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AUGUST 5, 2008

INVESTING IN ASSET BACKED SECURITIES

ABS Research
Chris Flanagan AC Head, Global Structured Finance Research (1-212) 270-6515 christopher.t.flanagan@jpmorgan.com Edward Reardon (1-212) 270-0317 edward.j.reardon@jpmorgan.com Amy Sze, CFA (1-212) 270-0030 amy.sze@jpmorgan.com Brynja Sigurdardottir (1-212) 270-0967 brynja.x.sigurdardottir@jpmorgan.com

Agenda
Page

Introduction to ABS Credit Card Automobile ABS


S EC U R I T I E S

1 11 35 53 86

Student Loan ABS (FFELP) Home Equity ABS

I N V E S TI N G

I N

AS S E T

B AC K ED

ABS outstanding
Asset-backed Asset-backed Securities Securities Outstanding Outstanding ($ ($ billions) billions)
2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800
A B S

1Q08 1Q08 year year end end outstanding outstanding by by collateral collateral
2472 2480

Student Loan
2130 1955 1828 1694 1543

10%

Auto 8% Cards 14%

Equip
1281 1072 901 732 536 404

2%

Other 41% Home Eq 24% MH 1%

600 400 96

T O

98

00

02

04

06

1Q08

I N T R O D U C TI O N

As of 1Q08. Other is approximately 90% CDOs Sources: SIFMA

U.S. ABS supply: The peak is behind us.


Supply Supply ($ ($ Billions) Billions)
900 800 702 700 600 500 330 400 300 200 100 116 0 1998 2000 2002 2004 2006 YTD08 224 240 272 874 888
Credit Cards Autos Home Equity Student Loans Global RMBS Equipment

Sector Sector supply supply ($ ($ Billions) Billions)


2005 66 103 559 64 35 9 39 874 2006 66 84 555 65 69 8 40 888 2007 91 62 224 48 66 6 32 529 2.9 3.1 116.3 23.8 2008 YTD 54.6 32.6 2008 Full Year Proj 95 50 0 30 30 5 20 230

500 402

529

Other Total

Other includes Floorplan, Motorcycle, Small Business Loans, Time Share, Aircraft, Franchise, and other miscellaneous assets. As of Aug 1, 2008. Source: JPMorgan, IGM CorporateWatch, and Bloomberg.

Outstanding Outstanding ($1,552bn ($1,552bn total total as as of of year year end end 2007) 2007)
Student Loans $244 16% MH $27 Home Equity $586 37%
Sources: JPMorgan, SIFMA

Other $102 7%

Autos $199 13% Credit Cards $348 Equipment $46 3% 22%

A B S

2%

I N T R O D U C TI O N

T O

Sources: JPMorgan, IGM CorporateWatch, and Bloomberg.

ABS investor base has grown dramatically


Phase I: 1985-1989
Bank portfolios Insurance companies Total return accounts Bank trust departments

Phase II: 1989-1993


State funds Asset swap investors Credit unions Corporations Govt Agencies

Phase I & II
Bank portfolios Insurance companies Total return accounts Bank trust departments State funds Credit unions Corporations Govt Agencies Asset swap investors

Phase III: 1993 - 2002


Money market funds Intl. Investor Specialty Hedge funds Central banks Credit leveraged funds SPVs Securities Lenders

Phase IV: 2002 - Present

Cash/synthetic Mezz SF CDOs HG SF CDOs Macro hedge funds Dealers

I N T R O D U C TI O N

T O

A B S

Concepts of Securitization: Asset Securitization


Packaging of pools of assets for sale as debt securities Repayment of the ABS is derived from cash flow generated by the underlying assets ABS are typically issued by banks, finance companies, and corporations Assets typically securitized include: Consumer Loans: Auto Loans, Credit Card Receivables, Home Equity Loans,

Manufactured Housing Loans, or Student Loans


Business Loans: Equipment Loans, Dealer Floorplan, Small Business Loans
Issuers Issuers Investors Investors

Lower Cost of Funds Balance Sheet/Ratio Improvement


A B S

High Credit Quality Higher yield than comparable rated

Access Foreign and US Capital Markets Access Different Areas of the Yield Curve Transfer Risks to Investors

corporate and government securities


Liquidity Relatively Predictable Cash Flows Wide Variety of Maturities

I N T R O D U C TI O N

T O

ABS basic structure


Monthly principal & interest payments True Sale Special Purpose Vehicle Master Trust Owner Trust REMIC Investors Issue ABS

Receivables Credit Cards Auto Loans Home Equity Student Loans

Seller / Servicer Banks Finance Companies Corporations

Represent ownership interest in a pool of receivables sold by originators into a special purpose

vehicle (the Trust)


Are typically secured by homogeneous assets with relatively predictable cash flows Assets are legally separated from the seller/servicer, limiting investor exposure to the
A B S

seller/servicer
Feature credit enhancements which lead to high credit ratings

I N T R O D U C TI O N

T O

How do ABS issued get AAA Ratings?


Trust Trust Structure Structure Credit Credit Enhancement Enhancement

Bankruptcy Remote

Internal Excess Spread Subordination Reserve Fund Spread Account Overcollateralization External AAA-rated Monoline

Vehicle
Insulates Investor from

Issuer AAA Rating


Payout Payout Events Events / / Performance Triggers Performance Triggers

Insurer

Protects investors from

adverse credit developments


T O I N T R O D U C TI O N A B S

Structure and credit enhancement


Credit Enhancement

Assets (Principal Amounts)

ABS (Liabilities Principal Amounts)

AAA Loss allocation (bottom up) ($800 million) Seniority (top down)

Receivables Pool ($1,000 million)

AAA 20% = AA 9% + A 5% + BBB 3% + OC 3%

AA ($90 million) A ($50 million) BBB ($30 million) OC* ($30 million)

AA 11% = A 5% + BBB 3% + OC 3% A 6% = BBB 3% + OC 3% BBB 3% = 3%OC

A B S

T O

Excess Spread (or Excess Interest)

I N T R O D U C TI O N

* OC = Overcollateralization (or Assets > Liabilities). Reserve account may be used in addition to or instead of OC.

Excess spread
Excess spread is the first line of defense against losses in ABS Gross Portfolio Yield

Charge-offs Bond Coupon Servicing Fee Excess Spread

18.00% - 4.00% - 5.50% - 2.00% 6.50%

(Revenue: interest earned on asset) (Credit losses on assets) (Liability cost of ABS debt) (Other expenses) (Net income)

I N T R O D U C TI O N

T O

A B S

AAA ABS spreads recently gave up most of the years earlier gains
3 3 year year AAA AAA spreads spreads spread spread to to LIBOR LIBOR (bp) (bp)
190 170 150 130 110 90 70 50 30
A B S

Credit Card

Prime Auto

Student Loan (FFELP)

UK RMBS

AA Financial (1-3 year)

95

135

90

190

158

10 -10 4/00 10/00 4/01 10/01 4/02 10/02 4/03 10/03 4/04 10/04 4/05 10/05 4/06 10/06 4/07 10/07 4/08

I N T R O D U C TI O N

T O

As of Aug 1, 2008. Source: JPMorgan.

10

Agenda
Page

Introduction to ABS Credit Card Automobile ABS


S EC U R I T I E S

1 11 35 53 86

Student Loan ABS (FFELP) Home Equity ABS

I N V E S TI N G

I N

AS S E T

B AC K ED

11

Market Overview: Type of Cards


Credit Credit Cards Cards Account Type
y Revolving, general

Retail Retail / / Private Private Label Label Credit Cards Credit Cards
y Revolving, can only

Charge Cards Cards Charge


y Non revolving, general

purpose

be used at retailer that issues card

purpose

Monthly Principal

y Holder must pay

y Holder must pay

minimum balance each payment period

minimum balance each payment period

y Holder must pay all

balances in full each payment period

Examples

y Visa

y Bloomingdales

Mastercard Discover AMEX Optima

Macys Neiman Marcus Sears

y AMEX Green

Corporate Cards

C R E D I T

C AR D

12

Market Overview: Types of Credit Cards


Affinity cards Cards marketed to a specific group to promote loyalty

(e.g. college, sports team, professional organization)


Teaser rate cards Have a low introductory APR. After the introductory period, the APR increases to

a market rate
Co-branded cards Visa / MasterCard jointly marketed with a retailer that often provide rewards at

that retailer (e.g. Nordstrom VISA card)


Secured cards Cards with credit limits backed by a cash security deposit

C R E D I T

C AR D

13

Credit Card ABS issuance


Credit Credit Card Card ABS ABS supply supply ($ ($ bn) bn)
100 91 68 69 67 80 52 52 60 43 42 43 57 51 55 66 65

2007 2007 floating-rate floating-rate supply supply by by WAL WAL ($bn) ($bn)
40 30 20 10 0 3 4 5 WAL (yr) 7 10 5 6 6 30

25

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

34 40 23 21 20 20

2007 2007 fixed-rate fixed-rate by by WAL WAL ($bn) ($bn)


4.8

16

4.6 4.4 4.2

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
C AR D
As of Aug 1, 2008 Source: JPMS, IGM CorporateWatch, Bloomberg.

4.0 3 W AL (yr) 10

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

C R E D I T

14

Credit Card ABS by issuer


Supply Supply by by issuer issuer

Issuer Chase Bank of America (MBNA) Citibank Capital One American Express Discover Card GE Capital Washington Mutual HSBC ADVANTA Nordstrom First National National City Turquoise Cabela's WFN (Wachovia) Conn Funding Others Total
As of Aug 1 2008 Source: JPMS, IGM CorporateWatch, Bloomberg.

Tickers CHAIT BACCT CCCIT COMET AMXCA, AEIT DCENT GEMNT WMMNT HMNT ABCMT NDCCM FNMNT NCCMT HCARD CABMT WFNMT CONN

2005 13,445 9,450 8,875 5,930 6,600 5,579 2,619 2,208 1,084 1,275

2006 9,625 17,495 10,500 9,100 3,499 3,442 973 4,250 1,000 1,915

2007 20,635 18,140 16,090 8,875 7,842 6,698 4,183 2,925 1850 1,450 850 850

2008 YTD 12,600 13,335 7,025 4,925 10,633 3,500

247

600 250

425 1,750 500 500 150

425

374 500

7,970 65,885 65,124

352 91,165 54,605

C R E D I T

C AR D

15

Structure: Structural Features of Credit Card ABS


Trust Structures Master note trust: delinked Master trust Cashflow Mechanics Revolving period Soft bullet Controlled amortization (CAM) Credit Enhancement As unsecured revolving debt obligations, credit card receivables offer limited

recovery in the event of a cardholder default.


Credit enhancement protects investors from resulting losses Typical Credit Card ABS Deal Characteristics Pricing Benchmarks Coupon Type Typical New Issue Size
C AR D

Swaps, LIBOR Fixed or Floating $1.0 billion

C R E D I T

16

Structure: Trust Structure Delinked Master Note Trust


De-links issuance and maturities of senior

and subordinate classes of notes


Allows issuers MTN-like flexibility. Can be

Master Trust

more opportunistic in issuance


Allows for issuance for block sizes of

Collateral Certificates

subordinates
Public issuance of notes allows unrestricted

transferability and ERISA eligibility for virtually all classes


Master trust issues collateral certificate

Issuance Trust

which is deposited into issuance trust


Common among Bank Card ABS issuers

Class A AAA

Class B A

Class C BBB

Subclass A1,A2,...
C AR D

Subclass B1,B2,...

Subclass C1,C2,...

C R E D I T

17

Structure: Cashflow Mechanics Revolving Period


The interest-only period, during which time bondholders receive interest payments

but no principal payments


Revolving period typically lasts from 110 years, depending on the life of the

transaction
It is followed by the controlled amortization or accumulation period Monthly principal collections are used to purchase new receivables Revolving period can be terminated early if certain early amortization events occur

C R E D I T

C AR D

18

Structure: Cashflow Mechanics Soft Bullet


Principal repayment where bondholders receive all the principal they are due on the

expected maturity date


At the completion of the revolving period, principal payments are captured in an

account during the accumulation period


Sharing of principal collections in the trust structure can drastically shorten the

accumulation period
Example Three-year expected maturity with five-year legal final
Revolving Period Months 1-33 No Yes Yes No Accumulation Period Months 34-36 No Yes After Accum Yes Principal Repaid Month 36 Paid in Full Yes After Accum Yes

Soft Bullet Cash Flow Structure Principal Payments Interest Payments Purchase of Receivables Principal Accumulation

C R E D I T

C AR D

19

Structure: Cashflow Mechanics Soft Bullet (Continued)


Investment: Investment: Credit Credit card card ABS, ABS, three-year three-year bullet bullet maturity maturity Bond cash flow ($100 MM investment) Bond cash flow ($100 MM investment)
100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Revolving period Accumulation period

Interest paid to investor

Principal paid to investor

Collateral: Collateral: Credit Credit card card accounts, accounts, monthly monthly principal principal and and interest interest receipts receipts
Collateral balance ($)

Excess seller interest Required seller interest Investor interest

6
Source: JPMS.

12

18
Revolving period

24

30
Accumulation period

36

C R E D I T

C AR D

20

Basic credit card securitization cash flows


Available Available finance finance charge charge collections collections Priority of of distribution distribution Priority

Servicing fee to servicer (typically 2.00%) Interest income Net recoveries on charged off assets Interchange Fee income Interest payment on Class A Notes Interest payment on Class B Notes Interest payment on Class C Notes Deposit to the spread account Excess spread to residual holder

Available Available principal principal collections collections

Priority of of distribution distribution Priority

Cover interest shortfalls on each class of Notes Cover servicing fee shortfalls Make targeted deposit to Class A principal Principal collections

funding account
Make targeted deposit to Class B principal

C AR D

funding account
Make targeted deposit to Class C principal

C R E D I T

funding account
Excess paid to residual holder
21

Structure: Credit Enhancement Credit Enhancement Type


Excess spread is first line of defense In most master trusts, excess spread is
Typical Typical Credit Credit Enhancement Enhancement Structure Structure
Share of Assets

available to be shared with other series


Seller owns the excess spread and is

Class A

Rating AAA

CE

Deal Structure

motivated to maximize excess spread


Spread account Account that traps a portion of excess

86.50% 13.50%

Class A Class B Class C Spread Acct Excess

B C Spread Account Excess Spread

A BBB N/R N/R

6.75% 6.75%

6.75%

spread typically for benefit of C Class


Subordination Represents a subordinated ownership

1.00% 6.00%

interest in the trust with payment rights subordinate to higher rated tranches
Collateral invested amount (CIA) / Class C

Gross Portfolio Yield Charge-offs Net Portfolio Yield

18.00% - 4.00% 14.00%

Generally rated BBB


Class B

Generally rated A
Principal collections will be allocated to
C AR D

Base Rate WA Bond Coupon - 5.50% Servicing Fee - 2.00% Excess Spread 6.50%

Class B only after Class A is paid and Class C only after the Class A and B are paid
Insurer wrap (rare, on subprime receivables)

C R E D I T

22

Credit enhancement by issuer


Credit Credit Card Card ABS ABS credit credit enhancement enhancement BBB BBB spread spread account account example example - CHAIT CHAIT

Issuer Advanta American Express Charge American Express - Credit Bank of America Cabela Capital One Chase CHAIT Citibank CCCIT Discover GE HSBC HSBC Private Label National City Nordstrom WaMu
Source: JPMorgan, Deal Documents.

AAA 17.00% 7.00% 12.00% 14.00% 13.50% 17.00% 11.50% 12.25% 12.50% 18.75% 20.50% 24.00% 12.50% 16.50% 27.00%

A 8.50% 4.00% 6.50% 6.50% 6.50% 8.00% 5.75% 7.00% 7.50% 9.50% 12.00% 12.50% 6.50% 8.00% 16.50%

3-month Excess Spread % 4.50% or greater 4.00 - 4.49% 3.50 3.99% 3.00 3.49% 2.50 2.99% 2.00 2.49% 0.00 1.99% < 0.00%

Spread Account Funding % 0.00% 1.00% 1.50% 2.50% 4.00% 5.00% 5.75% 5.75%

Source: Chase 8K filing March, 1, 2007 Note: The Spread Account schedule is issuer specific. Above for Chase only.

Excess spread first line of defense against losses AAA and A benefit from subordination BBB credit enhancement from spread account Funding schedule of spread account aims to be fully collateralized versus the par BBB bond
C AR D

amount before excess spread drops below zero

C R E D I T

23

Structure: Cashflow Mechanics Early Amortization Events Protect Investors


Deals are structured with early amortization triggers to protect investors from

extended exposure to deteriorating asset quality. If an early amortization event occurs, deal begins to pay out immediately.
All principal collections become allocable to investors immediately and cash on

deposit in accumulation account is paid to investors sequentially


Principal is no longer limited to controlled amortization/accumulation amount Investors get a portion of principal normally allocable to the seller Typical Early Amortization Events Seller/Servicer

Failure or inability to make required deposits or payments Failure or inability to transfer receivables to the trust when necessary False representations or warranties Certain events of default, bankruptcy, or receivership of the seller or servicer

Legal

Trust becomes classified as an investment company under the Investment Company Act of 1940
Performance

Three-month average excess spread falls below a minimum level (i.e., zero) Sellers participation falls below the required level Portfolio principal balance falls below the invested amount

C R E D I T

C AR D

24

Credit Card ABS collateral characteristics


Credit Credit Card Card ABS ABS Master Master Trust Trust composition composition comparison comparison
Master Trust Number of Accounts(million) Receivables Balance($million) Average Balance (Incl. 0 & credit balance accts)($) Average Balance (excl. 0 & credit balance accts)($) Weighted Average Credit Limit($) Weighted Average Age (months) Average Utilization Rate Outstanding Balance <$5,000 $5,000 10,000 $10,000+ Credit Limit $0 5,000 $5,000 10,000 $10,000+ Age Not more than 12 months 12 months to 24 months 24 months to 36 months 36 months to 48 months Over 48 months +
C AR D

Chase - CHAIT 3,200.0 76,407 1,902 4,050 11,421 94 16.7% 25.71% 28.40% 46.24% 7.90% 16.16% 75.86% 0.00% 12.27% 12.12% 11.59% 64.02% 12.25% 5.97% 6.87%
08-6 A Prosup, May 08

BofA (BACCT) 58.0 100,380 1,732 4,359 14,110 96 12.3% 22.10% 26.20% 51.80% 7.20% 16.10% 76.70% 0.70% 1.80% 6.70% 10.80% 70.20% 13.60% 8.30% 6.70%
08-6 A Prosup, Apr 08

Capital One 30.0 44,767 1,492 2,275 6,396 62 22.9% 49.71% 25.70% 24.67% 33.71% 18.91% 47.39% 5.92% 11.81% 11.40% 12.49% 58.38% 12.40% 6.50% 6.37%
08-4 A Prosup, Mar-08

Citi - CCCIT 38.5 77,816 2,021 3,994 11,721 17.2% 25.14% 25.87% 49.09% 7.07% 13.96% 78.97% 4.33% 5.45% 6.19% 6.89% 77.14% 14.98% 6.69% 8.05%
08-A7 Prosup, Mar-08

Discover 31.2 38,145 1,222 2,733 8,924 13.7% 37.80% 39.10% 23.20% 10.70% 33.90% 55.40% 2.60% 5.70% 5.30% 4.40% 82.00% 9.70% 6.10% 8.30%
08-4A Prosup, May-08

Geographic Concentration >5% California New York Texas


Source and As Of Date

C R E D I T

Source: Moodys, Deal Documents

25

Credit Card ABS collateral characteristics (continued)


Credit Credit Card Card ABS ABS Master Master Trust Trust composition composition comparison comparison Amex - Credit Master Trust Card
Number of Accounts(million) Receivables Balance($million) Average Balance (Incl. 0 & credit balance accts)($) Average Balance (excl. 0 & credit balance accts)($) Weighted Average Credit Limit($) Weighted Average Age (months) Average Utilization Rate Outstanding Balance <$5,000 $5,000 10,000 $10,000+ Credit Limit $0 5,000 $5,000 10,000 $10,000+ Age Not more than 12 months 12 months to 24 months 24 months to 36 months 36 months to 48 months Over 48 months +
C AR D

Amex Charge Card 6.6 7,525 1,148 2,064

HSBC (Union Plus) 4.0 5,629 1,443 7,510 105 19.2%

National City 1.2 2,111 1,795 3,054 11,402 147 15.7% 34.40% 37.50% 28.10% 8.70% 23.10% 71.80% 0.00% 0.00% 8.10% 7.30% 84.70%

WaMu 7.6 16,913 2,225 2,897 6,294 58 35.4% 41.86% 43.02% 15.17% 23.96% 41.29% 34.74% 1.92% 20.42% 10.57% 11.89% 55.20% 16.57% 7.28% 7.14%

27.7 43,845 1,584 3,902

25.70% 21.10% 53.30% 5.30% 9.80% 58.30% 1.10% 10.40% 11.60% 10.90% 66.00% 17.08% 8.73% 6.85%
08-5 Prosup, May 08

41.30% 17.10% 42.10%

26.09% 34.99% 38.93% 8.41% 20.55% 71.04%

0.00% 0.00% 0.50% 7.20% 92.20% 14.80% 9.64% 9.15%


08-1 Prosup, Feb 08

0.00% 5.81% 17.17% 56.93% 13.11% 13.38%


07-2 Prosup, Jul 07

Geographic Concentration >5% California New York Texas


Source and As Of Date Source: Moodys, Deal Documents

C R E D I T

08-1 Prosup, May 08

07-A5 OM, Sep -07

26

Credit Card ABS collateral characteristics (continued)


Credit Credit Card Card ABS ABS Master Master Trust Trust composition composition comparison comparison
Master Trust Number of Accounts(million) Receivables Balance($million) Average Balance (Incl. 0 & credit balance accts)($) Average Balance (excl. 0 & credit balance accts)($) Weighted Average Credit Limit($) Weighted Average Age (months) Average Utilization Rate Outstanding Balance <$5,000 $5,000 10,000 $10,000+ Credit Limit $0 5,000 $5,000 10,000 $10,000+ Age Not more than 12 months 12 months to 24 months 24 months to 36 months 36 months to 48 months Over 48 months +
C AR D

Advanta 1.6 6,004 3,643 6,665 15,818 42 23.0% 14.41% 23.10% 62.58% 5.10% 11.47% 83.43% 19.96% 24.09% 15.01% 6.78% 34.16% 15.53% 8.25% 6.16%
08-A3 Prosup, May 08

Cabelas 1.6 1,778 1,121 1,880 7,806 14.4% 58.43% 33.21% 8.50% 13.14% 64.20% 22.65% 12.15% 13.37% 11.38% 10.40% 52.70% 5.04%

GE 46.8 17,081 365 621 1,983 90 18.4% 92.59% 6.26% 1.17% 79.84% 17.11% 3.05% 14.58% 11.28% 9.75% 8.27% 56.12% 9.68% 6.76% 10.15%

HSBC Private Label 12.4 8,434 680 3,998 46 17.0% 74.25% 17.97% 7.78% 57.00% 26.97% 16.03% 38.54% 16.40% 8.90% 29.53% 13.28% 8.16%
07-1 Prosup, Dec-06

Nordstrom 4.7 1,413 298 1,106 6,436 72 4.6% 67.40% 23.74% 8.86% 42.03% 23.81% 34.16% 7.15% 8.62% 12.75% 18.87% 52.61% 36.85%

Geographic Concentration >5% California New York Texas


Source and As Of Date Source: Moodys, Deal Documents

C R E D I T

2008-1 OM, Sep-07

07-4 Prosup, Apr-07

07-1 OM, Jan-07

27

Credit Card ABS collateral minimum/full payment


Credit Credit Card Card ABS ABS Master Master Trust Trust comparison comparison

Chase CHAIT % of Accounts Making Min. Payment * % of Accounts Making Full Payment * % Accounts with No Payment Due % of Accounts Making Min. Payment (excl. Accounts with No Payment Due) % of Accounts Making Full Payment (excl. Accounts with No Payment Due) As Of Date
4% 18% 52% 8% 37% Mar-08

BofA (BACCT)
4% 8% 62% 9% 22% Mar-08

Capital One
7% 15% 35% 11% 22% Mar-08

Citi - CCCIT
4% 21% 49% 8% 41% Dec-07

Discover**
4% 15% 57% 10% 35% May-08

AmexCredit Card
4% 20% 60% 11% 50% May-08

National City
8% 24% 42% 15% 42% Mar-08

GE GE managed managed portfolio portfolio data data

GE % of Receivables Making Min. Payment % of Receivables Making Full Payment As Of 4% 51% Apr-07

Metrics in bold are reported, italics are derived * This metric is calculated based on all accounts in the trust, including those that have a credit balance or zero balance and therefore do not have a payment due. ** Reported payment percentages are based on averages from the beginning of the calendar year. Source: Moodys, Static Pool reports

C R E D I T

C AR D

28

Credit Card ABS collateral credit score distribution


Credit Credit Card Card ABS ABS Master Master Trust Trust credit credit score score (FICO) (FICO) comparison comparison
Master Trust No score <= 600 601-660 661-720 > 720 <=660
As Of Date

Chase CHAIT * 1% 8% 11% 25% 55% 19% Feb-08

BofA (BACCT) 1% 12% 17% 35% 35% 29% Mar-08

Capital One 1% 13% 15% 27% 43% 29% Mar-08

Citi CCCIT 1% 10% 16% 34% 39% 26% Mar-08

Discover 1% 13% 14% 32% 40% 27% May-08

HSBC (Private Label) 1% 14% 19% 27% 39% 33% Dec-06

HSBC (Union Plus 1% 11% 14% 30% 45% 25% Jul-07

National City 1% 7% 9% 27% 56% 16% Dec-07

Nordstrom 2% 11% 15% 28% 44% 26% Jan-07

WaMu 0% 20% 28% 37% 15% 48%


Sep-07

Amex Amex FICO FICO profile profile

Master Trust No score < 560 560-659 660-699 700-759 >=760 < 660 (excl. no score) As Of
* Based on sample only. Source: Moodys, Deal Documents

AMEX - Charge Card 0% 2% 10% 13% 29% 46% 12% Feb 08

AMEX - Credit Card 0% 4% 14% 17% 36% 29% 18% May 08

C R E D I T

C AR D

29

Rating agency breakeven scenarios for Credit Card ABS


S&P S&P BBB BBB credit credit card card breakeven breakeven prior-recession prior-recession scenario scenario (%) (%)
Yield From 18.8% to 17.4% over 6 months Charge-offs Breakeven 9.7% (from 4.5%) Payment Rate* From 20.0% to 16.0% over 6 months

S&P S&P BBB BBB credit credit card card breakeven breakeven deeper-recession deeper-recession scenario scenario (%) (%)
Yield From 18.8% to 14.1% over 15 months Charge-offs Breakeven 9.3% Payment Rate* From 20.0% to 15.0% over 15 months

* Assume an average 28 months between expected and legal final maturity Source: S&P

Note: S&P deeper-recession scenario coincides with S&P economists view of potential loses exceeding 9% by spring of 2009 in such a scenario. In this scenario, excess spread starts trapping in the fourth month and early amortization triggered due to negative excess spread in tenth month.

Over 15 years of S&P credit card performance index history, charge-offs never

exceeded 7.6%, and yield never fell below 16.8%. Payment rate never under 15% for 10 years.
Fitch Fitch credit credit card card breakeven breakeven stress stress analysis: analysis: base base case* case*

Change In Yield Monthly Payment Rate Charge-offs


*Purchase rate 100% assumed in the base case. Source: FitchRatings

AAA -35.00% -45.00% 4.50x

A -25.00% -35.00% 3.00x

BBB -20.00% -30.00% 2.25x

Timing Down One-Month Down One-Month Six-Month Ramp

C R E D I T

C AR D

30

Fitch breakeven analysis example: Chase


Chase Issuance Trust Break-Even Stress Scenarios
BASE STRESS Yield Monthly Payment Rate Chargeoffs Purchase Rate Performance (12-Month Variable Yield Monthly Payment Rate Chargeoffs Purchase Rate Average)* 17.40% 22.22% 3.50% 100.00% AAA Stress 35.00% 55.00% 10.75x 20.00% Output 11.31% 10.00% 37.63% 80.00% A Stress 25.00% 45.00% 8.39x 15.00% Output 13.05% 12.22% 29.37% 85.00% BBB Stress 20.00% 30.00% 6.65x 10.00% Output 13.92% 15.55% 23.28% 90.00% Timing Down Overnight Down Overnight Six-Month Ramp AAA 35.00% 45.00% 4.50x 0.00% A 25.00% 35.00% 3.00x 0.00% BBB 20.00% 30.00% 2.25x 0.00% Timing Down One-Month Down One-Month Six-Month Ramp

Steady State Stress Case (starting from 24-month average actual performance)

Stress Case (starting from 12-month average actual performance)

* 12-month period ended November 30, 2007 100% Purchase Rate Stress Performance (12-Month Variable Yield Monthly Payment Rate Chargeoffs Purchase Rate Average)* 17.40% 22.22% 3.50% 100.00% AAA Stress 35.00% 55.00% 5.51x 100.00% Output 11.31% 10.00% 19.29% 0.00% A Stress 25.00% 45.00% 3.18x 100.00% Output 13.05% 12.22% 11.13% 0.00% BBB Stress 20.00% 30.00% 1.53x 100.00% Output 13.92% 15.55% 5.36% 0.00% Timing Down Overnight Down Overnight Six-Month Ramp

Portfolio Wind-down Scenario (no new receivables)

* 12-month period ended November 30, 2007

C AR D

Source: Fitch Investors Service

C R E D I T

31

Bank Card ABS performance: Excess spread offers robust credit protection. Portfolio yield should stay relatively flat. Payment rate slows as home equity withdrawal declines
Charge-offs and and 3-month 3-month excess excess spread spread Charge-offs
10% 9% 8% 7% 6% 5% 4% 3% Bankcard Charge-offs Excess Spread (3-month Average)

Portfolio Portfolio yield yield


22% 21% 20% 19% 18% 17% 16% 15% Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

Total Total delinquencies delinquencies


6% 5% 4% 3% Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07
C AR D
As of July 2008 distribution date. Source: JPMorgan, Moodys

Payment Payment rate rate


22% 20% 18% 16% 14% 12% Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

C R E D I T

32

Case Study: Checklist for Evaluating Credit Card ABS


Seller Seller / / Servicer Servicer Portfolio Portfolio

Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Regulators (OCC, FDIC, OTS) Senior Management Experience Servicing Platform (FDR/TSYS) Collections
C AR D

Underwriting standards Card type retail, low-price, affinity, and

co-branded, among others


Annual percentage rate Fixed / Floating Index Flexibility of issuer to adjust pricing Use of teaser rates Attrition rates Geographic and demographic diversification Interchange (bank-to-merchant fees) Convenience usage Seasoning Portfolio growth Credit Scores Secured vs. unsecured collateral

C R E D I T

33

Case Study: Checklist for Evaluating Credit Card ABS


Structure Structure Performance Performance

Structure Type Cashflow Priorities Shared Excess Seller / Servicer / Trustee Tranche sizes Currency Ratings Fixed or Floating / Benchmark Expected average life Principal payment window or bullet date Legal final maturity Credit enhancement Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets) Other structural features (e.g., series-

Yield Charge-offs Lagged Charge-offs Payment Rate Delinquencies Excess Spread Pool Balance Sellers Interest Recoveries Managed Portfolio vs. Master Trust

Performance

specific triggers, discounting)


C AR D C R E D I T

34

Agenda
Page

Introduction to ABS Credit Card Automobile ABS


S EC U R I T I E S

1 11 35 53 86

Student Loan ABS (FFELP) Home Equity ABS

I N V E S TI N G

I N

AS S E T

B AC K ED

35

Market Overview: Auto Receivables


Secured consumer installment loans or leases used to finance new and used car

purchases
Receivables carry a fixed interest rate and are usually originated for 36, 48, or 60

months (and typically extend no more than 5years)


Receivables originated by Auto manufacturer finance subsidiaries (Captives)

GMAC, Ford, Daimler, Toyota, Honda, BMW


Banks

Chase, USAA
Specialty Finance Companies

AmeriCredit, Capital One, CarMax

AU T O M O BIL E

A B S

36

Market Overview: Type of Auto Loans / Leases


Prime Prime Auto Auto Loans Loans Loan Loan Type Type Near-Prime Near-Prime Auto Auto Loans Loans Subprime Subprime Auto Auto Loans Loans Auto Leases Leases Auto

Fully Amortizing Loan

Fully Amortizing Loan

Fully Amortizing Loan

Closed End Lease At termination, Lessee can return or purchase New Excellent

Car Car Type Type

Predominately New Excellent

Predominately Used Fair

Predominately Used Poor

Borrower Borrower Credit Credit

Coupon Coupon

0%-8%

8%-13%

13%-20%

8%-12%

Originators Originators

Captives, Banks

Specialty Finance Companies, Banks 3% - 10%

Specialty Finance Companies, Banks 10% - 20%

Captives, Banks

A B S

Expected Expected Losses Losses

0.75% - 3%

1.5% - 5.0%

AU T O M O BIL E

37

Market Overview: Auto ABS Issuance


2007 2007 Floating Floating Rate Rate Issuance Issuance ($BN) ($BN)
7 6 5 4 3 2 1 0 6.4 6.5 5.4

Auto Auto ABS ABS Issuance Issuance ($ ($ bn) bn)


100 90 Other Non-Prime Prime 8 8 7 70 7 23 21 50 10 40 30 5 6 5 9 12 18 18 29 20 7 28 25 9 17 8

2.0 1.2

80

Money Mkt

60

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

2007 2007 Fixed Fixed Rate Rate Issuance Issuance ($BN) ($BN)
25 20 15 10 5 0
A B S

14 44 26 49

59 57 44

10.4

11.9

10.5 6.1 1.1

20 10 0

10 14

54

50 35 31

20 23 2 16 18 16 19 14 12 10

Money Mkt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Total = $__mm
Source: JPMS, IGM CorporateWatch, Bloomberg.

AU T O M O BIL E

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

38

Market Overview: Auto ABS Issuance


Top Top Prime Prime Auto Auto ABS ABS Issuers Issuers by by 2007 2007 Volume Volume ($ ($ bn) bn) Top Top Non-Prime Non-Prime Auto Auto ABS ABS Issuers Issuers by by 2007 2007 Volume Volume ($ ($ bn) bn)

Issuer GMAC Ford Honda USAA CarMax DaimlerChrysler Nissan World Omni AmeriCredit Capital One Hyundai Merrill Lynch Goldman Sachs Wachovia JPMorgan (JPMART) Franklin Auto Chase Other Total
A B S

2005 3.04 9.68 7.70 4.53 1.59 4.00 4.23 1.73 1.50 0.77 1.77 1.29 2.90 0.35 3.62 5.17 53.88

2006 6.05 8.94 4.08 5.24 1.27 6.58 3.41 1.84 2.25 1.88 0.85 1.30 0.56 0.36 2.33 3.15 50.09

2007 7.56 5.04 2.91 2.56 2.15 2.10 2.06 2.00 2.00 1.75 0.86 0.77 0.66 0.65 0.45 0.33

Issuer AmeriCredit Capital One Drive Wachovia Triad CPS HSBC automotive UPFC Long Beach Prestige Drive Time Credit Acceptance First Investors WFS Wells Fargo Total

2005 5.50 7.20 0.18 2.85 2.01 0.59 0.66 1.40 0.70 0.42 0.15 5.73 27.39

2006 4.70 7.00 0.19 2.70 2.84 2.83 0.62 0.91 1.60 0.95 0.49 0.20 0.24 25.27

2007 5.00 4.25 2.30 1.95 1.37 0.90 0.86 0.50 0.49 0.33 0.32 0.20

18.46

33.86

Source: JPMS, IGM CorporateWatch, Bloomberg.

AU T O M O BIL E

39

Structure: Structural Features of Auto ABS


Trust Structures Owner Trust Cashflow Mechanics Amortizing pass through of Principal Credit & Maturity Tranching Bullet tranches rare Credit enhancement As autos are a depreciating asset, only partial recoveries are expected in the

event of default
Credit enhancement protect investors from resulting losses Typical Auto ABS Deal Characteristics Pricing Benchmarks Coupon Type Typical New Issue Size
A B S

Swaps, EDSF, LIBOR Fixed or Floating $1.5 - $2.0 billion (Prime) $0.5 - $1.0 billion (Non Prime)

AU T O M O BIL E

40

Structure: Amortizing Cashflows


Loan amortizes principal over their term-to-maturity Loan may prepay in advance of the scheduled maturity Voluntary prepayment

Refinancing or sale of vehicle


Involuntary prepayment

Repossession or loss of vehicle


When a prepayment occurs, principal is paid through to the security holders, thus

retiring that portion of principal that is attributable to the loan that has prepaid
Prepayments measured by Absolute (ABS) prepayment model

Standard measure of prepayments for automobile loan backed securities, which calculates monthly prepayments as the percent of the original dollar balance of receivables. Prime auto ABS typically prices using 1.5% ABS assumption.
The small collateral balance and relatively short maturity for the typical auto loan

contract reduces the incentive to refinance because monthly payment saving would be minimal
A B S AU T O M O BIL E

41

Structure: Amortizing Cashflows


Bond Bond Cashflows Cashflows
Principal Paid Interest Paid

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 De al Age

Underlying Underlying Asset Asset Cashflows: Cashflows: Retail Retail auto auto installment installment contracts, contracts, 60 60 mo mo term, term, monthly monthly P&I P&I

Principal
A B S
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 De al Age

AU T O M O BIL E

42

Structure: Owner Trust


Primary structure used in Auto ABS Provides flexibility in structuring cashflows Permits multiple senior tranches: 2(a)-7 eligible money market tranches Total rate of return: tranches with
Obligors Seller/ Servicer Bankruptcy remote sale Reserve Fund Owner Trust Issuer Owner Owner Trust Trust

defined principal lockout periods


Floating rate tranches Credit enhancement to senior notes

typically provided by subordinated certificates supplemented with reserve account

Class A-1 Notes A-1+/P-1

Class A-2 Notes AAA

Class A-3 Notes AAA

Class A-4 Notes AAA

Class B Certs A

Investors

Investors

Investors

Investors

Investors / Retained

AU T O M O BIL E

A B S

43

Basic auto securitization cash flows


Available Available funds funds Priority of of distribution distribution (sequential (sequential structure) structure) Priority

Collateral payments Principal Interest Net recoveries on charged off assets Servicer advances Proceeds of repurchases of receivables by the

Servicing fee to servicer (typically 0.50%-1.00%) Interest payment on Class A Notes Interest payment on Subordinated Notes Principal payment on Class A Notes Sequentially from A-1 through A-4 Principal payment on Subordinated Notes Trustee fees Remaining funds to certificateholder (excess

servicer
Reserve fund

spread)

AU T O M O BIL E

A B S

44

Structure: Credit Enhancement Types of Enhancement


Excess spread is first line of defense Excess funds from the interest paid on the
Typical Typical Credit Credit Enhancement Enhancement Structure Structure Share of Assets Credit Enhanc ement 4.75% 0.50%

auto loans after expenses


Reserve account Cash deposited and/or captured Subordination Interest and principal that would have
A

Class

Rating

Deal Structure

AAA 95.25% A N/R N/R 4.25% 0.50%

Certificate Reserve Account Excess Spread

Class A Certificate Reserve Acc Excess

otherwise been distributed to subordinate classes is re-directed to more senior classes


Financial Guarantee Typically a surety bond issued by

3.00%

monoline insurance company which guarantees timely payment of interest and ultimate repayment of principal
A B S

Common on Non-prime Auto Yield Supplement for Subvented Loans Used to increase the yield on the

AU T O M O BIL E

underlying collateral (APR) to match the coupon required on the issued bonds
45

Structural features of Auto Loan ABS


Strict sequential: Classes in order of A1, A2, A3, A4, then subordinates Partial sequential: A1, then pro-rata senior/sub if credit enhancement at target and

passing triggers, sequential otherwise


Reserve funds Fully funded, non-declining Reserve fund step up or down based on triggers Triggers Based on delinquency and cumulative loss schedule Credit enhancement increase over the life of the deal due to: Non-declining reserve accounts, which grows as a percentage of current

outstanding balance as the ABS pool amortizes


Availability of excess spread to turbo notes Trapping excess spread within the ABS deal As a result, Auto ABS sector experiences a high number of upgrades to downgrades
A B S

148 upgrades to 0 downgrades by Moodys in 2006

AU T O M O BIL E

46

2007 Prime Auto ABS collateral characteristics


Prime Prime Auto Auto ABS ABS (as (as of of deal deal pricing pricing date) date) APART 2007-1 Pricing Date Deal Size Collateral Number of Receivables Average Principal Balance Weighted Average APR Weighted Average Original Term (mos) Weighted Average Remaining Term (mos) Seasoning (mos) Geographic Distribution Weighted Average FICO % Used
A B S

COPAR 2007-1 06/14/07 $1,250 mn 67,151 $17,491 7.54% 61 55 6 CA 18% TX 10% FL 8% 736 57% 4.25% 1.00% 3.25% 8.50%

CarMax 2007-3 09/07/07 $500 mn 40,413 $12,867 10.39% 63 58 6 TX 16% FL 12% CA 10% 679 97% 6.25% 0.50% 0.50% 7.25%

FORD 2007-A 06/19/07 $1,992 mn 102,246 $21,761 4.39% 63 60 3 TX 12% CA 11% FL 9% 705 13% 5.00% 0.50% -2.00% 3.50%

CARAT 2007-1 05/31/07 $2, mn 99,653 $20,999 4.48% 63 53 10 CA 12% TX 11% FL 7% 702 13% 5.25% 0.50% 0.25% 6.00%

HAROT 2007-1 02/21/07 $1,211 mn 69,274 $18,071 6.05% 56 50 6 CA 17% TX 8% NJ 7% 740 15% 3.25% 0.50% N/A 3.75%

NAROT 2007-A 02/15/07 $1,023 mn 55,724 $19,221 5.67% 62 53 9 CA 13% TX 13% FL 9% 750 10% 4.50% 0.50% 0.00% 5.00%

USAA 2007-1 06/11/07 $1,222 mn 64,604 $18,916 6.73% 62 58 4 TX 15% CA 9% FL 7% 723 34% 2.75% 0.80% N/A 3.55%

World Omni 2007-A 02/13/07 $1,100 mn 48,011 $19,873 7.17% 65 61 4 FL 42% GA 20% NC 18% 730 13% 2.75% 0.25% 0.00% 3.00%

05/24/07 $1,000 mn 46,539 $20,188 10.35% 78 68 10 CA 13% TX 13% FL 11% 709 56% 12.75% 1.00% 0.50% 14.25%

Initial Triple A Credit Enhancement Subordination Reserve Overcollateralization * Total


* And/Or Other
Source: JPMorgan, Deal Documents

AU T O M O BIL E

47

2007 Non-Prime Auto ABS collateral characteristics


Non-Prime Non-Prime Auto Auto ABS ABS (as (as of of deal deal pricing pricing date) date) AMCAR Pricing Date Deal Size Collateral Number of Loans Average Principal Balance WAC WAOM (Months) WARM (Months) Seasoning (Months) Geographic Distribution 80,593 $18,324.28 16.56% 70 69 1 TX 13% FL 10% CA 9% WA FICO % Used Initial AAA Credit Enhancement Wrap Subordination Reserve Account O/C, reinsurance, other
A B S

COAFT 2007-B 04/30/2007 $2,000 mn 89,253 $15,723 11.81% 67 60 6 CA 17% FL 9% IL 6 % 661 61% MBIA 0.00% 1.50% 7.50% 9.00%

HSBC 2007-1 01/23/2007 $859 mn 67,842 $17,473 14.28% 68 59 8 TX 17% CA 13% FL 12% 614 71% N/A 0.00% 1.00% 27.50% 28.50%

Long Beach 2007-A 03/13/2007 $486 mn 22,141 $18,686 12.27% 69 65 4 CA 41% FL 10% AZ 10% 635

Prestige 2007-1 07/25/2007 $325 mn 16,937 $17,344 17.44% 70 63 6 TX 25% AZ 17% UT 13% N/A 83%

Triad 2007-A 05/22/2007 $775 mn 54,169 $15,638 16.23% 70 63 7 TX 21% CA 11% FL 7% 573 80% FSA 0.00% 2.00% 8.50% 10.50%

WALOT 2007-1 05/30/2007 $1,950 mn 119,849 $16,687 12.42% 67 60 7 CA 32% AZ 5% WA 5% 638 72% N/A 14.25% 0.25% 0.00% 14.50%

2007-C-M 07/17/2007 $1,500 mn

601 72% MBIA 0.00% 2.00% 7.00% 9.00%

FSA 2.50% 0.00% 8.00% 10.50%

FSA 0.00% 1.00% 9.00% 10.00%

Total
Source: JPMorgan, Deal Documents

AU T O M O BIL E

48

Performance: Prime Auto


Prepayments Prepayments (3 (3 Mo. Mo. ABS) ABS)
2.2 2.0 1.8 1.6 1.4 1.2 1.0 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 2005 2006 2007 2008

Delinquencies Delinquencies (30+ (30+ Day) Day)


10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2/05 2005 2006 2007 2008

2/06

2/07

2/08

Cumulative Losses Losses Cumulative


1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00%
A B S

Recoveries Recoveries
2005 2006 2007 2008 70% 50% 30% 10% 2005 2006 2007 2008

2001

13

19

25

31

37

1/05

1/06

1/07

1/08

AU T O M O BIL E

Source: JPMorgan, Intex Solutions.

49

Performance: Non Prime Auto


Prepayments Prepayments (3 (3 Mo. Mo. ABS) ABS)
2.3 2.1 1.9 1.7 1.5 1.3 1.1 0.9 4/04 2004 2005 2006 2007 2008

Delinquencies Delinquencies (30+ (30+ Day) Day)


15% 10% 5% 0% 2004 2005 2006 2007 2008

4/05

4/06

4/07

4/08

4/04

4/05

4/06

4/07

4/08

Cumulative Losses Losses Cumulative


14% 12% 10% 8% 6% 4% 2% 0%
A B S

Recoveries Recoveries
2005 2006 2007 2008 80% 70% 60% 50% 40% 30% 20% 2004 2005 2006 2007 2008

2001

13

19

25

31

37

43

2/04 8/04 2/05 8/05 2/06 8/06 2/07 8/07 2/08

AU T O M O BIL E

Source: JPMorgan, Intex Solutions.

50

Case Study: Checklist for Evaluating Auto ABS


Seller Seller / / Servicer Servicer Portfolio Portfolio

Company Type (Captive, Bank or Specialty Finance) Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Market Share Use of Incentives
A B S

Borrower Credit Prime/Mid Prime/Subprime Underwriting Standards Sourcing (Indirect/Dealer/Retail) Auto Type New / Used Make / Models Loan Characteristics Simple Interest Balloon Deferred APR & Subvention Term (36-, 48-, 60- months) Seasoning Geographic/demographic diversification Portfolio growth Credit Scores

Senior Management Experience Servicing / Collections

AU T O M O BIL E

51

Case Study: Checklist for Evaluating Auto ABS


Structure Structure Performance Performance

Structure Cashflow Priorities Owner vs. Grantor Trust Credit Enhancement

Charge-offs Prepayment Rate Delinquencies Recoveries Excess Spread Managed Portfolio vs. ABS Performance

Wrap vs. Senior Sub Subordinate lockouts Reserve Fund Targets / Step-ups / Floors Yield Supplement Accounts
Seller / Servicer / Trustee Tranche sizes Ratings Fixed or Floating / Benchmark Expected average life Principal payment window or bullet date
A B S

Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)

AU T O M O BIL E

52

Agenda
Page

Introduction to ABS Credit Card Automobile ABS


S EC U R I T I E S

1 11 35 53 86

Student Loan ABS (FFELP) Home Equity ABS

I N V E S TI N G

I N

AS S E T

B AC K ED

53

Higher costs and rising enrollments have led to increase in student loan financing needs
Cost Cost of of attendance attendance Constant Constant (inflation-adjusted) (inflation-adjusted) dollars dollars
$35,000

Past Past and and projected projected undergraduate undergraduate enrollments enrollments 2-year 2-year and and 4-year 4-year institutions institutions ('000) ('000)

$32,307

18,000 17,000 16,000

$30,000

$25,000

15,000 14,000 13,000 12,000

$20,000

$15,000

$13,589

(F F E L P )

$10,000

11,000 10,000

$5,000 96-97 98-99 00-01 '02-03 '04-05 '06-07

1990 1993 1996 1999 2002 2005 2008 2011 2014 Actual Projected

A B S

Private Four-Year
Source: Trends in College Pricing, The College Board

Public Four-Year

L O AN

Source: U.S. Department of Education, NCES. Digest of Education

S T U D EN T

54

Student Loan ABS issuance


Student Student Loan Loan ABS ABS supply supply ($ ($ bn) bn)
70

2007 2007 supply supply by by WAL WAL ($bn) ($bn)


12

60

10.4

15 8

10 8.3 8

9.7

50 6 40 4 30 56 41 33
(F F E L P )

6 4.7

5.0 4.0

51

48

20

4 2.4

3.1

10 2 1994 3 10 1996 13 10 9

16

19 10

24

1998 FFELP

2000

2002

2004

2006

2008

A B S

10

12

15

Private Credit

WAL (years)

L O AN

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

S T U D EN T

55

Student Loan ABS issuers


Supply Supply by by issuer issuer ($ ($ millions) millions)
Issuer FFELP Sallie Mae Nelnet SLC Chase (Collegiate) GCO Education Goal Access College Loan Corporation NorthStar Education Brazos Wachovia Pennsylvania Higher Education SunTrust South Carolina KeyCorp Others Total FFELP Private Credit Sallie Mae National Collegiate (First Marblehead) SLC KeyCorp NorthStar Education Total
Source: JPMS, IGM CorporateWatch, Bloomberg.

Tickers SLMA NSLT SLC CEDLT (COELT) GCOE GOAL ACCSS COLLE NEF BRHEA WSLT PHEAA STSLT SCSLC KSLT

2005 23,690 6,865 4,350 2,700 1,230 1,000 1,324 2,700 1,020 3,544 1,800 800 700 294 3,892 55,909

2006 26,403 5,733 4,822 2,143 1,585 1,007 1,700 1,289 1,611 1,249 765 500 91 0 48,896

2007 23,438 3,936 3,092 1,222 1,213 1,200 1,179 1,100 628 303

(F F E L P )

10,312 47,623

L O AN

SLMA NCSLT SLC KSLT NEF

A B S

3,352 3,246 669 7,267

S T U D EN T

5,682 4,309 3,055 794 653 14,493

2,805 4,308

7,958

56

FFELP loan originators and holders


FY2007 FY2007 top top originators originators of of FFELP FFELP loans loans ($ ($ millions) millions)
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13
(F F E L P )

FY2007 FY2007 holders holders of of FFELP FFELP loans loans ($ ($ millions) millions)
Origination Volume 9,002 4,764 3,262 3,065 2,955 2,934 1,493 1,333 1,304 1,125 1,062 1,020 948 891 839 716 662 647 624 567 12,146 51,907
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Lender Sallie Mae Citibank Student Loan Corporation National Education Loan Network (NELNET) Brazos Group Wells Fargo Education Financial Services Pennsylvania Higher Education (PHEAA) Wachovia Education Finance JP Morgan Chase Bank College Loan Corporation Education Lending Group Goal Financial GCO-ELF Access Group Northstar Guarantee Missouri Higher Education (MOHELA) Bank of America EdAmerica/Edsouth Suntrust Bank College Foundation Inc. South Carolina Student Loan Corp Other Total Industry Holder Volume 128,088 28,038 25,770 14,391 11,996 11,984 10,964 10,250 10,242 10,130 7,541 6,413 5,562 4,959 4,544 4,541 3,334 3,170 2,870 2,653 55,079 362,518

Lender Sallie Mae Citibank Bank of America JP Morgan Chase Bank Wells Fargo Education Financial Services Wachovia College Loan Corp US Bank EdAmerica Access Group Northstar Guarantee Education Lend Group Suntrust Bank Pittsburg National Corp National Education Loan Network (NELNET) Citizens Bank Education Finance College Foundation Inc. Regions Pennsylvania Higher Education Assistance Fifth Third Others Total Industry

14 15 16 17 18 19 20

L O AN

A B S

S T U D EN T

Source: www.finaid.org

57

FFELP loan consolidators


FY2007 FY2007 top top consolidators consolidators of of FFELP FFELP loans loans ($ ($ millions) millions)
Rank Lender 1 2 3 4 5 6 7 8 9 10 11 12 13
(F F E L P )

Sallie Mae National Education Loan Network (NELNET) Next Student Affinity Direct JP Morgan Chase Bank Education Lending Group Citibank Student Loan Corporation Wells Fargo Education Financial Services College Loan Corporation PA Higher Education (PHEAA) Graduate Leverage Pacific Loan Proc Goal Financial Erie Processing Missouri Higher Education (MOHELA) Wachovia Education Finance Academic Loan Group FinanSure Student Loan Brazos Group EdAmerica/EdSouth Others Total Industry

Consolidation Volume 12,554 4,529 3,021 2,108 1,825 1,731 1,586 1,428 1,269 1,258 1,095 1,090 743 675 674 654 630 628 622 557 8,614 47,290

Consolidation volume dropped to $47.3bn in FY2007 from $72.4bn in FY2006, a 35% decline

14 15 16 17 18 19 20

L O AN

A B S

S T U D EN T

Source: www.finaid.org

58

Ensuring Continued Access to Student Loans Act of 2008


Signed into law by the President on May 7th Key provisions ED (Dept of Education) to serve as secondary market for FFELP loans until July

2009 (Prohibits such loan purchases from resulting in any cost to the federal government)
Clarify EDs authority as lender of last resort with capital

Authorizes Secretary of Education to advance funds to guaranty agencies acting as lender of last resort Include parent borrowers in lender-of-last-resort program for those unable to obtain loans
Allow deferment of PLUS loans until 6 months after graduation
(F F E L P )

Increase annual loan limit by $2k and aggregate limit to $31k/$57.5k for

dependent/independent undergraduates
Authorizes lenders, for loans made from July 2008 through June 2009, to

A B S

S T U D EN T

determine that borrowers of PLUS, who are no more than 180 days delinquent on their home mortgages, and no more than 89 days delinquent on the repayment of any other debt, meet a specified extenuating circumstances requirement which makes them eligible for such loans despite having an adverse credit history
59

L O AN

Reductions to lenders in the FFELP program (College Cost Reduction and Access Act of 2007)
Eliminate the "Exceptional Performer" status that allows lenders that meet certain

requirements established by the Secretary of Education to receive higher insurance rates on defaulted loans
Reduce the insurance paid by the federal government to lenders on defaulted loans from 97

percent to 95 percent of unpaid principal balances on October 1, 2012


Reduce the amount that guarantors may keep through collections on defaulted loans from 23

percent to 16 percent
Reduce the special allowance payments (SAP) from the Department to lenders based on their

(F F E L P )

tax status. For-profit lenders would receive a 55 basis point SAP reduction and non-for-profit lenders would receive a 40 basis point SAP reduction. To ensure that only nonprofit lenders benefit from the increased subsidization, nonprofit lenders that are owned in-whole or in-part by a for-profit entity would not be eligible for the reduced subsidy reductions. Nonprofit lenders that are purchased by for-profit entities would also lose their higher subsidization rates on the date of the sale
Increase the loan fee paid to the Department by lenders - that cannot be passed on to

borrowers - from 0.5 percent to 1 percent of the principal amount of each newly originated loan made on or after October 1, 2007
Decrease the account maintenance fees paid by the Department to guarantors from .10 percent

L O AN

A B S

to .06 percent on newly originated loans

S T U D EN T

60

Since 1993, securitization has been a cost effective alternative to secondary market financing
With the explosive growth of ABS market and the recognition of student loans as high quality

assets, lenders increasingly securitize their portfolios


The relatively low credit enhancement required in student loan ABS has attracted a number of

institutions to pursue securitization


In 1993, Society Bank (now KeyCorp) became the first issuer of public student loan ABS and

many other issuers have followed suit


Sallie Maes emergence in the ABS market, however, redefined student loan securitization. The

company is the largest Student Loan ABS issuer (accounting for roughly half of supply)
Student Student Loan Loan ABS ABS Outstanding Outstanding ($bn) ($bn)
200
(F F E L P )

184 153 127 99 41 52 70 72

199

150 100 50 0 1999 2000 2001 2002

A B S

2003

2004

2005

2006

2007

L O AN

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

S T U D EN T

61

FFELP overview
Established in 1965, the Family Federal Education Loan Program (FFELP) has helped

make higher education affordable by providing access to guaranteed student loans


FFELP loans are financed by private lenders, serviced and administrated by the

private sector
FFELP volume nationwide total approximately $85bn in fiscal year 2006 FFELP loan benefit from U.S. Government guarantee 97% (initial loan disbursement 7/06 and after), 98% (10/93 to 6/06) or 100% (pre

10/93), guaranteed for principal and accrued interest


Will decline to 95% on October 1, 2012 Borrower benefits Long term financing (up to 30 years if consolidated)
(F F E L P )

Interest subsidies during in school period on some loans Deferment/forbearance allows borrower to temporarily stop payments if they

return to school or experience financial hardship


FFELP loans are not dischargeable in bankruptcy

S T U D EN T

L O AN

A B S

62

FFELP loan types


FFELP provides the following types of loans Stafford loans

Subsidized: To students demonstrating financial need Unsubsidized: To students who either do not demonstrate need or require supplement to Subsidized loan
PLUS: To graduate and professional students and or parents of undergraduates (in excess of

Stafford
Consolidation loans: Consolidation multiple loans under FFELP into one for the borrower

S T U D EN T

L O AN

A B S

(F F E L P )

63

Collateral: FFELP student loan types


Stafford Stafford Loans Loans Interest Interest Rate Rate PLUS PLUS Loans Loans Consolidation Consolidation Loans Loans

Variable interest rate, reset annually, capped at 8.25% 91-day T-bill + 1.7% during in-school, grace and deferment periods; 91-day T-bill + 2.3% during repayment 10 years Year 1: Year 2: Years 3/4: Graduate: $2,625 $3,500 $5,500 $8,500

Variable interest rate, reset annually, capped at 9.00% 91-day T-bill + 3.1%

Fixed interest rate for life of loan, capped at 8.25% Weighted average of interest rates of loans consolidated, rounded up to nearest 1/8th of one percent

Formula Formula

(F F E L P )

Max Max Repayment Repayment Period Period Max Max Annual Annual Loan Loan

10 years Up to cost of education, less other aid received

30 years Not applicable

L O AN

A B S

For loans distributed after July 1, 1998 and before July 1, 2006 , subject to a maximum interest rate of 8.25%. The cap is offset by Special Allowance Payments (SAP) by the ED to lenders.

S T U D EN T

64

Stafford student loan rates


Stafford Stafford loan loan rates rates
Trigger Date <10/1/81 1/1/81-9/12/83 9/13/83-6/30/88 7/1/88-9/30/92 10/1/92-6/30/94 7/1/94-6/30/95 7/1/95-6/30/98 7/1/98 6/30/98 7/1/06 - 9/30/07 >10/1/07 Borrower Rate 7% 9% 8% 8% for 48 months; then, 91-day Treasury + Margin 91-day Treasury + Margin 91-day Treasury + Margin 91-day Treasury + Margin 91-day Treasury + Margin Fixed 6.8% Decline to fixed 3.4% by 7/1/2011 Maximum Borrower Rate 7% 9% 8% 8% for 48 months, then 10% 9% 8.25% 8.25% 8.25% Interest Rate Margin N/A N/A N/A 3.25% 3.10% 3.10% 2.50% (in school, grace, or deferment), 3.10% (repayment) 1.70% (in school, grace, or deferment), 2.30% (repayment) N/A N/A

S T U D EN T

L O AN

A B S

(F F E L P )

65

PLUS student loan rates


PLUS PLUS loan loan rates rates
Trigger Date Before 10/01/81 From 10/01/81 through 10/30/82 From 11/01/82 through 06/30/87 From 07/01/87 through 09/30/92 From 10/01/92 through 06/30/94 From 07/01/94 through 06/30/98 From 07/01/98 through 06/30/06 From 07/01/06 Borrower Rate 9% 14% 12% 1-year Index + Interest Rate Margin 1-year Index + Interest Rate Margin 1-year Index + Interest Rate Margin 91-day Treasury + Interest Rate Margin 8.5% Maximum Borrower Rate N/A N/A N/A 12% PLUS 10%, SLS Loans 11% 9% 9% 8.5% Interest Rate Margin N/A N/A N/A 3.25% 3.10% 3.10% 3.10% N/A

S T U D EN T

L O AN

A B S

(F F E L P )

66

Consolidation loans
Consolidation Consolidation loan loan benefits benefits Maximum Maximum term term by by debt debt burden burden
Total Educational Debt < $7,500 $7,500-$9,999.99 $10,000-$19,999.99 $20,000-$39,999 $40,000-$59,999 > $60,000 Max Term (years) 10 12 15 20 25 30

Extends loan term from 10 years up to 30, thereby

reducing their monthly payments, albeit at a higher total interest cost.


Converts adjustable-rate loans to a fixed-rate,

locking in the interest rate for the life of the loan. Interest rate is the weighted average of the rates on the student loans, rounded to the nearest 1/8th.
For borrowers with multiple lenders, allows the

borrower to make only one single payment to one lender. Payment to the single lender begins 60 days after disbursement. There is no grace period.

S T U D EN T

L O AN

A B S

(F F E L P )

67

Interest Subsidy Payments and Special Allowance Payments

Borrower

Principal and Interest

Dept of Education (ED)

SAP and ISP Paid quarterly

Lender

Interest Subsidy Payment (ISP)


(F F E L P )

Special Allowance Payment (SAP)


Provides lenders with minimum returns

Federal government pays for in-school,

grace and deferment interest on subsidized loans


Available for Stafford Subsized and

to either the 91-day T-Bill or 90-day CP plus a spread


Available for Stafford and

A B S

L O AN

Subsidized Consolidation Loans

Consolidation Loans
Available for PLUS loans when

S T U D EN T

borrower hits a cap

68

Special Allowance Payment (SAP)


SAP SAP calculation calculation

Date of first disbursement From 10/1/92 through 6/30/95 From 7-1/98 through 6/30/98 From 7/1/98 through 12/31/99

Special Allowance Margin 3.10% 2.50% for Stafford loans that are In-School, Grace or Deferment 3.10% for Stafford Loans that are in Repayment and all other loans 2.20% for Stafford Loans that are In-School, Grace or Deferment 2.80% for Stafford Loans that are in Repayment 3.10% for PLUS, SLS and Consolidation Loans

From 1/1/00

1.74% for Stafford Loans that are In-School, Grace or Deferment 2.34% for Stafford Loans that are in Repayment 2.64% for PLUS and Consolidation Loans

Under legislation effective 10/1/07

55bp cut for Stafford and PLUS (not-for-profit 40bp cut)

S T U D EN T

L O AN

A B S

(F F E L P )

69

Guarantors
Private non-profit corporations Act as middle men between lenders and

the federal government agency


Monitor the compliance of schools that

Student Pays Yes No Yes Guarantor Pays No Rejected Claim

participate in FFELP
Receive fees for insurance, default aversion,

account maintenance, etc.


Are reinsured by the Department of

Education for amounts paid on defaulted claims


Make recoveries on defaulted loans

(currently 50% to 75%) on behalf of federal government


(F F E L P )

Yes US Dept of Education pays claim or reassigns guarantor Claim cured No Credit enhancement absorbs losses

Guarantee timeline Lender must submit default claim after at

S T U D EN T

least 270 day delinquent Guarantor must review and pay claim within 90 days after the lender filed it Guarantor will pay the lender accrued interest for up to 450 days delinquent Guarantor must file reimbursement claim with Dept of Ed within 30 days of paying default claim to lender

L O AN

A B S

70

Capable servicing: a key component in ensuring the Department of Education (ED) guarantee
Adherence to ED servicing guidelines is critical to maintain guarantee Servicers are audited regularly by an independent firm to verify servicing quality and

compliance with ED procedures


Rating agencies also review servicers ability to meet all compliance requirements Assuming quality servicing, the predominant risk is liquidity timing of claim filing

and receipt of guaranty


ED guaranty remains valid in event of Guarantor failure

Claim Package

Reinsurance claim

Servicer
(F F E L P )

Guarantor
98% reimbursement Reinsurance $

US Department of Education

Collect payments Process deferments

Apply for ISP Apply for SAP

Collection on delinquent loans Submit claim package to guarantor

S T U D EN T

L O AN

A B S

71

Cash flow dynamics of FFELP student loans


Department of Education
ED reinsurance of 95-100% of principal and accrued interest Defaulted loan claim package Loan payments Claim $$$

State and private guarantee agencies

Servicer

Originator/ holder of loan

Securitization trust
$$$

(F F E L P )

Student borrower

Normal payment scenario Student default scenario

ABS investors

Interest subsidy payments are paid on qualifying loans to the loan holders while students

A B S

are in school

L O AN

Special Allowance Payments are paid to holders of student loans to ensure they receive a

market interest rate of return guidelines

S T U D EN T

Loans remain eligible for ED guaranty so long as servicers follow specified diligence

72

Most issuers utilize similar senior-subordinate structures


Senior and subordinate notes backed by government guaranteed student loans Class A notes and Class B notes are rated Aaa/AAA/AAA and Aa1/AA/AA+ or greater by

Moodys/S&P/Fitch, respectively 10% clean-up calls and auction calls are used

SLM SLM 2005-3 2005-3


Capped AAA Class A-1 to A-6 Notes
Investors

SLM SLM 2005-1 2005-1


Uncapped AAA Class A-1 Note

Student Loan Trust

Student Loan Trust

Uncapped AAA Class A-2 Note Uncapped AA Class B Note

Investors

Capped AA Class B Note Swap

(F F E L P )

100% consolidation collateral Underlying collateral indexed to 90-day CP (98.6%)

100% FFELP collateral Underlying collateral indexed to 90-day CP (90.2%)

S T U D EN T

or 91-day T-Bills (1.3%) Interest rate is capped at 6%. The cap matures in 1 year Credit enhancements include: 3.00% subordination 0.25% reserve fund Capitalized interest account of $10 million Excess spread available

or 91-day T-Bills (9.8%) The securities were not subject to a cap, and as a result of the underlying CP collateral, the uncapping was achieved structurally Credit enhancements include: 3.0% subordination 0.25% reserve fund Excess spread available

L O AN

A B S

73

Basic credit card securitization cash flows


Available Available finance finance charge charge collections collections Priority Priority of of distribution distribution

Servicing fee to servicer (typically 2.00%) Interest income Net recoveries on charged off assets Interchange Fee income Interest payment on Class A Notes Interest payment on Class B Notes Interest payment on Class C Notes Deposit to the spread account Excess spread to residual holder

Available Available principal principal collections collections

Priority Priority of of distribution distribution

(F F E L P )

Cover interest shortfalls on each class of Notes Cover servicing fee shortfalls Make targeted deposit to Class A principal Principal collections

A B S

funding account
Make targeted deposit to Class B principal

L O AN

funding account
Make targeted deposit to Class C principal

S T U D EN T

funding account
Excess paid to residual holder
74

Credit Enhancement
Government guaranty FFELP loans benefit from a 95-100%
Typical Typical Credit Credit Enhancement Enhancement Structure Structure
Share of Assets 97.00% 2.75% 0.25% 0.75% Credit Enhanc ement 3.00% 0.25%

guaranty ultimately backed by the DOE.


Excess spread available to cover losses not
Class A Certificate Reserve Fund Excess Spread Rating AAA A N/R N/R

Deal Structure

covered by guaranty
Excess funds from the interest paid on the

Class A Class B Reserve Excess

student loans after expenses


Ranges from 75-125bp. Reserve account Cash deposited and/or captured Subordination Interest and principal that would have
(F F E L P )

otherwise been distributed to subordinate classes is re-directed to more senior classes


Overissuance, driven by the rating agencies,

A B S

S T U D EN T

L O AN

is further evidence of the superior collateral quality.

75

Credit Enhancement: Excess spread examples


FFELP deal deal excess excess spread spread example example (7/07) (7/07) FFELP

Spread over index Servicing fee Administration fee Estimated losses CP-LIBOR differential Weighted spread on SLABS Excess spread

2.37 (0.90) (0.02) (0.03) 1.43 (0.08) (0.17) 1.18

SAP margin cut by legislation

February February 2008 2008

Spread over index Servicing fee Administration fee Estimated losses CP-LIBOR differential Weighted spread on SLABS Excess spread

1.79 (0.90) (0.02) (0.03) 0.84 (0.08) (0.75) 0.01

Cost of funding higher

College Cost Reduction and Access Act of 2007 decreased lender profitability.

Examples of changes that took effect October 1, 2007 include


(F F E L P )

Reduced the special allowance payment (SAP) margin to lenders based (for-

profit lenders 55bp and non-for-profit 40bp cut).


Increase the loan fee paid by lenders from 0.5% to 1% Lenders cannot pass on these higher cost to borrowers under FFELP Term ABS market dislocation started mid-2007; funding costs continue to increase

S T U D EN T

L O AN

A B S

76

FFELP SLABS under-collateralized deal structure


Historically, deals under-collateralized at closing Deal parity: Student Loan assets / note liabilities < 100% Excess spread used to build parity Deals with large amounts of ARS will build parity more slowly than expected due to

higher funding costs; some deals will be unable to build parity if ARS market does not recover
College College Loan Loan Corp Corp 2007-1 2007-1 (low (low initial initial parity parity of of 97.4%, 97.4%, high high ARS ARS funding of 59% ) funding of 59% )

Parity Parity example example

Initial Parity 97% Asset


(F F E L P )

End of Year 1 parity 98% Asset 94 94 Liability 93 AAA 3A 96

Liability 97 AAA 3A 100

98.0% 97.8% 97.6% 97.4% 97.2% 97.51% 97.66% 97.60% 97.57%

97 97

A B S

S T U D EN T

Asset spread Funding cost Servicing = Excess spread

97.0% Apr-07 Jul-07 Oct-07 Jan-08

L O AN

Note: Term ABS 41% at weighted average spread of +6bp Source: Deal documents

77

Recent changes in deal structure


Recent developments No more consolidation loans Issuance at parity or above ARS market closed Slower pricing speed assumed
NelNet NelNet Student Student Loan Loan Trust Trust

2008-1 Assets Initial Parity Senior Total Pricing Speed (CPR) Liabilities Initial Estimated Excess Spread
Source: JPMorgan, Deal documents

2007-2 Stafford & Plus; 35% Consolidation

All Stafford & Plus

103.09% 100% 12% for Stafford & Plus

103.60% 98.40% 22% for Stafford & Plus; 2-10% over 10 years for Consolidation 88% Term ABS; 12% Auction Rate 115bp

(less consolidation activity)


Lower excess spread

100% Term ABS 55bp

S T U D EN T

L O AN

A B S

(F F E L P )

78

Rating Agency Considerations


Cash flow scenarios

Servicing Servicing factors factors

Collateral Collateral factors factors

Transaction Transaction structure structure factors factors

S T U D EN T

L O AN

Defaults Claim rejects Claim cures Loan documentation Servicing infrastructure Collections Disaster recovery Proper guarantee documentation Servicer audits

A B S

Repayment mix School concentrations Loan type Delinquencies, losses, & prepayments Seasoning Applicable margin ED guarantee level

(F F E L P )

Payment structure Legal structure Tranching and turboing Maturity, legal final Reserve fund Interest carryover Overissuance

79

Rating Agency Stress Tests


All scenarios are designed to test the transactions liquidity rather than credit
Triple-A Triple-A Stress Stress Scenario Scenario Defaults Defaults Application Application Single-A Single-A Stress Stress Scenario Scenario

30% 75.0% yr. 1 12.5% yr. 2 12.5% yr. 3 95% on 98% loans 97% on 100% loans 2x historical 3x historical Capitalize all interest on balance 100 bps in year 1 6 month spikes up to 300 bps for 5 years, reverting back to 100 bps 60 days 60 days

19% 75.0% yr. 1 12.5% yr. 2 12.5% yr. 3 97% on 98% loans 99% on 100% loans Historical Historical Capitalize all interest on balance 75 bps in year 1 6 month spikes up to 120 bps for 5 years, reverting back to 75 bps 60 days 60 days

Reimbursements Reimbursements

Deferrals Deferrals Forebearance Forebearance


(F F E L P )

Unsubsidized Unsubsidized loans loans TED TED Spread Spread

L O AN

A B S

Payment Payment Lags Lags Student Student SAP SAP & & ISP ISP

S T U D EN T

80

Structure: Factors affecting prepayments


Student loan prepayment may be broken down to three main segments Voluntary prepayment Loan consolidation prepayment Involuntary prepayment (default) Loan type (e.g., Stafford, PLUS, consolidation) and payment status (e.g., in-school,

deferral/forbearance, in re-payment) also affect speeds for each segment


For example, a Stafford loan just entering into re-payment will exhibit higher

initial prepayments than other loan types. This would be the case of a student graduating and choosing to prepay/consolidate his/her loan or cannot find a job and defaults
School type (e.g., vocational, 2-year, 4-year), borrower age/indebtedness and

seasonality (the school year) are some other factors


(F F E L P ) S T U D EN T L O AN A B S

81

Student Loan prepayments


A
FFELP FFELP Stafford Stafford Student Student Loan Loan Rates Rates (%) (%)
9.0 7/1/98 - 6/30/06 School, grace, deferment 7/1/98 to 6/30/06 Repayment 7/1/06 and after (fixed rate)

Sallie Sallie Mae Mae life-to-date life-to-date prepayment prepayment speeds speeds for for FFELP FFELP (LTD (LTD CPR) CPR)
40% 1995-1 1997-1 35% 1999-1 2001-3 30% 2004-4 2006-1 25% 1996-1 1998-1 2000-4 2002-1 2005-1 2007-2

8.0

7.0

6.0
20%

5.0
15%

4.0
(F F E L P )

10%

3.0

5%

A B S

2.0 Jul-93 Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07


Source: Bloomberg, U.S. Department of Education.

0% Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

L O AN

Note: Non-consolidation Source: Sallie Mae.

S T U D EN T

82

Performance: FFELP student loan collateral minimal credit risk


>210 >210 days days delinquencies delinquencies (SLM (SLM ABS) ABS) % % of of current current total total principal principal balance balance
7% 2002-1 2006-1 6% 2004-4 2007-2 2005-1

Cumulative Cumulative defaults* defaults* (SLM (SLM ABS) ABS) % % of of original original balance balance
10% 9% 8% 7% 6% 2002-1 2006-1 2004-4 2007-2 2005-1

5%

4%

5% 4% 3%

3%

2%
(F F E L P )

2% 1% 0%

1%

A B S

0% Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07


Source: Sallie Mae Static Pool Data

14

20

26

32

38

44

50

56

62

68

Deal Age (M onths)


* Sum of claims paid, claims rejected (by Dept of Education) and risk sharing losses Source: Sallie Mae Static Pool Data

S T U D EN T

L O AN

83

Relative Value Checklist for Evaluating Student Loan ABS


Seller Seller / / Servicer Servicer Portfolio Portfolio

Company Type Private Enterprise/State/Non-profit Servicer: Exceptional Performance

Loan Type FFELP (e.g., Consolidation, Stafford,

Plus)
Underwriting Standards Appraisal & Compliance Review Process Loan Characteristics Credit Grade FICO School Type Term Rate Margin/Index/Caps Co-signers Repayment Status Loan Type Balance Guarantor Disbursement Date Portfolio growth

Designation
Corporate Rating Liquidity / Cash Position / Profitability Growth / Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management
(F F E L P )

Competitive Position Legal/Regulatory Oversight / Compliance HEA Reauthorization Senior Management Experience Servicing / Collections

S T U D EN T

L O AN

A B S

84

Relative Value Checklist for Evaluating Student Loan ABS


Structure Structure Performance Performance

Structure Cashflow Priorities Triggers Caps Credit Enhancement

Losses Claim rejection rate Prepayment Rate Delinquencies Forbearance/deferral Excess Spread

Reserves Subordination Overcollateralization/Parity


Seller / Servicer / Trustee Tranche sizes Ratings Fixed or Floating / Benchmark
(F F E L P )

Expected average life Principal payment window Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)

S T U D EN T

L O AN

A B S

85

Agenda
Page

Introduction to ABS Credit Card Automobile ABS


S EC U R I T I E S

1 11 35 53 86

Student Loan ABS (FFELP) Home Equity ABS

I N V E S TI N G

I N

AS S E T

B AC K ED

86

Types of home equity loans


Types Types of of Mortgage Mortgage Loans Loans

2nd Lien 2nd Lien/ High LTV


Borrower

1st Lien Subprime B&C Credit Impaired 1st 80%-85% 7%-8% 600-625 Ameriquest Countrywide Option One RFC Alt-B Near Prime Alt-A Prime Documentation Property Type 1st 75% 6.5% 715 Countrywide IndyMac RFC (RALI) PrimeJumbo A Prime

Home Equity Line of Credit Prime

Prime Near Prime 2nd 2nd: 90% HLTV: 115% 2nd: 8%-10% HLTV: 12% 690-715 Countrywide CSFB (HEMT) GMAC RFC (RFMS2)

Lien LTV WAC FICO Originators

2nd 90%-100% 6% 715 Countrywide RFC (RFMS2) Wachovia

1st 80%-85% 6.5%-7.5% 650-700 Ameriquest Impac RFC (RAMP)

1st 70% 6.25% 725 Chase Countrywide Wells Fargo WaMu

E Q U I T Y

AB S

Asset Backed Home Equity

Mortgage Backed

HO M E

87

Home Equity ABS issuance


Supply Supply ($bn) ($bn)
600 500 400 300 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 B&C HELOC 2nd Lien HIL/125

2007 2007 issuance issuance by by rating rating

AA 10%

A 5% BBB 3% BB 0%

AAA 82%

2007 2007 fixed-rate fixed-rate ($bn) ($bn)


5 4 3 2 1 0
AB S

2007 2007 floating-rate floating-rate ($bn) ($bn)


60 50 47 24 15 23 9 0.7 10

2.9 1.9

3.2 2.4 0.5 2.0 0.2 5 7 10


40 20 0

4 WAL Bucket

4 WAL Bucket

E Q U I T Y

Source: JPMorgan, IGM CorporateWatch, Bloomberg.

HO M E

88

HEL ABS dominated by large players including dealer conduits


Single-seller Single-seller conduits conduits by by loan loan originator originator 2006 2006
Ameriquest New Century First Franklin 8% Option One 21% 19% WMC 5% Other 28% 11% Long Beach 6% W ells Fargo 2%
Morgan Stanley Citibank

Top Top HEL HEL ABS ABS issuers issuers by by Volume Volume ($ ($ mn) mn)
Parent Countrywide Merrill Lynch Ticker CWL MLMI FFMER FFML SURF MSAC SAST CMLTI CRMSI Lehman Brothers SASC BNCMT SAIL 28,684 6,541 12,705 8,470 9,619 13,127 5,745 9,292 3,843 2,859 13,224 14,438 2,172 11,281 17,951 4,470 18,847 3,508 7,120 23,597 6,164 20,273 2,558 11,352 2,031 16,328 1,636 11,950 5,935 17,633 11,983 16,410 8,810 17,632 11,904 6,567 2,539 12,675 10,010 8,259 10,180 7,619 7,428 7,364 7,210 6,477 6,233 4,495 367 3,577 1,187 4,658 4,180 2005 40,165 15,047 2006 36,031 31,459 2007 26,576 4,832 8,462 6,195 1,499 12,203 2,739 11,327 1,535 7,733 2,811

Total = $77 bn

Conduit Conduit issuers issuers 2006 2006


Barclays BofA UBS 7% 0% GS 4% 6% Greenwich CSFB 4% 7% DB 7% ML BS 10% MS 9% LB 8% Citi 11% FBR 0% JPMAC 6% Other 11%

Option One Deutsche Barclays Greenwhi ch Bear Stearns JPMorgan Goldman Sachs C-Bass GMAC RFC

OOMLT ACE SABR SVHE BSABS JPMAC GSAMP CBASS FMIC RASC RAMP WMHE HASC

AB S

10%

Total = $107 bn
Source: JPMorgan, IGM CorporateWatch, Bloomberg.

WaMu HSBC

HO M E

E Q U I T Y

89

Subprime mortgage lending and servicing


Top Top 20 20 subprime subprime lenders lenders in in 2006 2006 by by volume volume ($mn) ($mn) Top Top 20 20 subprime subprime servicers servicers by by volume volume ($mn) ($mn)

AB S

Organization Name Wells Fargo Home Mortgage HSBC (Household) New Century Financial Corp. Countrywide Financial Corp. WMC Mortgage Corp. Fremont Investment & Loan Option One Mortgage Corp. First Franklin Financial Washington Mutual Ameriquest Mortgage Corp. CitiFinancial Homecomings (GMAC-RFC ) Accredited Home Lenders BNC Mortgage, Inc. Chase Home Finance NovaStar Mortgage, Inc. Mortgage Lenders Network Ownit EMC Mortgage ResMAE Estimated Industry
Source: National Mortgage News, JPMorgan.

2005 40,013 47,339 56,096 44,637 31,795 36,016 39,093 29,511 34,491 60,635 20,509 27,535 16,583 16,079 9,655 9,267 4,082 8,297 8,952 6,858 804,900

2006 74,249 55,886 51,600 40,596 32,146 31,838 29,811 27,725 26,837 25,578 23,500 18,144 15,603 13,725 11,548 10,968 10,221 9,376 8,763 7,438 722,260

Organization Name Countrywide Chase ResCap (GMAC) Option One CitiFinancial Ameriquest Ocwen Wells Fargo National City Litton (C-Bass) WaMu HSBC Homeq New Century (Carrington) Morgan Stanley/Saxon Select Portfolio Servicing Fremont EMC (Bear Stearns) NovaStar Wilshire Estimated Industry

3/31/07 125,137 83,130 82,092 67,262 65,000 58,000 55,200 52,386 49,955 47,918 47,402 46,659 45,494 40,000 33,045 30,795 27,000 22,959 16,164 15,000 $1.3 trillion

3/31/06 117,847 75,445 72,381 75,695 60,278 113,500 42,151 45,509 39,913 44,670 41,940 48,925 44,824 36,800 26,615 24,557 23,200 23,338 15,062 12,900

E Q U I T Y

Subprime loan originations in first three quarters of 2007 was approximately $170bn and

servicing volume estimated at $1.1trillion as of Sept 31, 2007

HO M E

90

Servicer ratings
Subprime Subprime primary primary servicer servicer ratings ratings
Moodys Accredited AMC (Ameriquest) Aurora Chase CitiMortgage Countrywide EMC Fremont GreenTree HomeComings (GMAC) HomeEq (Wachovia) IndyMac SQ3+ SQ1 SQ2 SQ1SQ1SQ4 SQ3 SQ2Average Strong Above Average Strong Above Average Average Above Average Strong Strong Strong SQ4+ S&P Fitch RPS3RPS3+ RPS2 RPS1 RPS1RPS1 RPS1 RPS4 RPS3+ RPS2+ RPS1 RPS2+ Litton National City New Century NovaStar Ocwen Option One Popular Saxon Select Portfolio WaMu Wells Fargo Wilshire SQ2SQ2 SQ3+ SQ2+ SQ2SQ2 SQ1 SQ1Above Average Strong Strong Strong Strong Above Average Average Above Average Strong Strong Moodys SQ2 S&P Strong Fitch RPS4 RPS3+ RPS2 RPS1 RPS2RPS2+ RPS2+ RPS2+ RPS1 RPS1 RPS4 RPS3+

As of Dec 2007 Source: Moodys (SQ1 to SQ5), S&P (Strong, Above Average, Average, Below Average, Weak), Fitch (RPS1 to RPS5)

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AB S

91

Collateral: Summary HEL ABS pool data


HEL HEL ABS ABS collateral collateral summary summary
Vintage 2000 2001 2002 2003 2004 2005 2006 2007 Pool Balance 37,050,607,243 57,121,702,491 109,790,592,724 166,243,398,632 348,337,978,218 447,221,087,693 435,500,641,387 Avg Loan Balance 119,418 128,445 143,514 166,584 184,282 194,674 193,815 190,634 75,231 86,799 93,154 140,378 165,095 164,037 169,118 181,282 WAC 10.17% 9.75% 8.72% 7.62% 7.09% 7.22% 8.16% 8.33% 10.92% 10.34% 9.45% 7.71% 7.06% 7.35% 8.03% 8.28% WAM 349 346 347 350 352 353 355 355 278 285 299 321 332 333 336 344 LTV 78.61% 79.62% 80.30% 81.58% 81.26% 81.40% 81.24% 81.53% 79.19% 81.83% 82.52% 81.51% 80.05% 79.74% 80.44% 77.82% FICO 600 601 611 619 628 630 627 625 605 619 634 652 660 642 647 634 Cashout 43% 51% 54% 55% 55% 52% 50% 56% 55% 52% 58% 58% 59% 66% 58% 64% 4% 8% 8% 10% 7% 17% 25% 33% 23% Simult 2nd Stated Doc 15% 20% 24% 28% 31% 36% 37% 33% 12% 11% 13% 15% 12% 24% 37% 20% 7% 8% 16% 5% 1% 1% 0% 1% 3% 15% 28% 20% 16% 2% 23% 31% IO 40 Year % Fixed 6% 8% 14% 20% 19% 14% 14% 18% 73% 83% 86% 91% 97% 97% 87% 73%

Floater (back by majority ARMs)

179,757,299,673 Fixed (back by majority FRMs) 2000 2001 2002 2003 2004 2005 2006 2007
AB S

19,313,339,844 26,515,853,738 46,636,397,175 45,865,248,374 30,576,054,338 23,851,645,005 18,839,830,813 6,222,763,236

Source: JPMorgan, Company Reports

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Credit enhancement: Types of credit enhancement


Excess spread is first line of defense Excess funds from the interest paid on the
Typical Typical Credit Credit Enhancement Enhancement Structure Structure
Share of Assets 88.25% 5.00% 2.25% 2.50% 2.00% Credit Enhanc ement 11.75% 6.75% 4.50% 2.00%

home equity loans after expenses


Overcollateralization Utilization of excess spread to accelerate

Class Class A Class M-1 Class M-2 Class B OC

Rating AAA AA A BBB NR

Deal Structure

Class A Class M-1 Class M-2 Class B OC Excess

principal payments to bondholders


Subordination Interest and principal that would have

otherwise been distributed to subordinate classes is re-directed to more senior classes


Financial Guarantee Typically a surety bond issued by monoline

Credit Credit Enhancement Enhancement Types Types (2007) (2007)


S/ S & M I 15% Guarant ee 10 %

insurance company or Fannie/Freddie which guarantees timely payment of interest and ultimate repayment of principal
Mortgage Insurance (Lender Paid)
AB S

Senio r/ Sub 75%

Use of deep mortgage insurance to cover

E Q U I T Y

losses up to a specified LTV

Source: JPMS, IGM CorporateWatch, Bloomberg.

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Credit enhancement levels have increased across the capital structure


HEL HEL ABS ABS floaters floaters credit credit enhancement enhancement
AAA 2000 2001 2002 2003 2004 2005 2006 2007 19.49% 17.10% 18.22% 18.54% 19.50% 21.50% 21.36% 21.10% 14.40% 16.18% 17.75% 16.94% 18.35% AA+ AA 12.63% 10.91% 11.72% 12.40% 13.13% 14.57% 13.98% 14.42% AA15.99% 12.11% 11.78% 11.37% 11.13% 12.45% 12.18% 12.57% 9.30% 10.65% 10.39% 10.87% A+ A 7.28% 5.81% 6.56% 7.27% 7.81% 9.12% 8.77% 8.93% A7.09% 5.00% 5.50% 5.91% 6.47% 7.63% 7.23% 7.67% BBB+ 6.73% 0.75% 3.19% 4.33% 5.26% 6.22% 5.84% 6.21% BBB 2.59% 1.69% 2.29% 3.16% 4.04% 4.94% 4.67% 5.06% BBB2.06% 2.04% 1.58% 2.05% 3.02% 3.96% 3.63% 3.89% 0.71% 2.02% 2.24% 3.17% 2.79% 2.88% 0.50% 1.69% 1.64% 1.92% 2.55% 2.05% 2.22% BB+ BB

*Senior/subordinate only, no MI, Moody's rated only. Enhancement based on lowest of three agencies Source: JPMorgan, deal documents.

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94

Structure: Amortizing Cashflows


Loans typically amortize principal over their term-to-maturity. Some loans require balloon

payments.
Loans may prepay in advance of the scheduled maturity Voluntary prepayment

Refinancing or sale of home Involuntary prepayment Repossession or loss of home When a prepayment occurs, principal is paid through to the security holders, thus retiring that portion of principal that is attributable to the loan that has prepaid Prepayment measured by Constant prepayment model (CPR)
Home Equity loans exhibit much less negative convexity as compared to Conforming and Jumbo

MBS.
Typical HEL ABS Deal Characteristics Pricing Benchmarks

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AB S

Swaps, EDSF, LIBOR Coupon Type Fixed or Floating Typical New Issue Size $750 million - $2 billion Tranched by credit rating and maturity

95

Structure: Prepayment pricing assumptions


Most ABS issues are priced using a
Prepayment Prepayment Pricing Pricing Curves Curves (PPC) (PPC)
60 50
CPR (%)

prepayment assumption (PPC) which varies for FRM and ARM loans. For example
FRM: 100% PPC (4.00% - 20.00% CPR over

ARM 100% PPC FRM 100% PPC FRM 125% PPC

40 30 20 10 0 0 2 4 6

12 months, 12% thereafter)


ARM: 100% PPC (2-30% over 12 months,

30% 13-22, 50% 23-27, 35% thereafter)


Prepayment rates are expressed in terms of

8 10 12 14 16 18 20 22 24 26 28 30

Constant Prepayment Rate (CPR), which measures monthly prepayments as a percentage of the previous months outstanding principal balance.
Variation in prepayments from those

Pool Pool Factor Factor


100% 80% 60% 40% 20% A: Faster Prepayment B: Expected Prepayment C: Slower Prepayment

expected at pricing can lengthen or shorten the bonds life


AB S

0%
Source: JPMS.

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Structure: Factors affecting prepayments


Interest rates Incentive is a function of interest rates, shape of the curve, and loan rate. Higher

quality borrowers tend to be more sensitive than lower quality borrowers due to the increased quantity of refinancing options.
Home Price Appreciation Housing Market: Price appreciation may allow borrowers to take additional equity

out or trade up their houses.


Credit quality An improvement in credit history provides incentive for lower quality borrowers to

refinance as their improved status makes possible substantial savings.


Prepayment penalties Dramatically reduce the incentive to refinance while penalty is in effect. Typical prepayment penalty is 6 months interest on 80% of the loan.

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97

Structure: Sample capital structures


Y Y structure structure
Class AF-1 AF-2 AF-3 AF-4 AF-5 AF-6 WAL (Yrs) 1 2 3 5 7 6 Rating AAA AAA AAA AAA AAA AAA Collateral FRM group FRM group FRM group FRM group FRM group FRM group M-1 M-2 B-1 B-2 Type Sequential Sequential Sequential Sequential Sequential NAS 6 6 6 6 AA A BBB BB Fx/Fl FX FX FX FX FX FX All groups All groups All groups All groups Subordinate Subordinate Subordinate Subordinate FL FL FL FL Class 1AV-1 2AV-1 2AV-2 2AV-3 WAL (Yrs) 2.5 1 3 7 Ratin g AAA AAA AAA AAA Collateral ARM conforming ARM non-conf ARM non-conf ARM non-conf Type Pass-through Sequential Sequential Sequential Fx/Fl FL FL FL FL

Y structure: two separate groups backing separate senior tranches; both groups backing subordinated tranches
H H structure structure WAL Class (Yrs)
AF-1 AF-2 AF-3 AF-4
AB S

Rating AAA AAA AAA AAA AAA AAA AA A

Collateral FRM group FRM group FRM group FRM group FRM group FRM group FRM group FRM group

Type Sequential Sequential Sequential Sequential Sequential NAS Sequential Sub Sequential Sub

FX/ FL FX FX FX FX FX FX FX FX

Class 1AV-1 2AV-1 2AV-2 2AV-3 MV-1 MV-2 BV

WAL (Yrs) 2.5 1 3 7 6 6 6

Ratin g AAA AAA AAA AAA AA A BBB

Collateral ARM conforming ARM non-conf ARM non-conf ARM non-conf ARM groups ARM groups ARM groups

Type Pass-through Sequential Sequential Sequential Sequential Sub Sequential Sub Sequential Sub

FX/FL FL FL FL FL FL FL FL

1 2 3 5 7 6 6 6

AF-5 AF-6 MF-1 MF-2

E Q U I T Y

BF 6 BBB FRM group Sequential Sub FX H structure: two groups each with its own senior/subordinated structure

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Structure: Stepdown
Sample Sample target target credit credit support support percentages percentages
Initial Credit support Senior Certificates (AAA) M-1 (AA+) M-2 (AA) M-3 (AA-) M-4 (A+) M-5 (A) M-6 (A-) M-7 (BBB+) M-8 (BBB) M-9 (BBB-) M-10 (BB+) 17.90% 14.80% 12.85% 11.05% 9.40% 7.85% 6.45% 5.20% 4.20% 3.15% 2.00% After Stepdown Date Target Credit Support 35.80% 29.60% 25.70% 22.10% 18.80% 15.70% 12.90% 10.40% 8.40% 6.30% 4.00%

Subordinated bonds locked out (i.e., do not receive principal) prior to the stepdown date Stepdown date typically set at the earlier of 1) AAAs paid off or 2) the latter of

i) 36 months from deal closing and ii) when senior credit enhancement reaches target
On or after the stepdown, subordinated bonds receive principal only is the triggers are passing

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99

Structure: Triggers
Performance triggers are embedded in the transaction typically to increase credit enhancement

in the face of weaker than expected credit performance If performance triggers fail, principal that would have otherwise have gone to pay down the overcollateralization, mezzanine and subordinate bonds are redirected to pay senior bonds. Bonds revert to sequential pay. Trigger typically will shorten senior bonds and extend subordinate bonds
Usually compares credit enhancement with delinquencies or based on life-to-date cumulative

losses (can be static or dynamic).

Sample Sample Cumulative Cumulative Loss Loss Trigger Trigger

Sample Sample Delinquency Delinquency Trigger Trigger

Sample Sample Trigger Trigger Effect Effect

Distribution Date

July 2007 June 2008 3.00% July 2008 June 2009 4.75% July 2009 June 2010 6.00% July 2010 6.75%
AB S

60+ Delinquent loans including loans in foreclosure, bankruptcy and REO > 40% * credit enhancement for prior distribution date

OC target will not step

down
Deal will pay sequentially Sub bonds extend, OC

release delayed until cured

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Structure: Impact of triggers on cashflow


Home Home Equity Equity Principal Principal Cashflow Cashflow Pass Pass Triggers Triggers
AAA pass through AAA 1yr AAA 3yr AAA 7yr AA A BBB BB+ 0 20 40 60 80 M onths 100 120 140 160 180

Home Equity Equity Principal Principal Cashflow Cashflow Fail Fail Triggers Triggers Home
AAA pass through AAA 1yr AAA 3yr AAA 7yr AA A BBB BB+
AB S

20

40

60

80 M onths

100

120

140

160

180

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101

Structure: Cap risk in Home Equity ABS


Available funds cap Cap limits the bond coupon to the WA loan rate less servicing fees and other costs Underlying mortgages subject to initial, periodic and lifetime caps (typically 3%/1%/6%) Lifetime caps are generally quite high and unlikely to be a limiting factor On most deals a shortfall reimbursement feature covers any interest payment shortfalls by

drawing on future excess spread


Transactions may also purchase LIBOR caps or enter into corridors/swaps to mitigate risk

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102

Structure: Interest rate hedging instruments caps and swaps


Primary function is to mitigate basis risk (mismatch in asset and liability interest rates) Collateral

Predominantly pays fixed interest for first 2-3 years (due to fixed and hybrid ARM loans) Floating interest typically references 6-mo LIBOR Bonds typically pay floating interest referencing 1-mo LIBOR
Interest Rate Caps and Swaps Reference 1-mo LIBOR Amortizing notional amounts Constant or changing strike rates Interest Rate Caps Require an initial cash outlay at deal closing Protect from rise in interest rates above strike Interest Rate Swaps Alter cashflow characteristics to match those of the assets and liabilities Counterparties agree to swap periodic payments (trust pays fixed, receives floating)
AB S

Payments received usually flow through cashflow waterfall

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HEL ABS performance


HEL HEL ABS ABS ARM ARM prepayments prepayments by by loan loan age age (CPR) (CPR)
70% 2000 2004 60% 2001 2005 2002 2006 2003 2007

HEL HEL ABS ABS ARM ARM delinquencies delinquencies by by loan loan age age (60+ (60+ delinquencies) delinquencies)
25% 2000 2004 20% 2001 2005 2002 2006 2003 2007

50%

40%

15%

30%

10%

20%

5%
10%

AB S

0% 3 5 7 9 11 13 15 17 19 21 23

0% 1 3 5 7 9 11 13 15 17 19 21 23

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Source: JPMorgan, Intex.

104

Relative Value Checklist for Evaluating HEL ABS


Seller Seller / / Servicer Servicer Portfolio Portfolio

Company Type (Bank or Specialty Finance) Corporate Rating Liquidity / Cash Position Profitability Company Growth Equity Valuations / Stock Price Funding Mix Breath of Business Lines Operations and Management Competitive Position Regulatory Oversight / Compliance Predatory Lending/HUD/FTC/OCC/OTS
AB S

Loan Type Subprime/HELOC/2nd/High LTV Underwriting Standards Appraisal & Compliance Review Process Sourcing (Broker/Retail/Correspondent) Loan Characteristics Credit Grade LTV Rate Lien Property Type Prepay Penalty DTI Geographic Portfolio growth

FICO Term Margin/Index/Caps Documentation Occupancy Loan Purpose Seasoning

Senior Management Experience Servicing / Collections

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Relative Value Checklist for Evaluating HEL ABS


Structure Structure Structure Structure (cont) (cont)

Structure Cashflow Priorities Triggers Caps Cross Collateralization Mortgage Insurance Interest Only Strips Prepayment Penalty Cashflow Credit Enhancement

Fixed or Floating / Benchmark Expected average life Principal payment window Embedded derivatives & Counterparties Legal structure (true sale, pledge of assets)

Wrap vs. Senior Sub Company Guaranty Cross-over date Overcollateralization Spread Holidays / Fully funded Target / Step-up / Step-down

Performance Performance

Charge-offs Prepayment Rate Delinquencies Recoveries Excess Spread Roll Rates Time to Liquidation

Seller / Servicer / Trustee


AB S

Tranche sizes Ratings

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Analyst Certification The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this research accurately reflect my personal views about any and all of the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein.

Copyright 2008 J.P. Morgan Chase & Co. All rights reserved. JPMorgan is the marketing name for J.P. Morgan Chase & Co., and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank is a member of FDIC. J.P. Morgan Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMorganL), J.P. Morgan Europe Limited and J.P. Morgan plc are authorized by the FSA. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. J.P. Morgan Securities Singapore Private Limited is a member of Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS). J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P.Morgan Australia Limited (ABN 52 002 888 011) is a licensed securities dealer. Additional information is available upon request. Information herein is believed to be reliable but JPMorgan does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan and/or its affiliates and employees may hold a position, may undertake or have already undertaken an own account transaction or act as market maker in the financial instruments of any issuer discussed herein or any related financial instruments, or act as underwriter, placement agent, advisor or lender to such issuer. Clients should contact analysts at and execute transactions through a JPMorgan entity in their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form without prior consent of JPMorgan. This report has been issued, in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as relevant persons). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other European Economic Area countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. JPMorgan uses the following recommendation system: Overweight. Over the next six to twelve months, we expect this bond to outperform the average total return of the bonds in the analysts (or analysts teams) coverage universe. Neutral. Over the next six to twelve months, we expect this bond to perform in line with the average total return of the bonds in the analysts (or analysts teams) coverage universe. Underweight. Over the next six to twelve months, we expect this bond to underperform the average total return of the bonds in the analysts (or analysts teams) coverage universe. JPMorgan uses the following rating system: Improving (I) The issuers long-term credit rating likely improves over the next six to twelve months. Stable (S) The issuers long-term credit rating likely remains the same over the next six to twelve months. Deteriorating (D) The issuers long-term credit rating likely falls over the next six to twelve months. Deteriorating+ (D+) The issuers long-term credit rating likely falls to junk over the next six to twelve months. Defaulting (F) There is some likelihood that the issuer defaults over the next six to twelve months.
This report should not be distributed to others or replicated without prior consent of JPMorgan. 107