20130208

Nomura | Securitized Products Weekly
8 February 2013
Securitized Products Weekly

Securitized Products Research | North America
8 F E B R U AR Y 2 0 1 3
Agency MBS: Market Overview and Relative Value

During the past week, 30-year production coupon passthroughs have marginally
underperformed their Treasury hedges by 1-2 ticks. 15-year 2.5s and 3.0s were the
star performers last week as they outperformed 30-year 3.0s and 3.5s by 2.5-3.5
ticks on duration-adjusted basis. As the size of agency MBS focused REITs has
grown a lot over the past two years and they have become more active in fixed-rate
MBS, hedging related flows from mortgage REITs in a selloff scenario have been
receiving a lot of attention from the market. However, a closer look at the financial
statements of two of the largest mortgage REITs, which together own close to 65% of
all agency MBS owned by mortgage REITs, seem to be indicating that the market is
likely overestimating their hedging needs. Although the short-term volatility in MBS
performance is likely to remain high, we believe that the agency MBS sector is
presenting a very good opportunity to investors with 3-6 months horizon. Finally, we
present an assessment of the relative value between seasoned post-reset Hybrid
ARMs and CMO floaters.
Prepayments: January Prepays and Short-term Projections

Aggregate 30-year Fannie and Freddie prepayments in January largely reversed the
increase observed in December and declined by 4% and 3% m-o-m to 29.6 CPR and
30.5 CPR respectively. Prepay speeds on lower coupons, especially cuspy coupons
such as 3.5s, declined the most, which was in-line with our expectations. Prepays on
Fannie transferred collateral were stable while prepays on Freddie transferred
collateral have been inching up. While some of this increase on Freddie transferred
collateral could be explained by an increase in involuntary prepays, a good portion of
the pick-up in prepays for special servicer like Ocwen is possibly because of a pickup in voluntary prepays. We expect 30-year Fannie aggregate prepays in February to
be around 8% lower than in January.
Mortgage Credit
Prices were slightly lower in the non-agency market this week and we recommend a
modest overweight after the recent sell off. On Tuesday, Flagstar was ordered to pay
Assured Guaranty $90m for rep and warranty breaches, and we analyze the
implications of the ruling. In addition, we present an update on the callable bonds.
Fixed Income Research

Strategists
Ohmsatya Ravi
+1 212 667 2338
ohmsatya.ravi@nomura.com
Pratik K. Gupta
+1 212 667 1403
Pratik.Gupta@nomura.com
Dhivya Krishna
+1 212 667 2183
dhivya.krishna@nomura.com
Arun Manohar
+1 212 667 9360
arun.manohar@nomura.com
Paul Nikodem
+1 212 667 2130
paul.nikodem@nomura.com
Lea Overby
+1 212 667 9479
lea.overby@nomura.com
Steven Romasko
+1 212 298 4854
steven.romasko@nomura.com
Kunal Singal
+1 212 667 1814
kunal.singal@nomura.com
Sean Xie
+1 212 667 9081
sean.xie@nomura.com
This report can be accessed electronically
via: www.nomura.com/research or on
Bloomberg (NOMR)
Consumer ABS Market

FFELP SLMA deals printed lower prepayment speeds in 2012Q4 across the board.
The speeds were close to 2012Q1 levels after spiking in 2012Q2 and 2012Q3. Going
forward, we think that FFELP prepayment speeds should remain range-bound and a
slowdown in prepayment speeds should offer a spread pick up opportunity in
premium FFELP bonds.
CMBS: Simon Earnings and Notes on the MBA Conference

Spreads were flat on the week with GG10s widening marginally to 140bp over
swaps. This week we provide commentary on the MBA CREF/Multifamily convention,
and we highlight Simon Property Groups fourth quarter earnings and implications for
CMBS. In the news, we highlight recent new issuance, Macerichs possible sale of 17
malls, and the Renaissance Tower modification.
This report is intended for Qualified Institutional Buyers only
Nomura Securities International Inc.
See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
8 February 2013
Contents
Recent Performance and Market Flows
Hedging Needs of Mortgage REITs
MBS Basis: Remain Overweight MBS versus Treasuries and Swaps
Short Duration Assets: Post-Reset Hybrid ARMs vs. CMO Floaters
Relative Value in the Agency Passthrough Market
Prepayments: January Prepays and Short-term Projections 10

Higher Coupon Prepays
11
Ginnie Mae
12
Short-term Prepay Projections
13
Mortgage Credit
15
Consumer ABS Market
22
Market Commentary
22
CMBS: Simon Earnings and Notes on the MBA Conference
26
In the News
27
MBA CREF/Multifamily Convention
28
Simon Property Group
32
8 February 2013
Recent Performance and Market Flows
Ohmsatya Ravi
During the past week, 30-year production coupon passthroughs have marginally
underperformed their Treasury hedges by 1-2 ticks (Thursday-Thursday closes). The intra-day
volatility in MBS spreads remained quite volatile throughout the week although the directionality
of MBS spreads with rates seems to have subsided somewhat from the prior week. The 15-year
2.5s and 3.0s were the star performers last week as they outperformed 30-year 3.0s and 3.5s
by 2.5-3.5 ticks on duration-adjusted basis. The Feb/Mar dollar roll of FN 3.0s had weakened by
about 1 tick this week but still traded 1.5-2.0 ticks special and its Mar/Apr roll is opening up
about 2 ticks special.
Aggregate 30-year Fannie and Freddie prepayments in January largely reversed the increase
observed in December and declined by 4% and 3% m-o-m to 29.6 CPR and 30.5 CPR
respectively. Prepay speeds on lower coupons, especially cuspy coupons such as 3.5s,
declined the most, which was in-line with our expectations. However, higher coupon Fannie
prepays (5.0s-6.0s) were nearly unchanged m-o-m, while we expected them to slow down
marginally. The gross and net issuances of agency MBS in January were $159bn and 11bn,
respectively while the pay-downs on Feds MBS portfolio were about $30.5bn in January. We
expect 30-year Fannie aggregate prepays in February to be around 8% lower than in January
because of the drop in day-count and a slight decline in the refinance index.
The Fed was a net buyer of $18.4bn agency MBS over the week ending February 6 which
brings the cumulative MBS purchases by the Fed since the QE 3 program was announced in
September to $356bn. Approximately 30% of all agency MBS purchases by the Fed last week
were in GNMAs, which is a continuation of the theme from the prior two weeks. This percentage
used to be close to 20-21% until the beginning of December but gradually increased to above
30% levels since then. If the current pace were to continue, the Fed should be a buyer of about
$220-$240bn GNMA MBS in 2013. Comparing this number with the expected gross and
issuances for GNMA MBS in 2013 of $315bn and $105bn respectively, we believe that overall
supply/demand technicals are highly positive for production coupon GNMA MBS.
Hedging Needs of Mortgage REITs1

As the size of agency MBS focused REITs has grown a lot over the past two years and have
become more active in fixed-rate MBS (relative to the past when they were more active in
ARMs), hedging related flows from mortgage REITs in a selloff scenario have been receiving a
lot of attention from the market. Specifically, agency MBS market participants have been
concerned about potential selling of MBS by REITs as the 10-year Treasury backed up by about
40bp over the past 7-8 weeks. A closer look at the financial statements of two of the largest
mortgage REITs (Annaly and American Capital), which together own close to 65% of all agency
MBS owned by mortgage REITs, seem to be indicating that the market is likely overestimating
their hedging needs.
Figures 1 and 2 show expected changes in the portfolio value of two of the largest REITs,
Annaly (NLY) and American Capital (AGNC), in different interest rate scenarios (based on
instantaneous parallel changes in interest rates). As of September 30, 2012, AGNC reported
that its portfolio had negative 0.7yrs duration gap and its portfolio value actually increases by
0.07% for a 50 backup in rates and declines by 0.6% for a 50bp rally in rates. Similarly, NLY
reported that its portfolio value declines by only 0.03% for a 50bp backup in rates (as of
September 30, 2012). For comparison, in December 2010, NLY and AGNC estimated that their
portfolio values will decline by 0.87% and 0.7% respectively for a 50bp backup in rates. While
we recognize that the estimates for changes in REIT portfolio values are based on several
A major portion of this subsection is a reprint of the material presented in a short report published
yesterday afternoon.
+1 212 667 2338

ohmsatya.ravi@nomura.com
Paul Nikodem
+1 212 667 2130
Dhivya Krishna
+1 212 667 2183
Sean Xie
+1 212 667 9081
sean.xie@nomura.com
Arun Manohar
+1 212 667 9360
8 February 2013
model assumptions and each REIT is different from others, it seems fair to conclude that
mortgage REITs were well positioned at the beginning of 4Q12 for the recent backup in rates
(from duration perspective alone).
Fig. 1: Interest Rate Sensitivity of the Portfolio of American Capital (AGNC)
Change in
Interest Rates
-100bp
-50bp
+50bp
+100bp
Est. Change in Portfolio Value

12/31/2010
9/30/2012
0.30%
-1.34%
0.40%
-0.60%
-0.70%
0.07%
-1.50%
-0.40%
Source: American Capital, Nomura Securities International Estimates
Fig. 2: Interest Rate Sensitivity of the Portfolio of Annaly (NLY)
Change in
Interest Rates
-75bp
-50bp
-25bp
+25bp
+50bp
+75bp
Est. Change in Portfolio Value

12/31/2010
9/30/2012
1.62%
-0.44%
1.24%
-0.25%
0.82%
-0.02%
-0.23%
-0.01%
-0.87%
-0.03%
-1.58%
-0.07%
Source: Annaly, Nomura Securities International Estimates
Based on the 4Q12 stockholder presentation released by AGNC yesterday evening and the 8-K
filed by NLY on Wednesday, we highlight the following points:
First, there was lot discussion last October and early November that mortgage REITs
actively sold agency MBS. The reports released by AGNC and NLY earlier this week
indicated that REIT holdings of agency MBS may not have declined at all in 4Q12. We
estimate that the agency MBS exposure of AGNC (including TBAs) increased by $6bn
while that of NLY declined by about $4bn (in terms of face value) in 4Q12. Considering
that these two REITs account for about 65% of all REIT holdings of agency MBS, we
believe that the market overestimated the magnitude of REIT selling of agency MBS
during 4Q12.
The weighted average maturity of repos of both AGNC and NLY seem to have
increased significantly over the past few quarters. For example, AGNC increased its
original contractual average maturity of repo funding to 181 days as of December 31,
2012 from 57 days as of September 30, 2011. This extension of the maturity of repo
financing by large REITs should alleviate some of the funding issues that they could
have faced in times of significant market distress.
AGNC reported that the duration gap of its portfolio was negative 0.2 yrs as of
December 31, 2012 versus negative 0.7 yrs as of September 30, 2012. Thus, they
were still slightly short duration at the beginning of the year. In addition, they seem to
have added significantly to their payer swaption positions during 2012 ($14.5bn
notional payer swaptions outstanding as of December 31, 2012 versus $3.2bn notional
payer swaptions outstanding as of December 31, 2011). Assuming that the positioning
of AGNC is reflective of the mortgage REIT universe as a whole, it appears likely that
mortgage REITs are not as vulnerable as the market seems to be thinking to the
scenario of the 10-year Treasury yield backing up to 2.25%.
Looking ahead, Figure 3 shows the estimated changes in market values of AGNCs portfolio
and equity NAV in different interest rate scenarios as of December 31, 2012. Note that a 50bp
selloff in rates (starting with December 31, 2012 levels) is expected to reduce the equity NAV by
8 February 2013
only 2%. Considering that the 10-year Treasury yield was at 1.76% on December 31, we could
conclude that REITs may not be as significant sellers of agency MBS as the market is expecting
them to be in a continued backup scenario. We caution investors though that the short-term
negative impact of even limited convexity related flows could be meaningful because of the
lower flexibility on dealer balance sheets. We look at a 7-10bp short-term widening of MBS
spreads due to hedging related flows to be a great opportunity to go for maximum overweight
on agency MBS.
Fig. 3: Estimated Changes in Market Values of AGNCs Portfolio and Equity NAV
Change in
Est. Change in Market Values
Interest Rates Portfolio Value
Equity NAV
-100bp
-1.8%
-15.1%
-50bp
-0.7%
-5.5%
+50bp
-0.2%
-2.0%
+100bp
-1.1%
-9.1%
Source: American Capital, Nomura Securities International Estimates (as of December 31, 2012)
MBS Basis: Remain Overweight MBS versus Treasuries and

Swaps
On January 18, our strategy team initiated a modest overweight on agency MBS as we felt that
long-term supply-demand technicals are highly favorable to the MBS basis because of the Feds
purchase program and dollar rolls on production coupon MBS are trading 1.5-2.5 ticks special
per month. Currently, 30-year 3.0s and 3.5s are trading at a Treasury OAS of 10-14bp on our
models (early Friday afternoon spreads) while they traded as tight as -25bp to -30bp within two
weeks after the QE 3 program was announced in September and at about +20bp before the QE
3 program was announced. Although MBS spreads have shown a strong directionality with
rates over the past 2-3 weeks, risk-reward seems to be positive for agency MBS for investors
with 3-months or longer horizon now.
If the 10-year Treasury rallies to 1.80%, we expect Treasury OASs of FN 3.0s and 3.5s
to tighten by 16-20bp over the next 2-3 months. This spread tightening coupled with
dollar roll specialness should lead production coupon MBS to sharply outperform
Treasuries.
If rates backup above 2.25%, production coupon MBS spreads are likely to widen by 810bp due to convexity related flows in the short-term, but we expect MBS spreads to
snap back to 5-10bp tighter than current levels as the Fed continues to take away
$40bn agency MBS out of private investors and domestic banks, REITs and overseas
investors are likely to provide stronger demand for MBS at higher yield levels. Agency
MBS are already beginning to look attractive to REITs on expected return on equity
basis. Even if REITs sell MBS into a selloff in the short-term, we expect them to be
able to raise new capital and provide net positive demand for MBS over the next 3-6
months if the 10-year sells off to 2.25-2.50%.
Although the short-term volatility in MBS performance is likely to remain high, we believe that
the agency MBS sector is presenting a very good opportunity to investors with 3-6 months
horizon.
8 February 2013
Short Duration Assets: Post-Reset Hybrid ARMs vs. CMO Floaters2

The 20bp steepening in the treasury yield curve over the past month has highlighted the risks
from a continued sell-off in rates. Market participants fearing a further rise in interest rates have
been considering shorter duration assets as an investment alternative, along with the traditional
buyers of short-duration assets such as banks and some REITs. While CMO floaters have been
a common choice in the past, the 20-30bp tightening of floater DMs in 2012 has reduced yields
to very low levels. Hence, we evaluate alternative short-duration assets that are relatively more
attractive. In this article, we consider seasoned post-reset Hybrid ARMs as an alternative to
CMO floaters. We begin with a detailed discussion of prepayment trends, followed by a
comparison of key valuation metrics between seasoned post-reset Hybrid ARMs and CMO
floaters.
Prepays on Post-Reset ARM Loans

Figure 4 shows prepays on amortizing FN 5/1 Hybrid ARMs that are now post-reset by
origination year, while Figure 5 shows the collateral characteristics by the ARM index. Prepays
on the 2003 and 2004 vintage loans have been stable at low levels of around 10 CPR during
the late 2010-early 2012 time frame. However, prepays have steadily increased in 2012 until
stabilizing more recently. Later in the article, we discuss in detail the driving factors behind this
prepayment behaviour. The more recent post-reset ARMs are from the 2006 and 2007 vintages.
2006 originated 5/1s reset in 2011 and since then their prepays have generally converged with
those of the more seasoned post-reset hybrid ARMs. However, prepays have recently started
diverging and this is likely due to the impact of the HARP program (collateral characteristics
show that Gross WAC is comparable to that of the 2003-04 vintage loans and hence it has
comparable refinance incentive, however the average Current LTV is much higher at 89).
Lastly, the 2007 vintage loans reset in 2012 and prepays on this cohort are generally expected
to converge to that of the 2006 vintage owing to comparable collateral characteristics.
Fig. 4: Prepays on Amortizing FN 5/1s by Origination Year
Fig. 5: Collateral Characteristics of FH 5/1 ARMs by Vintage and

Index
45%
Index Vintage
LIBOR
2003
2004
2005
2006
2007
Treasury 2003
2004
2005
2006
2007
40%
35%
CPR (%)
30%
25%
20%
15%
10%
5%
2003
2004
2006
Feb-13
Dec-12
Oct-12
Jun-12
Aug-12
Apr-12
Feb-12
Oct-11
Dec-11
Aug-11
Jun-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
0%
Net Margin Gross WAC Avg FICO Avg Current LTV Avg DTI ALS ('000s)
1.8
3.3
728
55
33
139
1.8
3.3
730
65
33
151
1.8
3.4
726
80
35
156
1.8
3.3
724
89
35
169
1.8
3.4
715
89
37
181
2.3
2.9
720
58
32
122
2.3
2.9
721
69
34
138
2.3
2.9
722
80
36
148
2.3
2.9
727
88
38
173
2.2
3.1
717
89
39
167
Source: Fannie Mae, Freddie Mac, Nomura Securities International
2007
Source: Fannie Mae, Freddie Mac, Nomura Securities

International
The increase in prepays on seasoned post-reset (2003 and 2004 vintage) collateral is
specifically notable. Prepays on the 2003-04 cohort are unlikely to be driven by HARP as the
average current LTV of the loans is below 70, hence making them ineligible for the LLPA
reduction, solicitation and LTV cap waivers offered by the HARP 2.0 program. While the general
expectation in the market has been that borrowers paying a floating rate are unlikely to have a
strong incentive to refinance, the recent drop in ARM rates to historical low levels has created a
situation where the seasoned post-reset borrowers are paying a floating rate that is higher than
the fixed rate they can lock-in if they refinance into a new Hybrid ARM.
To better understand the increase in prepays, we look at prepays based on the index that is
used to determine the ARM mortgage rate during the floating period. While the recent
conventional ARM production has been primarily LIBOR-resetting ARMs, CMT-based ARMs
2
This subsection is a reprint of the material published in a short report earlier today.
8 February 2013
accounted for around 58% of the overall production in 2003 and 2004. Over the past year,
prepays on LIBOR-indexed ARMs have increased by 6.3 CPR while that of CMT-indexed ARMs
have increased by only 3.5 CPR (Figure 6). This can be explained by the difference in the
refinance incentives for the two borrower groups.
Fig. 6: Prepays by Index for FH 5/1 Hybrid ARMs (2003-04

Vintage)
Fig. 7: WAC of 2003 Vintage FH 5/1s by Index and Mortgage Rates

4.3
25%
Mortgage Rate (%)
4.1
CPR (%)
20%
15%
10%
5%
3.9
3.7
3.5
3.3
3.1
2.9
2.7
LIBOR-ARM WAC
Treasury-ARM WAC
5/1 Rate
CMT-reset
Source: Freddie Mac, Nomura Securities International

Figure 7 shows the WACs for 2003 Vintage FH 5/1s by the underlying ARM index. Treasury
ARMs are indexed to the CMT 1-year rate and LIBOR ARMs are indexed to the 12m LIBOR
rates. The divergence between the WACs of LIBOR and Treasury-indexed ARMs since the
beginning of 2012 can be explained by the spike in LIBOR rates towards the end of 2011. The
12m LIBOR rates increased by around 35bp during H2 2011, while 1yr CMT rates have
remained range-bound. As ARMs reset on an annual basis, ARMs that previously reset during
Q4 2011-Q3 2012 are currently paying higher rates.
The current historically low mortgage rates along with higher LIBOR rates have created a
situation where post-reset ARMs are able to refinance into a new 5/1 or a 7/1 Hybrid ARM. As
shown in Figure 7, LIBOR-indexed ARMs have an opportunity to reduce their mortgage rate by
around 25bp and 50bp by refinancing into a new 7/1 and 5/1 respectively. This incentive-driven
refinance activity is likely responsible for the 6.3 CPR increase in prepays of LIBOR ARMs over
the past year. The refinance incentive of Treasury-indexed ARMs is significantly lower as the
borrowers are already paying a lower mortgage rate and hence have a limited ability to lower
their monthly payments. Hence, we believe that the 3.5 CPR increase in prepays is likely to
have occurred due to refinance demand from borrowers intending to lock-in a low fixed rate for
the next 5 or 7 years.
Choice of New Loan: While ARM borrowers have an incentive to refinance into either of a 5/1
or a 7/1 Hybrid, it appears that the majority of the borrowers have refinanced into a new 7/1
loan. Figure 9 shows monthly issuance of refinance loans and suggests that while the issuance
of 5/1 refinance loans has declined over the past two years, the issuance of 7/1 and 10/1
refinance loans has held fairly steady. The choice of 7/1 product is likely driven by the tighter
underwriting standards for obtaining a new 5/1 Hybrid ARM. As we have highlighted in the
3
past , new Agency underwriting guidelines for 5/1 ARMs require borrowers to qualify at the
higher of note rate + 2% and the fully indexed rate. These stricter underwriting guidelines do not
apply to ARM loans with a fixed rate period of over five years.
Prepays across Servicers: Figure 6 shows prepays on 2003-04 vintage Conventional 5/1s for
Bank of America and Wells serviced loans. While prepays on Wells serviced loans have
increased over the past year (in line with the discussion above), the pickup in prepays on Bank
of America serviced loans has been fairly benign. This suggests that some lenders are more
efficient in identifying and notifying borrowers regarding possible refinancing opportunity.
Hence, servicer is another important factor in determining the prepayment performance of a
pool. Bank of America serviced loans account for around 32% of 2003-04 vintage FN 5/1, while
Pickup in Issuance of Longer Reset ARMs discussed in the Securitized Products Weekly dated 04 March
2011
3
Dec-12
Oct-12
Jun-12
Aug-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Oct-10
Aug-10
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
LIBOR-reset
Dec-10
2.5
0%
7/1 Rate
8 February 2013
Wells serviced loans account for about 37% of FH 5/1 loans. This difference in servicer
distribution causes the above discussed prepay patterns to be more pronounced among
Freddie loans than in Fannie loans.
Projected WAC: The 20-30bp decline in 12m LIBOR rates over the past 3-5 months is likely to
be reflected in the WACs as the ARMs undergo a rate reset over the next 6-9 months. This
reset will bring WACs back to the levels observed during the first half of 2011 and reduce the
incentive to refinance. As a result, the elevated prepays observed over the past few months are
likely to be restricted to the next few months only and should not be of a significant concern to
investors.
Fig. 9: Prepays on 2003-04 Vintage FN & FH 5/1s by Servicer
6000
25%
5000
20%
4000
CPR (%)
Issuance ($mn)
Fig. 8: Monthly Issuance of Amortizing FN and FH Refinance Loans
3000
15%
10%
2000
5%
1000
7/1
LIBOR - BofA
10/1
LIBOR - Wells
Treasury - BofA
1/1/2013
12/1/2012
11/1/2012
9/1/2012
10/1/2012
8/1/2012
7/1/2012
6/1/2012
5/1/2012
4/1/2012
3/1/2012
2/1/2012
1/1/2012
12/1/2011
11/1/2011
9/1/2011
8/1/2011
1/1/2013
12/1/2012
11/1/2012
9/1/2012
10/1/2012
8/1/2012
7/1/2012
6/1/2012
5/1/2012
4/1/2012
3/1/2012
2/1/2012
1/1/2012
12/1/2011
11/1/2011
9/1/2011
10/1/2011
8/1/2011
7/1/2011
6/1/2011
5/1/2011
4/1/2011
3/1/2011
2/1/2011
1/1/2011
5/1
10/1/2011
0%
Treasury - Wells
Source: Fannie Mae, Freddie Mac, Nomura Securities

International
Valuations
Figure 10 shows a comparison of valuation metrics across post-reset Hybrid ARMs from the
2003 and 2007 vintages and CMO floaters. Hybrids have marginally longer duration than the
floaters primarily because they reset annually compared with the monthly reset on the CMO
floaters. Other differences in the two structures include lower lifetime caps on floaters and
annual reset caps on Hybrids. Even after accounting for these differences in the model, postreset ARMs offer an attractive yield and OAS pick-up versus floaters, based on our prepayment
expectations. For instance, the Hybrid ARMs considered in Figure 7 offer a yield pick-up of 4670bp versus floaters and an OAS pick-up of 7-33bp for a marginal increase in duration.
Potential risk factors include the premium dollar prices at which Hybrid ARMs trade relative to
CMO floaters and the volatility in 12m LIBOR rates caused by uncertainties in Europe and the
US.
Fig. 10: Relative Value Between Post-Reset Hybrid ARMs and CMO Floaters
Bond Type
WAC/WALA/ALS Price Coupon (%) Yield (%) DM (bp) LIBOR OAS (bp) Duration CPR 1yr (%) CPR Life (%) Life Cap (%)
2003 Vintage CMT+234.5 Post-Reset Hybrid 2.92/113/141k 106-20
2.50
0.95
80
13
0.6
17.4
15.8
10.5
2007 Vintage L+186.5 Post-Reset Hybrid
3.27/68/151k 106-30
2.88
1.14
37
34
0.3
22.8
16.3
10.8
L+50 MLB Floater
6.42/68/74k
100-30
0.71
0.44
24
1
0.4
26.1
21.2
7.0
L+30 CQ Floater
4.06/5/214k
100-02
0.50
0.49
28
6
0.6
4.6
12.0
6.5
Source: YieldBook, Nomura Securities International Estimates (As of 02/07/2013 closes)
8 February 2013
Relative Value in the Agency Passthrough Market
Trade #1: Short DW 3.0s Butterfly (Since 12/6/2012)
Figures 11 and 12 show the valuations of the 30-year and 15-year coupon stacks on our models
as of yesterdays close (the results from YieldBook models adjusted to reflect our expectations
for prepayment speeds). In general, higher coupon passthroughs look cheaper than lower
coupon passthroughs and investors positioning for a backup in rates and/or Feds purchase
program to end before the end of this year should find FN 4.0s and 4.5s very attractive at
current spread levels.
Fig. 11: Valuations of the 30-year Coupon Stack (as of February 7, 2013)
Security
TBA Assumption (Mar)
Yield
Tsy ZV (bp)
Duration
Convexity
FNCL 3.0s
2 WALA, 3.50 GWAC, $280 K
2.40%
49
Swap ZV (bp) Tsy OAS (bp) LOAS (bp)

43
5.6
-2.5
1-yr Speed
8.4
FNCL 3.5s
9 WALA, 4.05 GWAC, $280 K
2.15%
66
60
12
4.0
-3.4
17.9
FNCL 4.0s
24 WALA, 4.50 GWAC, $280 K
2.09%
86
79
34
26
2.9
-2.6
28.2
FNCL 4.5s
42 WALA, 5.00 GWAC, $250 K
2.05%
101
92
53
44
2.3
-2.3
31
Source: YieldBook, Nomura Securities International
Fig. 12: Valuations of the 15-year Coupon Stack (as of February 7, 2013)
Security
TBA Assumption (Mar)
Yield
Tsy ZV (bp)
LOAS (bp)
Duration
Convexity
FNCI 2.5s
2 WALA, 3.00 GWAC, $260 K
1.67%
34
Swap ZV (bp) Tsy OAS (bp)

22
11
-1
3.9
-1.7
5.9
FNCI 3.0s
9 WALA, 3.45 GWAC, $260 K
1.49%
47
35
17
2.7
-2.4
16.4
FNCI 3.5s
24 WALA, 3.95 GWAC, $240 K
1.29%
50
36
25
11
1.7
-1.7
28.6
FNCI 4.0s
42 WALA, 4.45 GWAC, $220 K
1.38%
61
47
43
28
1.5
-1.5
29.6
Source: YieldBook, Nomura Securities International
1-yr Speed
8 February 2013
Prepayments: January Prepays and Short-term

Projections
Aggregate 30yr Fannie and Freddie prepayments in January largely reversed the increase in
December and decreased 4% and 3% m-o-m to 29.6 CPR and 30.5 CPR respectively. The
aggregate prepays were in line with our expectations. Some interesting trends observed in the
recent print include:
+1 212 667 2183

Lower Coupon Prepays: Lower coupons, especially cuspy coupons such as 3.5s
declined the most, in line with our expectations. The 2011 vintage Freddie 3.5s
declined 6%, while Fannie 3.5s fell 11%. Based on Freddie loan level data, we believe
that the decline was uniform across TPO and Retail originated loans (Figure 1). Larger
declines were observed in prepays of the lower WAC buckets, suggesting that some of
the fall may have been driven by higher driving mortgage rates (Figure 2). On average,
2011 vintage 3.5s declined by a greater extent than 2011 vintage 4.0s.
HARP Prepays: While higher coupon Fannie prepays (5.0s-6.0s) were nearly
unchanged compared with December, prepays on most Freddie higher coupons
increased between 2-4%. Prepays on Fannie transferred collateral were stable, while
prepays on Freddie transferred collateral have been inching up. While some of this
increase on Freddie transferred collateral may be explained by an increase in
involuntary prepays, which is expected of these special servicers, a good portion of the
pick-up in prepays for special servicers like Ocwen is possibly because of a pick-up in
voluntary prepays. Although the impact of Ocwen prepays on the cohort aggregate
prepays is small, we believe this trend is indicative of what is likely to occur if the
special servicers, to whom agency loan servicing is being transferred, beef up their
currently limited origination capacity.
Ginnie Mae: Aggregate prepays on 30yr GN Is decreased by 2% to 27.1 CPR, while

those on 30yr GN IIs increased by 1% to 22.1 CPR. The large prepays on Bank of
America issued 6.0s and 6.5s suggests that Bank of America bought out delinquent
loans from 6.0s and 6.5s this month, which was in-line with our expectations.
Fed Paydowns: Paydowns on the Feds MBS portfolio are estimated to be around
$30.5bn in January.
Issuance: Gross issuance of Agency MBS in January was $159bn compared with
$128bn in December. This volume is comparable with the 4Q 2012 average issuance
of $156bn.
Fig. 1: Prepays on 2010 and 2011 GD 3.5s by Origination Channel

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Arun Manohar
+1 212 667 9360
Paul Nikodem
+1 212 667 2130
Fig. 2: Prepays on 2011 GD 3.5s and 4.0s by WAC Buckets
M-o-m change in CPRs (%)
5%
0%
-5%
-10%
-15%
2010 Non-TPO
2010 TPO
2011 Non-TPO
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
-20%
Jan-12
CPR (%)
Dhivya Krishna
2011 TPO
0.375-0.5
0.5-0.625
0.625-0.75
Spread between Gross WAC and Net WAC

2011 GD 3.5s
2011 GD 4.0s
10
>=0.75
8 February 2013
Higher Coupon Prepays

While higher coupon Fannie prepays (5.0s-6.0s) were nearly unchanged compared with
December, prepays on most Freddie higher coupons increased between 2% and 4%. Fannie
prepays were mostly unchanged because of a drop in involuntary prepays that offset a slight
increase in voluntary prepays (Figure 3). However, Freddie involuntary prepays increased,
especially for 6.5s. Across servicers, Bank of America Freddie prepays increased, while others
were roughly unchanged (Figure 4).
Fig. 3: Voluntary and Involuntary Speeds on 30-year Fannie and Freddie MBS
Freddie
Voluntary CPR (%)
Coupon Vintage
4
4.5
5.5
6.5
Fannie
Involuntary CPR (%) Voluntary CPR (%) Involuntary CPR (%)
Feb-13
Jan-13
Feb-13
Jan-13
Feb-13
Jan-13
Feb-13
Jan-13
2010
32.2
34.3
0.4
0.3
33.7
35.7
0.2
0.2
2009
45.2
46.0
0.4
0.4
42.7
44.2
0.5
0.5
2010
32.3
32.9
0.8
0.6
31.3
31.7
1.0
1.0
2009
39.6
41.2
0.6
0.8
39.9
40.9
1.1
1.1
2005
39.5
41.0
2.2
1.9
42.3
41.5
4.4
3.8
2010
22.8
23.9
1.8
1.5
22.4
21.7
2.5
2.5
2009
30.6
30.8
1.5
1.5
28.6
29.5
2.3
2.1
2008
48.2
45.1
3.9
3.3
49.0
48.8
4.1
4.1
2007
43.8
40.1
4.7
3.5
45.9
46.7
5.5
5.0
2005
38.6
39.1
3.6
3.3
41.0
40.6
4.2
3.9
2009
23.5
23.8
2.4
2.8
21.7
21.3
3.1
3.0
2008
41.0
40.1
4.4
4.2
43.9
44.0
5.0
5.3
2007
40.6
38.9
5.7
5.0
45.2
44.3
6.2
6.9
2006
39.9
37.4
5.2
5.2
42.3
42.1
6.1
6.4
2005
35.7
35.0
4.2
4.2
34.5
34.2
5.2
5.6
2008
35.8
33.2
5.2
5.8
38.4
37.1
7.3
7.3
2007
35.2
33.7
6.7
6.3
38.0
38.7
7.5
8.0
2006
35.4
34.8
5.9
5.8
38.2
37.6
7.2
7.6
2005
27.8
26.9
4.9
4.6
28.0
27.4
7.8
8.2
2008
30.1
26.9
6.7
4.8
28.0
29.2
9.0
9.2
2007
29.9
29.1
8.9
7.7
31.6
29.7
10.0
10.4
2006
30.2
29.5
6.4
6.6
32.5
29.7
8.9
8.2
Fig. 4: Prepays by Servicer for LTV>80 2006-08 Vintage Loans

70%
60%
CPR (%)
50%
40%
30%
20%
10%
FHLG30
FNM30
FNM30
- BofA
- BofA
- Wells
FHLG30
FNM30
- Chase
- Chase
FHLG30
FNM30
2/1/2013
1/1/2013
12/1/2012
11/1/2012
9/1/2012
10/1/2012
8/1/2012
7/1/2012
6/1/2012
5/1/2012
4/1/2012
3/1/2012
2/1/2012
1/1/2012
12/1/2011
11/1/2011
9/1/2011
10/1/2011
8/1/2011
7/1/2011
0%
- Wells
- SubServicer
11
8 February 2013
Prepays on Fannie transferred collateral and subserviced by GreenTree were unchanged, while
prepays on Seterus subserviced loans increased slightly (Figure 5). However, prepays on
Freddie transferred collateral have been inching up (Figure 6). Although some of this increase
could be explained by a rise in involuntary prepays (Figure 7), which is expected of these
special servicers, we believe a good portion of the pick-up in prepays for special servicers like
Ocwen is because of a pick-up in voluntary prepays. We believe the pick-up in Ocwen voluntary
prepays was the result of an increase in origination capacity caused by the acquisition of
Homeward Residential Holdings around October of 2012. We had published a detailed note on
the limited origination capacity of special servicers possibly constraining the voluntary prepays
4
on loans that they service . Although Ocwen currently only services around 3% of the 20062008 vintage Freddie loans, this trend is indicative of what is likely to occur if the special
servicers, to whom agency loan servicing is being transferred, beef up their currently limited
origination capacity.
Fig. 5: Prepays on Bank of America and Sub-serviced Fannie LTV>80 2006-08 Vintage
Loans
80%
70%
CPR (%)
60%
50%
40%
30%
20%
10%
Jan-13
Feb-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
BofA
Subservicer - Nationstar
Others
May-12
Mar-12
Jan-12
Feb-12
Dec-11
Oct-11
Nov-11
Sep-11
Jul-11
Aug-11
0%
Subservicer - GreenTree
Subservicer - Seterus
Source: Fannie Mae, Nomura Securities International
Fig. 7: Involuntary Prepays on Freddie Transferred Collateral

(2006-08 Vintage Loans)
60
25
50
20
Involuntary CPR (%)
CPR (%)
Fig. 6: Prepays on Freddie Transferred Collateral (2006-08

Vintage Loans)
40
30
20
10
15
10
5
0
Bayview Financial
M & T Bank
Nationstar
Ocwen
Bayview Financial
Nationstar
Ginnie Mae
Aggregate prepays on 30yr GN Is decreased by 2% to 27.1 CPR, while those on 30yr GN IIs
increased by 1% to 22.1 CPR. The large prepays on Bank of America issued 6.0s and 6.5s
(Figure 8) suggests that Bank of America bought out delinquent loans from 6.0s and 6.5s this
month. It is also likely that Bank of America buyouts in lower coupons like 4.5s dropped as preMay 2009 prepays dropped sharply from around 48CPR to 44CPR. As we had highlighted in
4
M & T Bank
Refer to article Prepay Impact of Bank of America MSR Sales published on January 14, 2013.
12
Ocwen
8 February 2013
our prior weekly, we believe these buyouts that Bank of America carried out in lower coupons
like 4.0s and 4.5s occurred because of modification approvals and once these modifications are
flushed out, we expected buyout activity to resume in higher coupons.
CPR (%)
Fig. 8: Aggregate Prepays on GN Is by Coupon and Issuer

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
4.5
5.5
6.5
4.5
BofA
5.5
6.5
4.5
5.5
Chase
11/1/2012
12/1/2012
1/1/2013
6.5
Wells
2/1/2013
Source: Ginnie Mae, Nomura Securities International
Short-term Prepay Projections

We expect Fannie 30yr aggregate prepays in February to be around 8% lower than January
because of a drop in daycount and a slight drop in the refinance index. We present our
projections for the different sectors in Figures 9-11.
Fig. 9: Prepay Projections for 30yr Fannie Mae MBS
WACLS
1-Mo Actual
1-Mo
Projection
Coupon
Vintage
Bal ($mm)
WAC
WAM
WALA
FICO
LTV
Dec
Jan
Feb
3.0
2012
155,591
3.59
354
270,956
769
71
6.0
6.8
6.0
6.5
3.5
3.5
3.5
4.0
4.0
4.0
4.0
4.5
4.5
4.5
4.5
4.5
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.5
5.5
5.5
5.5
5.5
5.5
5.5
6.0
6.0
6.0
6.0
6.0
6.0
6.5
6.5
2012
2011
2010
2012
2011
2010
2009
2012
2011
2010
2009
2003
2011
2010
2009
2008
2005
2004
2003
2009
2008
2007
2006
2005
2004
2003
2008
2007
2006
2005
2004
2003
2007
2006
210,209
36,900
15,816
67,917
85,151
76,808
54,194
7,726
72,559
76,866
117,705
8,533
22,627
40,819
34,715
17,503
28,678
16,220
37,264
5,052
28,535
26,390
12,596
27,896
22,522
38,401
15,882
34,618
26,324
7,741
9,466
7,858
9,939
11,459
4.01
4.02
4.13
4.47
4.47
4.49
4.56
4.96
4.93
4.94
4.94
5.07
5.37
5.36
5.43
5.66
5.64
5.55
5.50
5.94
6.04
6.14
6.15
5.98
5.93
5.94
6.53
6.57
6.56
6.50
6.44
6.48
7.06
7.02
349
340
327
346
337
326
307
345
334
322
309
234
334
321
311
296
260
244
232
310
296
285
273
260
246
231
297
286
272
261
245
232
287
272
8
16
27
9
19
28
44
11
20
32
43
114
21
33
42
57
91
104
114
42
57
68
79
91
103
116
56
67
79
90
104
116
66
79
246,576
252,192
236,408
205,962
232,553
232,327
218,124
173,759
210,546
222,213
214,063
141,698
196,539
210,314
196,521
195,134
164,547
149,546
133,354
167,623
186,827
183,545
175,289
148,681
138,042
122,325
169,876
167,736
157,966
126,611
118,044
108,527
141,748
133,106
759
771
773
739
760
765
766
726
749
755
758
733
730
736
741
738
725
723
722
720
730
720
719
712
713
716
717
708
709
701
700
703
693
698
74
18.0 17.7
70
34.5 30.9
70
35.1 30.7
79
14.7 14.5
73
30.8 30.5
71
35.9 33.8
66
44.4 42.9
81
13.2 12.3
76
25.2 25.6
74
32.3 32.0
71
41.6 40.6
69
41.1 42.0
81
19.5 19.1
79
23.7 24.4
76
31.0 30.2
73
50.9 51.2
71
42.9 43.6
71
37.6 38.5
70
38.3 38.3
76
23.7 24.2
76
47.0 46.8
74
48.3 48.7
73
45.9 45.9
73
37.9 37.9
73
34.4 34.5
72
34.6 34.2
79
41.8 43.0
78
43.7 42.8
75
42.4 42.7
78
33.4 33.6
78
27.3 28.4
75
26.4 26.8
82
37.1 38.5
79
35.5 38.5
Mortgage Rate
16.0
28.0
28.0
13.0
28.0
31.0
39.0
11.0
23.5
29.5
37.5
39.0
17.5
22.5
28.0
47.0
40.0
35.5
35.0
22.0
43.0
45.0
42.0
35.0
32.0
32.0
40.0
40.0
39.5
31.0
26.5
25.0
36.0
36.0
3.37
16.5
28.5
29.0
13.5
29.0
32.0
41.0
11.5
24.5
31.0
39.5
40.5
18.5
23.5
29.0
49.0
42.0
37.0
36.5
23.0
45.0
47.5
44.0
36.5
34.0
33.5
41.5
42.0
41.5
32.5
28.0
26.0
38.0
37.5
3.45
13
Mar
8 February 2013
Fig. 10: Prepay Projections for 15yr Fannie Mae MBS
Coupon
2.5
3.0
3.0
3.0
3.5
3.5
3.5
4.0
4.0
4.0
4.0
4.5
4.5
4.5
4.5
4.5
4.5
5.0
5.0
5.0
5.0
5.5
Vintage
2012
2012
2011
2010
2012
2011
2010
2011
2010
2009
2003
2011
2010
2009
2008
2004
2003
2008
2005
2004
2003
2007
Bal ($mm) WAC

81,681
3.01
49,894
3.45
30,966
3.45
4,071
3.59
8,267
3.97
30,732
3.91
25,509
3.92
15,694
4.37
21,346
4.41
18,102
4.48
4,527
4.55
2,225
4.84
5,316
4.85
8,430
4.89
3,564
5.06
4,384
4.96
15,075
4.96
3,328
5.57
3,313
5.49
3,396
5.43
9,928
5.44
2,019
6.08
WAM
173
169
161
148
166
156
147
154
142
130
61
154
141
131
116
70
60
118
83
71
58
107
WALA
5
9
16
27
10
20
28
21
32
43
114
22
33
43
58
105
115
57
91
103
116
68
WACLS
228,537
194,609
201,016
170,364
143,231
173,823
167,410
150,449
146,326
134,135
59,243
124,420
127,611
119,944
117,139
69,174
54,855
101,219
76,073
63,918
49,131
91,071
FICO
770
763
770
773
750
762
770
754
760
762
742
743
745
749
746
733
736
736
729
722
728
728
WAOLS
198,818
194,091
206,015
184,577
207,167
199,786
160,031
190,119
196,043
186,117
150,908
168,749
165,427
171,698
122,412
156,081
113,941
140,912
AOCS
714
702
713
705
710
647
687
702
637
657
671
641
629
651
674
625
668
611
1-Mo Actual
LTV
Dec
Jan
64
8.5
10.0
65
15.6
16.2
63
27.6
26.3
62
30.9
26.5
66
12.0
13.8
64
26.3
26.9
62
33.9
31.5
64
25.5
25.4
63
34.3
33.7
60
40.1
39.0
59
26.9
25.8
68
18.1
21.2
66
27.7
28.9
63
33.8
33.6
61
43.0
41.5
59
25.6
25.7
59
25.0
25.0
62
35.1
34.0
60
24.2
25.5
61
21.0
21.6
60
21.8
22.0
61
30.8
29.1
Mortgage Rate
1-Mo
Projection
Feb
Mar
9.0
9.5
15.0
15.5
23.5
24.5
24.0
25.0
13.0
13.5
25.0
26.0
29.0
30.0
24.0
25.0
31.0
32.5
36.0
37.5
24.0
25.0
20.0
21.0
27.0
28.5
31.0
32.5
38.0
39.5
24.0
25.0
23.1
24.0
31.5
33.0
23.5
25.0
20.0
21.0
20.5
21.5
27.0
28.5
2.65
2.66
Fig. 11: Prepay Projections for 30yr GN Is
Coupon
Vintage
3.0
2012
3.5
2012
3.5
2011
4.0
2011
4.0
2010
4.0
Post-MIP 2009
4.5
2011
4.5
2010
4.5
Post-MIP 2009
4.5
Pre-MIP 2009
5.0
2010
5.0
Post-MIP 2009
5.0
Pre-MIP 2009
5.0
2008
5.0
2003
5.5
2008
5.5
2003
6.0
2008
Bal ($mm)
18,050
26,430
10,330
23,229
28,185
6,879
9,330
41,180
41,457
24,571
10,854
28,746
17,288
5,403
5,918
12,318
6,751
9,453
WAC
3.50
4.00
4.00
4.50
4.50
4.50
5.00
5.00
5.00
5.00
5.50
5.50
5.50
5.50
5.50
6.00
6.00
6.50
WAM
354
348
342
338
329
312
336
323
315
309
322
315
309
298
231
300
230
301
WALA
5
9
16
20
28
43
21
33
41
46
34
41
47
56
115
55
116
54
Source: Ginnie Mae, Nomura Securities International
14
OLTV
95
94
95
95
94
94
94
94
94
94
94
94
94
94
96
94
95
93
1-Mo Actual 1-Mo Projection

Dec
Jan
Feb
Mar
2.0
3.0
3.0
3.0
16.7
15.6
14.5
15.0
24.3
23.8
22.0
23.0
25.9
24.2
22.5
23.5
21.0
20.8
19.5
20.5
26.1
26.6
25.0
26.0
24.9
24.0
23.0
24.0
25.6
25.9
24.5
26.0
30.1
29.0
28.0
29.5
48.5
44.0
42.0
44.0
20.6
21.8
20.5
21.5
24.6
25.3
24.0
25.0
39.8
38.8
37.0
39.0
46.7
46.3
44.0
46.0
26.3
26.0
25.0
26.0
41.5
41.5
45.0
47.0
25.9
26.2
25.0
26.0
32.7
38.4
32.0
33.5
Mortgage Rate 3.37
3.45
8 February 2013
Mortgage Credit
Market Color
Paul Nikodem
In Subprime, volumes were higher after last weeks conference and prices were slightly lower
from the previous week. Retail interest weakened a bit and there was an increase in ABX
trading due to hedging activity. In the Option ARM sector, prices were down by approximately 1
point from last week. Hedge funds were net sellers and there was an increase in DNTs on bid
lists. BWIC volumes were $2.5bn in subprime and $1.5bn in Option ARM.
+1 212 667 2130

In Prime and Alt-A there was heavy trading volume this week. Money managers continued to
have a meaningful bid and hedge funds were mostly sellers. There was strong demand in
particular for long duration floaters, bonds that had favorable NAIC breakpoints, and bonds
having rep & warranty upside; however Prime Fix bonds underperformed this week due to
recent moves in rates. Prices were lower by a point from last week on the average. BWIC
volumes were $1bn in Prime $3.5bn in Alt-A.
+1 212 667 1814

Recommended Positioning
We maintain a slight overweight positioning in the non-agency RMBS sector and recommend
buying on dips. The fundamental backdrop for the sector has not changed, and we expect
continued improvements in housing and borrower performance to benefit the sector. We
continue to expect spreads to tighten over the medium term due to a favorable technical
environment. We continue to favor buying bonds that have strong carry and a flatter profile to
economic scenarios (POA SSNR, Alt-a Hybrid SSNR); in addition, we recommend buying bonds
with potential rep and warranty upside, as this weeks Assured/Flagstar ruling should be a clear
positive for these bonds.
News
RMBS Litigation
US Bank files rep and warranty lawsuit against Credit Suisse: Last week, US Bank, acting
as the trustee for the HEAT 2007-1 trust, filed a putback lawsuit against Credit Suisses DLJ
Mortgage Capital alleging contractual violations relating to $1b of faulty mortgages. It alleged
that roughly 80% of the loans had material rep and warranty breaches, specifically those
relating to the originators underwriting guidelines, compliance with applicable laws, and the
mortgage loan schedule. The plaintiff alleged that DLJ breached its contract by not
repurchasing or curing those loans as stipulated in the PSA.
Dutch pension fund ends suit: Stichting Pensioenfonds ABP, the biggest Dutch retirement
fund, ended its lawsuit against Deutsche Banks ACE Securities Co. Previously, the judge had
dismissed claims of aiding and abetting fraud and negligent misrepresentation while allowing
claims of common-law fraud and fraudulent inducement. ABP had settled earlier with JP Morgan
Chase and has filed similar lawsuits against Morgan Stanley, Credit Suisse and Goldman
Sachs.
Assured v. Flagstar Ruling

On 5 February, Flagstar was ordered to pay Assured Guaranty $90.1m, plus interest and
attorney fees, for failing to repurchase or cure defective mortgages with rep and warranty
breaches in two securitizations that Assured had guaranteed. The two affected trusts FSTAR
2005-1 and 2006-2 involve 15,000 HELOC loans with a $900m balance. Assured initially
sought $116m and had previously paid $90.1m in claims for these two deals.
The Mortgage Loan Purchase Agreements (MLPA) for the two deals contain around 75
mortgage loan representations, although the court case centered around two specific reps that
15
Sean Xie
+1 212 667 9081
sean.xie@nomura.com
Kunal Singal
Pratik K. Gupta
+1 212 667 1403
Pratik.Gupta@nomura.com
8 February 2013
were relevant: 1) Each loan was originated in accordance with Flagstars underwriting
guidelines; and 2) No error, omission, misrepresentation, negligence or fraud occurred by any
party involved in originating the mortgage loan. Although Assured is not a party to the MLPA,
the Sale and Servicing Agreement (SSA) designate Assured as a third-party beneficiary of
those agreements.
The court examined the testimony of various experts from both sides; Assureds experts
claimed to have discovered material breaches on 606 of the 800 loans taken as a sample
85% of the loans in the FSTAR 2005-1 sample and 67% of the FSTAR 2006-2 sample. The
defects were caused by a variety of material factors including undisclosed debts, overstated
income, overvalued appraisals, occupancy misrepresentation and insufficient cash reserves.
Flagstar challenged the findings of these experts, but Judge Rakoff largely accepted the expert
testimony of Assureds witnesses and allowed the use of statistical sampling methodology.
The following are key takeaways from the ruling:
Assured was awarded $90.1m in damages which reimburses it for the claims it paid
out. In addition, the ruling required Flagstar to reimburse Assured for attorneys costs
and fees, plus interest.
Future damages: The ruling did not mention the possibility of future damages,
although if these deals continue to incur losses the amount due to Assured may
increase.
Representative sampling is permissible to prove rep and warranty breaches in a

pool. In this case, the sample size used was 800 of 15,000 loans, or approximately a
5% sample. Effective use of this method would reduce the cost, time and effort to
resolve rep and warranty lawsuits.
Sufficient notice: The court ruled that Assureds notice of pervasive breaches was
sufficient to trigger the notice requirement for Flagstar to address defects. By not
curing or repurchasing defective loans within 90 days of the notice date, Flagstar had
breached the terms of its contract and was therefore liable for damages.
Causation: The judge previously ruled that an insurers claim for a rep and warranty
breach is valid if it causes an increased risk of loss regardless of whether or not the
loan defaults.
Implications of the ruling

Although this ruling is subject to appeal, it should be very positive for monolines and RMBS
bondholders involved in R&W suits, in our opinion. Judge Rakoff is a well-respected federal
judge, whose opinion is followed closely; other New York judges may use a similar line of
reasoning in hearing other cases in state court. The ruling could specifically affect RMBS R&W
suits by further increasing the applicability and scope of statistical sampling and by increasing
the applicability of causation.
In addition, this ruling will likely change how banks view the cost-benefit calculation for
approaching rep and warranty liability. Based on this ruling, plaintiffs may find it easier to prove
material breaches through statistical sampling, and thus the potential cost for a bank/originator
of losing a rep and warranty case may well increase. Due to the high breach rates cited in this
case and other related lawsuits (75%+), it could be prohibitively expensive for a bank to face a
judgment on outstanding rep and warranty liability if the claims are substantiated. Thus, this
ruling may increase the incentive for banks to settle any rep and warranty liability.
Housing Data
th
According to the CoreLogic index, December home prices increased for the 10 consecutive
month and had the largest year on year increase of 8.3% since May 2006. The HPI increased
by 0.4% on a monthly basis. Only 4 states experienced a year-over-year decline - Delaware (3%), Illinois (-3%), New Jersey (-1%) and Pennsylvania (-1%). The states posting the largest yo-y home price gains were Arizona (20%), Nevada(15%), Idaho (15%), California (13%) and
Hawaii (13%).
16
8 February 2013
According to Trulia's Price and Rent monitor, asking prices on homes rose 0.9% on a m-o-m
basis and 6% on a y-o-y basis. Across MSAs, Phoenix had the largest gain of 25% y-o-y.
Overall asking rents increased by 4.1% y-o-y, which is slightly lower than the 4.7% y-o-y
increase seen in July; the largest increase was seen in Houston (+16% y-o-y). The report cited
increased rental supply as one reason for the slowing growth in asking rents.
Fig. 9: Summary of Housing Data
Home Prices
Metric/Index
Unit
CoreLogic HPI
(including distressed sales)
(Jan 2000 = 100)
CoreLogic HPI
Period
(Jan 2000 = 100)
(excluding distressed sales)
Home Prices (Trulia)
Rental prices (Trulia)
Change in asking prices
Change in asking rents
(%, M-o-M)
Level
Dec-12
Nov-12
Oct-12
146
146
Dec-12
153
Nov-12
Oct-12
January
146
7%
152
0%
6%
151
-0%
4%
0.9%
2.2%
(%, Y-o-Y)
5.9%
(%, Y-o-Y)
January
(Y-o-Y)
8%
7%
6%
1%
(%, Q-o-Q)
MSA with largest home asking price increase (Y-o-Y)

Phoenix, AZ
25%
Change
(M-o-M)
0%
0%
-1%
4%
MSA with largest rent increase (Y-o-Y)
Houston, TX
16%
Salt Lake City, UT
17%
Oakland, CA
10%
San Jose, CA
Las Vegas, NV
Warren-Troy-Farmington Hills, MI
17%
17%
16%
Miami, FL
Denver, CO
Seattle, WA
9%
7%
6%
Source: CoreLogic, Trulia, Nomura
17
8 February 2013
Update on Callable Bonds

In the January remittance cycle, five seasoned prime deals were called from the WFMBS and
First Horizon shelves after servicers were inactive in calling deals in late 2012. As more
seasoned prime deals continue to factor down, we expect the market to become increasingly
focused on pricing call risk in these deals. Figure 1 shows the number of deals called by quarter
and the number of deals that are newly eligible for a call. Most servicers have not been overly
aggressive in calling deals in the past, although it is possible that this may change depending
on how the economics of deal calls evolve.
Figure 2 contains a list of deals that were called over the past year and a half; the majority of
these deals are backed by seasoned prime collateral with a low delinquency pipeline. On
average, most deals were called at least three months past the initial call date with many deals
being called significantly after the initial call date. Over the past year, WFMBS, First Horizon,
Chase, and CMSI were the most active shelves that called deals.
Fig. 1: Number of deals newly eligible for call and those called post 2011 Q4
12
10
8
Newly Eligible
Called
4
0
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
Source: Loan Performance, Nomura
18
8 February 2013
Fig. 2: Summary of deals called in the past

Call date
Balance
($mn)
D30+
WAC
% Fixed
Months post call

threshold
WFMBS 2003-11
Jan-13
61
308
10
2%
5.0
100%
WFMBS 2004-03
Jan-13
23
111
FIRSTHORIZON2003-AR4
Jan-13
23
53
10
2%
5.3
100%
10
4%
2.9
0%
18
FIRST HORIZON2003-6
Jan-13
31
FIRST HORIZON2003-10
Jan-13
21
77
10
2%
5.8
100%
62
10
11%
5.8
100%
CHASE 2003-S07
Sep-12
30
135
10
3%
5.4
100%
CHASE 2003-S06
Sep-12
26
124
10
1%
5.4
100%
CHASE 2003-S08
Sep-12
26
112
10
2%
5.2
100%
CHASE 2003-S02
Sep-12
13
71
10
0%
5.6
100%
21
FIRST HORIZON2003-5
Jul-12
65
195
10
2%
5.8
100%
FIRST HORIZON2003-4
Jul-12
36
103
10
3%
5.9
100%
CMSI 1994-05
Jun-12
45
1%
7.4
100%
80
CMSI 1994-03
Jun-12
28
0%
7.3
100%
72
ABN AMRO 2003-10
May-12
17
73
10
1%
4.9
100%
WFMBS 2003-08
May-12
81
381
10
10
1%
5.3
100%
WFMBS 2003-C
May-12
14
10
0%
3.1
0%
56
SBMS VII 2001-CPB1
Apr-12
11
24
10
0%
2.9
0%
83
CMSI 2003-07
Mar-12
26
120
10
1%
5.4
100%
WFMBS 2003-07
Jan-12
46
195
10
0%
5.4
100%
WFMBS 2003-04
Jan-12
49
127
10
10
4%
6.0
100%
CMSI 2003-06
Dec-11
40
124
10
4%
5.9
100%
SBMS VII 03-NBC1
Dec-11
60
881
10
5%
5.1
0%
13
RFC 2003-S08
Dec-11
24
144
10
1%
5.4
100%
RFC 2003-S02
Dec-11
31
92
10
3%
6.0
100%
12
RFC 2003-S03
Dec-11
12
73
10
3%
5.6
100%
14
RFC 2003-S05
Dec-11
23
140
10
1%
5.7
100%
10
GMACM 2003-J04
Dec-11
27
135
10
3%
5.2
100%
GMACM 2003-J03
Dec-11
19
88
10
4%
5.3
100%
13
ABN AMRO 2003-05
Sep-11
68
202
10
10
5%
5.7
100%
WFMBS 2003-06
Sep-11
56
246
10
1%
5.6
100%
WFMBS 2003-05
Sep-11
48
121
10
10
1%
6.0
100%
WFMBS 2002-22
Sep-11
18
54
7%
6.8
100%
65
Deal Name
Loan Count Call threshold (%) Factor at call
Figure 3 shows a history of deal calls by issuer and quarter, and Figures 4 and 5 show some
metrics to assess the relative aggressiveness of call practices across issuers, including
delinquency, WAC and timing past the initial call date. The average delinquency rate for most
called deals remained below 3% except for a few shelves such as Washington Mutual
(WAMMS) and First Horizon Mortgage (FHASI) where some deals had a delinquency rate as
high as 14% and 11% respectively. In the past, issuers generally called multiple deals at once for example RFC has mainly called deals in the 4th quarter (November 2010 and Dec 2011) but
has not called any deals in late 2012 possibly due to bankruptcy proceedings.
Figure 5 shows the timing of deal calls - expressed as the number of months that a deal
remains outstanding past the initial call date before being called. Across issuers, AMAC and
CHASE were more aggressive in calling deals soon after the call date while the WAMMS shelf
showed the opposite trend.
19
8 February 2013
Fig. 3: Number of deals called each quarter
Shelf
AMAC
CHASE
CMSI
FHASI
GMACM
RFMSI
WAMMS
WFMBS
2010 Q4 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2013 Q1
6
8
3
11
3
3
1
1
1
4
1
2
2
2
4
15
10
6.5
6%
6.0
5%
5.5
4%
5.0
3%
4.5
2%
4.0
1%
3.5
0%
3.0
Avg D30+
35
9
8
7
6
5
4
3
2
1
0
30
25
20
15
10
5
0
Avg factor at call
7.0
7%
Months post call threshold
8%
Fig. 5: Average # months past initial call date and average

factor of called deals
WAC
Avg D30+
Fig. 4: Avg delinquency rate and WAC of called deals
WAC (rhs)
Months post call threshold
Source: Loan Performance Nomura, includes deals called after

Q42010
Avg Factor
Source: Loan Performance, Nomura, includes deals called after

Q42010
Incentives to call deals

In this section, we analyze an issuers incentives to call deals based on loan pricing for
performing and non-performing loans. Based on valuations in the whole-loan market, seasoned
loans that are always current are likely to trade at 103-104 for a 5% fixed coupon and 101-102
for a post-reset ARM with a 150bp margin. Delinquent loans in seasoned prime deals are likely
to trade at 60-65% of updated BPO or 70-85% of loan balance based on updated LTVs. We
assume that the fixed costs for calling a deal typically do not exceed 50k, although accounting
considerations may affect this calculation as well.
We assume that an issuer requires at least a 0.5 point incentive (and thus a 100.5 weighted
average price of underlying loans) to call a deal given the fixed costs and administrative work
required to call a deal. Based on this assumption, we estimate that the break-even delinquency
rate is approximately 12% for deals backed by fixed-rate loans and 4% for deals backed by
floating-rate loans.
Future deals to be called

Figure 6 shows the universe of potentially callable deals for some of the larger issuance
shelves. GMAC and RFC seems to have potentially the highest likelihood of being called given
the low delinquency pipeline of eligible deals, though the current bankruptcy proceedings may
be an impediment. WFMBS and CMSI may also be more likely to call their outstanding deals as
they have lower delinquency pipelines on average.
20
8 February 2013
Fig. 6: Prime Shelves with deals eligible for call
WAC
Shelf
No of
deals
eligible
AMAC
6.1
BOAMS
13
4.0
CHASE
CMSI
Avg no. of Avg D30+

Avg
months post of prev
Factor
called
threshold
deals
100% 6%-10%
2
16
2%
Fixed D30+
rate % range
31%
1%-7%
47
1%
5.6
100% 5%-7%
26
2%
5.2
100%
2%
CSFB
3.5
74
GMACM
5.2
100% 3%-5%
11
3%
RFMSI
12
5.5
100% 1%-3%
2%
SASC
11
4.6
65% 0%-16%
75
5%
WAMMS
18
3.9
27%
2%-7%
44
7%
WFMBS
15
4.5
43%
2%-5%
23
2%
1%
35% 8%-17%
Valuations
Figure 7 shows the valuation of a sample deal near the call threshold. Generally the market
seems to be expecting issuers to be less aggressive about calling deals; based on current
pricing, many seasoned deals near their call date would price to a 0 or negative spread if the
issuer calls the deal at the first available opportunity.
For the sample deal below, WFMBS 2004-A A1, the yield is mainly dependent on the timing of
the call date, as it is unlikely that the bond takes writedowns. The current factor of the deal is
12%, and the call threshold is 10%. Figure 7 shows the valuation of the bond under different call
assumptions. Based on current market pricing, this deal offers a negative spread if the bond is
called at the first call date, a 130-150bp spread if the deal is called at a 5% factor, and 221237bp spread if the deal is never called. The pricing of this deal is very sensitive to call timing,
and each additional month that the deal remains outstanding past the first call date can result in
meaningful incremental spread.
Market pricing for these deals generally reflects the historical inefficiency that servicers have
exhibited in calling deals. However, if issuers become more aggressive about calling deals as
the economics of these transactions improve, this may affect the pricing of seasoned prime
deals near the call date.
Fig. 7: Sample valuation for a seasoned prime deal near the call date
WFMBS 2004-A A1 @ 103-10

Call Threshold: 10%
Current Factor: 12%
Scenario
Base HPA
Stress HPA Base HPA
Call Assumption
Never
Never
Yield
Stress HPA Base HPA
Stress HPA Base HPA
Stress HPA
5%
5%
7.5%
7.5%
10%
10%
2.6
2.8
1.5
1.8
0.9
1.2
(1.5)
(0.8)
221
237
130
150
72
98
(157)
(87)
WAL
2.9
3.3
1.7
2.0
1.2
1.4
0.6
Writedown
0%
0%
0%
0%
0%
0%
0%
0%
Spread
Source: Intex, Nomura
21
8 February 2013
Consumer ABS Market

Market Commentary
Secondary consumer ABS market was fairly active this week with flows across the board. In
credit card ABS, there was some supply in longer duration fixed card ABS and short bonds with
floating coupon. There has been a sharp tightening in spreads in FFELP subordinates in the
new issuance market and spreads in the secondary market have exhibited similar trends with
SLMA subordinate bonds (~8 year WAL) trading with DM in low 200s, compared with DMs in
low to mid 300s a few weeks back. There were some flows in auto ABS with short average life
trading at low single digit spreads or through the benchmark.
There was some softening in spreads this week as the new issuance market regained focus of
the market participants. Spreads widened by 3-5bp in the 2-3 year WAL utilities sector and by
1bp in 1-2 year FFELP ABS. Spreads in other on-the-run consumer ABS sectors were almost
flat from previous week.
Fig. 1: Spreads in consumer ABS market in the week ending 2/8/13
Rating
BBB
Sector
A/L
1yr
2yr
AAA
3yr
5yr
7yr
Credit card
Floating
18
34
50
75
Credit Card
Fixed
17
31
45
70
Utilities
Fixed
14
18
31
Auto
Fixed
13
Equipment
Fixed
Floating
7
12
13
Student loans
2
8
37
60
23
Source: Nomura
New issuance
New issuance market picked up steam after a slowdown last week due to ASF. There was
$5.8bn in new issuance through 8 deals across various sectors. In auto ABS, we continue to
see an increased participation of high beta sectors such as floorplan and rental fleet ABS. There
has been a significant increase in investor interest in these sectors as they still offer significant
spread pick-up. The 5.4-year AESOP 2013-1 A priced at 80bp to the interpolated swap curve,
compared with interpolated swap + 125bp pricing for AESOP 2012-3 A with similar WAL and
structure profile.
NAVMT returned to the ABS market with a 2-year deal, after it last deal in October 2011. This
was the second auto floorplan ABS deal this year and we expect that this sector should
experience some spread tightening due to high investor interest.
CARMX 2013-1 was upsized from $800mn to $1.045bn. The short average life senior bonds in
CARMX 2013-1 priced at similar levels as in CARMX 2012-3 that was issued in October 2012.
On the other hand, there was tightening down the capital structure with the 4-year B, C and D
pricing at 5bp, 15bp and 50bp tighter, respectively, compared to CARMX 2012-3.
The subordinate trance in SLMA 2013-1 exhibited a similar trend of significant tightening as
seen in the recently issued NSLT 2013-1A B. The 8.6 year bond priced at 1 month Libor +
225bp, showing a strong pick-up in investor interest in the past month as the previous SLMA
subordinate tranche with a similar WAL profile (SLMA 202-7 B) had priced at 1 month Libor +
350bp. We think that FFELP subordinate bonds offer attractive spread pick-up opportunities and
this space could attract fair amount of investor interest due to discount pricing and investment
grade profile, but there is limited paper in the market.
Discover issued its first series of credit card ABS notes this year with a $800mn 5-year floating
rate bond that priced at 1 month Libor + 30bp, and a $900mn 3-year fixed coupon bond that
22
Kunal Singal
+1 212 667 1814
8 February 2013
priced at interpolated Swap + 15bp. The fixed coupon bond priced at similar level as COMET
2013-A1.
Fig. 2: New issuance in consumer ABS market in the week ending 2/8/13
Pricing
Date
2/6/2013
Collateral
Trust
Class
Schd
Size ($mn) Pricing
redemption
2.0
169
1mL+67
2.0
11
1mL+100
2.0
9
1mL+150
2.0
11
1mL+225
Coupon
Floorplan (Auto)
NAVMT 2013-1
A
B
C
D
2/6/2013
Prime credit card
DCENT 2013-A1
DCENT 2013-A2
A1
A2
5.0
3.1
800
900
1mL+30
iS+15
0.50
0.69
2/5/2013
Prime auto retail loans
CARMX 2013-1
A1
A2
A3
A4
B
C
D
0.3
1.1
2.5
3.7
4.0
4.0
4.0
155
350
332
151
15
28
15
0.002
E+10
iS+13
iS+20
iS+50
iS+80
iS+125
0.20
0.42
0.60
0.89
1.24
1.54
1.99
2/5/2013
FFELP student loans
SLMA 2013-1
A1
A2
A3
B
1.0
3.3
6.8
8.6
280
396
538
35
1mL+17
1mL+25
1mL+55
1mL+225
0.35
0.45
0.75
2.00
2/5/2013
Equipment loans and leases GALC 2013-1
A1
A2
A3
A4
B
C
0.4
1.3
2.3
3.4
3.8
3.8
78
99
97
75
14
12
E+26
iS+32
iS+52
iS+70
iS+110
0.24
0.61
0.78
1.16
1.44
1.83
1.15
1.45
1.95
2.45
2/5/2013
Rental fleet
AESOP 2013-1A
A
B
5.4
5.4
653
98
iS+80
iS+150
1.92
2.62
2/5/2013
Insurance Premium
PFSFC 2013-AA
A
B
3.0
3.0
376
24
1mL+55
1mL+110
0.75
1.30
Source: Add Source Here
Slowdown in prepayments in FFELP student loan ABS

FFELP SLMA deals printed lower prepayment speeds in 2012Q4 across the board. The speeds
were close to 2012Q1 levels after spiking in 2012Q2 and 2012Q3. As we had mentioned in a
previous article, the Department of Education had launched Special Direct Consolidation Loan
Initiative in 1H2012 to borrowers with
At least one student loan held by EDa Direct Loan or a Federal Family Education
Loan (FFEL) Program loan owned by ED and serviced by one of ED's servicersand
At least one commercially-held FFEL Program loan in grace, repayment, deferment, or
forbearance.
The increase in prepayment speeds was in accordance with our expectation of largest increase
in speeds for loans originated in 2006-2010 in 2012Q2 and 2012Q3 and speeds resetting at
lower levels in 2012Q4.
23
8 February 2013
Fig. 3: Prepayment speeds for SLMA Stafford deals, by vintage
(%) CPR
25
20
2002
2003
2004
2005
2006
2007
2008
2010
2012
15
10
5
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Source: SLMA, Nomura
Fig. 4: Prepayment speeds for SLMA Consolidation deals, by vintage
(%) CPR
10
8
2002
2003
2004
2005
2006
2007
2009
2011
6
4
2
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Going forward, we think that FFELP prepayment speeds should remain range-bound as the
loans that passed the Special Direct Consolidation Loan Initiative are likely to burnout.
Separately, FFELP borrowers have limited incentive to prepay as they have other options to
lower their monthly payments such as opting for income-based payment plans. Borrowers
currently in school, or that have recently entered the grace period could not benefit from this
initiative and could prepay in future, however the composition of such loans is decreasing in
outstanding deals (Figure 3).
Fig. 5: % Loans in school and grace in outstanding Stafford FFELP deals, by vintage
2002
2003
2004
2005
2006
2007
2008
2010
2011Q4
0.9%
1.1%
1.3%
1.9%
1.9%
3.4%
5.2%
4.2%
2012Q4
0.7%
0.8%
0.9%
1.2%
1.2%
2.1%
3.0%
2.4%
2011Q4
0.2%
0.2%
0.4%
0.6%
0.7%
1.2%
1.8%
1.9%
2012Q4
0.1%
0.2%
0.3%
0.4%
0.5%
0.7%
1.1%
1.3%
2012 All
School (%)
4.1%
6.9%
3.4%
Grace (%)
Relative Value
We think the slowdown in prepayment speeds should offer an opportunity to pick up spread in
premium FFELP bonds as most market participants had been running such bonds at higher
24
1.4%
1.8%
1.1%
8 February 2013
speeds. For example, recently SLMA 2008-5 A3 was trading at mid 20s DM at 8 CPR
5
assumption. Prepayment speeds on the deal had increased to low to mid teens in 2012Q2 and
2012Q3 and were at 2.4 CPR in 2012Q4. Keeping the price constant, a 2-4 point drop in CPRs
offers additional 12-22bp for the same pricing and extends the bond from 1.5-years WAL to
almost 2-years WAL for a 4 point drop scenario.
Auto sales continue to post strong trends

In January, US auto sales were almost flat from the previous month at 15.23mn (seasonally
adjusted annual rate). Year-on-year, sales were up approximately 10% due to relatively easier
credit and pent-up demand in the previous years. Auto sales are approaching the pre-crisis
levels and we think that going forward, the growth in auto sales should be limited (Figure 6).
Figure 6 also shows that the US inventory of light vehicles has continued to increase in the past
three years and is close to pre-crisis levels.
Fig. 6: Auto sales (SAAR) and light vehicles inventory
Fig. 7: Enter Title Here
#mn units
#mn units
20
15
% market
share
20%
GM
Ford
Toyota
16%
Chrysler
Honda
12%
10
Nissan
8%
Hyundai
Auto sales
4%
Light Vehicles Inventory

(RHS)
0
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Kia
VW
0%
0
Jan-13
Jan-12
Apr-12
Jul-12
Source: Wards Auto, Nomura
Source: Wards Auto, Haver, Nomura
Figure 8 shows that year-on-year, most car manufacturers have posted positive growth (nonseasonally adjusted sales). Figure 7 shows the change in market share for the 10 largest car
manufacturers and among the largest manufacturers, GM and Ford have maintained their
dominance as the number 1 and number 2 sellers.
Fig. 8: 1-month and 12-month change in auto sales, by manufacturer

60%
1m Change
12m Change
40%
20%
0%
-20%
-40%
-60%
-80%
Source: Wards Auto, Nomura
Assuming Deferment, Forbearance and Repayment loans are scheduled to make payments
25
Oct-12
Jan-13
Subaru
8 February 2013
CMBS: Simon Earnings and Notes on the MBA

Conference
Despite this weeks heightened volatility in the broader markets, legacy spreads
widened marginally, with benchmark GG10 A4s widening 2bp since last Fridays close.
GG10s are now trading at 140bp over swaps, while 2007 AAA last cash flows widened
5bp to within a range of 80bp to 125bp.
Within the new issue space, senior AAA and subordinate classes on new issue deals continue
to price at their tightest levels, driven by investor interest for longer-dated spread product and a
reach for higher yields. As a result of this tightening in new issues, we expect that legacy bonds
may appear more attractive versus new issuance, and we expect that legacy CMBS spreads
are likely to stabilize near their current levels.
Adding further support to CMBS spreads, dealers appear to be rebuilding their inventories as
bid list volume has increased, as we see in TRACE data. However, inventories have not
reached levels seen in early 2012, likely indicating that the dealer books can continue to expand
(Figure 1).
1,200
800
400
0
-400
-800
-1,200
-1,600
-2,000
-2,400
Net Dealer Buy (lhs)*
-2,800
-3,200
9-Jan
9-Mar
8-May
7-Jul
Avg Daily Px (rhs)
110
109
108
107
106
105
Price
YTD change in inventory (mn)
Fig. 1: Investment grade dealer volume vs. cash prices (5-day moving average)
104
103
102
101
5-Sep
4-Nov
3-Jan
*Excludes the $1.8bn placement associated with ESA 2013-ESH7
Source: FINRA TRACE, IDC, Nomura
This week, the equity markets continued their climb in spite of mixed economic news. Initial
jobless claims were reported at 366K, a decrease of 5K from the previous weeks revised figure
of 371K. The four-week moving average also decreased by 2K, to 350K. Further, the trade
deficit narrowed to $38.5bn on record petroleum exports, while wholesale inventories dropped
by 0.1%. Nomura economists expect economic growth to pick up from the flat pace reported for
the prior quarter, likely adding support to the commercial real estate markets and CMBS.
Collectively, the reduction in macroeconomic volatility and improving fundamentals provide a
positive tailwind for the CMBS market, resulting in improving credit profiles of legacy
transactions. Further, we expect the availability of credit to borrowers to continue to improve as
conduit lenders expand their platforms, reducing concerns of default risk at maturity. However,
increased issuance is likely to drive prepayment rates in legacy vintages higher, resulting in
negative convexity for bonds priced at steep premiums. Although wider spread levels for super
seniors increase their appeal, we prefer owning AM and higher quality AJ bonds that are less
susceptible to this risk.
With an expanding investor base and increased interest in the asset class, we believe that new
issue deals are increasingly attractive. These deals are likely to continue to benefit from
demand for longer-duration spread product, and we expect that the credit curve will continue to
flatten as investors seek incremental yield.
26
Lea Overby
+1 212 667 9479
lea.overby@nomura.com
Steven Romasko
+1 212 298 4854
steven.romasko@nomura.com
8 February 2013
CMBX Performance
Prices across the AAA stack finished lower on the week on average across all series, with AAAs
outperforming. AAA prices declined 0.1% on the week, while AM and AJ prices fell 0.9%, and
2.02%, respectively (Figure 2).
Tranches among Series 6 finished mostly lower on the week, with single-A and BBB- classes
underperforming, declining 2.0% and 4.8%, respectively. ASs outperformed on the week, rising
marginally by 0.1%.
Fig. 2: CMBX weekly price changes (through Thursdays close)
AAA
AM / AS
AJ
AA
A
BBB
BBB-
CMBX.NA.1
31-Jan 7-Feb
Diff
98.19 98.23
0.04
96.53 96.29 (0.24)
92.57 91.56 (1.01)
78.83 77.15 (1.68)
59.48 57.58 (1.90)
26.68 26.48 (0.20)
16.50 16.54
0.04
CMBX.NA.2
31-Jan 7-Feb
Diff
97.25 97.26
0.01
94.23 93.72 (0.51)
84.08 82.82 (1.26)
62.08 60.22 (1.86)
36.83 36.17 (0.66)
13.88 13.95
0.07
10.08 10.07 (0.01)
CMBX.NA.3
31-Jan 7-Feb
Diff
96.27 96.18 (0.09)
90.94 89.52 (1.42)
70.65 68.66 (1.99)
34.03 33.55 (0.48)
18.63 18.42 (0.21)
8.69
8.71
0.02
7.35
7.39
0.04
CMBX.NA.4
31-Jan 7-Feb
Diff
96.34 96.21 (0.13)
88.86 87.71 (1.15)
69.59 67.70 (1.89)
38.51 37.99 (0.52)
23.23 23.04 (0.19)
16.85 16.94
0.09
13.65 13.58 (0.07)
CMBX.NA.5
31-Jan 7-Feb
Diff
96.44 96.32 (0.12)
88.18 87.52 (0.66)
70.37 68.97 (1.40)
47.51 47.00 (0.51)
26.88 26.84 (0.04)
17.35 17.46
0.11
13.59 13.61
0.02
Source: Markit, Nomura
Implied spreads across the senior tranches of CMBX 4 widened on the week, with AAAs
outperforming. AAAs widened 3bp on the week to 103bp over swaps, while AMs and AJs
widened 23bp and 56bp, respectively. AM tranches closed at 291bp over swaps on Thursday,
and AJs closed at 821bp over swaps (Figure 3).
Fig. 3: CMBX.NA.4 spread levels

1400
Composite Spread
1200
1000
AAA
800
AM
600
AJ
400
200
0
Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13
Source: Markit, Nomura
In the News
New Issue
CMBS issuance continues to rise, with two transactions pricing this week. Bank of America and
Morgan Stanley priced their $1.13bn conduit transaction, MSBAM 2013-C8, with super seniors
pricing at 72bp over swaps, in line with offerings over the past few weeks. Goldman also priced
their $1.10bn floating-rate transaction, GSMS 2013-KYO, with the AAA class pricing at onemonth Libor + 85bp. Collateral for the deal consists of six full service hotels and resorts in
Hawaii and California and are operated under management agreements with Starwood Hotels.
According to Bloomberg News, two CMBS transactions consisting of a single-borrower and a
conduit transaction are pre-marketing. Goldman plans to issue a $500mn single borrower
transaction tied to Macerichs Kings Plaza Mall, GSMS 2013-KING, located in Brooklyn. UBS
and Barclays issued a free-writing prospectus for an 86-loan transaction, UBSBB 2013-C5.
27
CMBX.NA.6
31-Jan 7-Feb
Diff
98.10
97.15 (0.95)
98.39
98.45
0.06
100.02
101.30
99.20
99.29
(0.82)
(2.01)
100.34
95.55
(4.79)
8 February 2013
Macerich lists 17 malls for sale, two securitized in 2012 deals

According to the transcript from their fourth-quarter conference call, Macerich has placed 17
asssets on the market. While they initially did not intend to sell all of the assets, they have
received significant interest. They plan to sell assets worth between $500mn and $1bn with a
cap rate in the mid-7% range.
Four of the assets are securitized in CMBS deals. All of the centers that are for sale are below
the top 30 centers in their portfolio of 70 centers, and the four CMBS assets are categorized
below the top 40 centers (Figure 1). Because the two recently securitized loans are in their
lockout period, a sale will result in an assumption of the in-place debt. The other two loans may
be defeased.
Fig. 1: CMBS exposure to Macerich loans

Deal Name
BACM 2006-2
BSCMS 2004-PWR3
WFRBS 2012-C10
WFRBS 2012-C9
Loan Name
Valley Mall
Great Northern Mall
Towne Mall
Chesterfield Town Center
Balance
42,891,000
36,349,993
23,369,000
110,000,000
Pct Deal
1.8%
5.9%
1.8%
10.5%
Location
Maturity
Harrisonburg, VA
Jun-16
Clay, New York
Dec-13
Elizabethtown, KY Nov-22
Richmond, VA
Oct-22
Source: Nomura, Trepp, Macerich
Renaissance Tower modification detailed, loan securitized in WBCMT 2006C29

Todays Commercial Mortgage Alert provided details of the recently approved modification on
the Renaissance Tower Office Building, which secures a $127.2mn loan in WBCMT 2006-C29.
According to the article, the special servicer, Helios, restructured the loan, writing it down to
$120.0mn and bifurcating it into a $60mn A Note and $60mn B Note. In addition, the maturity
date has been extended one year to November 2017, and the sponsor, a Joseph Moinian
partnership, contributed $12mn in fresh equity. In addition, the $15mn B Note held by Dividend
Capital has been extinguished.
While the special servicer has not provided updated financials, commentary indicates that
occupancy at the property is currently 50%. Assuming that no principal is recovered on the B
note, we estimate that final loss severity on this loan is likely to exceed 60%.
MBA CREF/Multifamily Convention

Notes and Key Takeaways
On February 2-6, the Mortgage Bankers Association held their annual Commercial Real Estate
Finance/Multifamily Housing Convention and Expo in San Diego. The conference is designed to
provide a venue where commercial and multifamily real estate professionals gather to network
and strengthen relationships, as well as discuss trends in market conditions, the economy, and
regulatory oversight. In this article we provide an overview of the sessions that we attended.
Industry participants are generally positive on the health of the economy and believe that
origination volume is likely to increase in 2013. Adding further support to an improving
economy, the Mortgage Bankers Association recently issued an update to its quarterly survey of
originations. The survey showed that overall commercial and multifamily lending increased
significantly in the fourth quarter, up 49% year-over-year and 70% on the quarter. Origination
volume increased across each lender type, with conduits showing the strongest gains.
However, many expressed concerns about the Feds ability to cease quantitative easing and the
effects of rising interest rates on the lending environment.
28
NCF DSCR MAC Classification

0.93
Top 51-62
1.45
Top 51-62
1.94
Top 41-50
2.13
Top 41-50
8 February 2013
Origination Volume Index
Fig. 1: MBAs Origination Volume Index by Investor Type

700
600
500
400
300
200
100
0
Conduit
Life Co
Agency/GSE
Bank & Thrift
Total
Source: Nomura, MBA
The Outlook for 2013 and the Commercial/Multifamily Market

In this session, two industry experts and provided their insights into the state of the economy
and the commercial real estate markets.
Jay Brinkman, Ph.D., Chief Economist and Senior Vice President of Research & Education for
the MBA opened the session, discussing the state of the economy. He believes that we will
continue to see modest ongoing growth with a continued drop in unemployment and a slight rise
in the ten-year Treasury rate, to 2.5% as of year-end 2014. He listed several near-term risks,
including ongoing discussions regarding tax policy, increased regulatory burden, especially with
healthcare and the environment, as well as increased rate volatility associated with Fed
announcements. He also expressed concerns regarding new asset bubbles, as well as
continued unrest in the Middle East. Surprisingly, he believes that sequestration and future
spending cuts are not a cause for concern as any major effects should be transitory.
As a positive sign for the economy, consumer debt is now increasing, showing that consumers
have more confidence in the economy. However, the majority of this increase is due to the
growth in student loan debt, and we are also seeing a commensurate uptick in default rates on
these loans. Auto loans are also now showing gains, and credit card debt now appears flat,
while home equity debt continues to decline.
Dr. Brinkman also pointed out that unemployment is improving as initial claims have steadily
declined. However, there is still a large percent that are now considered long-term unemployed.
He discussed the Feds MBS buying program at length, pointing out that the Fed is essentially
choosing the preferred asset class for us. In addition, keeping rates very low punishes thrift and
savings in favor of spending. These purchases may be difficult to unwind, and as a result, a rate
reversal could be very sharp as investors try to sell bonds ahead of the Fed.
Lastly, he discussed regional drivers of growth, including the concentration of those with a
college education within a city, the effects of state taxes, as well as oil and gas discoveries.
Adding to the refinanceability of mortgage debt, loan rates are near historic lows, closely
tracking the 10-year treasury rate. While we have seen a converging in spreads on
securitized products since the credit crisis, he points out that the credit curve remains much
steeper than in 2007.
Fig. 2: NOI Index

120
115
110
NOI Index
Jamie Woodwell, Vice President of Commercial Real Estate Research for the MBA, also
provided insights into the health of the commercial real estate market. According to NCREIF,
Multifamily NOI has seen 9% growth and is now at its peak levels. In addition, the office
sector is finally turning positive. With NOIs stabilizing and property prices back near 2005
levels, a greater portion of the mortgage debt outstanding is now refinanceable.
105
100
95
90
85
80
He highlighted the MBAs recently published loan maturity volumes study and projected
origination volumes for the next three years. The maturity volume survey shows a 21%
decline in loans due to mature in 2013 from the previous study. Peak maturity volume
remains in 2015-2017. Woodwell projects that origination volume, which is likely to be driven
by transaction activity, is likely to increase 11% in 2013 to reach $254bn. He expects further
growth over the next two years, with $269bn and $289bn in originations each year.
29
Office
Retail
Source: PPR, Nomura
Apartment
8 February 2013
Multifamily -- What's Next

Fig. 3: Multifamily Originations
Each of the panelists expects to see similar levels of origination in the year ahead. However,
Morgan Stanley expects to see more conduit lending within the multifamily sector. As CMBS
spreads stabilize, conduit lenders can offer more appealing terms to better compete with
other multifamily lenders. The panelists have no expectations that the agencies will pull back
from the multifamily market. Because they account for approximately 40% of multifamily
lending, a pullback would likely lead to an increase in offered rates as other lender types
struggled to grow their platforms.
Origination Volume Index
Participants in this panel discussed recent trends in multifamily lending and factors that may
affect origination volumes over the next year. Panelists included representatives from
Freddie Mac, Fannie Mae, PNC Real Estate, Morgan Stanley, and Pacific Life Insurance
Company.
300
250
200
150
100
50
0
Regarding the health of the multifamily market, the panelists agreed that, while construction
Source: MBA, Nomura
lending had increased, multifamily supply remains below demand, easing concerns
regarding a bubble in the sector. However, they point out that the industry has historically not
moderated lending, even as supply exceeded demand. When considering multifamily supply,
the panelists do not believe that single family rentals will pose a threat to the multifamily market,
as single family housing is a different housing type from multifamily. In addition, single family
housing prices are improving, increasing the appeal of renting. In addition, single family housing
starts will lead to further job growth, allowing the economy to further stabilize, to the benefit of
the multifamily market.
Regarding cap rates, the representative from Morgan Stanley stated that cap rates have
decreased significantly, with even more volatile hotels pricing at a 6% rate for the best
properties. He believes that cap rates will continue to decrease as capital continues to chase
assets, with the best properties benefiting the most and others seeing a stabilization of cap
rates near current levels. The representatives from both Fannie Mae and Freddie Mac agreed
that current cap rates are not too low, as the difference between cap rates and Treasuries is
near historical wides.
Portfolio Lending
In a panel on portfolio lending, representatives from Aegon USA Realty Advisors, LLC, CIT Real
Estate Finance, PPM Finance, Inc., and M&T Bank discussed the changing real estate lending
environment and their plans for the year ahead. Generally, the panelists believe that geopolitical
and macroeconomic risks to the marketplace have subsided, but concerns on the Feds ability
to successfully exit from quantitative easing remain. Specific to the commercial real estate
sector, they expressed concerns about deteriorating underwriting and interest rate risk.
However, concerns regarding the performance of the multifamily sector were mitigated due to
limited new construction.
Panelists believe that the volume of outstanding debt is likely to increase by around 15% in
2013 as acquisition activity has improved. By lender type, they believe that the majority of the
increase will be seen in CMBS and bank portfolios. In addition, they are seeing an increase in
appetite for whole loans from sovereign funds, endowments, pension funds, and international
banks. They do not generally believe that regulation, including the new capital requirements
regarding High Velocity Commercial Real Estate (HVCRE) loans, will have a significant impact
on the lending environment.
While gateway cities have benefitted from this new financing, credit remains more constrained
within secondary and tertiary markets.
High Yield/Non-Traditional Lending
A panel of lenders, including representatives from Redwood Trust Inc., Torchlight Investors,
BB&T Real Estate Funding, Contrarian Capital Management, LLC, and Blackrock Financial
Management discussed several financings that they had provided to storied properties. After
each panelist presented the background for the asset, the remaining panelists discussed what
their approach would have been, highlighting differing strategies and risk profiles for each
lender.
30
8 February 2013
Diversification Works Until it Doesn't; Markets Don't Correlate Until they Do

Sally Gordon, Ph.D., managing director in the risk and quantitative analysis group at Blackrock,
presented research demonstrating strengths and weaknesses of risk models. In particular, she
demonstrated how correlations between markets can change over time. As expected, certain
markets, such as the New York office market and the Washington, D.C. office market are highly
correlated. However, generally, correlations between property types and MSAs are fairly
random and differ during various market cycles. In particular, during the financial crisis between
2008 and 2012, all markets were highly correlated, eliminating the benefits of diversity just when
it is most needed.
She also discussed the importance of understanding liquidity and volatility in various markets
when making investment decisions. While the New York and DC office markets are highly
correlated, the New York office market is highly volatile but benefits from high liquidity as well. In
contrast, DC is only slightly less liquid but much less volatile, indicating that the market may be
a more stable investment choice.
Gordon pointed out three risks to the broader market that may arise over the next few years.
First, while models are necessary to evaluate risk, they are not sufficient. Modelers must
constantly be mindful of new risks, such as changes to the regulatory environment that may not
be captured in a given model. She also expressed concerns regarding the mispricing of risk,
which can occur when demand outstrips supply. Lastly, she pointed out that a zero interest rate
did not indicate that there was zero risk. Because there is a higher probability that interest rates
may rise from here, risks are no longer symmetrical. Specific to the commercial real estate
sector, she also expressed concerns regarding the amount of credit-related debt due to mature,
starting in 2015.
FHA Multifamily and Healthcare: Still the "Star of the Show?"
Spokespeople from the FHA provided an overview of mortgage volume for 2012 and provided
an update on several initiatives to streamline loan processing. The FHA is working to be more
focused on industry standards, to bring their requirements more in line with other capital
sources. The agency's portfolio increased 15% over the past year, driven primarily by their
223(a)(7) refinancing program. Over the past year, they have experienced a 70% decrease in
their backlog and a 40% cycle time reduction for 223(a)(7) processing.
The agency recently endorsed the largest FHA-insured transaction in multifamily history, a
$621mn loan for Co-op City in New York. The agency is receiving more requests for co-op
financing, and they are working to streamline processing for co-op loans larger than $50mn.
The agency is also implementing several risk management changes and tools. They are
developing the ability to flag loans that report a DSCR below 1x. Currently, their default rate
within their portfolio is approximately 20bp.
We also received an update from the Office of Healthcare Programs. As of year-end 2012, the
agency's portfolio consisted of over 2,890 loans with a balance of over $28.3bn. Their claims
rate remains very low at under 2% within the combined 232 and 242 programs. They are also
seeing an increase in 223(a)(7) refinancing requests. Currently, the agency averages 156 days
of processing time per request, dropping to 140 days for 223(a)(7) requests.
Ginnie Mae Correspondent Meeting
Four representatives from Ginnie Mae provided an update to the Ginnie Mae multifamily
program, as well as their projections for the year ahead. Over the course of 2012, Ginnie Maes
Multifamily MBS portfolio increased 16% to $67.4bn, and they expect growth to continue as
political support for multifamily housing has increased due to the crisis in single family housing.
The firm has therefore increased their headcount from 83 employees to 106 over the last year.
In addition, the agency continues to look to modernize their infrastructure and implement key
operational and risk management initiatives. In particular, they have recently redesigned their
website and begun a rebranding initiative.
31
8 February 2013
Fig. 4: Ginnie Mae Portfolio
General Growth Properties and the Financial Crisis: One Man's Journey
25
20
15
10
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Regarding performance of Ginnie Mae loans, their delinquency rate has trended significantly
lower and is now 0.58%, versus 1.26% as of a year ago. However, their rate continues to
remain approximately twice as high as the delinquency rate reported by Fannie Mae and
Freddie Mac.
30
GNMAProject Loan Issuance ($bn)
Much of this growth has been due to refinancings through the 223(a)(7) program, and
currently, 29% of their portfolio consists of these mortgages, up from 25% as of year-end
2012. Examining loans that paid off over the prior year, almost 80% had coupons between
4.5% and 6.5% and were originated between 2002 and 2010. Currently, Ginnie Maes
portfolio contains over 4,300 loans that meet these criteria, indicating that the rate of
223(a)(7) refinancings is likely to remain high.
Original Balance
Current Balance
Source: GNMA, Nomura

John Bucksbaum, founder of Bucksbaum Retail Properties, LLC and former CEO of GGP,
discussed the rise and downfall of the second largest mall REIT in the US. The firm was
highly exposed to the CMBS market, with over $16bn in securitized loans due to mature
between 2009 and 2011. With the collapse of conduit lending that accompanied the financial
crisis, the firm was unable to refinance maturing debt, even though the individual malls were
able to cover their debt service. As a result of the firm's troubles, Bucksbaum resigned in
October 2008, and the firm filed for bankruptcy in April 2009. He stressed the importance of not
allowing debt maturities to compress into too short of a time frame. He also discussed the
ramifications of the bankruptcy on his personal life, as well as the effects on his family and
friends, stressing the importance of having a strong network of friends, family and colleagues.
Simon Property Group

Fourth Quarter Earnings
On February 4, Simon Property Group (SPG) announced fourth quarter and full year 2012
results, reporting financials above analyst expectations and prior year performance. To date, the
company continues to aggressively implement their development and redevelopment strategy,
planning to open five premium outlets centers in 2013, and they are currently redeveloping 24
US properties. The firm has seven loans that are scheduled to mature in 2013, with a total
balance of $363mn. Four of the seven loans are securitized within CMBS, and we expect them
to pay in full. Given the companys focus on reducing portfolio borrowing costs and lengthening
duration, these loans may return to CMBS transactions.
In all, the earnings announcement reaffirms Simons strength as a sponsor for CMBS loans, and
we believe the companys core assets will continue to perform. However, in our opinion,
substantial risk exists for the firms non-core assets, the majority of which are secured within
CMBS. In total, 13 properties are categorized as Other or are held within The Mills Partnership,
and eight of these assets, with a total balance of $664mn across seven loans, are securitized
within CMBS. We provide an in-depth analysis of this exposure, and we generally believe that
substantially all of these loans will experience moderate losses.
Significantly, a foreclosure sale for the $64mn Hilltop Mall loan secured in MSC 2005-HQ7 is
anticipated in the first quarter of 2013, and we project a 35-40% loss severity upon resolution. In
addition, we reiterate our prior positions for the $114mn Marley Station loan and the $43mn
Liberty Plaza loan, projecting a 50% and near-total loss, respectively, upon resolution.
Operational highlights
Simon reported Funds From Operations of $827.4mn for the quarter, or $2.29 per diluted share,
19.9% ahead of $1.91 per diluted share reported in the prior-year period, and 5.6% above
consensus estimates of $2.17 per diluted share. The company also increased the quarterly
dividend 4.5% to $1.15 per share, representing the sixth consecutive increase.
Portfolio occupancy, sales psf, and base minimum rent psf were all higher on in the quarter.
Occupancy increased 70bp to 95.3%, while sales and rent psf increased 6.6% and 3.4% to
32
8 February 2013
$568psf and $40.73psf, respectively. Results were driven by strong growth within the Mall and
Premium Outlet portfolio, with NOI expanding annually by 4.8% among comparable properties.
Specifically, Simon continues to focus on improving tenant mix, replacing shorter term leases
with longer term leases, and downsizing underproductive tenants to offer space for higher
quality occupants.
In 2012, Simon spent over $900mn on capital expenditures, two-thirds of which is directly
related to new development and redevelopment projects, and capex is expected to exceed
$1bn in 2013. In development activity, the company continues to focus on outlet centers. During
the quarter Simon opened the Tanger Factory Outlet Centers in Texas City, Texas, a 353,000sf
upscale outlet center positioned between Houston and Galveston. The company plans to open
an additional five Premium Outlet Centers in 2013, one in Chandler, Arizona, one in
Chesterfield, Missouri, and the remaining three internationally. According to the press release,
redevelopment and expansion projects are underway at 24 US properties, and 30 new anchor
big box tenants are scheduled to open in 2013.
In acquisition activity, the company acquired two outlet centers, one in Grand Prairie, Texas and
the second in Livermore, California. In addition, Simon partnered with Institutional Mall Investors
to own and operate The Shops at Mission Viejo in California, and the Woodfield Mall located in
the Chicago suburb of Schaumburg, Illinois. In January, the partnership closed on a $295mn
mortgage on Mission Viejo, which was recently secured into a single-borrower transaction,
RBSCF 2013-SMV. In the capital markets, Simon issued $500mn in 10-year senior unsecured
notes with a 2.75% coupon, and a five-year $750mn private offering of 1.50% senior unsecured
notes.
Upcoming maturities
During 2012, SPG closed or locked rates on 30 new mortgages totaling $3.7bn, with an average
interest rate of 3.88% and a weighted average term of eight years. During the call, SPG
indicated their intention to continue reducing average borrowing costs and extend portfolio
duration by locking in current rates for longer terms.
Ten loans totaling $1.1bn were initially scheduled to mature in 2013. According to their quarterly
filing, Simon has already refinanced three, one of which, the $66mn Circle Centre Mall, is
securitized in CSFB 2003-C4. We expect the payoff to appear in the upcoming remittance cycle.
Of the remaining seven assets, four are securitized in CMBS (Figure 1). Given the high debt
yield and debt coverage, we expect these loans to pay in full as scheduled.
Fig. 1: 2013 Debt Maturities ($mn)

Deal Name
CSFB 2003-C4
MLMT 2003-KEY1
LBUBS 2003-C8
MSC 2003-IQ6
JPMCC 2006-LDP9
Loan Name
Circle Centre Mall
Miami International Mall
Liberty Tree Mall
Mall at Tuttle Crossing
Discover Mills
Balance
$ 66.3
88.3
35.0
108.2
131.9
Maturity
Apr-13
Oct-13
Oct-13
Nov-13
Dec-13
Occ. Pct
69%
92%
92%
85%
82%
DSCR
2.37x
2.54x
3.31x
2.12x
1.53x
Debt Yld
19%
20%
18%
16%
10%
Source: Nomura, Trepp, SPG Filings
Noncore Assets
At the time of our last update on Simon, the firm classified 21 assets as Other Properties,
which according to their annual filing, indicates that the firm considers these assets as non-core
to their business model. This included several assets formerly owned by the Mills Corp as well
as outlet centers. In the fourth quarter, the firm listed only five assets as Other and has
transferred the eight Mills assets that they continue to own as joint venture with Farallon Capital
Management in a separate segment designated TMLP. However, given current servicer
commentary, asset performance, and information from Simon, the reclassification for these
assets has not altered the firms strategy, and therefore, we continue to view these assets as
non-core to Simons business model.
Of the five outlet centers included within the Other classification, two, the Florida Keys Outlet
Center and the Huntley Outlet Center, are secured within CMBS as part of a broader portfolio of
assets. The $586mn Prime Outlets Pool secured pari-passu across WBCMT 2006-C23 and C25
33
8 February 2013
is scheduled to mature in January 2016. Through September 2012, the loan carried NCF DSCR
of 2.19x, higher than the 1.48x coverage produced at securitization. The portfolio contains
exposure to ten retail outlet centers, and Simon classifies the remaining eight properties as core
holdings. Given Simons commitment to a majority of these assets, we expect the loan to
perform for the remainder of its term and to pay off at maturity. However, terms of this loan have
associated collateral release provisions, allowing Simon to dispose of these assets for a
premium price. Specifically, the Huntley and Florida City properties have partial defeasance
releases prices of 110% and 125%, respectively (Figure 2).
Fig. 2: Prime Outlets Pool secured in WBCMT 2006-C23 and C25

Property
Total
San Marcos
Grove City
Ellenton
Jeffersonville
Pleasant Prairie
Huntley
Gulfport
Naples
Lebanon
Florida City
State
TX
PA
FL
OH
WI
IL
MS
FL
TN
FL
Balance ($m n)
257,942,415
71,266,353
56,288,812
52,045,331
Occ.
92%
99%
99%
97%
99%
97%
61%
95%
51%
95%
81%
29,945,797
14,856,829
12,535,450
7,985,546
7,706,980
5,311,316
NCF DSCR
2.19x
2.20
1.74
2.18
4.07
1.85
0.33
2.88
0.52
2.48
2.17
Non-core
Source: Nomura, Trepp, SPG filings
The Mills and TMPL

On March 8th, the firm purchased Farallon Capital Managements interest in 26 of 36 Mills
assets for $1.5bn, retaining their partial interest in the ten remaining properties. In previous
quarters, SPG classified the 36 properties formerly owned by Mills under several categories: 16
were listed under The Mills, an additional 16 were classified as regional malls, and the
remaining four were listed as community centers. The mills assets generally range in size from
1.0mn to 2.2mn square feet and are located in major metropolitan areas. The firm continues to
classify the fully-owned properties as core holdings and the partial-interest exposures as noncore.
Seven of the initial 10 partially-owned malls are securitized within CMBS (Figure 3). Since our
second quarter publication, Simon has disposed of two of the partially-owned malls, St. Louis
Mills and the Lakeforest Mall. Four of the five remaining securitized properties are under
significant stress, and we expect their resolution to result in moderate loan-level losses. Given
the debt yield and high coverage associated with Discover Mills, we expect this loan to pay in
full upon maturity in December 2013.
Fig. 3: CMBS exposure to initial TMLP assets

Loan Name
Bal. ($mn)
116.0
Franklin Mills - A&B
174.0
Discover Mills*
131.9
Marley Station
114.4
Hilltop Mall
64.4
Liberty Plaza
43.0
Disposed partial interests
St. Louis Mills
90.0
Lakeforest Mall
82.0
Non-securitized interests
Deal Name
GSMS 2007-GG10
JPMCC 2007-LD11
JPMCC 2006-LDP9
BACM 2005-3
MSC 2005-HQ7
JPMCC 2007-LD12
MSC 2007-IQ13
BSCMS 2005-T20
Maturity
Status
DSCR
Severity
Jun-19
30
NA
30-35%
Dec-13
Jul-12
Jul-12
Jun-17
Current
FCL
FCL
Current
1.53x
1.12x
1.29x
0.86x
0%
50%
35-40%
>70%
Jan-12
Sep-15
REO
Current
NA
NA
20%
26%
The Esplanade
The Galleria at White Plains
Northpark Mall
* In addition to this balance, this loan carries a $23.7mn B-Note held outside the trust
Source: Nomura, Trepp, SPG filings
34
8 February 2013
Franklin Mills
The $290mn pari passu loan, supported by a 1.6mn sf one-story super regional mall located in
northeast Philadelphia, recently cured after receiving a modification in December. The special
servicer, CWCapital, granted a modification which primarily included a note split, rate reduction,
and principal paydown, as well as borrower equity contribution. We recently highlighted the
impact of the modification in our December remittance report as well as our January publication
on the Liberty Plaza loan.
Based on these terms, we estimate that the modification will result in monthly interest shortfalls
of $538k and $366k for the LD11 and GG10 transactions, respectively, during the zero interest
periods. Between October 2013 and June 2017, interest shortfalls will average $109k and $72k
for LD11 and GG10 transactions. Given the amount of interest shortfalls generated over the
remaining term of the loan, in addition to repayment of borrower capital and return, we find B
Note repayment unlikely. As a result, we assign a 31% loss severity to this loan.
Discover Mills
The $133mn loan cured in January 2012 after receiving a modification, giving the loan a twoyear extension through December 2013. The loan is secured by a 1.2mn sf one-story mall
located in Lawrenceville, Georgia, 20 miles north of the Atlanta CBD. The property was built in
2001 and expanded through 2005.
Initially scheduled to mature in December 2011, the property was unable to secure takeout
financing despite a high NCF DSCR and debt yield of 1.73x and 10.8%, respectively. Including
the $23.7mn B-Note, the loan has a NCF DSCR of 1.46x and a 9.7% debt yield. In addition to
the extension, the special servicer, LNR, implemented a lender-approved budget for monthly
operating expenses and amended the waterfall to apply all excess cash flow towards the
repayment of principal on the A and B-Note on a pro-rata basis. At origination, 24 leases
accounting for 30.6% of base rent were due to expire in 2012, including Neiman Marcus and
Burlington Coat factory, both of which have renewed their leases. Given the recent re-leasing of
anchor tenants, strong coverage, and yield metrics, we expect the loan to perform and obtain
takeout financing after the majority of the leases have been renewed.
Marley Station
The $114mn Marley Station loan is supported by a 1.1mn sf regional mall located in Glenn
Burnie, Md. The loan transferred to special servicing in April 2012, and the servicer is pursing
foreclosure. In August 2012 the property received an updated appraisal, valuing the property at
$65mn, below our initial estimate of $89mn. Based on the updated appraisal, we estimate a
loan loss severity of approximately 50% upon resolution.
For a full analysis of the Marley Station loan please refer to our First Insights article published
on September 12, 2012.
Hilltop Mall
The $64mn Hilltop Mall loan went into foreclosure in August 2012 after the borrower indicated
their inability to pay off the loan by the July maturity date. According to the servicer commentary,
a foreclosure sale is anticipated for the first quarter of 2013, pending completion and resolution
of outstanding due diligence items.
The loan is supported by a two-story enclosed mall with four anchor buildings containing a
gross leasable area of 1mn sf, of which 564,410 sf is collateral for the Hilltop Mall. Located in
Richmond, California, the mall was constructed in 1976 and later renovated in 1998. Three of
the four anchors, Macys, JC Penney and Sears are not part of the collateral for the loan, while
the fourth anchor, Walmart, moved in post-securitization. We believe this asset has substantial
risk to the downside as both Sears and J.C. Penney may choose to exit underperforming
locations.
Year-end 2011 financials indicate NCF DSCR and occupancy levels of 1.29x and 68%,
respectively, which is down from underwritten levels of 2.53x and 92%. The property was valued
at $45mn upon its appraisal in July 2012. Haircutting the appraisal by 10% to account for
advances, workout fees, and expenses indicate a 37% loan loss severity upon resolution.
35
8 February 2013
Liberty Plaza
Located adjacent to the Franklin Mills mall, Liberty Plaza is a 371,505 sf retail space occupied
by Walmart (36% NRA), Dicks Clothing & Sports (20% NRA), and Path Mark (15% NRA).
The $43mn loan remains current; however, the property was transferred to special servicing in
January 2013 for imminent default. In addition to poor cash flow, the transfer likely reflects the
relocation of Wal-Mart from this asset to the adjacent Franklin Mills mall. We first highlighted the
relocation in a July 2012 research note, and this move was affirmed by the modification
document for the $290mn Franklin Mills loan.
On January 28 we reaffirmed our severity for the Liberty Plaza loan. Given the lack of
sponsorship, high vacancy, and insufficient income generation, we continue to believe that
eventual resolution will result in a near total loss.
Please view our Special Topics piece for a full analysis.
St. Louis Mills

This loan is secured by a 1.2mn sf one-story enclosed super regional mall located Hazelwood,
Missouri, outside of the St. Louis CBD, and has recently transitioned to REO after LNR took title
to the asset. The property contains three anchor tenants, eight major retail tenants, four
entertainment- related tenants and contains the top performing theater in the St. Louis metro
area.
Most recent NCF DSCR indicates coverage of 1.32x through the first quarter of 2011, down
from 1.58x at securitization, and the property faces significant rollover risk. At origination, 28
tenants accounting for 23% of base revenue had leases due to expire in 2013. Leases for an
additional 19 tenants with 15% of base revenue expire in 2014.
Despite its performance, the loan was transferred to the special servicer, LNR, after Simon
requested a modification based on their inability to obtain refinancing by the January 2012
maturity date. According to servicer commentary, a deed-in-lieu of foreclosure was approved
and executed in August 2012, and LNR is now evaluating a disposition strategy.
Using the updated appraisal given in December 2011 indicates a value of $78mn, down 45%
from the $142mn valuation given at securitization. This appraisal may slightly understate the
property value given the assets recent leasing activity. According to the St. Louis Post6
Dispatch , Ross Dress for Less will occupy the former 35,000 sf Circuit City space beginning in
the spring of 2013. The box has been empty for three years, and the addition of Ross will boost
occupancy by 3%.
Haircutting the appraisal by 10% to account four advances, expenses, and workout fees,
produces a loan loss severity estimate of approximately 20%.
Lakeforest Mall
The loan is supported by a 1mn square foot mall located in Gaithersburg, MD, 15 miles north of
Washington, D.C. and is anchored by Macys, J.C. Penney, Sears, and Lord & Taylor. In
January 2013 the loan transitioned to performing after receiving a modification that included a
sale and an assumption of debt by Five Mile Capital.
Terms of the modification include a $20.5mn principal paydown, a principal loss of $34.1mn, a
three-year extension, and a reversion to IO payments for the remainder of its term. The loss
resulted in a total write-down of the rake class LF and pushed deal-level losses through class J.
After accounting for the principal paydown and loss, the A Note balance is now $82mn, resulting
in a 26% severity for the Trust, lower than our original estimate of 34%.
On September 4, we reported that the property was sold to Five Mile Capital Partners for
$100mn and projected a similar modification structure. According to The Washington Post, Five
Mile plans to invest $20.0mn to reposition the mall which may include adding big-box stores to
Kavita Kumar, St. Louis Mills finally finds tenant for former Circuit City store, St. Louis Post-Dispatch, June 13, 2012,
accessed July 24, 2012, http://www.stltoday.com/business/columns/consumer-central/st-louis-mills-finally-finds-tenant-forformer-circuit-city/article_54852892-b596-11e1-8199-0019bb30f31a.html
36
8 February 2013
the parking lot areas surrounding it. In addition, Urban Retail Properties has taken over
management from the former owner of the mall, Simon Property Group.
For a full analysis of the terms of the modification and further information on this asset, please
see our First Insights article published on September 26, 2012.
37
8 February 2013
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Securitized Products Weekly

Agency MBS: Market Overview and Relative Value

Prepayments: January Prepays and Short-term Projections

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CMBS: Simon Earnings and Notes on the MBA Conference

This report is intended for Qualified Institutional Buyers only

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Recent Performance and Market Flows

Hedging Needs of Mortgage REITs

MBS Basis: Remain Overweight MBS versus Treasuries and Swaps

Short Duration Assets: Post-Reset Hybrid ARMs vs. CMO Floaters

Relative Value in the Agency Passthrough Market

Prepayments: January Prepays and Short-term Projections 10

Short-term Prepay Projections

Consumer ABS Market

CMBS: Simon Earnings and Notes on the MBA Conference

MBA CREF/Multifamily Convention

Simon Property Group

Nomura | Securitized Products Weekly

Agency MBS: Market Overview and Relative Value

Recent Performance and Market Flows

Hedging Needs of Mortgage REITs1

+1 212 667 2338

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Fig. 1: Interest Rate Sensitivity of the Portfolio of American Capital (AGNC)

Est. Change in Portfolio Value

Source: American Capital, Nomura Securities International Estimates

Fig. 2: Interest Rate Sensitivity of the Portfolio of Annaly (NLY)

Est. Change in Portfolio Value

Source: Annaly, Nomura Securities International Estimates

Nomura | Securitized Products Weekly

MBS Basis: Remain Overweight MBS versus Treasuries and

Nomura | Securitized Products Weekly

Short Duration Assets: Post-Reset Hybrid ARMs vs. CMO Floaters2

Prepays on Post-Reset ARM Loans

Fig. 4: Prepays on Amortizing FN 5/1s by Origination Year

Fig. 5: Collateral Characteristics of FH 5/1 ARMs by Vintage and

Source: Fannie Mae, Freddie Mac, Nomura Securities International

Source: Fannie Mae, Freddie Mac, Nomura Securities

Nomura | Securitized Products Weekly

Fig. 6: Prepays by Index for FH 5/1 Hybrid ARMs (2003-04

Fig. 7: WAC of 2003 Vintage FH 5/1s by Index and Mortgage Rates

Source: Freddie Mac, Nomura Securities International

Nomura | Securitized Products Weekly

Fig. 9: Prepays on 2003-04 Vintage FN & FH 5/1s by Servicer

Fig. 8: Monthly Issuance of Amortizing FN and FH Refinance Loans

Source: Fannie Mae, Freddie Mac, Nomura Securities International

Source: Fannie Mae, Freddie Mac, Nomura Securities

Source: YieldBook, Nomura Securities International Estimates (As of 02/07/2013 closes)

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Relative Value in the Agency Passthrough Market

Trade #1: Short DW 3.0s Butterfly (Since 12/6/2012)

TBA Assumption (Mar)

2 WALA, 3.50 GWAC, $280 K

Swap ZV (bp) Tsy OAS (bp) LOAS (bp)

9 WALA, 4.05 GWAC, $280 K

24 WALA, 4.50 GWAC, $280 K

42 WALA, 5.00 GWAC, $250 K

Source: YieldBook, Nomura Securities International

TBA Assumption (Mar)

2 WALA, 3.00 GWAC, $260 K