Shorting Home Equity Mezzanine Tranches

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Footnote Exhibits - Page 0960 Strictly private & confidential. What does the payment shock mean to the borrower in the example? U Borrower's mortgage debt-to-income ratio alone, which is assumed at 35% at the loan origination, will grow more than 10 points to 46% after the initial reset and to nearly 50% at the second reset. M With a moderate growth assumption for the borrower's other debts, the borrower's total debt-to-income ratio can grow to nearly 60% at the expiration of the 10 term. E In order for the borrower to have the same (mortgage) debt-toincome ratio at the second reset (when the rate becomes fully indexed), the income needs to grow more than 19% annually. E If home prices stop appreciating, the borrower, with LTV virtually unchanged in the existing loan and likely larger credit card and other debts incurred in the meantime, may find it difficult to refinance into another affordable loan. M According to a subprime mortgage servicer who has the top servicer rating from all rating agencies, in the past, about 50% of the borrowers who did not refi at the payment reset would default eventually. Deutsche Bank All numbers shown in this presentation are indicative and are based on a sample portfolio. Actual numbers will be different and will depend on the actual portfolios selected. 36 00 00 00 00
Footnote Exhibits - Page 0961 Strictly private & confidential Debt-to-income ratios for subprime mortgage borrower would become dramatically higher if calculated using payments with fully-indexed coupons Distribution of subprime ARM originated in 2005 and 2006 by DTI 2 35%
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Shorting Home Equity Mezzanine Tranches

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