## Bond Lab Technologies - Modeling Mortgage Default and Sizing Mortgage Credit Enhancement from the GSEs to the Private Label Market.

**The slideshow above outlines the steps taken to determine the appropriate g-fee:**

- First, 1,000 short rate and home price paths are simulated.
- Next, the home price paths are passed to the Bond Lab default model generating a default curve for each simulated trajectory. Note: the voluntary repayment rate is zero CPR.
- The default trajectories are applied to the pool of borrowers to determine the expected cumulative loss. Note: cumulative losses are expressed as a percentage of the pool's original balance.
- The expected cumulative loss of the pool is 3.46% and the pool's expected average life, absent voluntary repayments, is 17.9 years. If one were to apply a 3x loss coverage multiplier then the credit enhancement for this pool is 10.4%. Given the pool's expected average life of 17.9 years the annual g-fee is
**58 basis points.** - The distribution of cumulative losses suggests that in the majority of cases expected cumulative losses are below 5.0%. However, tail losses may exceed 10.0%.

**Summary**

- The analysis above implies an ongoing agency g-fee of 58 basis points.
- In the case of a private label securitization collateralized by prime fixed-rate loans the implied triple-A credit enhancement level is 10.4%. Consequently, the currently used prime mortgage credit enhancement level of between 8.0% and 9.0% are sufficient to protect the triple-A investor against tail risk losses at the 99% confidence level.

Bond Lab® Technologies, Inc.

Structured Finance Analytics

The Agency g-fee should be between **55 and 60 basis points** before credit adjustments.

In this example we assume a pool of loans whose underlying borrowers all share the same characteristics.

- 30-year term
- 30% debt-to-income ratio
- 720 credit score
- 25 bps spread to the prime mortgage rate at origination (SATO)

For the analysis we will use the Bond Lab default model and assume a 35% severity.