Securitization

The dizzying rate at which Countrywide Financial Corp.'s prospects are changing from bad to worse can make one forget that two weeks ago Washington Mutual's own struggles were sharing headlines. What a difference several days, hours and minutes make in the dramatic downturn of America's biggest mortgage lender.

U.S. RMBS trouble is brewing for Bermuda-based Taberna Capital Management.

Fannie Mae acknowledged that 2006 was a tough year for financial results on its 10-K-related conference call last Thursday, announcing that net income declined to $4.1 billion, compared with $6.3 billion in 2005.

In the shadow of an unfriendly and overhung credit market, Sallie Mae shareholders approved a buyout last week that would add as much as $16.5 billion to the leveraged finance pipeline. But don't consider the deal closed just yet. In light of government subsidy cuts, the private equity group let it be known that they may scuttle the deal altogether. Are the buyers really looking for an out, or are they making noise to help squeeze a better deal from the beleaguered student loan provider?

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Wachovia Securities 7,948.09 1 16.98 11 JP Morgan Securities Inc. 5,503.0 2 11.757 12 Banc of America Securities LLC 5,059.6 3 10.809 9 Citigroup Global Markets, Inc. 3,342.4 4 7.141 7 Credit Suisse Securities (USA) LLC 3,319.7 5 7.092 6 ABN AMRO Incorporated 2,783.0 6 5.946 5 Merrill Lynch, Pierce, Fenner & Smith Inc 2,726.4 7 5.825 5 Deutsche Bank Securities, Inc. 2,509.2 8 5.361 6 Barclays Capital 2,384.3 9 5.094 5 RBS Greenwich Capital 2,374.5 10 5.073 5 Industry Total 46,807.6 - 100.0 50 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup Global Markets 34,211.9 1 15.4 46 Merrill Lynch 31,645.6 2 14.3 38 Wachovia Securities 16,546.7 3 7.5 28 JPMorgan Securities 14,866.9 4 6.7 25 Banc of America Securities 14,629.0 5 6.6 19 Deutsche Bank Securities 13,609.7 6 6.1 29 Morgan Stanley 13,053.5 7 5.9 61 Bear Stearns 11,721.3 8 5.3 23 UBS 11,148.3 9 5.0 26 Lehman Brothers 10,594.0 10 4.8 23 Industry Total 221,972.5 - 100.0 397 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan Securities 15,980.0 1 27.937 26 Banc of America Securities 11,573.3 2 20.233 21 Citigroup Global Markets 9,165.0 3 16.023 13 Morgan Stanley 5,052.6 4 8.833 8 Credit Suisse 2,721.3 5 4.757 8 Deutsche Bank Securities 2,195.8 6 3.839 10 Barclays Capital 2,175.0 7 3.802 5 RBS Greenwich Capital 2,128.3 8 3.721 3 HSBC Securities 1,750.0 9 3.059 9 Wachovia Securities 1,337.5 10 2.338 4 Industry Total 57,200.3 - 100.0 87 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Countrywide Securities 22,910.5 1 12.019 24 Merrill Lynch 19,188.39 2 10.066 20 RBS Greenwich Capital 16,382.0 3 8.594 30 Morgan Stanley 16,051.0 4 8.42 18 Lehman Brothers 15,156.9 5 7.951 24 Citigroup Global Markets 14,604.4 6 7.661 19 Bear Stearns 12,237.0 7 6.42 22 JPMorgan Securities 12,021.8 8 6.307 16 Barclays Capital 10,877.2 9 5.706 13 Banc of America Securities 8,140.2 10 4.27 22 Industry Total 190,621.3 - 100.0 240 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Banc of America Securities 6,928.2 1 19.2 7 JPMorgan Securities 5,973.5 2 16.6 6 Deutsche Bank Securities 3,551.49 3 9.9 5 Credit Suisse 3,423.1 4 9.5 4 Barclays Capital 2,544.83 5 7.1 2 RBC Capital Markets 2,531.0 6 7.0 3 Goldman Sachs 2,326.17 7 6.5 3 Citigroup Global Markets 2,107.4 8 5.8 3 Morgan Stanley 2,090.1 9 5.8 2 Lehman Brothers 1,380.67 10 3.8 1 Industry Total 36,035.2 - 100.0 18 Source: Thomson Financial

aircraft ABS 1% auto ABS 11% credit card ABS 12% equipment ABS 1% real estate ABS 67% student loan ABS 8% trade receivables 0% utilities ABS 0%

This is getting to be a habit. The ABS market remained in a resting state for the third week last week, getting little encouragement from gun-shy investors and with the overall credit market getting only slightly more sympathy from the Federal Reserve.

Amid an endless stream of increasingly bad news in the mortgage market, investors have been shorting the ABX index, expecting further deterioration and hedging their positions in the stagnant CDO arena.

Introduction

The mortgage market was beginning to look like ducks in a shooting gallery last week after a devastating amount of bad news. The injured participants, C-BASS, NovaStar Financial, American Home Mortgage Investment Co., HomeBanc, Impac Mortgage Holdings, National City Corp., Luminent Mortgage Capital and Aegis Mortgage Corp., among others, took a beating. Some were more crippled than others.

CLO market players will be more discerning about transactions in the second half of this year, according to panelists at a Loan Syndications and Trading Association seminar held in New York last Wednesday. The participants highlighted the recent slowdown after $57 billion in CLOs were issued in the first half of 2007.

Things will never be the same in the extendible note (EN) portion of the ABCP sector, and that is the way investors want it. The buy-side community made its wishes plain over the past two weeks, firmly refusing to buy much new extendible note ABCP debt, especially the sort that funded MBS and CDO debt via single-seller vehicles.

Fitch Ratings has responded to the subprime market turmoil by revising its criteria for measuring mortgage default and loss risk for newer vintages. The methodology now takes into account current credit risks that have sent the U.S. RMBS market into a tailspin, including high-risk loans, significant changes in adjustable-rate mortgages and declining home prices in certain regions.

MGIC Investment Corp. and Radian Group were not the only stakeholders to lose confidence in the outlook for the subprime market last week. Across the entire consumer ABS spectrum, capital markets investors dug in their heels and held onto their cash so tightly that they virtually shut down the new-issuance ABS market last week.

Figuring out how to finance a college education is a notoriously confusing and frustrating process. It is not always clear to borrowers exactly how much a loan will cost once it is approved, how much of the debt should be repaid before graduation or how to effectively manage and repay the thousands of dollars owed after graduation.

As the subprime RMBS market continues to face uncertainty, prime loans might be hit next - not surprising given the loose underwriting standards that characterize all of the 2006 vintage. These expectations come amid 2006 vintage resets and increasing concern over Alt-A collateral.