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www.fitchratings.com May 26, 2009

Residential MortgageSpecial Report

U.S. RMBS Servicers’ LossMitigation and Modification Efforts

Summary

Notwithstanding the changes in loss mitigation under way, data submitted by Fitch’srated servicers indicate that RMBS servicers have been responding to this challengingenvironment by increasing the overall number of loss mitigation (loss mit) resolutions orworkouts, including significantly increasing the number of loan modifications (mods). InDecember 2008 research, Fitch projected that over the following 12 months RMBSservicers were expected to modify up to 15% of 2005

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2007 vintage RMBS mortgages, anincrease from virtually none in 2007. As of April 2009, approximately 7% of RMBS and18% of RMBS subprime loans in these vintages had been modified.When properly done, modifications can benefit both homeowners and RMBS investors.As it has always been, the key to a successful loan modification program issustainability. This depends on the borrower wanting to keep the property, as well ashaving sufficient cash flow to make the modified payment. However, based oninformation from servicers and data from First American Loan Performance (LP), Fitch

Analysts

Diane Pendley+1 212 908-0777

diane.pendley@fitchratings.com

Thomas Crowe+1 212 908-0227

thomas.crowe@fitchratings.com

051015201/073/075/077/079/0711/071/083/085/087/089/0811/081/093/09

Sources: Fitch Ratings and LoanPerformance.

2005

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2007 Vintage RMBS Loans Modified

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Subprime

(As % of Outstanding Balance)

024681/073/075/077/079/0711/071/083/085/087/089/0811/081/093/09

Sources: Fitch Ratings and LoanPerformance.

2005

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2007 Vintage RMBS Loans Modified — Prime, Alt-A, and Subprime

(As % of Outstanding Balance)

Fitch Ratings requests its ratedservicers provide detailed informationon loss mitigation strategies as part ofits annual servicer ratings process. Inaddition, Fitch requests updatedinformation on a semiannual basis (as ofend of June and December). Fitch usesthis information to establish and updateindustry trends and benchmarks forvarious factors, such as the activitylevel and performance of loss mitigationsefforts, including mods, repaymentplans, and short sales.

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places a conservative projection for subprime 60 days or more delinquent re-defaultrates within the range of 65%

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75% after 12 months. Market pressures to allow moreaggressive mods and continued home price declines, as well as the economy’s effect onjob losses, factor into this projection.Principal reduction has been debated as necessary for the success of modifications.Proponents believe that borrowers re-default less when they receive an incentive to stay inthe property by having their principal reduced, giving them immediate equity or a quickeropportunity of equity. Data on mods with material principal increases (more than 10% inbalance) show higher re-defaults, 60%

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70%. However, mods in this group continue to averageonly 8%

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9% of the total mods performed and have decreased slightly in the first quarter of2009. Likewise, mods with significant principal balance reduction (more than 10% decrease)are limited to less than 4% of all mods performed. The majority of RMBS modifications todate have been within the range of a 10% decrease to a 5% increase in balance, which hasseen re-default rates of 35%

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55% after 12 months

(see charts on page 12)

010203040506070(12)(10)(8)(6)(4)(2)024681012

Months

20042005200620072008Source: Fitch Ratings and LoanPerformance.

RMBS Subprime 60+Day Delinquencies Pre- and Post-Modification by Vintage

(%)

Using the same data set, principal and interest (P&I) payment increases and decreasesalso have an impact on the rate of re-defaults. Modified loans with a payment increaseof 20% or more and loans with a payment decrease of 20% or more now indicate aspread in re-default rates from 70% to 40%, respectively. However, it should be notedthat data indicate loans modified with any increase in payment continue to drop from ahigh of 40% of all mods in early 2007 to 10% of all mods in March 2008. For the loans inwhich the payments declined, regardless of the amount of decrease, the re-default rateis within a narrow 40%

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50% range after 12 months

(see charts on page 13)

.The new administration’s modification guidelines primarily focus on affordability ofpayment, with the use of principal forbearance (as opposed to forgiveness) as a laststep in the process. However, the program provides for incentives ($1,000 for each offive years) to reduce the outstanding forbearance amount if the borrowers continue toperform. This incentive, along with the specific guideline to use forbearance, isexpected to affect the use of principal forgiveness going forward. Nevertheless,initiation of the new administration’s programs is only now under way, and some detailshave yet to be finalized

(see program summary in Addendum A, page 15)

. While some

U.S. RMBS Servicers’ Loss Mitigation and Modification Efforts May 26, 2009

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servicers have registered for the program, actual usage for RMBS is still beingdetermined by servicers.Actual loss severities for loans that have re-defaulted after modification, completed theforeclosure and REO process, and ultimately liquidated from RMBS are rare. Determinationof actual losses for these loans is further complicated and extended by the servicersproviding either additional modifications or other loss mitigation efforts (such as shortsales) if the first mod re-defaults. Therefore, comparison of losses for loans receivingmodifications to losses on loans without modification is not yet conclusive. Furthermore, itcould be months before the volume or performance of loans modified using theadministration’s guidelines can be compared to modifications completed to date.Fitch will be closely watching the possible implementation, repercussions, andperformance of modification strategies on its rated servicers, as well as transactions,should these guidelines be utilized for RMBS loans. This report discusses some of thesimilarities, as well as differences, in loss mitigation, specifically modification, whichhas been used by RMBS servicers previously, and the new program.

Overview

U.S. private-label RMBS servicers continue to struggle with the rising volume of delinquentloans, not only in the subprime mortgage sector, but also in the Alt-A and even primemortgage sectors. In addition, government, consumer advocate, and media attention issquarely focused on applying pressure to servicers to avoid foreclosures and keep borrowers intheir homes. New administration programs, which include guidelines for modifications, statethese guidelines should be used as “usual and customary industry standard(s),” includingapplication to RMBS. Furthermore, this plan states that guidelines should be used unlessspecifically prohibited by the governing pooling and servicing agreements (PSAs), and if so, theservicer should use reasonable efforts to remove these obstacles. However, many investors, aswell as servicers, have expressed concerns with the guidance regarding long-term performanceof the modified loans, process specifics, and legality within the PSA contracts.The ability to obtain re-default information continues to be difficult and has been furthercomplicated by servicers modifying the loan a second or more times if the initial attemptfails. However, Fitch has determined that by using logic filters to the LoanPerformance(LP) data, in addition to the actual modified indicator, it is possible to more accuratelyidentify the majority of mods completed, as well as their post-mod performance.