
+1 212 667 1814

kunal.singal@nomura.com
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06 April 2012
Summary of trading activity over the week

Overall trading activity and dealer inventories were flat to slightly down on the week, while trading in non-Investment Grade bonds continued to dominate. Total trading volumes from TRACE are shown in figures 1-4 below.
Fig. 1: Overall Trading Volumes over the past 6 months

8
7
Total Volume ($bn)
6 5 4 3 2 1 0
Source: TRACE, Nomura Securities International
Fig. 2: Net Change in Dealer Positions since May 15th, 2011

2
Total change in Volume ($bn)
(2) (4) (6) (8) (10)
10/17
10/31
11/14
12/12
5/16
6/13
7/11
8/22
9/19
10/3
10/6 10/13 10/20 10/27 11/3 11/10 11/17 11/24 12/1 12/8 12/15 12/22 12/29 1/5 1/12 1/19 1/26 2/2 2/9 2/16 2/23 3/1 3/8 3/15 3/22 3/29 4/5
Customer Buy Customer Sell Dealer to Dealer
11/28
12/26
PRE-2005
2005-2007
POST-2007
12
3/19
5/30
6/27
7/25
1/23
2/20
8/8
9/5
1/9
2/6
3/5
06 April 2012
Fig. 3: Composition of Trading Activity for past 2 weeks for Customer Buy (left) and Customer Sell (right) transactions
0%
4% 2%
1% 8%
4% 2%
23%
IG Pre-2005 IG 2005-2007
11%
IG Pre-2005 IG 2005-2007
31%
IG Post-2007 Non-IG Pre-2005 Non-IG 2005-2007

Non-IG Post-2007
IG Post-2007 Non-IG Pre-2005 Non-IG 2005-2007

Non-IG Post-2007 60%
54%
Fig. 4: Summary of trading activity this week

Tim e period Last w eek MTD YTD Total Volum es (buy+sell+dealer) 6.4 6.4 151.1 Total Custom er Buy Volum e 3.5 3.5 68.0 Total Custom er Sell Volum e 2.6 2.6 73.8 Total IG Total Non-IG Volum e Volum e 0.3 0.3 15.7 6.0 6.0 135.4 Total Pre-2005 Vintage volum e 0.7 0.7 13.8 Total 2006-07 Vintage Volum e 3.7 3.7 88.1 Total post-2007 vintage volum e 2.0 2.0 49.2
Housing Market
Although the most recent release of Case-Shiller and other home price indices indicate that home prices were still falling nationwide, more recent data on home prices have been increasingly optimistic. Based on the historical strong correlation between home prices and the number of months of total home supply, home prices may have began to stabilize or even started to increase in some markets in the past few months. In this article, we look at the supply/demand dynamic of the housing market. Housing demand should be slightly stronger going forward due to the continued economic recovery, falling unemployment and robust investor demand. Future housing supply will depend on liquidation speed of the shadow inventory. We expect the liquidation of distressed properties to increase by 20% in 2012 as the servicer settlement is largely resolved, and nationwide home prices could fall by approximately 3% due to the increase of distressed home sales. However, if servicer liquidation of these distressed properties does not increase, home prices could flatten or rebound slightly in 2012. Home prices are low to historical standards, and we think there is more upside risk than downside risk to our forecast. For non-agency RMBS investors, deals with a large delinquency pipeline should benefit the most from home price stabilization as reduction of the distressed liquidation discount will increase the recovery rate.
Home prices in historical context

According to most equilibrium measures, home prices are fair to slightly cheap. Home prices have kept pace with the growth in personal income in the past except in the early 2000s, but have fallen below the long term trend recently (Figure 1 left). In addition, rents have grown and recently caught up with the home prices after the recent drop. This coupled with the historic low mortgage rate, indicates that owning is the most favorable compared with renting in history (Figure 1 right) Figure 2 left shows that the median monthly mortgage payment accounts for the smallest share of household income in history, indicating that housing affordability is high. Even after adjusting for the mortgage
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06 April 2012
insurance payment assuming an FHA loan with a 3.5% down-payment, housing affordability is still at historical high (figure 2 right).
Fig. 1: Personal income vs home prices (left) and rental prices vs home prices (right)
1993=100
1993 = 100 300

House Prices, incl. distressed sales
400
350
Home Price Index
14000
12000
300
Personal Income Index (right)

300 250 200 150 100 50 Dec-81 10000 8000 6000 4000
250
Rental prices* 200
250
200
150
150
100
2000 0 Dec-11
100
Dec-86
Dec-91
Dec-96
Dec-01
Dec-06
50 1986
50 1991 1996 2001 2006 2011
Source: Bureau of economic analysis, FHFA, CoreLogic, Nomura global economic
Fig. 2: Mortgage payment on median house price as % of household income (left) and home affordability index (right)
% 26
220
Affordability: PMMS, 20% down 200 180

160 140
24
22
Affordability: FHA, 3% down
20 18
16
120
14
12 Mortgage payment as % of income Jan-00 Jan-04 Jan-08 Jan-12
100
80 Jan-02
10 Jan-96
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Source: NAR, Nomura global economic, Nomura securities
Housing demand: After the expiration of first-timer home buyer tax credit program in 2010, the demand for housing has improved steadily. Going forward, the net demand for housing should come primarily from two sources: first-time home buyers and investors. We think the demand from firsttime homebuyers will be limited. However, the demand from investors should stay strong in the near future.
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06 April 2012
Fig. 3: Total existing home sale

mn Units 6.0 5.5
5.0 4.5 4.0 3.5 3.0 Feb-09 Total Existing Home Sales Second expiration date of the tax credit
First expiration date of the tax credit

Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
Source: NAR, Nomura global economics
Household formation slowed down in 2008 when the recession started, but it has increased recently as the economy recovers (Figure 4 left). Although there is some pent-up demand for new household formation, first-time home buyers as a percent of home sales has remained low since the expiration of tax credit (Figure 4 right). Figure 5 left shows that about 50% of first time home buyers are in the age group of 25-34; however, the unemployment rate or underemployment rate of this age group is also higher (Figure 5 right). In addition, the desire of this age group to own a home may be tamped by the fact that home prices fell sharply during most of their adulthood. In addition, this group generally has higher student loan debt and lower income compared with previous generations. Thus, we expect the increase of housing demand from first time homebuyers to be limited.
Fig. 4: Household formation(left) and % sale to first-time home buyers (right)
thousands 3,000
2,500
% 55 50 45 40 35 30 Second expiration date of the tax credit
Net addition in households
% First-time home buyers
2,000 1,500
1,000
500 25 Feb-09 First expiration date of the tax credit Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
Source: Census bureau, NAR, Nomura global economics
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06 April 2012
Fig. 5: age group distribution of first time homebuyers (left) and unemployment/under-employment rate by age group (right)
Years 60
50 40 30 20 10
All Buyers
First-time
Repeat Buyers
35% 30% 25% 20% 15%

10% 5% 0%
% Underemployment
% Unemployed
18-24 25-34 35-44 45-54 >=55
18-29
30-49 50-64 Age-group
65+
Source: NAR, BLS, Gallup, Nomura securities international
Lured by attractive financing and high rental yield, investor demand for housing has increased in the past year (Figure 6 left) and will likely stay strong in the near future. In some major MSAs, the gross rental yield is over 10% (Figure 6 right). Separately, because net rental unit completion will not increase significantly until late 2013, rents will likely continue to increase over the next two years as the economy improves (Figure 7 left). In addition, a few recent REO rental initiatives, such as Fannie Maes REO rental program, if successful, will be a catalyst to bring more capital to the investors. Thus, we believe that investor demand will likely be strong in the near future.
Fig. 6: Investor share of total existing home sale (left) and gross rental return in some major MSA (right)
24% 22%
% of homes sold to investors
20%
15%
Gross rental return
20% 18% 16% 14% 12% 10%

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 % of homes sold to investors
10%
5%
0%
Source: NAR, Tulia.com
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06 April 2012
Fig. 7: Historic and projected rent growth(left) and net rental unit completion (right)
Hist 2yr Change Proj 2yr Change
12% 9% 6% 3% 0% -3% -6%
mn 40
No of rental units completed
30
20
10
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Source: PPR, Nomura securities international
Home supply: Housing supply largely comes from three sources: existing homes, new homes and distressed homes. We expect that the supply of homes will be largely stable or slightly increase in the near future, with decreased supply of existing and new homes largely compensated by the increased supply of distressed. Figure 8 shows there was moderate decline of supply from existing homes in the past few years. We expect that the existing housing supply will be limited in the future unless home prices rebound as current homeowners likely continue to suffer from negative equities. In addition, new home supply declined substantially in the past five years. The future supply of new homes should also be limited, because single family construction in the past few years has been depressed. Housing completions of single family homes reached a record low in 2011, and are likely not going to increase soon. Distressed home supply on the market has been quite stable in the past few years in spite of a huge shadow inventory. Going forward, the increase of home supply likely will largely depend on the liquidation speed of the distressed inventory. Although most servicers expect a moderate pick up in liquidations this year, so far there has not been any evidence of increase. RealtyTrac data shows that servicers were able to process 350k foreclosure filings per month before the robo signing incident in late 2010. However, they were only able to process about 200k foreclosure filings in 2011. Even after the servicer moratorium was lifted in late 2011, the total foreclosure filing only increased slightly. With the servicer settlement largely resolved and the clarification of the new servicing standard, we expect the liquidation speed to increase moderately. However, there are still a few issues that could limit the increase of liquidation speeds. First, some of the big servicers have reached their capacity for processing foreclosures because of increased scrutiny of their foreclosure operations. In contrast, some of the smaller servicers have extra capacity and can increase foreclosure filings, but in judicial states, significant backlogs in the legal system should limit foreclosure processing speeds. However, at minimum, short sale volumes should increase in 2012 due to increased willingness from banks to write down 2nd liens as well as settlement-related incentives. Thus we expect a moderate increase of liquidation speed of the shadow inventory.
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06 April 2012
Fig. 8: Source of housing supply (left) and realtytrac foreclosure filing (right)
mn Units 8 7 6 5 4 3 2 1 0 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
Thousands 400 350

300
Foreclosure Filing
250
200
Robo signing
150
100 Jan-07 Jan-08 Jan-09 Jan-10
Exisitng home supply
Distressed home supply
Foreclosure moratorium finished

Jan-11 Jan-12
New home supply Shadow inventory: FCL
Shadow inventory: D90+
Source: NAHB, NAR, RealtyTrac, Nomura global economics
Future home price projection: There are more optimistic reports on the home prices in the media recently. NAR survey reported increased foot traffic at open houses, and some home builders recently reported strong demand for new housing. In addition, a few servicers also reported that recent REO liquidations brought in multiple offers and the liquidation discount has decreased. Figure 9 demonstrates that there is a strong correlation between number of months of housing supply and home prices. Due to both a moderate increase in demand and limited supply, the number of months of housing supply has dropped to a seven-year low. There is evidence that home prices may have begun to rise.
Fig. 9: housing inventory measured by number of months of supply vs corelogic home price index
Inventory for sale/ monthly sales 12
Y-o-Y (inverted) %
-20
11
10 9
Months' supply of 1-family homes (6-mon lead, lhs) Case-Shiller 20 city home price (rhs)
-15
-10 -5
0
8
7
6
5 4
5 10
15 20
3 Jan-00 Aug-01 Mar-03 Oct-04 May-06 Dec-07 Jul-09 Feb-11

Source: Nomura global economics
However, home price stabilization highly depends on how fast the distressed home supply increases. In our base case forecast, distressed liquidation volumes will increase by 20% in 2012, causing overall nationwide home prices to decrease by 3% by the end of 1Q2013, largely due to a shift in index composition. However, if servicers do not increase the liquidation rate of the shadow inventory, home prices may increase slightly in 2012. Home prices are low in the historical context, and housing affordability is at a historical high. We think downside risk is abating, and upside risk dominates our forecast.
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06 April 2012
The most recent CoreLogic home price index release for Feb 2012 offers a hint of the home price path in 2012. Nationwide, home prices increased by 0.7% m-o-m, and decreased 0.8% y-o-y excluding distressed home sales. However, including distressed sales, home prices decreased by 0.8% m-o-m and 2% y-o-y. Going forward, if distressed sales do not increase, home prices could record an increase for 2012, even including distressed sales. However, if the distressed sales increase by 20% as we expect in our baseline forecast, home price will continue to fall during 2012. Impact on the RMBS market: Even if national home housing indices drop over the next year, it is possible that REO prices remain flat or increase slightly due to increased investor demand, which should have a positive impact on severities. RMBS deals with sizable delinquent pipelines will benefit the most from a home price stabilization or rebound. Separately, more optimism on future home prices may reduce the incidence of strategic default for underwater borrowers.
Update on non-agency current pays: historical returns and various metrics for calculating carry
Many investors have a clear preference for current-pay bonds as returns are less dependent on spread tightening or future price appreciation. Within the universe of current pay bonds, there is a wide range of metrics used to calculate carry and expected return for these securities, leading to very different opinions on relative value. In this article, we analyze the historical performance as well as projected returns under various carry metrics for some representative current-pay bonds. Finally, we conclude the article with our relative value recommendations based on this analysis. Historical returns: Figure 1 shows the 1-year historical return for sample bonds across sectors. We separate total returns for each bond into historical price return and the realized carry return. Realized 12-month returns across most non-agency bonds ranged from a high of 8% for the sample prime fixed bond mainly due to high carry, to a low of -10% for POA Sr Mezz and -8% for Alt-B floaters due to low carry and spread widening. Next, we show a proxy for the historical sharpe ratio of various RMBS bonds by comparing historical risk (range of yields over the past 12 months) versus historical return (12-month realized return) in Figure 2. Over the past 12 months, prime fixed bonds performed the best according to this metric due to a combination of spread compression and high current carry; in addition, certain subprime front-pay sequential and seasoned mezz bonds also performed well according to this metric.
Fig. 1. Historical return analysis

1-year return attribution 1y px chg Total Return Price Return Carry Return net of W/D 12m range of projected yield -0.3 7.7% -0.3% 8.0% 1.0% -3 0.4% -3.2% 3.6% 1.5% -4.5 -3 -9 -12 -6 -1 -4 -0.5 3 -1.6% 3.9% -8.0% -10.7% -2.4% 4.4% -3.8% 4.0% 5.2% -5.9% -5.4% -17.3% -35.3% -9.5% -1.3% -6.8% -0.6% 3.6% 4.3% 9.3% 9.3% 24.6% 7.1% 5.7% 2.9% 4.6% 1.6% 2.0% 3.4% 3.5% 4.0% 3.5% 3.3% 4.5% 3.1% 3.0%
Sector Prime Fix Prime Hyb Alt-A Fix Alt-A Hyb Alt-B Flt POA Sr Mezz POA SSNR Subpr FP Seq Subpr FP PR Subpr Seas Mezz Subpr Seas Mezz
Bond Latest price WFMBS 07-11 A96 94 WFMBS 05-AR16 3A2 92 CMALT 07-A3 1A1 CMLTI 07-AR1 A3 GSAA 06-11 2A2 DSLA 2007-AR1 2A1B SAMI 06-AR7 A1A RAAC 2007-SP3 A1 FFML 2006-FF11 2A3 FHLT 2003-B M1 MSAC 04-NC8 M2 72 53 43 22 57 76 55 79 87
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06 April 2012
Fig. 2. Historical sharpe ratio: yield vol vs. realized yield, last 12m
10 Prime Fix WFMBS
5
Realized Yield (%)
0 Prime Hyb WFMBS
Subpr FP Seq RAAC Alt-A Hyb Subpr Seas CMLTI Mezz FHLT
POA SSNR SAMI
-5
Alt-a Fix CMALT
Alt-B Flt GSAA
-10 -15
Subpr FP PR FFML POA Sr Mezz DSLA
Historical Yield Vol (%)

Projected performance
In the following section, we compare various yield and carry metrics for sample current pay bonds across the non-agency spectrum (figure 3). There are a number of ways to calculate carry, depending on whether interest and/or principal are included and based on the time horizon; relative value preferences depend on which of these metrics are used for comparison purposes. The metrics used for this analysis include the following: Projected yield to maturity in base (-3% HPA) and stress (-8% HPA) scenario. The remaining calculations are based on the base case scenario. Current cashflow yield: projected bond P&I payments (next 12m) divided by bond price Current interest yield: projected bond interest (next 12m) divided by bond price Projected return breakout: We separate the expected return into a carry component and an expected price return component. The expected carry is calculated as total principal + interest payments net of writedowns over the next 12 months. Next, the future price in 12 months is calculated such that the 12-month total holding period return equals the annualized yield-to-maturity in the base case scenario.
In Figure 4, we calculate the forward price projection for various bonds using the same approach as discussed above. For each calculation, we assume that the bondholder earns the annualized yield to maturity in every 12-month period by buying the bond at the initial price, earning the carry net of writedowns over that period, and selling the bond at the end of the period at the calculated forward price. For example, if an investor bought the prime fixed bond today at $94 and earned the expected carry over the next 12 months, they would have to sell the bond in 12 months at 94.5 in order to realize a 6.3% return over that period. Forward prices trend upward for the prime fix, prime hybrid, and Alt-A fixed bonds and some subprime seasoned mezz bonds, while other bond types have gradual price declines over time either due to an implied writedown feature on certain bonds or higher writedowns and/or worsening collateral composition over time. Finally, in Figure 5 we calculate a forward-looking projected risk vs. return metric, similar to the historical sharpe-ratio calculated in figure 2. On a forward-looking basis, the subprime front-pay sequential and the Alt-A fixed bond look most attractive according to this metric.
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06 April 2012
Fig. 3: Projected returns and various carry metrics

Projected Yield Cashflow returns (12m) Exp. return breakout (base scen/12m fwd) Base Stress Curr CF Yield Curr Int Yield Carry net of W/D (%) Price Return (%) 6.3 5.8 27.1 5.8 5.8 0.5 6.0 5.8 14.5 2.8 3.7 2.3 7.5 8.0 7.7 7.5 8.9 9.2 8.0 7.5 6.8 6.3 6.0 -7.0 7.6 8.6 6.0 6.2 19.5 18.7 20.5 51.4 17.9 20.6 25.7 16.4 7.9 1.0 1.1 1.9 0.9 1.9 0.8 1.7 2.5 7.1 10.4 23.0 6.8 5.2 10.9 2.5 5.0 0.9 -2.7 -15.5 2.1 3.9 -2.9 5.0 Projected price Projected W/D Carry net of repo in 12 months (% cb, next 12m) (20% HC/L+200) 94.5 8.5% 94.1 3.3% 75.1 53.5 41.9 18.6 58.2 79.0 53.4 82.4 6% 9% 21% 8.5% 2.8% 3.3% 10.5% 2.6% 4.0% 4.2% 2.9%
Sector
Prime Fix Prime Hyb Alt-a Fix Alt-A Hyb Alt-B Flt POA Sr Mezz POA SSNR Subpr FP Seq Subpr FP PR
Price WFMBS 07-11 A96 94 WFMBS 05-AR16 3A2 92

CMALT 07-A3 1A1 CMLTI 07-AR1 A3 GSAA 06-11 2A2 DSLA 2007-AR1 2A1B SAMI 06-AR7 A1A RAAC 2007-SP3 A1 FFML 2006-FF11 2A3
Bond
72 53 43 22 57 76 55 79
Subpr Seas Mezz FHLT 2003-B M1
Fig. 4: Projected forward price holding base yield constant over time: Prime/Alt-A (left) and POA/Subprime (Right)
120 100
Prime Fix WFMBS Prime Hybrid WFMBS
100 80 60
Subpr Seas Mezz: FHLT Subprime 2007: RAAC

POA SSNR: SAMI
80 60 40 20 0
Alt-A Fix CMALT Alt-A Hyb CMLTI Alt-B Flt GSAA Year
40 20 0
Year
Subprime ProRata: FFML POA SR Mezz: DSLA
Fig. 5: Future risk vs. return: base expected return vs. projected yield range across model scenarios
10
Subpr FP Seq RAAC
POA SSNR SAMI Subpr FP PR FFML Alt-B Flt GSAA Subpr Seas Mezz FHLT
Base Yield
Alt-A Hyb CMLTI

Alt-a Fix CMALT Prime Fix WFMBS Prime Hyb WFMBS
POA Sr Mezz DSLA
5 0 1 2 3 4 Projected yield range 5 6
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06 April 2012
Relative value thoughts

First, we recommend buying Alt-A fixed bonds versus prime fixed bonds. Although the prime fixed bond has high current cashflow yields, it has a relatively low yield to maturity and will become more dependent on liquidation cashflows going forward. We find the Alt-A fixed bond to be relatively more attractive due to higher overall yields and higher current interest yields, in addition to a better risk/reward ratio as shown in Figure 5. Separately, if prepayment burnout continues and liquidations increase, the carry of the Alt-A fixed bond should improve relative to the prime fixed bond. Second, we recommend a levered position in POA SSNRs instead of buying POA SR Mezz bonds: although the POA sr mezz bond has high near-term carry and upside optionality to an improved macro backdrop, it takes significant writedowns in the near term and does not look attractive from a risk/reward basis due to negative expected yields in the stress scenario. Instead of buying this tranche, we would prefer to buy the POA SSNR tranche with leverage for a more balanced yield profile with upside optionality. Third, we find subprime front-pay sequentials to be attractive from both a current carry perspective and from a risk/reward perspective due to their high yields and more stable profile.
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06 April 2012
Consumer ABS Market

Despite a shorter week, there was decent activity in the consumer ABS market with nearly $1.1bn in BWIC volumes . The sell-off in equity markets and the broader market volatility prompted some money managers to offload some of their inventory mid-week; however the sentiment in the market retained its firm tones as the generic spreads were largely unchanged on the week. The investor demand remains strong and investors continue to move to the long-end of the curve.
Gaetan Ciampini +1 212 667 1135

gaetan.ciampini@nomura.com
Fig. 1: Consumer ABS Spreads as of 4/6/2012

Rating Sector Credit card Credit Card Utilities Auto Equipment Student loans A/L Floating Fixed Fixed Fixed Fixed Floating 1yr 4 5 6 6 12 25 2yr 10 12 12 15 20 35 AAA 3yr 18 19 18 23 30 45 70 105 5yr 30 45 35 7yr 50 60 48 65 65 95 95 A BBB
Kunal Singal +1 212 667 1814

kunal.singal@nomura.com
After a brief hiatus, there was new issuance in consumer ABS sector. The investor appetite was high for new issuance as all the three deals were upsized and priced at tight spreads. The 2-year A tranche in the AMOT deal was upsized from $500mn and was priced close to the FORDF 2-year senior tranche issued in February. SLMAs private student loan ABS was upsized by $220mn and the 4-year A2 tranche was priced at 240bp, tighter by 15-20bp than the expectation. The structure of the deal was similar to SLMA 2011B, but with shorter WAL through the capital structure. WFNMT issued the second 7-year private label credit card deal of the year. As we had pointed out in our previous article, the longer-dated credit card universe currently trades at a premium and there is limited paper in the market with maturity beyond 2015 creating positive demand technicals in this space. As a result, the 7-year deal to get upsized and price at 140bp spread to the swap curve. WFNMT is one of the wider private label credit card issuers and the strong execution illustrates the demand for higher yield assets.
Fig. 2: New issuance in Consumer ABS in the week ending 4/6/2012

Pricing Date Trust 4/4/2012 4/4/2012 AMOT 2012-2 SLMA 2012-B Class A A1 A2 A3 4/5/2012 WFNMT 2012-A A WAL 1.9 1.5 4.2 5.7 6.9 Size ($mn) 625 482 342 67 413 Pricing 1mL+50 1mL+110 iS+240 1mL+300 iS+140 Coupon 0.74 1mL+140 3.75 1mL+325 3.14
Moodys new rating methodology for FFELP ABS

Moodys published its new rating methodology for deals backed by FFELP student loans, following its release of the proposed methodology earlier this year. The final approach differs from the proposed methodology in two major ways:
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06 April 2012
The final approach includes new cashflow assumptions accounting for the reduced basisrisk due to the recent legislation that allows holders of FFELP loans to shift from the earlier 3m CP special allowance payment index to 1m Libor. Under the proposed approach, the loss timing curve would have applied on the loans that were in repayment, deferment or forbearance; contrary to previously assumption where the loss-timing curve was applied only on the loans in repayment. The finalized approach applies a shorter, more front-loaded curve, but applies it only to the loans in repayment.
The final approach incorporates the rest of the proposals. Along with the release of the finalized approach, Moodys has placed 194 bonds from 24 deals with an outstanding amount of $7.5bn on review for possible downgrade, less than the $10bn FFELP ABS as expected under the proposal. The most significant change from the proposal is the incorporation of lower basis risk with the implementation of the Consolidation Act that affects the shift in the SAP index from 3m CP to 1m Libor. We had pointed out in a previous article, there remains some basis risk even after the shift due to timing mismatch, but it reduces the volatility in basis-risk as the 3mL-1mL basis is significantly less volatile than the previous 3m CP- Libor basis (Figure 3). This reduces the impact of higher cumulative default assumptions as applied in the latest methodology, as the stress spikes in the basis are lower than that under the 3m CP-Libor basis. In Moodys supplemental report to the new criteria, they have highlighted similar reasoning to reduce the new spread and spike assumptions (Figure 4).
Fig. 3: Rolling one month volatility is lower for the 3mL-1mL basis
bp 300 250 200 150
1 m Vol 3mL-CP
1m Vol 3mL-1mL
100 50 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Federal Reserve, Bloomberg, Nomura Securities International
Fig. 4: Comparison of basis-risk spread spikes

Spike Scenario 3m Libor - 1m Libor 3m Libor - 3m CP
Source: Moodys
Expected Case 65 bps 75 bps
Baa Stress Case 85 bps 100 bps
A Stress Case 100 bps 130 bps
Aaa Stress Case 120 bps 150 bps
24
06 April 2012
S&Ps rating actions on First Marblehead private student loans ABS

In a recent rating action, S&P reviewed 89 bonds from 20 First Marblehead deals and lowered the ratings on 82 bonds and the affirmed the rest. The rating agency had placed these bonds on CreditWatch negative in November 2011 as these bonds had experienced higher than expected default levels and reduced credit enhancement left in the bonds. Most of the senior tranches were downgraded to a range of BB to CCC-, with some bonds downgraded by as much as 6 notches.
Auto Sales data

The strong run in auto sales in the year continued with 14.32mn seasonally adjusted annual sales of light vehicles in March, a 10% increase year-on-year (Figure 5). There were a total of 1.4mn auto sales in March, with the domestic players market share slightly increasing to 44%, while the share of the Asian manufacturers stepped down by 1% to 48%. Figure 6 compares the change in market share for the top five manufacturers by market share. Figure 7 presents the current market share of the top 10 players as in March 2012.
Fig. 5: Seasonally adjusted annual US auto sales
mn Units 16 14 12
10 8 Mar-10
SAAR Auto Sales
Sep-10
Mar-11
Sep-11
Mar-12
Source: Bloomberg, Nomura Securities International
Fig. 6: Market share of top 5 auto mannufacturers

GM Toyota Ford Honda Chrysler
Fig. 7: Top 10 auto manufacturers by market share
25%
20%
15%
10%
5%
0%
GM Ford Toyota Chrysler Nissan Honda Hyundai Kia VW Subaru 0% 5% 10% Market Share 15% 20%
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Source: WardsAuto, Nomura Securities International
Source: WardsAuto, Nomura Securities International
25
06 April 2012
CMBS Market
CMBS spreads widened significantly as concerns regarding Spains ability to service its debt burden and disappointment with the latest commentary from the Federal Reserve weighed on the broader markets. In addition, CMBS investors remained concerned regarding increased secondary supply from Maiden Lane dispositions. On the week, last cash flow super senior spreads widened approximately 10-40bp and are now trading in a range of 150 to 225bp over swaps. GG10 A4s gave up all of their 2012 gains, ending the week at 265bp over swaps, 55bp wider on the week. We recommend investors continue adding new issuance paper and higher quality super senior bonds that are highly unlikely to suffer principal losses. Although this weeks nonfarm payrolls number was weaker than expected, we believe that the economy continues to improve, which will likely result in further long-term tightening and increased stability for lower quality super senior and AM bonds. These tranches may also benefit from increased demand for longer duration spread product in a low-rate environment. In addition, we recommend selectively adding higher quality AM and AJ bonds as improving economic indicators are likely to result in lower than expected losses to the trusts. Volume from both the secondary markets and new issuance continues to be met with good investor demand as investors may be taking advantage of the pullback. According to TRACE data, prices on investment-grade bonds traded in the secondary market declined along with dealer inventories (Figure 1). Since last Thursdays close, $4.6bn in investment grade CMBS bonds exchanged hands in the secondary markets, significantly below last weeks total of $5.4bn and slightly below than the 2012 weekly average of $4.8bn.
Lea Overby +1 212 667 9479

lea.overby@nomura.com
Steven Romasko +1 212 298 4854

steven.romasko@nomura.com
Fig. 1: Investment grade dealer volume vs cash prices (5-day moving average)
YTD change in inventory (mn)
1,200
108
900
600 300
Avg Daily Px (rhs)
107 106 105
0
-300 Net Dealer Buy (lhs) -600 103 104
12-Mar
19-Mar
26-Mar
9-Jan
13-Feb
20-Feb
27-Feb
16-Jan
23-Jan
30-Jan
Source: FINRA TRACE, IDC, Nomura Securities International
CMBX prices within the AAA stack finished sharply lower on the week, with AJ tranches underperforming, falling $3.16 on average across all series and tranches. AM tranches fell $2.29 on the week, followed by a $0.79 drop among super senior AAAs (Figure 2).
26
5-Mar
6-Feb
2-Apr
Price
06 April 2012
Fig. 2: CMBX weekly price changes (through Thursdays close)

CMBX.NA.1 30-Mar 5-Apr Diff 96.89 96.55 (0.34) 92.09 90.41 (1.68) 86.43 83.63 (2.80) 74.73 70.75 (3.98) 61.13 57.97 (3.16) 35.25 33.81 (1.44) 19.01 18.70 (0.31) CMBX.NA.2 30-Mar 5-Apr Diff 95.07 94.50 (0.57) 87.98 86.00 (1.98) 79.54 75.89 (3.65) 62.43 58.51 (3.92) 45.61 43.22 (2.39) 15.41 14.91 (0.50) 11.28 10.96 (0.32) CMBX.NA.3 30-Mar 5-Apr Diff 93.24 92.31 (0.93) 84.13 81.30 (2.83) 65.82 61.75 (4.07) 40.09 37.54 (2.55) 25.70 23.70 (2.00) 10.56 10.20 (0.36) 9.13 8.70 (0.43) CMBX.NA.4 30-Mar 5-Apr Diff 93.02 91.93 (1.09) 81.25 78.34 (2.91) 64.23 60.73 (3.50) 40.84 38.30 (2.54) 29.75 28.44 (1.31) 18.44 17.92 (0.52) 14.70 14.37 (0.33) CMBX.NA.5 30-Mar 5-Apr Diff 93.67 92.67 (1.00) 81.91 79.84 (2.07) 66.96 65.16 (1.80) 48.19 46.64 (1.55) 33.23 32.10 (1.13) 18.59 18.15 (0.44) 14.64 14.38 (0.26)
AAA AM AJ AA A BBB BBB-
Source: Markit and Nomura Securities International
Implied spreads in CMBX.NA.4 finished the week significantly wider, led by a 93bp increase among AJs, pushing the spread to 915bp over swaps. AM and AAA tranches finished the week 55bp and 17bp wider, and now stand at 449bp and 167bp over swaps, respectively (Figure 3). Volatility for all tranches increased moderately on the week. Corresponding three-month average daily moves for AAA, AM, and AJ tranches stand at 3.1bp, 6.1bp, and 11.8bp over swaps.
Fig. 3: CMBX.NA.4 spread levels

1400
1200
Composite Spread
1000
800 600 400
AAA AM
AJ
200
0
In the news
New issuance update
Two CMBS deals priced this week. First, JPMorgan and Wells Fargo priced the $132mn securitization on behalf of Rialto Capital backed primarily by distressed assets. In addition, UBS priced the single-asset deal backed by the Fontainebleau Hotel. According to Commercial Real Estate Direct, four conduit deals totalling $3.75bn deal are expected to launch in the second quarter. In addition, one single borrower issue, a $450mn deal backed by the Carousel Mall, are also expected in the second quarter.
Red Lion looks to sell the hotel chain

On March 28 , Red Lion Hotels announced that they are exploring strategic alternatives, including a potential sale of the company. The firm operates 48 midscale hotels located primarily in the western U.S. CMBS exposure to Red Lion Hotels is limited to nine loans secured in CSFB 2003-C4 and
th
27
06 April 2012
CSFB 2004-C1 (Figure 4). None of these loans are delinquent, and the majority report DSCRs in excess of 1.20x.
Fig. 4: CMBS Exposure to Red Lion Hotels

Deal Loan CSFB 2003-C4 Red Lion Hotel Port Angeles CSFB 2003-C4 Red Lion Hotel Yakima Center CSFB 2003-C4 Red Lion Hotel Eureka CSFB 2003-C4 Red Lion Hotel Kennewick CSFB 2003-C4 Red Lion Hotel Twin Falls CSFB 2003-C4 Total: Five Hotels CSFB 2004-C1 Red Lion Hotel Pasco CSFB 2004-C1 Red Lion Hotel Salt Lake Downtown CSFB 2004-C1 Red Lion Hotel Redding CSFB 2004-C1 Red Lion Hotel Richland Hanford House CSFB 2004-C1 Total: Four Hotels
Balance Pct Deal 7,544,883 0.8% 4,228,451 0.5% 2,487,325 0.3% 2,072,770 0.2% 2,487,325 0.3% 18,820,753 2.0% 8,539,813 0.8% 4,974,648 0.4% 4,103,239 0.4% 3,399,342 0.3% 21,017,042 1.9%
CITY Port Angeles Yakima Eureka Kennewick Twin Falls Pasco Salt Lake City Redding Richland
STATE WA WA CA WA ID WA UT CA WA
NCF DSCR 2.10 1.22 3.09 4.75 0.41 1.38 2.33 0.93 2.94
Three additional assets were previously owned by Red Lion Hotels but have been sold to third parties. In particular, the recently securitized Red Lion Hotel loan in GSMS 2011-GC5 provided acquisition financing for Lowe Enterprises to purchase the asset from Red Lion Hotels (Figure 5).
Fig. 5: CMBS exposure to assets previously owned by Red Lion Hotels

Deal WBCMT 2006-C23 CD 2007-CD4 GSMS 2011-GC5 Loan Red Lion - Yakima, WA(2) Red Lion Hanalei Hotel Red Lion Hotel - Seattle, WA Balance Pct Deal 2,200,333 0.1% 31,121,811 0.5% 31,633,330 1.8% CITY Yakima San Diego Seattle STATE WA CA WA NCF DSCR 1.28 0.79 1.50
Loan performance at maturity7

With $29bn of conduit loans now due to mature in 2012, the ability of these loans to refinance will have a significant effect on CMBS performance. Over a third of these loans were secured in deals from the 2007 vintage, and almost a quarter were secured in deals from the 2005 vintage. As a result, many deals from these vintages are now heavily exposed to maturity risk. We conclude this piece with an overview of the performance of loans with balance over $100mn that matured in the first quarter, as well as a list of large loans that are due to mature during the second quarter. The majority of these loans are securitized in deals from the 2007 vintage. Examining the loans that matured in the first quarter of 2012, we find that loan term, debt yield, and balance are strong indicators of performance at maturity while property type has a more muted effect. Although location remains an important factor, its significance declined among loans maturing in the first quarter.
Term: Performance for five-year loans remained weak for loans maturing in the first quarter as only 36% paid in full. Although historically, we have seen little difference between the performance of loans with seven or ten-year terms, seven-year loans maturing in the first quarter were significantly less likely to pay in full, as 57% of seven-year loans and 81% of ten year loans paid in full.
This article is a reprint of our previously published Special Topics piece published on April 4, 2012.
28
06 April 2012
Debt Yield: Loans with higher debt yields remain more likely to refinance, while loans with lower debt yields are more likely to be resolved with a loss. Loans maturing in the first quarter with debt yield between 6% and 8% are most likely to remain outstanding, and 69% of loans with debt yield over 8% paid in full, versus only 29% for loans with lower debt yields. Location: Historically, loans on properties located in major metropolitan areas are more likely to be resolved at maturity. However, for loans that matured in the first quarter, the importance of geographic location in determining refinanceability declined. We found that 58% of loans on properties in Tier 1 locations paid in full, versus 51% and 52% for loans on properties in Tier 2 and Tier 3 locations, respectively. Balance: Loans with smaller balances are more likely to be resolved at maturity. For loans that matured in the first quarter, 66% of those with balance under $10mn paid in full, dropping to only 38% for those with balance exceeding $100mn. Property type: Among loans maturing in the first quarter, 60% of those secured with retail properties paid in full. Multifamily and hotel loans maturing in the first quarter continued to underperform, and only 41% and 30% of these loans paid in full, respectively. Loans on office properties performed slightly worse than average, with 47% paying in full.
Methodology
Each quarter, we examine the loans that reached their initial maturity date over the course of the quarter to determine the factors most likely to indicate a borrowers ability to refinance. In addition, we compare these loans with those that matured in the preceding two years to track changes in the lending environment. We classify matured loans into eight categories, with three categories describing the current state of outstanding loans and five describing the final state of resolved loans: Extended: Outstanding loans that are not seriously delinquent whose maturity date has been extended. Seriously Delinquent: Outstanding loans that are 90+ days delinquent, in foreclosure or REO. Outstanding: Outstanding loans that are not seriously delinquent and have not been extended. Loss: Loans that were resolved within a year prior to their initial maturity date or ARD and suffered a loss upon resolution. At Maturity: Loans resolved within three months of their initial maturity date or ARD that did not suffer a loss. Late: Loans resolved more than three months past their initial maturity date or ARD that did not suffer a loss. Early: Loans resolved between four and twelve months prior to their initial maturity date or ARD that did not suffer a loss. Term: Loans that were resolved or defeased more than a year prior to their initial maturity date or ARD. These loans were likely term defaults or prepayments and did not face increased risk due to pending maturity. We eliminate these loans from the analysis of factors that influence repayment at maturity.
29
06 April 2012
Maturity Pipeline
As of the March 2012 remittance, $37.5bn in non-defeased conduit loans originally due to mature in 2012 remain outstanding, down from $43.1bn in of the January 2012. Of this total, $5.5bn has been extended and $4.3bn is seriously delinquent (90+ days, in foreclosure or REO). Maturity risk is likely to peak in 2016 and 2017 when approximately $120bn in maturing loans that are not seriously delinquent are expected to come due (Figure 1).
Fig. 1: Resolution distribution at maturity for conduit CMBS loans

150
Conduit Loan Maturities ($bn)
125 100 75 50 25 Disposed Amortized
Defeased
Extended Seriously Dlq
Outstanding
2012
Source: Trepp and NSI
2013
2014
2015
2016
2017
Universe: Conduit CMBS Deals
Among the loans that are now scheduled to mature in 2012 that are not seriously delinquent, 37% ($11bn) have five-year terms, and we expect these loans to be less likely to refinance than those securitized in earlier vintages (Figure 2). These loans were primarily originated in 2007 and suffered from a combination of weaker underwriting standards, as well as limited economic growth and property devaluation during their loan term. Based on the performance of five-year loans that matured in 2011, we expect that approximately half of these loans will be resolved by year-end. Because of the decline in credit availability in the second half of 2007, the majority of five-year loans that mature in 2012 are due during the first half of the year (Figure 3). In contrast, maturity dates for loans with ten-year terms are concentrated in the second half of the year, reflecting the pick-up in lending that occurred after the end of the recession in November 2001. As a result, we expect that 2012 maturity risk will peak in the second quarter.
30
06 April 2012
Fig. 2: Distribution by loan term (excl. seriously dlq loans)

140
Fig. 3: Distribution by loan term (excl. seriously dlq loans)

5 4
120
100
2012 Conduit Loan Maturities ($bn)
Conduit Loan Maturities ($bn)
80
60 40
3 2
1 -
20
2012 2013 2014 2015 2016 2017 5 Year 7 Year 10 Year
5 Year
Source: Trepp & NSI
7 Year
10 Year
Source: Trepp & NSI
Performance at maturity
Among loans that came due in the first quarter, 49% were resolved by the end of the quarter, a 5% decline from the resolution percentage for the previous quarter. Currently, 10% of the loans due to mature in the first quarter are seriously delinquent and an additional 9% have been modified to extend the maturity date (Figure 4). Currently, a total of $8.6bn in non-defaulted mortgages is due to mature in second quarter. The performance of these loans will be significantly impacted by the performance of a single asset. Currently, 22% of loans initially due to mature in the second quarter have been extended; however, almost half of this amount is due to the Beacon D.C. and Seattle Portfolio loan. This loan was initially scheduled to mature in May 2012 but was given a five-year extension.
Fig. 4: Resolution distribution for conduit CMBS loans

100%
Maturity Performance Distribution
90%
80%
Outstanding
Extended
70%
60% 50%
Seriously DLQ Late

At Maturity
40%
30%
Early Loss
20%
10%
0% 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12
Source: Trepp & NSI
31
06 April 2012
Maturity risk by initial loan term

We continue to see weak performance for loans with original terms of five years (Figures 5 and 6). These loans were originated near the top of the market, and in addition to having weaker underwriting standards, have suffered a harsh economic environment during their terms. Among fiveyear loans that matured in the first quarter, 46% have been resolved, versus 76% for loans with longer terms. For the year ended March 31, 2011, 47% of five-year loans have been resolved versus an average of 81% for loans with longer terms. As further indication of the weaker performance of loans with shorter terms, five-year loans appear more likely to suffer losses upon resolution. Among loans that matured in 2011, 11% of loans with five-year loans suffered a loss, only slightly higher than the percent of loans with longer terms. However, 19% of five-year loans are now seriously delinquent and are therefore likely to suffer a loss upon resolution. As a result, the percentage of five year loans that are resolved with a loss is likely to significantly increase.
Fig. 5: Resolution distribution of 1Q 12 loan maturities

100%
Fig. 6: Resolution distribution of 2011 loan maturities

100%
90%
80% Outstanding Seriously DLQ
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% 5Y
Source: Trepp & NSI
0% 7Y 10Y 5Y
Source: Trepp & NSI
7Y
10Y
In spite of more aggressive underwriting in 2007, the five-year loans that are now reaching maturity appear to be performing in line with the recent average (Figure 7). Excluding loans that were resolved during their term, 39% of loans that matured since January 2010 paid in full by maturity. An additional 24% either resolved late or have been extended, and, similarly, 24% either suffered a loss or are now seriously delinquent (and therefore likely to suffer a loss). Among five-year loans that matured in the first quarter of 2012, 36% paid in full, in line with the historical average. Further, the percentage of first quarter 2012 successful resolutions is likely to increase slightly over the next three months, as we consider loans that pay off no more than three months late to have paid At Maturity.
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06 April 2012
Fig. 7: Resolution distribution of five-year loan maturities

70%
Resolution Distribution
60% 50% 40% 30% 20% 10% 0%
Early or At Maturity Late or Extended

Loss or Seriously Dlq
Source: Trepp & NSI
Maturity risk by debt yield

Debt yield, which measures net operating income as a percentage of the outstanding loan amount, provides a simple measurement of balloon risk. Higher debt yields indicate lower levels of risk, with lenders historically viewing a 12% debt yield as an attractive rate. Conduit deals securitized in 2012 have an average debt yield of 10.8%, according to Moodys. As a comparison, 53% of loans originated in 2005 were underwritten with an A-Note debt yield below 10%, rising to 61% for loans originated in 2007. Loans that were scheduled to mature since January 2010 show a correlation between debt yield and the ability to pay at maturity (Figures 8 and 9). Among these loans, 71% with debt yield greater than 8% have paid in full, dropping to only 34% for loans with lower debt yields. Conversely, loans with lower debt yields are much more likely to either have been resolved for a loss or are now seriously delinquent. This relationship between performance and debt yield continues to hold for loans that matured in the first quarter, as 69% of loans with debt yield over 8% paid off at maturity, dropping to only 29% for loans with lower debt yields.
33
06 April 2012

100% 90% 80% 70% 60% Outstanding Seriously DLQ
Fig. 9: Resolution dist. of loans maturing since Jan. 2010

100% 80% 60% 40% 20% 0% <=6% 6-8% 8-10% 10-12% >12%
50% 40% 30% 20%

10% 0%
Extended
At Maturity Early
Loss
Outstanding, not Seriously DLQ Loss or Seriously DLQ Paid in Full Extended
Source: Trepp & NSI
Source: Trepp & NSI
Maturity risk by location

For loans that matured in the first quarter of 2012, the importance of geographic location in determining refinanceabily declined. Loans on properties in Tier 1 cities continue to benefit from increased availability of credit as only 37% of these loans remain outstanding versus 48% of loans in Tier 1 and Tier 2 cities, a difference of 11% (Figures 10 and 11). Loans on properties in Tier 1 and Tier 2 locations maturing in the first quarter were less likely to be refinanced, and the percentage of these loans that remain outstanding is considerably higher than the 2011 average. As of the end of the quarter, 54% of loans on properties in Tier 1 locations and 42% of loans on Tier 2 locations have paid in full. In comparison, among loans that matured in 2011, 69% of loans on Tier 1 properties and 59% of loans on Tier 2 properties have paid in full. We define Tier 1 MSAs as the set that Moodys considers to be Major Markets in their Commercial Property Price Index -- New York, Washington, D.C., San Francisco, Los Angeles, Chicago and Boston. We define Tier 2 cities as the remaining cities included in PPRs Top 54 cities. The superior performance of properties in Tier 1 cities reflects a larger division in commercial real estate, with prices rising for trophy properties in primary markets and remaining flat for properties in secondary and tertiary markets. The largest improvement in performance by geographic profile occurred within loans on properties located in Tier 3 locations. Among loans due to mature in the fourth quarter of 2011, 62% of loans on properties in Tier 3 locations remained outstanding by quarter-end. In contrast, only 43% of Tier 3 loans maturing in the first quarter of 2012 remain outstanding. This higher resolution rate may indicate that credit availability is beginning to increase in secondary and tertiary markets.
34
Resolution Distribution
06 April 2012

100%

100%
90%
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% Tier 1
Source: Trepp & NSI
0% Tier 2 Tier 3 Tier 1

Source: Trepp & NSI
Tier 2
Tier 3
Maturity risk by loan balance

Larger loans are less likely to be resolved than smaller loans; however smaller loans are more likely to suffer a loss upon resolution. For loans with an outstanding balance of less than $10mn that matured in 2011, the resolution rate is 83%, compared with 65% for loans with a balance between $25 and $50mn and 52% for loans with a balance greater than $100mn (Figures 12 and 13). The difference in the disposition rate reflects the continuing difficulty of refinancing large loans partially due to the historically low level of CMBS securitization. During the market peak, CMBS lending was a leading choice of financing for large loan borrowers. Commercial real estate borrowers must now rely more heavily on financing from insurance companies and other portfolio lenders subject to balance sheet constraints. Also contributing to the higher resolution rate, special servicers appear to be more likely to extend large loans and dispose of smaller loans. Excluding loans with GGP as a sponsor, 12% of loans with balance over $100mn that were due to mature in 2011 were extended, while only 3% of loans with balance no greater than $100mn were extended. In contrast, only 2% of the resolved loans with balance over $50mn were resolved with a loss, while 12% of loans with smaller balance suffered a loss.
35
06 April 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Outstanding Seriously DLQ
Outstanding
Seriously DLQ
Extended
At Maturity Early
Extended Late
At Maturity
Loss
Early Loss
Source: Trepp & NSI
Source: Trepp & NSI
Maturity risk by property type

Among loans that matured in the first quarter of 2012, retail loans demonstrated the highest resolution rate at maturity across the four major property types. Excluding GGP loans from consideration, retail loans maturing in 2011 outperformed loans on other property types as 73% paid in full versus the average of 64%. This improved performance may be due to increased appetite for retail loans from conduit lenders (Figures 14 and 15). Because of their shorter lease terms, multifamily and hotel loans have both experienced elevated delinquency rates over the past three years. However, partially due to the increased financing available to multifamily borrowers from the agencies (FNMA, GNMA, and FHLMC), a much larger portion of multifamily loans have been able to pay in full at maturity. Among loans that matured in 2011, 56% of multifamily loans paid in full and an additional 18% were resolved with a loss. In contrast, only 37% of hotel loans paid in full and 17% were resolved with a loss. Further, the percentage of hotel loans resolved for a loss is likely to continue to increase, as 25% of 2011 maturities remain outstanding and seriously delinquent.
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06 April 2012

100%

100%
90%
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% OF RT MF LO OT
0% OF RT MF LO OT
Source: Trepp & NSI
Source: Trepp & NSI
Loans with balance over $100mn that matured in the fourth quarter of 2011
We highlight 23 loans with balance over $100mn that were either originally or currently scheduled to mature in the first quarter of 2012 that were not resolved a year prior to their maturity date (Figure 16). During the first quarter, five of these loans transitioned from current to non-performing matured, indicating increased likelihood of default at maturity. Two of these loans continue to perform, indicating that the borrower continues to actively support the loans while arranging new financing. Three of these loans were resolved by the end of the year, and three additional loans were resolved th th in the first quarter of 2012. All three newly resolved loans, 9 West 57 Street, 9 West 57 Street (Land), and Mandarin Oriental, are located in New York City, further evidence of the increased likelihood of refinancing for properties located in Tier 1 cities.
37
06 April 2012
Fig. 16: Large loans with original or current maturity date in the fourth quarter of 2011
Status Loss Loan Nam e Balance Deal Nam e BACM 2007-2 BACM 2007-3 CD 2007-CD4 CSMC 2007-C3 JPMCC 2007-LDPX LBUBS 2002-C2 WBCMT 2007-C30 Pct Deal Maturity MSA 3.6% 3.8% 3.3% 2.9% 3.1% 2.4% 1.7% 3.7% 2.1% 2.0% 2.4% 3.8% 6.4% 6.4% 5.6% 3.9% 3.0% 2.2% 6.2% 2.7% Mar-12 Mar-12 Feb-12 Mar-12 Mar-12 Feb-12 Feb-12 Jan-12 Feb-12 Jan-12 Jan-12 Mar-12 Mar-12 Jan-12 Feb-12 Jan-12 Jan-12 Jan-12 Jan-12 Mar-13 Mar-13 Feb-15 Jan-13 Dec-13 Feb-16 Apr-15 Feb-17 New York New York Washington Miami New York Washington Fayetteville, AK San Francisco San Francisco Washington Washington Chicago Las Vegas LA / San Diego Las Vegas Washington New York Washington Washington Washington Denver Atlanta Miami Pittsburgh NA Prop. Type Debt Yield OF OF OF LO OF RT Land MF RT OF OF MF MF OF RT OF LO LO MF LO LO MF OF RT RT RT LO NA NA 18.8% 8.9% 5.9% 26.9% 12.0% 7.9% 12.0% 22.4% 22.4% 7.0% 7.0% 7.0% 8.4% 7.4% NA NA NA 6.0% 6.0% 10.4% 5.9% 10.6% 7.4% NA -1.6%
One Park Avenue * One Park Avenue* At Maturity 9 West 57th Street Mandarin Oriental Franklin Tow er Dadeland Mall 9 West 57th Street (Land) Outstanding Sussex Commons I & II Pinnacle Hills Promenade Non-Perf Mat Pacific Shores * Pacific Shores * Georgian Tow ers * Georgian Tow ers * 200 West Adams Fashion Outlet of Las Vegas Southern California Portfolio FC Loew s Lake Las Vegas Hyatt Regency- Bethesda REO Riverton Apartments Extended Renaissance Mayflow er Hotel Renaissance Mayflow er Hotel Rockw ood Ross Multifamily Park Central Discover Mills Southland Mall Galleria at Pittsburgh Mills Four Seasons Aviara Resort - Carlsbad, CA
102,583,000 BACM 2007-1 140,000,000 MLCFC 2006-4 92,742,628 92,742,628 58,000,000 67,000,000 100,000,000 103,000,000 123,449,000 117,000,000 140,000,000 225,000,000 200,000,000 200,000,000 175,000,000 114,828,612 135,000,000 107,269,889 133,000,000 186,500,000 BACM 2007-1 GECMC 2007-C1 CD 2007-CD5 COMM 2007-C9 CD 2007-CD4 COMM 2007-C9 GCCFC 2007-GG9 CD 2007-CD4 GCCFC 2007-GG9 CD 2007-CD4 BACM 2007-3 BACM 2007-3 BACM 2007-3 CSMC 2007-C2 JPMCC 2006-LDP9 JPMCC 2007-LDPX MSC 2007-HQ11 WBCMT 2007-C30
Source: Trepp & NSI
Loans with balance over $100mn maturing in the first quarter of 2012
We highlight 23 loans with balance over $100mn that were either originally or currently scheduled to mature in the first quarter of 2012 that were not resolved a year prior to their maturity date (Figure 17). Four of these loans have already paid in full, and the Extendicare Portfolio paid prior to its modified maturity date. In addition, seven of these loans, including the $1.9bn Beacon D.C. & Seattle Pool, have been extended. Among the 14 outstanding loans scheduled to mature in the second quarter that are not seriously delinquent, we believe that most will fail to pay in full by maturity. Although six are located in Tier One locations, these loans report weaker debt yields. Servicer comments for one of these six loans, One Sansome Street, indicate that the borrower has received an offer for new financing with an anticipated payoff date of April 30, 2012. However, it remains unclear whether any of the remainder will be able to pay in full at maturity. Only two assets, the Lake Marriott and Orchard Parkway loan and The Streets at Southpoint loan, have debt yields exceeding 10%. Special servicer comments indicate that the Lake Marriott and Orchard Parkway borrower has requested a modification. GGP, the borrower for The Streets at Southpoint loan, has given no indication that they have secured takeout financing for this asset.
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Fig. 17: Large loans with original or current maturity date in the first quarter of 2012
Deal Nam e BACM 2002-2 BACM 2005-5 BACM 2007-2 BSCMS 2007-PW16 CSMC 2007-C4 GCCFC 2007-GG9 GECMC 2007-C1 GSMS 2005-GG4 JPMCC 2005-CB11 JPMCC 2005-LDP2 JPMCC 2007-LD11 Loan Nam e Crabtree Valley Mall One Renaissance Square Beacon D.C. & Seattle Pool * Beacon D.C. & Seattle Pool * 245 Fifth Avenue Lake Marriott and Orchard Parkw ay Manhattan Apartment Portfolio The Streets at Southpoint Southridge Mall CityPlace Corporate Center 315 Park Avenue South GSA Portfolio LBCMT 2007-C3 Bay Colony Corporate Center 110 William Street Bethany Phoenix Portfolio I LBUBS 2005-C2 The Woodbury Office Portfolio II - A note LBUBS 2006-C7 Extendicare Portfolio * LBUBS 2007-C1 Extendicare Portfolio * LBUBS 2007-C2 Extendicare Portfolio * LBUBS 2007-C6 Greensboro Park 100 Wall Street One Sansome Street MLMT 2007-C1 Gw innett Place Tow n Center at Cobb MSC 2005-IQ10 195 Broadw ay MSC 2007-HQ12 Columbia Center Beacon D.C. & Seattle Pool * MSC 2007-IQ14 New York City Apartment Portfolio Roll-Up Tabor Center & U.S. Bank Tow er Roll-Up Beacon D.C. & Seattle Pool * MSC 2007-IQ15 Hilton Washington DC MSDWC 2002-HQ Woodfield Shopping Center * MSDWC 2002-TOP7 Woodfield Shopping Center * WBCMT 2007-C31 Beacon D.C. & Seattle Pool * WBCMT 2007-C32 Beacon D.C. & Seattle Pool * ING Hospitality Pool(3)* Three Borough Pool WBCMT 2007-C33 ING Hospitality Pool(3)* Balance 103,600,000 274,778,222 338,197,017 140,000,000 107,250,000 151,094,965 124,000,000 116,132,823 219,000,000 284,000,000 156,600,000 123,000,000 104,500,000 108,926,767 117,399,060 139,569,073 115,000,000 280,000,000 380,000,000 113,874,926 195,000,000 300,000,000 548,155,702 215,000,000 292,821,240 292,821,240 283,850,000 133,000,000 283,850,000 Pct Deal Maturity MSA Prop. Type Debt Yield Apr-12 Raleigh RT 17.2% 6.5% Apr-12 Phoenix OF 7.7% 11.2% May-17 Various OF 5.7% 11.4% May-17 Various OF 5.7% 7.2% May-12 New York OF 6.0% 1.8% Apr-12 San Jose OF 12.7% May-12 New York MF Stale 4.7% Apr-12 Durham, NC RT 15.5% 9.0% Apr-15 Milw aukee RT 7.4% 5.8% Apr-12 Saint Louis OF 7.8% 4.3% Jun-12 New York OF 7.6% 5.5% May-12 Various OF 7.3% Jun-12 Boston OF 3.8% 5.4% Jun-12 New York OF 8.4% 4.3% Jun-17 Phoenix MF 6.4% 9.1% Dec-15 New York OF Stale May-12 Various HC Stale May-12 Various HC Stale May-12 Various HC Stale 3.9% Jun-15 Washington OF 6.2% 4.2% Jun-12 New York OF 5.8% 5.0% Jun-12 San Francisco OF 5.3% 3.1% Jun-12 Atlanta RT 6.3% 7.6% Jun-12 Atlanta RT 7.3% Apr-12 New York OF 7.9% 23.2% May-15 Seattle OF 5.1% 6.9% May-17 Various OF 5.7% 4.5% Apr-12 New York MF Stale 7.0% Apr-13 Denver OF 6.5% 12.7% May-17 Various OF 5.7% 11.2% Jun-12 Washington LO 8.6% Apr-12 Chicago RT 27.0% Apr-12 Chicago RT 27.0% 5.4% May-17 Various OF 5.7% 8.1% May-17 Various OF 5.7% 7.9% Jun-12 Various LO 9.1% 3.8% May-12 New York MF Stale 8.2% Jun-12 Various LO 9.1% Status At Maturity Outstanding Extended Extended Outstanding Outstanding Loss Outstanding Extended Outstanding Outstanding Outstanding At Maturity Outstanding Extended Extended Late Late Late Extended Outstanding Outstanding Outstanding Outstanding At Maturity Extended Extended FC Extended Extended Outstanding At Maturity At Maturity Extended Extended Outstanding FC Outstanding
Source: Trepp & NSI
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06 April 2012
Disclosure Appendix A1
ANALYST CERTIFICATIONS We, Ohmsatya Ravi, Ankur Mehta, Dhivya Krishna, Arun Manohar, Gaetan Ciampini, Paul Nikodem, Lea Overby, Steve Romasko, Kunal Singal and Sean Xie CFA, hereby certify (1) that the views expressed in this report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
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The term "Nomura Group Company" used herein refers to Nomura Holdings, Inc. or any affiliate or subsidiary of Nomura Holdings, Inc. Nomura Group Companies involved in the production of Research are detailed in the disclaimer below.
Issuer name BANK OF AMERICA CORP BANK OF NEW YORK MELLON CORP/THE BANK OF NEW YORK MELLON/THE FEDERAL NATIONAL MORTGAGE ASSOCIATION JP MORGAN CHASE INTERNATIONAL HOLDINGS
Disclosures A1,A2,A3,A4,A5,A6,A7,A9 A4,A5,A6,A7,A9 A4,A5,A6,A7,A9 A4 A4,A5
A1 Nomura Securities International, Inc has received compensation for non-investment banking products or services from the issuer in the past 12 months. A2 Nomura Securities International, Inc had a non-investment banking securities related services client relationship with the issuer during the past 12 months. A3 Nomura Securities International, Inc had a non-securities related services client relationship with the issuer during the past 12 months. A4 A Nomura Group Company had an investment banking services client relationship with the issuer during the past 12 months. A5 A Nomura Group Company has received compensation for investment banking services from the issuer in the past 12 months. A6 A Nomura Group Company expects to receive or intends to seek compensation for investment banking services from the issuer in the next three months. A7 A Nomura Group Company has managed or co-managed a publicly announced or 144A offering of the issuer's securities or related derivatives in the past 12 months. A9 Nomura Securities International Inc. makes a market in securities of the issuer.
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Securitized Products Research | Americas

MGM Mirage Securitized Products Weekly Credit Research | United States

Agency MBS: Market Overview and Relative Value

Agency MBS: March Prepayment Commentary

Sean Xie, CFA

CMBS: Loan Performance at Maturity

Nomura Securities International Inc.

Nomura | Securitized Products Weekly

Agency MBS: Market Overview and Relative Value

Ankur Mehta +1 212 667 2330

Dhivya Krishna +1 212 667 2183

Fig. 1: April/May Dollar Roll Levels and Implied B/E Speeds

TBA FNCL 4.5s FNCL 5.0s FNCL 5.5s FNCL 6.0s

April/May Dollar Roll 4.875 5.250 5.000 4.750

Implied B/E Speed 34.0 31.5 33.5 34.5

Nomura | Securitized Products Weekly

FHFA Reports Doubling of HARP Volumes in January1

Fannie HARP Fannie Streamline

Freddie HARP Freddie Streamline

Nomura | Securitized Products Weekly

Fig. 3: Prepays on HARP Eligible Pools by Current LTV

Fig. 4: Estimated Prepays Attributed to HARP Refinancings

LTV>80 speeds flat to slightly down

Freddie <=80 LTV Fannie <=80 LTV

Freddie >80 LTV Fannie >80 LTV

Freddie HARP CPR

Fannie HARP CPR

Nomura | Securitized Products Weekly

GNMA MBS: Underweight GN 4.0s versus GN 3.5s and 4.5s4

Fig. 5: Recent Price History of GN I and GN II 4.0s Butterflies

Relative Value in the Agency Passthrough Market

Nomura | Securitized Products Weekly

Fig. 6: Valuations of the 30-year Coupon Stack (as of April 5, 2012)

Source: YieldBook, Nomura Securities International

Fig. 7: Valuations of the 15-year Coupon Stack (as of April 5, 2012)

Source: YieldBook, Nomura Securities International

Nomura | Securitized Products Weekly

Agency MBS: March Prepayment Commentary5

Ankur Mehta +1 212 667 2330

Dhivya Krishna +1 212 667 2183

Explaining the Slower than Expected Prepayments

Nomura | Securitized Products Weekly

Fig. 1: Assessing the Impact of a Change in TPO % on the Refi Index

Total Refi Index 8000 8000

TPO % 50% 40%

Source: Nomura Securities International

Source: Fannie Mae, Freddie Mac, Nomura Securities International

Nomura | Securitized Products Weekly

HARP Continues to Increase Higher Coupon Speeds

Fig. 3: Voluntary Speeds on 30-year Fannie and Freddie MBS

Source: Fannie Mae, Freddie Mac, Nomura Securities International

Servicer Level Trends

Nomura | Securitized Products Weekly

Fig. 4: Prepay Speeds on 2006-08 Vintage 30-year Gold Loans by Servicer

Source: Freddie Mac, Nomura Securities International

GNMA: Bank of America buyout

Fig. 5: Prepay Speeds on GN I pools by Coupon and Issuer

30% 20% 10% 0%

We do not have buyout related data available for GNMAs yet.

Nomura | Securitized Products Weekly

+1 212 667 2130

Sean Xie, CFA

+1 212 667 9081