RMBS Loss Model 2007-08

Structured Finance
Residential Mortgage
Criteria Report
Analysts
Bill Hunt
+1 212 908-0857
bill.hunt@fitchratings.com
Glenn Costello
+1 212 908-0307
glenn.costello@fitchratings.com
Suzanne Mistretta
+1 212 908-0639
suzanne.mistretta@fitchratings.com
ResiLogic Criteria Update
Fitch has published two criteria reports
that detail changes made to Fitchs
residential mortgage rating criteria and
the ResiLogic mortgage model:
U.S. RMBS: Criteria Update to

ResiLogic Model, dated Aug. 14,
2007
U.S. RMBS: Updated Criteria for

Loan Documentation in ResiLogic,
dated Aug. 14, 2007
Both reports should be read in
conjunction with this report, which was
originally published on Oct. 4, 2006.
Related Research
Option ARM Risks and Criteria, dated

Oct. 4, 2006
U.S. RMBS Criteria for Subprime
Interest-Only ARMs, dated Oct. 4, 2006
U.S. RMBS Rating Criteria for Prime and
Alt-A Interest-Only Mortgages, dated
Oct. 4, 2006
40-, 45-, and 50-Year Mortgages: Option
ARMs, Hybrid ARMs, and FRMs, dated
Oct. 4, 2006
Rating U.S. Residential Mortgage
Servicers, dated Nov. 29, 2006
U.S. RMBS Cash Flow Modeling
Criteria: Updated, dated Feb. 6, 2007
ResiLogic: U.S. Residential

Mortgage Loss Model
Summary
Fitch Ratings introduces ResiLogic, its new rating model for analyzing
credit risk in U.S. residential mortgage-backed security (RMBS)
transactions. Fitch will begin using ResiLogic as the basis for RMBS
rating analysis on Nov. 6, 2006. With the introduction of ResiLogic,
the Fitch RMBS model software will be available for licensing by
market participants for the first time.
The ResiLogic model is based on performance history of over 1.6 million
residential first lien and closed-end second (CES) mortgage loans
originated between 1992 and 2000 and encompasses the three major
credit sectors: prime, Alternative-A (Alt-A), and subprime mortgages.
Base frequency of foreclosure (FOF) and loss severity (LS) are computed
at the loan level, based on each loans risks attributes, to derive an
expected base case loss amount.
In addition to base case loss expectations, the model generates loss
coverage requirements for each rating category, reflecting FOF and LS
sensitivity to economic stress. AAA ratings are based on the response
to severe, low probability stress simulation. The stressed loss levels are
computed by simulating changes in economic conditions at both the
national and state level for each loan. Thus, the loss coverage
computed for a pool of mortgages at each rating category reflects both
geographic composition and concentration.
Through logistic regression analyses of the data samples loan attributes
and performance from origination through 2005, Fitch identified 13
credit dimensions (e.g. risk attribute categories such as occupancy, loan
purpose, and documentation type, among others) sufficiently significant
to be incorporated in the models FOF calculation. Fitch found that the
three dimensions that most strongly influence FOF were Fair Isaac Corp.
(FICO) score, credit sector, and combined loan-to-value ratio (CLTV).
The regression analysis produced an FOF odds penalty or credit for the
individual loan attributes within each credit dimension. Application of
these credits and penalties to a pool of loans produces a base case FOF
for each loan.
Fitchs expected base case default performance for a mortgage varies
by state. Fitch has selected University Financial Associates, LLC
(UFA), a mortgage portfolio analysis software provider located in Ann
Arbor, MI, to provide default risk multipliers for each state. Based on
its analyses, UFA formulates its loan multipliers by state, which
represent the expected level of defaults over the life of a loan relative
to the national average on a constant quality basis. Fitch applies these
multipliers to each loans base case FOF to adjust for regional risk.
August 14, 2007

www.fitchratings.com
Structured Finance
Frequency of Foreclosure Credit Dimensions
Order of
Influence
1
2
Frequency of Foreclosure
Dimensions
FICO
Credit Sector
3
4
CLTV
Property Type
Product Type
Documentation Type
Loan Term
Prepayment Penalty
Occupancy
10
11
12
Front-End DTIs
Loan Balance at Closing
Loan Purpose
13
Preseasoning
Loan Attributes
Continuous
Prime
Alt A
Subprime
Continuous
Single-family detached
Condo/Co-op
Multifamily
Townhouse/other
PUD
Manufactured housing
Fixed-rate loan
Adjustable-rate loan
Balloon loan
Full documentation
Low documentation
No documentation
Term = 360 months
Term < 360 months
No prepayment penalty
Prepayment penalty
Owner-occupied primary
Owner-occupied secondary
Non-owner-occupied
Continuous
Continuous
Purchase/other
Refinance
Continuous
Baseline Attribute/Odds of
Default Relative to Baseline
Higher FICO scores = lower odds
Baseline
Higher
Higher
Higher CLTV = higher odds
Baseline
Lower
Higher
Higher
Lower
Higher
Baseline
Higher
Higher
Baseline
Higher
Higher
Baseline
Lower
Baseline
Higher
Baseline
Higher
Higher
Higher DTI = higher odds
Higher balance = lower odds
Baseline
Higher
More seasoning = lower odds
FICO Fair Isaac Corp. PUD Planned unit development. CLTV Combined loan-to-value ratio. DTIs Debt-to-income ratios.
dimension, are listed in the tables above and on page 3,

respectively.
The ResiLogic model derives expected LS through a

statistical analysis of historical LS performance. The
model uses a slightly different set of 12 credit
dimensions to compute a base LS expectation, similar
to those used for the FOF calculation. The attributes
within each credit dimension are assigned a LS penalty
or credit derived from the statistical analysis, which
determine Fitchs base case LS assumption for each
loan. Fitch extracted loss data on loans that went into
foreclosure and incurred a realized loss and found that
of the 12 credit dimensions, original loan balance,
CLTV, and mortgage coupon were closely correlated
to the incidence and amount of realized losses. Fitch
also found that servicer quality, as evidenced by the
Fitch servicer rating, directly affects LS.
The tables show each credit dimension ranked in order

of its influence on FOF and LS. The specific attributes
within each dimension determine its relative risk. For
example, the occupancy dimension consists of owneroccupied, owner-occupied second home, and nonowner-occupied (investor) loan attributes. One
attribute within each dimension represents the baseline
from which the relative risk of the other attributes is
measured, when holding all other dimensions constant.
In the example, owner occupied is the baseline.
The historical default and loss experience of each loan
attribute relative to the baseline determines the relative
FOF odds and LS sensitivity for that attribute. The
relative risk of various loan attributes in each credit
dimension are described in terms of higher or lower
odds of default for the FOF dimensions and as
sensitivity credits (lower severity) and penalties
(higher severity) for the LS dimensions, as shown in
the table above and on page 3.
This report describes Fitchs analytical model for

determining loss coverage requirements for rating
RMBS backed by first and second lien residential
mortgages.
Base FOF and LS Collateral Risk
ResiLogic makes a full credit assessment for a
RMBS pool using 13 credit dimensions and a state
dimension for determining FOF, together with a
slightly different set of 12 credit dimensions for LS.
The FOF and LS credit dimensions, as well as the
individual loan attributes that constitute each
FOF odds and LS sensitivity for continuous dimensions,

such as FICO score, CLTV, loan balance, and coupon,
are themselves generated by continuous functions.
Higher CLTVs increase the odds of default and LS and,
ResiLogic: U.S. Residential Mortgage Loss Model

2
Structured Finance
Loss Severity Dimensions
Order of
Influence
1
2
3
4
Loss Severity Dimension

Closing Balance
CLTV
Loan Coupon
Property Type
Occupancy
Loan Purpose
Credit Sector
Product Type
9
10
11
Preseasoning
FICO
Loan Term
12
Servicer Rating
Baseline Attribute/Loss Experience

Relative to Baseline
Higher balance = lower loss
Higher CLTV = higher loss
Higher coupon = higher loss
Baseline
Lower
Higher
Higher
Lower
Higher
Baseline
Higher
Higher
Baseline
Higher
Baseline
Lower
Lower
Baseline
Higher
Higher
More seasoning = lower loss
Higher FICO = lower loss
Baseline
Lower
Higher rating = lower loss
Loan Attributes
Continuous
Continuous
Continuous
Single-family
Condo/Co-op
Multifamily
Townhouse
PUD
Manufactured housing
Owner-occupied, primary
Owner-occupied, secondary
Non-owner-occupied
Purchase
Refinance
Subprime
Alt-A
Prime
Fixed
ARM
Balloon
Continuous
Continuous
Term = 360 months
Term < 360 months
Continuous
CLTV Combined loan-to-value ratio. PUD Planned unit development. ARM Adjustable-rate mortgage. FICO Fair Isaac Corp.
models predictive capability based solely on loan

attribute credit risk.
therefore, are assigned higher FOF and LS percentages.

Similarly, higher FICOs reduce the odds of default (i.e.
lower FOFs) and the severity of loss.
The disparity between the predicted and actual

performance for the 2000 Alt-A and prime vintages
reflects the recessionary environment of that year,
which is not accounted for in the test models.
Predictive Capability
Each of the credit sectors (prime, Alt-A, and subprime)
was divided into in-sample and out-of-sample data
sets (build and test data sets), such that roughly 10% of
the 1.6 million observations were set aside during the
variable selection phase, as shown in the table below.
Segregating the data set allows the model to test the outof-sample (unseen) data. Fitch obtained the loan-level
data from Loan Performance.
Still, the model was able to capture the drift of credit

quality in all the credit sectors exhibited by the 2000
Frequency of Foreclosure for Prime Loans
by Vintage
Predicted (In-Sample/Build Model)
For the Alt-A and subprime credit sectors, the out-ofsample included the 2000 vintage, the most recent
data set, which, coincidentally, represented a poor
quality vintage. The out-of-sample data set for the
prime sector consisted of the 1999 vintage, which
contained the most data of all the vintage years.
Actual
2.5
(%)
2.0
1.5
The charts at right and on page 4 illustrate the

1.0
Model Data Set Summary
0.5
Actual
FOF (%)
19.03
25.18
3.29
6.22
1.31
0.82
20
00
19
99
19
98
19
97
19
96
0.0
19
95
Predicted
FOF (%)
19.03
22.59
3.29
4.10
1.31
0.90
19
94
No. of
Loans
691,838
71,586
332,113
33,277
464,758
50,818
19
93
Sample
In-sample
Out-of-sample
In-sample
Out-of-sample
In-sample
Out-of-sample
19
92
Sector
Subprime
Subprime
Alt-A
Alt-A
Prime
Prime
Vintage Year
FOF Frequency of foreclosure.

3
Structured Finance
Loan attributes that exhibited default rates higher
than those of the baseline are assigned a FOF odds
penalty to reflect the higher default probability of that
attribute. Conversely, loan attributes that exhibited
lower defaults relative to the baseline are applied a
FOF credit to reflect their lower risk of default. The
aggregate of the baseline FOF and odds adjustments,
together with the state FOF penalty or credit,
produces a base FOF percentage for each loan. The
state FOF dimension is discussed on page 10.
Frequency of Foreclosure for Alt-A Loans

by Vintage
Actual
10
9
(%)
8
7
6
5
4
3
2
In Fitchs regression analysis, the vast majority of CES

analyzed were in the subprime sector. Subprime CES
are assigned the same FOF odds and credits as subprime
first liens for each dimension affected by credit sector.
For those dimensions not affected by credit sector, CES
are assigned the same penalties and credits as first liens.
High credit quality CES pools are less common but can
also be analyzed by ResiLogic.
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
1
0
Vintage Year
Credit Score and Credit Sector (Prime, Alt-A, and

Subprime): The highest ranking dimensions for
predicting mortgage defaults are FICO scores and credit
sector (i.e. prime, Alt-A, and subprime). Credit score
and sector closely interact with default risk, particularly
for prime and Alt-A loans. The credit sector baseline is a
prime mortgage.
vintage. The deterioration in credit quality typically

occurs during a recessionary period, as lenders tend to
loosen credit standards to maintain origination volume.
However, this is less noticeable in the subprime sector,
as evidenced by the proximity of the actual and
predicted results for the 2000 vintage.
The FOF by FICO chart on page 5 shows the default

rates for each FICO value by credit sector for a
sample loan, whose attributes reflect the weighted
average of the data sample. Prime and Alt-A default
rates are very low for FICOs above 700 and continue
to steadily decline as scores increase. Alt-A
underperformed the prime baseline; therefore, the
Alt-A credit sector is assigned higher odds that
increase the loans FOF percentage.
Base Frequency of Foreclosure
Discussed below and listed in the table on page 2 are

the 13 credit dimensions ranked in order of influence
on default risk for first liens and CES.
Frequency of Foreclosure for Subprime
Loans by Vintage
Actual
30
(%)
Still, the Alt-A sector exhibited the same sensitivity

to increases in FICO score as the prime sector.
Default probability decreased by 28% for every 20point increase in a prime or Alt-A FICO score. In
fact, prime default rates for scores above 750 were
under 35 basis points (bps) and defaults were roughly
1% and less for Alt-A loans with similar scores. The
FICO score penalty is based on the inverse relationship
between FICO score and default rates.
25
20
15
10
5
The slope differential of the subprime loan FOF by

FICO function clearly distinguishes the sector from
prime and Alt-A. The default rate decrease relative to a
20-point increase in FICO score is 12%, less than half
that for the prime and Alt-A loans. This lower
sensitivity of subprime default rates to changes in
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
Vintage Year

4
Structured Finance
FOF by FICO
Prime
40
ALT-A
Subprime
(%)
35
30
25
20
15
10
5
82
5
80
0
77
5
75
0
72
5
70
0
67
5
65
0
62
5
60
0
57
5
55
0
52
5
50
0
47
5
FICO Score
FOF Frequency of foreclosure. FICO Fair Isaac Corp.
Note: Assumes weighted average of the data samples characteristics.
FICO score is due to the high absolute levels of

defaults. These high rates indicate the vulnerability of
the subprime borrower to risk factors beyond the loan
attributes, such as deteriorating financial circumstances,
an inability to cash out equity due to slow home price
appreciation, and personal hardship, among others. In
contrast, the very low absolute levels of defaults in the
prime and Alt-A sectors and the clear response to FICO
scores indicate less vulnerability to extraneous factors.
chart below. The analysis showed that a 10% increase

in CLTV correlated to a 33% rise in FOF. Decadesworth of data demonstrate a strong correlation
between a borrowers propensity to default and
CLTV. Historical, as well as recent, performance
confirms that low homeowner equity reduces
borrower incentive to avoid foreclosure.
Subprime loans with a 70% CLTV or higher exhibit
incrementally smaller increases in defaults. This is
illustrated in the FOF by CLTV chart below.
Subprime borrowers are less sensitive to lack of
CLTV: FOF responds smoothly to increases in

CLTV for prime and Alt-A loans, as shown in the
FOF by CLTV
Prime
25
ALTA
Subprime
(%)
20
15
10
5
10
0
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
62
60
58
56
54
52
50
CLTV (%)
FOF Frequency of foreclosure. CLTV Combined loan-to-value ratio.

5
Structured Finance
homeowner equity than they are to changes in
financial circumstances and home price appreciation.
The analysis showed that default probability rose by
13% when increasing the CLTV from 65% to 70%
for subprime loans; however, the rise in default
probability was just 2% when increasing the CLTV
from 75% to 80%. The CLTV FOF odds reflect the
positive relationship between CLTV and default risk
and the increased probability of default when CLTV
rises by 5%. However, subprime loans with CLTVs
of 70% or higher are applied a lower FOF penalty to
reflect the lower rise in default risk when CLTVs of
70% or higher increase by 5%.
the borrowers downpayment, as well as pools secured

by CES, Fitch applies the FOF odds penalty to the
CLTV of both the first and second lien mortgages for
every loan that has more than one lien. This ensures
that the default risk potential adequately reflects the
reduced homeowner equity associated with the
presence of a second lien.
For first liens originated simultaneously with a

piggyback loan, i.e. a second lien used for financing
The table below shows the base case FOF projection

for a range of FICO and CLTV combinations for
Fitchs previous methodology of applying the FOF to

a higher CLTV only for piggybacks in excess of 35%
of the pool is no longer applicable. The new model
includes both liens in the FOF CLTV calculation for
100% of the loans that have a second lien attached.
Base Case FOF FICO\CLTV Matrix

(%)
50
55
60
65
70
CLTV
75
80
85
90
95
100
2.06
1.48
1.06
0.75
0.54
0.38
0.27
0.19
0.14
0.10
0.07
0.05
2.38
1.71
1.22
0.87
0.62
0.44
0.32
0.23
0.16
0.11
0.08
0.06
2.75
1.97
1.41
1.01
0.72
0.51
0.37
0.26
0.19
0.13
0.09
0.07
3.17
2.28
1.63
1.17
0.83
0.59
0.42
0.30
0.22
0.15
0.11
0.08
3.65
2.63
1.88
1.35
0.96
0.69
0.49
0.35
0.25
0.18
0.13
0.09
4.20
3.03
2.17
1.56
1.11
0.79
0.57
0.40
0.29
0.21
0.15
0.10
4.83
3.49
2.51
1.80
1.29
0.92
0.66
0.47
0.33
0.24
0.17
0.12
5.55
4.02
2.89
2.08
1.49
1.06
0.76
0.54
0.39
0.27
0.20
0.14
6.37
4.62
3.33
2.40
1.72
1.23
0.88
0.63
0.45
0.32
0.23
0.16
7.30
5.31
3.84
2.76
1.98
1.42
1.01
0.72
0.52
0.37
0.26
0.19
8.36
6.10
4.42
3.19
2.29
1.64
1.17
0.84
0.60
0.43
0.30
0.22
3.94
2.83
2.03
1.46
1.04
0.74
0.53
0.38
0.27
0.19
0.14
0.10
4.53
3.27
2.35
1.68
1.20
0.86
0.61
0.44
0.31
0.22
0.16
0.11
5.21
3.76
2.71
1.94
1.39
0.99
0.71
0.51
0.36
0.26
0.18
0.13
5.98
4.33
3.12
2.24
1.61
1.15
0.82
0.59
0.42
0.30
0.21
0.15
6.86
4.98
3.60
2.59
1.85
1.33
0.95
0.68
0.48
0.34
0.25
0.17
7.85
5.72
4.14
2.98
2.14
1.53
1.10
0.78
0.56
0.40
0.28
0.20
8.98
6.56
4.76
3.44
2.47
1.77
1.27
0.91
0.65
0.46
0.33
0.23
10.25
7.52
5.47
3.96
2.85
2.04
1.46
1.05
0.75
0.53
0.38
0.27
11.68
8.61
6.28
4.55
3.28
2.36
1.69
1.21
0.86
0.62
0.44
0.31
13.28
9.83
7.20
5.23
3.78
2.72
1.95
1.40
1.00
0.71
0.51
0.36
15.06
11.21
8.24
6.01
4.35
3.14
2.25
1.61
1.15
0.82
0.59
0.42
20.64
18.11
15.83
13.79
11.98
10.37
8.96
7.72
6.64
5.71
4.90
4.19
3.59
23.14
20.39
17.88
15.63
13.61
11.81
10.23
8.83
7.61
6.55
5.62
4.82
4.13
25.85
22.87
20.14
17.66
15.42
13.43
11.65
10.09
8.71
7.50
6.45
5.54
4.75
28.76
25.56
22.60
19.89
17.43
15.22
13.25
11.49
9.95
8.59
7.40
6.36
5.46
29.30
26.06
23.06
20.32
17.82
15.57
13.56
11.77
10.19
8.80
7.58
6.52
5.60
29.86
26.58
23.54
20.75
18.21
15.92
13.87
12.04
10.43
9.01
7.77
6.68
5.74
30.41
27.10
24.02
21.19
18.61
16.28
14.19
12.33
10.68
9.23
7.96
6.85
5.89
30.98
27.62
24.50
21.63
19.01
16.64
14.51
12.62
10.94
9.46
8.16
7.02
6.04
31.55
28.16
25.00
22.09
19.42
17.01
14.85
12.91
11.20
9.69
8.36
7.20
6.19
32.12
28.70
25.50
22.54
19.84
17.39
15.18
13.21
11.46
9.92
8.56
7.38
6.34
FICO Prime
600
620
640
660
680
700
720
740
760
780
800
820
FICO Alt-A
600
620
640
660
680
700
720
740
760
780
800
820
FICO Subprime
460
480
500
520
540
560
580
600
620
640
660
680
700
18.34
16.04
13.98
12.14
10.52
9.09
7.83
6.74
5.79
4.97
4.26
3.64
3.12
FOF Frequency of foreclosure. FICO Fair Isaac Corp. LTV Loan-to value ratio. Note: Each sector assumes a loan with the following attributes:
full documentation, owner occupied, fixed rate, single family, purchase, no prepayment penalty, 360-month term, 25% debt-to-income ratio (DTI),
and $250,000 balance.

6
Structured Finance
Fitchs analyses of affordability products have
demonstrated the payment increase potential faced by
borrowers at the initial rate reset or recast date. The
FOF odds penalties for each of these products are
based primarily on the size of the payment increase
relative to that for ARMs. The payment increases, as
well as other risks associated with these products, are
fully described in published Fitch Research.
each of the credit sectors. The table assumes that

other dimensions are set to the baseline attributes.
Note that the actual FICO and CLTV odds are
computed on a continuous basis and these points are
shown for illustration.
Property Type: The property type dimension consists
of single-family detached (SFD) homes, condominiums,
co-operatives, multifamily homes, townhouses, planned
unit developments (PUDs), and manufactured housing
(MH). The SFD property type is the baseline.
Loan Documentation: Limited or no documentation

(no doc) loans are assigned higher FOF odds based
on the higher default rates exhibited by these loans
relative to the full documentation (full doc) baseline.
Fitchs analysis showed that limited doc loans had a
24% higher default rate and no doc loans had a 50%
higher default rate compared with full doc loans.
Condominiums and PUDs exhibited lower defaults

relative to the SFD baseline by 32% and 18%,
respectively. Fitch believes that condos experience
fewer defaults because they are predominantly
concentrated in heavily populated metropolitan areas
where demand is high. Also, in high-cost rental
markets, condos provide homeownership benefits
with comparable monthly costs, which also fuels
demand. PUDs also exhibited fewer defaults than
SFD homes. Mortgages secured by either of these
two attributes have reduced odds of default.
Since limited and no doc programs usually omit an

income and/or asset verification, borrowers are more
vulnerable to default risk if they overestimate their
income and assets to qualify for a loan amount they
otherwise would not obtain under a full doc program.
Loan Term: Loans with less than 30-year terms
exhibited a 30% lower default rate than the 30-year term
baseline; therefore, loans with maturities less than
30 years are given a FOF odds credit to reflect the lower
probability of default. Borrowers of a 15-year mortgage,
in particular, voluntarily assume the higher payment
despite having a smaller payment option with the
30-year mortgage, an ARM, or affordability product.
This voluntary undertaking reflects a premium borrower
selection as opposed to adverse selection, which is
associated with lower mortgage payment options.
In contrast, multifamily, townhouses, and MH

properties exhibited higher default rates compared with
SFD homes. Multifamily homes are more prone to
default risk since the borrower is relying on income
from rental or other sources to help pay the mortgage.
Each of these property types is assigned higher odds
commensurate with performance, which reflects the
increased risk of default relative to the SFD baseline.
The MH property type has the highest FOF odds penalty
due to the high-risk nature of the property type.
As with other affordability products, there is little

performance history for mortgages with terms of
40 years or more to derive an accurate odds penalty
(or credit). Therefore, the odds penalties for loan
terms of 40 years or more were determined based on
Fitchs analyses of the payment increase potential,
slower amortization, and adverse selection risk
associated with loan terms greater than 30 years.
Product Type: Relative odds for adjustable-rate

mortgages (ARMs) and balloon loans were
determined based on their default performance
relative to that of the fixed-rate mortgage (FRM)
baseline. Both products exhibited higher default rates
compared with the baseline and, therefore, higher
default odds are assigned.
The odds penalties for affordability products such as
hybrid ARMs, interest-only mortgages (IOs), and option
ARMs were derived based on analysis of payment
increase potential rather than a logistic regression due to
the lack of substantive performance data available for
these products. FOF regression would produce a
distortedly low odds penalty for these products given
that the short performance history only spans the benign
economic environment of recent years.
Based on Fitchs analyses of 40-year FRMs, the

increase in adverse selection risk and lack of
amortization were low relative to 30-year FRMs. The
FOF odds penalty for 40-year FRMs reflects the
small increase in adverse selection risk. This is also
true for longer term hybrid ARMs and option ARMs.
However, the hybrids and option ARMs face a 5% and
25% higher payment increase, respectively, at the rate
reset or recast relative to their 30-year counterparts.
Fitch derived an odds penalty for each of these
7
Structured Finance
FOF by DTI
Prime
20
ALT A
Subprime
(%, FOF)
18
16
14
12
10
8
6
4
2
36
34
32
30
28
26
24
22
20
18
16
14
12
10
0
DTI (%)
FOF Frequency of foreclosure. DTI Debt-to-income ratio.
the borrower is relying on income from external

sources to repay the mortgage. If the property was
financed with an ARM, a borrower could
underestimate the mortgage payment; if the rental
income is insufficient, the payment increases. Second
homes and investor properties are assigned separate
FOF odds penalties to reflect their distinct, higher
odds of default relative to the baseline.
products based on the payment increases and, to a

lesser extent, the adverse selection risk. Products with
terms of 40 years and longer are fully described in
published Fitch research.
Prepayment Penalties: Loans with prepayment
penalties are concentrated in the subprime sector and,
to a lesser extent, in the Alt-A sector. Prime loans
rarely have prepayment penalties. Fitchs analysis
showed that loans with prepayment penalties exhibited
higher default rates than those without and, therefore,
are assigned an FOF odds penalty, regardless of the
prepayment penalty term. The baseline FOF for
measuring the increase in default risk was loans that
did not have a prepayment penalty.
Debt-to-Income Ratios (DTIs): Default rates were

slightly correlated to increases in front-end DTIs, as shown
in the chart above. A front-end DTI is the ratio of monthly
installment debt to monthly gross income (the mortgage
payment, taxes, and insurance are included in the back-end
DTI). For prime and Alt-A loans, a 5% increase in the DTI
yielded roughly a 3% rise in default rates.
Occupancy: Non-owner-occupied second homes and

non-owner-occupied investor properties exhibited
higher default rates than the owner-occupied baseline.
Second homes had higher default rates since borrowers
facing financial difficulty are likely to default on a
second home before their primary residence.
For subprime loans, there was slightly less sensitivity

to default risk when DTIs rose. A 5% increase in DTI
yielded a 2.5% rise in default risk. This lower
sensitivity is also reflective of the very high default
rates of the subprime sector and the vulnerability of the
subprime borrower to external risk factors.
Investment properties exhibited a 24% higher default

rate than owner-occupied properties. Fitch attributes
the high default rates to the effect of speculative
investments and high-risk nature of rental properties.
Speculative investing can increase default rates if the
property does not sell as fast or at the price needed
for an investor to break even. For rental properties,
Closing Balance: Closing balance affects default rates

in a nonlinear way, as shown in the chart on page 9.
Both low and high balance loans exhibited higher
default rates relative to the middle range of the band.
The high balance effect is more pronounced in the Alt-A
and prime sectors; default probability rises 5% when the

8
Structured Finance
FOF by Closing Balance Prime and Alt-A
Prime
(%)
3.0
ALT A
2.5
2.0
1.5
1.0
0.5
800
830
740
770
650
680
710
590
620
500
530
560
410
440
470
350
380
290
320
230
260
170
200
80
110
140
50
20
0.0
Closing Balance ($000)

For cashout refinances, in particular, a borrower who

extracts equity from the home is more likely to default
if he/she is facing financial difficulties or personal
hardship such as unemployment or divorce. Also,
many borrowers extract cash from accumulated home
equity for debt consolidation purposes, which may be
an indication that the borrower is financially strapped.
If the borrower reloads the debt after the
consolidation, the debt burden may become intolerable
and the borrowers likelihood of default rises.
loan balance increases from $700,000 to $750,000. This

is reflective of the higher adverse selection risk
associated with more expensive homes. However,
adverse selection risk depends on location. In higher
priced markets, particularly in the coastal states, adverse
selection risk is proportionate to the median value.
In the subprime sector, low balance loans incur
higher defaults. Decreasing the loan balance from
$100,000 to $50,000 increases the default probability
by 12%. Very low loan balances are generally
secured by less desirable properties and likely to be
in disrepair, which increases the default risk if the
borrower has difficulty selling the home.
Loan Seasoning: At deal closing, loans typically

have between two and six months of seasoning.
However, in most RMBS pools, there are a number
of loans with 12 months or more seasoning. These
loans benefit from having survived the early
months of loan payments. For prime, Alt-A, and
Loan Purpose: Refinance mortgages exhibited 12%

higher default rates than the purchase loan baseline.
FOF by Closing Balance Subprime
25
(%)
20
15
10
5
800
830
740
770
680
710
620
650
560
590
500
530
440
470
380
410
320
350
260
290
200
230
140
170
80
110
50
20
Closing Balance ($000)


9
Structured Finance
UFA Default Rankings by State
risk are greater than 1.2; states with multipliers

between 0.8 and 1.2 are at an average risk of default;
and those with multipliers of less than 0.8 are low risk.
(As of September 2006)

State
California
Colorado
Massachusetts
Michigan
Minnesota
New Hampshire
Rhode Island
Arkansas
Connecticut
Delaware
Georgia
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Maine
Maryland
Mississippi
Missouri
Montana
Nebraska
Nevada
New Jersey
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
Alabama
Alaska
Arizona
Florida
Idaho
Louisiana
New Mexico
West Virginia
Census Region
Pacific Region
Mountain Region
Northeast Region
North Central Region
Northeast Region
Northeast Region
Southern Region
Northeast Region
Southern Region
Southern Region
Pacific Region
Southern Region
Northeast Region
Southern Region
Southern Region
Mountain Region
Mountain Region
Northeast Region
Northeast Region
Southern Region
Southern Region
Pacific Region
Northeast Region
Southern Region
Southern Region
Southern Region
Mountain Region
Northeast Region
Southern Region
Pacific Region
Mountain Region
Southern Region
Pacific Region
Mountain Region
Southern Region
Mountain Region
Southern Region
Mountain Region
Southern Region
Default Risk
High
High
High
High
High
High
High
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Average
Low
Low
Low
Low
Low
Low
Low
Low
Regional economic conditions greatly influence

mortgage risk. UFAs analysis of regional risk takes
into account each states economic metrics, such as
personal income and distribution, employment
growth, housing construction, and other indicators. It
also factors in a demographic component, which
includes unemployment rates and population growth,
as well as a political component that considers local
taxes and zoning regulations.
UFAs analysis is used to derive the quarterly UFA
Mortgage Report default multipliers by state. The
multipliers represent the level of expected defaults
over the life of a loan relative to the national average
on a constant quality basis. For example, if the UFA
default multiplier for a state is 0.90, expected defaults
in that state are 90% of those for the average loan in
the U.S.
Fitch tested the UFA multipliers and found their predictive
power to be highly accurate. UFA provided historical
default multipliers, by state, dating back to 1996. The
multipliers provided were forward-looking factors; i.e.
they were computed as a function of data available up to
the date of the multiplier only, making them appropriate
for out-of-sample testing. To test the calibration, Fitch
subtracted 1.00 from each multiplier and added this factor
to the FOF logistic regression.
Base Loss Severity
LS is computed similarly to FOF through a statistical

analysis of historical data. This represents a significant
departure from Fitchs prior approach to LS. In earlier
Fitch models, LS was calculated using estimated
carrying costs and liquidation expenses, combined
with regional home price projections. In building the
ResiLogic model, Fitch took advantage of the
availability of a robust data set of actual observed loss
severities for defaulted mortgages. This data set
allowed Fitch for the first-time to directly model the
relationship between loan attributes and LS.
UFA University Financial Associates, LLC.
subprime loans, having at least six months seasoning

at deal closing results in a decrease in default
probability of roughly 8.5%, which results in a FOF
credit for loans seasoned more than six months at
deal closing.
LS penalties and credits are applied to each loan

attribute based on the LS experience relative to the
baseline. However, unlike FOF, where odds penalties
indicate an increased probability of default, the LS
model measures each attributes contribution to
incidence and amount of realized losses. For the
continuous dimensions like loan balance, coupon, and
State FOF Dimension: The UFA default multipliers

by state, as listed in the table above, are applied as a
penalty or credit to Fitchs base FOF derived from the
aforementioned collateral risk attributes. The
multipliers for those states categorized as high default
10
Structured Finance
LS by CLTV
Subprime
70
Alt-A
Prime
(%, LS)
60
50
40
30
20
10
10
0
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
68
66
64
62
60
58
56
54
52
50
CLTV (%)
LS Loss severity. CLTV Combined loan-to-value ratio.
CES model include closing balance, CLTV, loan

coupon, occupancy, and loan seasoning
CLTV, sensitivity penalties and credits reflect the

percentage increase or decrease in LS associated with
the possible attributes in each dimension.
Closing Balance: The original loan amount (or

closing balance) exhibited an inverse relationship to
LS. Larger loan balances exhibited lower relative
losses than low balance loans, which Fitch believes is
attributable to several factors. Foremost, the
foreclosure and liquidation costs as a percentage of a
large loan balance are lower than that of a small
balance loan. Second, properties securing a large loan
may be secured by more marketable properties that
may be in better condition, requiring less reparation
and expense. Servicers are likely to prioritize the
liquidation of these properties before a property
securing a smaller loan amount.
The aggregate of the baseline LS percentage and the

attribute adjustments produces a base LS percentage for
each loan. This contrasts with Fitchs previous
methodology, in which the loan balance was reduced by
a projected market value decline, carrying costs, and
liquidation expenses to derive a loans LS percentage.
To determine which credit dimensions interacted closest
with realized losses, Fitch extracted approximately 270,000
loans that had experienced a liquidation event and had a
payment history dating back to the first payment date. After
eliminating loans with mortgage insurance (MI), senior
liens, and reperforming and subperforming loans, Fitch had
observed data for roughly 124,000 loans.
Subprime loans have lower balances than prime and

Alt-A loans. Thus, more subprime loans incurred
losses and the loss percentages were higher. This
further demonstrates the impact that the closing
balance has on LS.
Discussed below and shown in the table on page 3

are the 12 dimensions in order of influence on LS.
Some of the dimensions affecting FOF did not affect
LS and were replaced by others. The dimensions
affecting LS, but not FOF, include loan coupon and
servicer rating. FOF credit dimensions not part of the
LS model are prepayment penalty, documentation,
and DTIs.
CLTV: As shown in the chart above, CLTV affects LS

because it reflects the amount of homeowner equity that
is available to absorb market value losses. LS is
positively correlated to CLTV; loans with high CLTVs
have little equity in the first loss position and, therefore,
incur higher losses in a soft or declining real estate
market. The LS penalty is based on the positive
relationship between losses and CLTV.
Subprime CES are treated the same as subprime first

lien mortgages for those LS dimensions affected by
credit sector. However, several of the 12 first lien
credit dimensions affecting LS were insufficiently
significant to be incorporated in the CES loss
calculation. The LS dimensions that constitute the
Loan Coupon: The loan coupon or mortgage rate

directly affects losses since it drives interest carrying
11
Structured Finance
Historical Prime Loan Loss Severity
2.0
(% of Sample)
1.8
34% of sample
had no loss
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
15
0
14
0
13
0
12
0
11
0
10
0
90
80
70
60
50
40
30
20
10
)
(1
0
(2
0
)
(3
0
)
(4
0
(5
0
0.0
Loss (% of Original Balance)
owner-occupied baseline. Investor properties are

vulnerable to loss if there is a rise in housing supply,
which can affect resale values and the period to sell
the property. Carrying costs and liquidation expenses
drive up losses if the borrower is unable to rent or sell
the property. To expedite a sale, the price of the
property is likely to be reduced.
costs. Interest accrues at the note rate on the outstanding

loan balance from the time the borrower makes the last
payment through the time liquidation proceeds are
received. Carrying costs can be significant for hard to
sell properties or in states with lengthy foreclosure
timelines or onerous eviction laws. The eviction process
can take several months even in moderate states. The LS
penalty is based on the positive relationship between the
mortgage coupon and losses.
Loan Purpose: Cashout and rate term refinances

experienced higher losses than purchase loans, which
is the baseline for the loan purpose LS dimension.
Losses on cashout refinances are due to the lower
amount of homeowner equity available to absorb
market value declines. As a result, loan refinances are
applied a LS sensitivity penalty to account for the
higher loss potential, as evidenced by past experience.
Property Type: As with default performance, condos

and PUDs incurred fewer losses than the SFD baseline.
As a result, condos and PUDs are applied a LS credit
due to their low loss experience relative to the baseline.
Multifamily homes, townhouses, and MH
experienced higher losses relative to SFD homes. The
loss experience is attributable to the lower market
demand and property condition declines associated
with multifamily and MH properties. Townhouses
usually experience steeper market value declines
since they compete with SFD properties and have
monthly association dues, which negatively affect the
resale value. The LS penalties applied to multifamily,
townhouse, and MH properties reflect their higher
loss experience relative to the SFD baseline.
Credit Sector: The baseline for the credit sector

dimension is subprime. LS for prime loans that went into
foreclosure was very low; few loans incurred a realized
loss of over 35% of the original balance. A large
percentage of the sample, almost 34%, incurred no loss,
as shown in the chart above.
More Alt-A loans incurred a realized loss, about 16%,
as shown in the chart on page 13. Most of the Alt-A
loans incurred losses in the 10%30% range, though
more loans than prime incurred losses in excess of 35%.
Prime and Alt-A loans are applied a LS credit since they
Occupancy: Non-owner-occupied second homes and

investor properties exhibited higher losses than the
12
Structured Finance
Historical Alt-A Loan Loss Severity
2.0
(% of Sample)
1.8
16% of sample
had no loss
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
15
0
14
0
13
0
12
0
11
0
10
90
80
70
60
50
40
30
20
10
0)
(1
0)
(2
0)
(3
0)
(4
(5
0)
0.0
the same penalty as a five-year balloon and so forth.

Fitch does not apply a sensitivity penalty to IOs with
interest-only periods of fewer than five years, since
the amortized amount during the early years of a
mortgage life is small and, therefore, would have a
negligible impact, if any, on LS.
incur lower losses than the subprime mortgages. Prime

loans have a larger credit than Alt-A due to the very low
loss experience of the prime loans.
About 8% of the subprime sector experienced no losses,
as shown in the chart on page 14, much less than the
percentage of prime and Alt-A loans. In addition, over
1.5% of the sample incurred a loss of over 100%. This is
likely due to the higher carrying costs and liquidation
and foreclosure expenses.
Given that no other products in the data sample

resemble an option ARMs negative amortization
feature, Fitch determined that a higher CLTV
assumption for the option ARM would serve as an
appropriate proxy for applying a sensitivity penalty. A
growing loan balance resulting from negative
amortization reduces homeowner equity, which, in
turn, increases the original CLTV. Fitch raises the
CLTV by five percentage points when applying the
CLTV sensitivity penalty to an option ARM, which is
consistent with Fitchs prior published research on
option ARM risk. Option ARMs also are assigned the
same product type LS penalty as a short-term ARM.
Product Type: ARMs and balloon mortgages

experienced higher realized losses than the FRM
baseline. ARMs incurred higher losses than balloon
mortgages due primarily to a higher fully indexed
mortgage rate, which increases the carrying costs.
To derive LS penalties for affordability products, Fitch
leveraged the LS experience for products with similar
amortization schedules. This approach allows for
consistency in the application of a sensitivity penalty
despite the lack of loss experience data during a
declining economic environment. The hybrid ARMs
are treated similarly to the FRM baseline since the
amortization terms are similar.
Seasoning, FICO Score, and Loan Term: Loans

with more seasoning at the RMBS closing date
experienced lower losses than those without any
seasoning. Fitch applies a LS credit based on the
decrease in LS relative to a six-month increase in
loan seasoning at deal closing.
IOs are treated similarly to balloon mortgages given

the lack of amortization that both products feature.
IOs with five-year interest-only periods are applied

13
Structured Finance
Historical Subprime Loan Loss Severity
2.0
(% of Sample)
1.8
8% of sample
had no loss
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
15
0
14
0
13
0
12
0
11
0
10
90
80
70
60
50
40
30
20
10
0)
(1
0)
(2
0)
(3
0)
(4
(5
0)
0.0
directly impact LS. Fitchs evaluation of each

servicer process as it relates to collections, loss
mitigation, bankruptcy and foreclosure, and real
estate owned (REO) assets, together with a review of
its loan administration process and use of technology,
determines the servicers rating.
FICO scores had a minor impact on the incidence and

amount of losses realized. Still, Fitchs analysis
showed that loans with high FICO scores incurred
fewer realized losses than loans with low scores.
Loan terms of less than 30 years also exhibited lower
defaults and losses than the 30-year term baseline.
Loans with 15-year maturities pay down principal at
a much faster pace, which significantly can reduce
loss exposure. A LS credit is applied to loans that
have a term less than 30 years.
The LS credit was derived based on Fitchs analysis of

loss performance in relation to servicer ratings. The
credit reflects a positive correlation between the
incidence of realized losses and the servicer rating;
loans serviced by servicers rated RPS1 by Fitch
experienced fewer losses and lower loss severities than
those serviced by RPS3 rated servicers.
Servicer Rating: Fitch rates servicers on a scale of

RPS1 (highest quality) to RPS5 (lowest quality).
Fitchs analysis of historical LS performance found
that LS is inversely correlated to servicer quality, as
evidenced by the Fitch rating.
Since this has a negligible effect on prime and Alt-A

pools, ResiLogic will apply a minimum credit to the
AAA base loss amount for highly rated servicers.
The quality and stability of a servicers operation have

a direct impact on its default management capabilities
and ultimately on LS, regardless of product type.
Fitchs servicer ratings serve as an added measure of
any additional risk or benefit directly associated with
the servicer of an RMBS transaction.
Primary Mortgage Insurance
Fitch applies a LS sensitivity credit to loans that have

borrower- and lender-paid primary MI. The LS
credits are directly proportional to the MI coverage
percentage; LS sensitivity to MI was not derived
based on a regression. Fitch gives full credit or applies a
discount to the mortgage coverage percentage,
depending on the insurers financial strength rating and
the proposed RMBS class rating.
Because differences in servicing practices and

execution can affect loan performance, Fitch analyzes
roll rates, resolution rates and methods, timeline
management, and expense controls, all of which
14
Structured Finance
Economic Stress and Rating
Category Loss Coverage
Fitchs modeling of loan-level risk attributes provides
insight into the relative risk of default and loss among
loans. Long-term historical analysis determines the
expected case loss. However, the RMBS rating process
requires determination of the appropriate absolute level
of loss protection associated with each rating category.
AAA rated bonds should be ensured of full principal
and interest return even if losses are many times
greater than the expected case. ResiLogic is designed
to project loss levels reflecting the impact of national
and regional economic stress on FOF and LS.
higher loss point on the distribution, culminating in the

low probability AAA loss expectations.
The distribution of loss levels generated by the
simulation was used to determine the appropriate
FOF and LS stress multiples and incorporate them
into the model for each rating level. In defining stress
multiples, Fitch has sought to maintain consistency
with its long-established approach relating
investment-grade loss protection to severe historical
economic scenarios. Prior iterations of Fitchs model
have tied required loss coverage to the severe Texas
recession of the late 1980s and the California
recession of the 1990s. In both instances,
unemployment rates rose rapidly by around 4%.
The determination of sensitivity to economic stress is

based on analysis of historical mortgage performance.
After accounting for the risks associated with the
various loan attributes described earlier, Fitch still
found unexplained default and loss behavior. As
shown in the charts on pages 3 and 4, there were
substantially higher actual FOFs than predicted by the
model for the 2000 vintage. Statistical analysis of
mortgage performance across a variety of economic
conditions shows that mortgage default and loss levels
are highly sensitive to economic stress penalties and
degree of state concentration. Adding sensitivity to
economic conditions to the model accounted for much of
the additional default and loss not captured by loan
attribute analysis.
The basis for Fitchs prior AA loss coverage levels

assumed a national level of stress as severe as these
regional recessions, with AAA losses representing
an even more unlikely scenario. The AA multiples
used for each product type in the new model are
based on similar levels of stress, encompassing
simulations of approximately 4% unemployment rate
changes on the national and state level. The AAA
stresses are even more severe, based on simulation
results equivalent to 5%6% of national and state
unemployment stress.
Fitchs simulation stresses can also be related to
home price declines. The AAA rating stress equates
to rapid, sustained declines in nominal home prices of
25% or more, depending on the state where the
property is located.
Once the sensitivity to economic stress was

established, Fitch ran extensive Monte Carlo
simulations of economic stress on the model loan
sample. The simulation included variation in both
national and state-level economic stress. The statelevel stresses reflect the historical volatility of
economic stress in each state as well as the
concentration of risk by state. The model sensitivity
to economic stress was increased relative to the
historical experience for all loans and, to a larger
degree, for subprime loans than for prime and Alt-A
loans. With the increased sensitivity to stress, more
severe loss levels were generated in the simulation.
This was a conservative adjustment to the model
intended to reflect the limited availability of
performance data, particularly for subprime
mortgages, under conditions of severe stress.
Impact of ResiLogic on Fitch Loss

Coverage Expectations
To evaluate how ResiLogic compared to Fitchs
existing loss coverage indications, Fitch tested the
ResiLogic model against over 700 pools that had been
evaluated in 2006. This analysis showed that, while
there was broad agreement between ResiLogic and
Fitchs loss coverage expectations, some differences did
appear. The most notable differences are due to
ResiLogics relatively heavy weighting of FICO versus
LTV when computing FOF, as well as the impact of the
new LS model. Additionally, ResiLogic does not give
as much benefit to fixed-rate subprime mortgages
compared with hybrid ARMs. These differences can
result in either increases or decreases in ResiLogics
loss coverage levels relative to Fitchs current model,
depending on pool characteristics.
The simulation generated a distribution of loss results for

each credit product (prime, Alt-A, and subprime). The B
rating loss expectations are associated with the highest
probability outcomes from the simulation, with each
higher rating category representing a lower probability,

15
Structured Finance
Loss Coverage and Credit
Enhancement
For most prime and many Alt-A securitizations, credit
enhancement for a given rating is equal to the loss
coverage level (subordination level). However, for
structures that employ excess interest as credit
enhancement, additional cash flow modeling is required
to determine the subordination and overcollateralization
necessary for each rated class. Fitch makes use of the
industry standard INTEX DealMaker technology for
cash flow modeling and provides all of its cash flow
modeling assumptions on its web site at
www.fitchratings.com. These assumptions are detailed
in previous Fitch Research.
The change in relative weighting of FICO versus

LTV is most noticeable at the extreme ranges of the
subprime mortgage spectrum. Very low FICO loans
are assigned higher FOFs, even if LTV is low, and
high LTV loans are not treated as harshly if
accompanied by relatively high FICOs.
ResiLogics LS model generates higher average
severities than previously and, in particular, does not
differentiate to the same degree between fixed and
ARM loans as the prior model. Similarly, the FOFs
for fixed and hybrid ARMs with similar
characteristics are also less disparate. The
combination of these changes results in less benefit
for fixed pool loss coverage relative to ARM pools,
particularly in the subprime credit sector.
ResiLogic Model 1.0 Software

With the introduction of the ResiLogic model, Fitch
will be making its RMBS model software available to
market participants for the first time. Originators,
issuers, underwriters, and asset managers can now
have access to Fitchs loan-level default and loss
analysis. After a beta test period, following Fitchs
conversion to ResiLogic, the model will be available
for licensing. The ResiLogic software will be
provided both as a desktop software system and an
applications programming interface (API). The
desktop software will allow a user with a properly
formatted data file of mortgage information to
generate indicative loss coverage numbers and obtain
detailed risk reports stratified by risk dimension or at
the loan level. Originators and purchasers of
mortgages can use the API tools to integrate Fitchs
analytics into their own software systems to aid in
real-time risk analysis and pricing.
Role of ResiLogic Model in Rating

Process
Mortgage pool analysis using the ResiLogic model is
a core component of Fitchs RMBS rating process.
However, Fitchs RMBS rating criteria encompass a
much more extensive analytical process in addition to
loan-level modeling. While a detailed explanation of
this process is outside the scope of this document,
key components include:
Extensive review of origination and servicing
operations and practices.
Review of legal structure.
Analysis of cash flow structure.
Rating committees will consider these and other

inputs, along with model results, when determining
RMBS ratings. Fitch will carefully consider any
changes to loss coverage levels indicated by
application of the ResiLogic model.
Copyright 2006 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.
Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the
information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the
truth or accuracy of any such information. As a result, the information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion as to the
creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of
any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection
with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort.
Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the taxexempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees
generally vary from USD1,000 to USD750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured
or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from USD10,000 to USD1,500,000 (or the applicable currency equivalent). The
assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the
United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic
publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

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RMBS Loss Model 2007-08

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Structured Finance

U.S. RMBS: Criteria Update to

U.S. RMBS: Updated Criteria for

Option ARM Risks and Criteria, dated

ResiLogic: U.S. Residential

August 14, 2007

dimension, are listed in the tables above and on page 3,

The ResiLogic model derives expected LS through a

The tables show each credit dimension ranked in order

This report describes Fitchs analytical model for

FOF odds and LS sensitivity for continuous dimensions,

ResiLogic: U.S. Residential Mortgage Loss Model

Loss Severity Dimension

Baseline Attribute/Loss Experience

models predictive capability based solely on loan

therefore, are assigned higher FOF and LS percentages.

The disparity between the predicted and actual

Still, the model was able to capture the drift of credit

The charts at right and on page 4 illustrate the

Model Data Set Summary

FOF Frequency of foreclosure.

ResiLogic: U.S. Residential Mortgage Loss Model

Frequency of Foreclosure for Alt-A Loans

In Fitchs regression analysis, the vast majority of CES

Credit Score and Credit Sector (Prime, Alt-A, and

vintage. The deterioration in credit quality typically

The FOF by FICO chart on page 5 shows the default

Base Frequency of Foreclosure

Discussed below and listed in the table on page 2 are

Still, the Alt-A sector exhibited the same sensitivity

The slope differential of the subprime loan FOF by

ResiLogic: U.S. Residential Mortgage Loss Model

FICO score is due to the high absolute levels of

chart below. The analysis showed that a 10% increase

CLTV: FOF responds smoothly to increases in

ResiLogic: U.S. Residential Mortgage Loss Model

the borrowers downpayment, as well as pools secured

For first liens originated simultaneously with a

The table below shows the base case FOF projection

Fitchs previous methodology of applying the FOF to

Base Case FOF FICO\CLTV Matrix

ResiLogic: U.S. Residential Mortgage Loss Model

each of the credit sectors. The table assumes that

Loan Documentation: Limited or no documentation

Condominiums and PUDs exhibited lower defaults

Since limited and no doc programs usually omit an

In contrast, multifamily, townhouses, and MH

As with other affordability products, there is little

Product Type: Relative odds for adjustable-rate

Based on Fitchs analyses of 40-year FRMs, the

the borrower is relying on income from external

products based on the payment increases and, to a

Debt-to-Income Ratios (DTIs): Default rates were

Occupancy: Non-owner-occupied second homes and

For subprime loans, there was slightly less sensitivity

Investment properties exhibited a 24% higher default

Closing Balance: Closing balance affects default rates

ResiLogic: U.S. Residential Mortgage Loss Model

Closing Balance ($000)

FOF Frequency of foreclosure.

For cashout refinances, in particular, a borrower who

loan balance increases from $700,000 to $750,000. This

Loan Seasoning: At deal closing, loans typically