Barclays Securitized Products Weekly Looking Past The EM Contagion

Securitization Research
31 January 2014
Securitized Products Weekly
Looking past the EM contagion

Emerging market concerns pushed long-term yields lower, but we expect the
normalization in rates, home prices and credit performance to continue in 2014. We
maintain our underweight recommendation on the agency MBS basis and favor nonagency MBS.
Views on a Page
Overview
Convexity Portfolio
14
Credit Portfolio
37
Agency MBS
Continuing down a straight path
4
At Chairman Bernankes last FOMC meeting, the Fed decided to continue tapering the
asset purchases with an overall reduction of $10bn, of which $5bn would be in
mortgages. The total mortgage purchase rate is now $30bn plus paydowns. With the Fed
continuing its tapering, the technicals for the mortgage basis have started to look weaker.
Prepayment commentary
10
We present our short-term prepayment projections for the February, March and April
reports.
Residential Credit
Non-agencies pare gains
16
Non-agencies pared some gains this week, in line with a global correction in risk assets.
The Bank of America $8.5bn settlement was approved, except on modification claims.
January remittance reports show severe drops in bond cash flows on many previously
BofA serviced deals that were transferred to Nationstar in the past few months. The Dutch
state announced the auction of the remaining $2.1bn UPB of bonds from the ING IABF.
CMBS
Volatility may present buying opportunity
20
The volatility in emerging markets and equities spilled into CMBS this week. We believe
the steady pace of improvement in the domestic economy provides a strong backdrop for
credit-sensitive bonds to outperform; we expect only a limited adverse effect on the
growth story from an emerging market slowdown. We revisit our low-quality 07 AM
recommendation from November 2013. Much of the alpha in this trade appears to have
been squeezed out, but the bonds remain attractive short duration tranches, paying
above-average yields compared with alternatives.
Estimating lease renewal probability in CMBS
23
We propose a method to predict lease renewal likelihoods from CMBS remittance data
and identify certain properties, geographies and tenant types that are more at risk.
Non-mortgage ABS
A good start to the year for ABS
30
ABS issuance was healthy in January, while credit performance across ABS sectors was
mostly stable. ABS spreads tightened modestly during the month, giving the ABS
component of the Barclays Agg index a year-to-date return of +37bp. We also discuss
several developments in the ABS market during the month.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 40
Ajay Rajadhyaksha
+1 212 412 7669
ajay.rajadhyaksha@barcap.com
www.barclays.com
Barclays | Securitized Products Weekly
VIEWS ON A PAGE
Category
Comments
Trade recommendations
Agency basis
Fed tapering represents a challenge for the basis over the longer term, as private demand will need to supplant the Fed.
Although a gradual tapering of MBS purchases will keep demand from the Fed strong in the near term, over the longer run, the
technicals should turn negative in the absence of Fed support, leading to spread widening. Within the mortgage sector, we
expect shorter-duration and shorter-spread-duration assets to outperform. Consequently, we recommend going up in coupon
in the 30y sector, and 15s versus 30s. We recommend expressing this view in a short position in FN 3.5s versus Treasuries and
long FN 30y 4.5/3.5 swap.
Short FN 3.5 vs Tsy

Long GN/FN 4 swap
Long FN 30y 4.5/3.5 swap
Long 15y 3.5 vs. 30y 4s
Prepayments
Given rates and the MBA index, refinance risk seems muted for now. The Treasurys stance against changing the HARP
cut-off date is a positive for IOs off conventional and GNMA 2009/10 collateral. Watts decision to delay g-fee increases
points to a more modest trajectory of guarantee fees relative to the current FHFA framework. We expect new production
FNCL discount speeds of 5-6 CPR and longer-run GNMA discounts to be 3-4 CPR faster, on higher buyouts and FHA to
conventional refinances.
Housing
Through November, US housing prices were up 11.8% y/y, with Nevada (+25.3%), California (+21.3%), and Michigan
(+14.4%) leading all states. The Corelogic Home Price Index increased 0.9% m/m seasonally adjusted in November, in line with
the 0.7-0.9% gains in H2 13. Year-to-date, HPA (seasonally adjusted) stands at 11.1%, which is close to our 11% forecast for
2013. Given the low inventory levels and signs of widening credit availability, we continue to expect home prices to rise 7% in
2014. Formerly distressed markets should continue to propel the recovery into 2014, due to attractive valuations and declining
distressed inventory; however, we see downside risks to high-priced metros from rising mortgage rates. Our regional forecasts
are available on Barclays Live (keyword HPA).
Residential
credit
We remain constructive and recommend alt-A FRM SSNRs in cleaner collateral and option ARM SSNRs/subprime PAAA/LCF
AAAs in weaker credit. We also believe that a 50bp pickup in new issue AAAs vs. agency MBS more than compensates for
worse liquidity, a lack of a government guarantee and slightly worse convexity. We are neutral on GSE credit risk-sharing deal
M1/M2 bonds after the most recent rally.
Long fixed coupon alt-A FRM SSNRs

(duration-hedged) leveraged and unleveraged
Long option ARM SSNRs and subprime LCFs
The steady pace of improvement in the domestic economy provides a strong backdrop for credit-sensitive bonds to outperform.
Emerging market volatility could spill into CMBS in the short run, but is unlikely to have a major effect on the growth story. Our
favorite trade is to take advantage of any significant widening in 3.0 mezz, especially 2013 BBBs. Despite recent weakness, our
long CMBX.6 BBB vs. short A trade is pricing close to its tights; we will look for opportunities to roll the trade into CMBX.7. Buy
AAA rated new issue X-A IOs (with leverage), which should benefit from higher rates, but stay neutral on dupers. Spreads on
lower-quality 2007 AM bonds have come in 150-200bp in the past two to three months; much of the alpha appears to have been
extracted, but these safe, short duration tranches still look attractive versus comparable alternatives. Stay cautious on cuspy
discount priced 07 AJ/mezz tranches, for which we believe the market is mispricing maturity risk in a rising rate environment. Go
long agency CMBS senior bonds; demand should be boosted by the impending addition to the Agg index and crossover interest
from the agency MBS sector, as investors look for extension protection options.
Buy 2013 vintage BBB
Among traditional non-mortgage ABS sectors, we prefer senior credit card, equipment, auto lease, and student loan ABS
tranches. We are also overweight subordinates off of dealer floorplan and equipment ABS deals; however, we are neutral on
subprime auto subordinates. Finally, in esoteric ABS, our favorite asset classes are aircraft ABS, small balance commercial ABS,
whole business securitizations, and cell tower ABS.
Buy credit card, equipment, auto lease, and

student loans ABS seniors
Overweight dealer floorplan & equipment subs
CMBS
Non-mortgage
ABS
Rates, curve,
and volatility
Prefer new issue non-agency AAAs vs TBA

Buy back-end re-REMICs off 2007 GG10 A4s
Buy Freddie K 10y senior IOs
Buy CMBX.6 BBB- vs. short CMBX.6 A
Buy new issue X-A IOs
Buy Freddie K 10y A2
Buy aircraft ABS, SBC, cell tower ABS, and WBS
We expect the improving economic outlook to put upward pressure on rates in the intermediate sector over the coming
months. We maintain our shorting duration view via OTR 7s and paying 4y1y swap rates, as they have limited room to rally,
and our long 2s3s5s and short 5s7s10s flys recommendations, as they offer asymmetric risk-reward. 2y1y-3y1y swap curve
steepeners also look attractive.
Source: Barclays Research
31 January 2014
OVERVIEW
Looking past the EM contagion

Ajay Rajadhyaksha
+1 212 412 7669
ajay.rajadhyaksha@barclays.com
Sandeep Bordia
+1 212 412 2099
sandeep.bordia@barclays.com
Nicholas Strand
+1 212 412 2057
nicholas.strand@barclays.com
Emerging market concerns pushed long-term yields lower, but we expect the
normalization in rates, home prices and credit performance to continue in 2014. We
maintain our underweight recommendation on the agency MBS basis and favor nonagency MBS.
Emerging market concerns dominated the market last week, with flight to quality pushing
10y Treasury yields to levels last seen in November 2013. The primary concern was whether
EM contagion would continue to drive US markets, and especially rates lower. While these
concerns can continue to flare up in the near term, our rate strategists believe that any
adverse effects on the US from emerging markets are likely to be limited. First, US exports to
the countries experiencing a crisis are only a small fraction of overall trade and GDP.
Second, the market seems to be differentiating more between asset classes and there has
been no broad-based tightening in financial conditions so far. Further, emerging market
countries have built significant foreign currency reserves, which should provide some cushion
in negative scenarios. Overall, they believe that the emerging market crisis is likely to have
limited effects on the US, but if there is a disorderly selloff in US equities, the Fed may turn
dovish. Please see US Rates Strategy for more details.
Remain underweight on agency MBS, constructive on resi credit

The week was no different for securitized products. Performance seesawed as rates and the
broader market moved up or down depending on EM headlines. Agency MBS performance
was mixed as the middle of the coupon stack fared well but both lower and higher coupons
underperformed. We continue to expect the Fed to move down the taper path in a straight line
and recommend an underweight to the agency MBS basis. With the Fed expected to continue
to taper in a straight line, demand supply technicals will soon turn negative for agency MBS.
We also recommend initiating a long position in IOS 4.5 09 as the possibility of a HARP data
extension has diminished significantly.
In the securitized credit sectors, prices ended weaker w/w in sympathy with other risky assets.
In the near term, it is not inconceivable that emerging market concerns could flare up even
more. That said, we expect the normalization in rates, home prices, and credit performance
to continue in 2014. Rates should be biased higher, while home price growth and credit
performance improvement should continue. In particular, we continue to favor alt-A fixedrates, negam super-seniors, and subprime PAAAs/LCFs in non-agency MBS. In CMBS, we
also recommend staying long equity-like assets such as 2013 BBBs versus super dupers.
In consumer ABS, we favour AAA securities of traditional sectors and subordinates of
equipment, dealer floorplan ABS and private student loans.
31 January 2014
AGENCY MBS TRENDS
Continuing down a straight path

At Chairman Bernankes last FOMC meeting, the Fed decided to continue tapering the asset
purchases with an overall reduction of $10bn, of which $5bn would be in mortgages. The
total mortgage purchase rate is now $30bn plus paydowns. With the Fed continuing its
tapering, the technicals for the mortgage basis have started to look weaker.
Nicholas Strand
+1 212 412 2057
The FOMC statement focused more on recognizing further firming in the economy on
Lokesh Chandra
the back of robust GDP numbers over past two quarters. Prospectively, the Fed also
now looks for the economy to expand at a moderate pace instead of picking up as
fiscal policy restraint is diminishing.
+1 212 412 2099

lokesh.chandra@barclays.com
A recent FHA mortgagee letter clarifies underwriting standards for certain debt-to-
Sandipan Deb
income (DTI) thresholds. We believe the increased guidance is designed to encourage

FHA lending to the lower end of the credit spectrum. While it is unclear whether
lenders will embrace the initiative, the net long-term effect is a loosening of the
credit box, in our view.
+1 212 412 2099

sandipan.deb@barclays.com
Wei-Ang Lee
+1 212 412 5356
With the Treasury Department indicating that it is against any change in HARP cut-
weiang.lee@barclays.com
off date, this has reduced the possibility of a HARP date extension significantly, in our
view. Although IOS for 4.5 and 5 of 09 and 10 have tightened after the
announcement, we believe that the policy risk is still being overestimated, therefore,
we are initiating a long position in IOS 4.5 10.
Leo Wang
+1 212 412 7571
leo.wang@barclays.com
At the highly anticipated FOMC meeting, the Fed reduced the monthly pace of asset
purchases by another $10bn to $65bn per month as was widely expected. Purchases of
agency MBS now stand at $30bn per month plus paydown reinvestment. The FOMC
upgraded its assessment of economic activity, indicating that it believes that the recent
weakness in economic data may be transitory in nature and related to weather disruptions.
The Q4 GDP growth estimate came in along expectations at a robust 3.2%.
Even though the Fed continued with tapering, rates surprisingly rallied over the week, and a
large part of that came after the FOMC statement. The rally was driven mainly by an increase
in risk aversion emanating from credit concerns in the emerging market. 10y yields ended
the week at 2.7% down 7bp from last weeks close.
FIGURE 1
Lower coupons underperformed the most over the past week
FIGURE 2
Fed purchased $12.6bn agency MBS over the past week
Coupon
2.5
Conv 30y
3.5
1,700
-2
-3
GN 30y
100
1
-1
Conv 15y
100
1,050
400
Total
1,050
600
2,700
6,700
1,500
8,200
4.5
400
150
550
Total
8,800
2,250
12,600
1,550
-4
-5
FNMA 3s
FNMA FNMA 4s
3.5s
vs 10y swap
FNMA FNMA 5s
4.5s
vs 10y Tsy
FNMA
5.5s
vs Tsy curve
Note: Performance from Jan 23 close to Jan 30 close. Source: Barclays Research
31 January 2014
Source: Federal Reserve, Barclays Research

Mortgage performance was mixed over the week. The middle of the stack fared well, while
lower and higher coupons underperformed their Treasury hedges. FN 3s were down by 3
ticks while 3.5 were flat. FN 4s and 4.5s outperformed their duration hedges by 1-2 ticks
each. We continue to have a negative view on the basis and expect it to underperform,
especially in the lower coupons. With the Fed continuing on its path to gradually taper the
asset purchases, demand supply technicals should soon turn negative for the basis.
Parting shot
Fed Chairman Bernankes last meeting as the head of the FOMC resulted in a statement
much less surprising than that from the penultimate one, as the tapering policies and pace
specified at the December meeting continued in a predictable pattern for the January
decision. Purchases will be reduced by another $10bn per month, split evenly between
agency MBS and Treasuries, bringing the total gross pace for February to $30bn and $35bn,
respectively, before reinvestment of paydowns.
Note that as agency MBS purchases taper further, the amount of paydowns reinvested from
the Feds agency debt holdings becomes a higher percentage of total purchases, when
added to the scheduled flat amount and any reinvestment of MBS paydowns. This
progression is somewhat front-loaded, with about $16bn more maturing through year-end,
$11bn of which rolls off through the remainder of H1. Maturities are lower in 2015, but then
increase back to $17bn in 2015 and $12bn in 2016 (Figure 3).
With the FOMC making the widely expected decision to continue tapering, the statement
focused more on recognizing further firming in the economy, and elucidating the conditions
under which the Fed could decide to change the pace of tapering. Specifically, the Fed
noted that economic growth has been picking up in recent quarters, a remark borne out by
the Q3 4.1% GDP print and advanced indications that Q4 GDP, which we expect to print in
the 3.4% area after mostly steadily increasing data year-to-date (Figure 4). Prospectively,
the Fed also now looks for the economy to expand at a moderate pace instead of picking
up as fiscal policy restraint is diminishing.
Thus, the Fed has retained its language surrounding further decisions to change the pace of
monthly purchases as requiring data to be consistent with further improvement in the labor
market and inflation moving back toward its longer-run objective. It also retained the right
to vary purchases outside of a preset course if the expected aforementioned economic
momentum does not continue.
FIGURE 3
Maturing agency debt owned by Fed ($mn)
FIGURE 4
GDP tracking estimate over time
4,500
4,000
Release
date
3,500
3-Jan
3,000
6-Jan
Period
Q4 GDP
tracking, %
Vehicle sales
Dec
2.8
Factory orders
Nov
2.8
Indicator
2,500
7-Jan
Trade
Nov
3.3
2,000
10-Jan
Wholesale inventories
Nov
3.4
1,500
14-Jan
Retail sales
Dec
3.4
1,000
500
0
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Maturing agency debt owned by Fed $ mn

31 January 2014
Jul-16
14-Jan
Business inventories
Nov
3.5
17-Jan
Housing starts
Dec
3.6
17-Jan
Industrial production
Dec
3.4
28-Jan
Durable goods orders
Dec
3.4
30-Jan
GDP
Q4-1st
3.2

Notably, the Fed made no mention of the recent volatility of financial conditions in emerging
markets, also as expected; we would look for the FOMC to make further acknowledgments
and/or assessments of their impact in future meetings.
Upside for IOS 4.5s and 5s of 2010 from lower HARP risk
As we wrote last week (Securitized Products Weekly, January 24, 2014), the Treasury
department has indicated that it is against any change in a HARP cut-off date. This has
reduced the possibility of a HARP date extension significantly, with the administration
withdrawing its push to extend the date by a year. Although Mel Watt could still unilaterally
extend the cut-off date, this would be increasingly less likely in the absence of the
administrations support, as well as in the face of opposition from investors.
As expected, the coupons most exposed to the risk of a HARP expansion tightened on this
announcement. IOS 4.5s and 5s of 2009 and 2010 and IOS 4s of 2009 cohort outperformed
their TBA and curve hedges significantly into the announcement (Figure 5). IOS 5s of 2009
have outperformed by over 30 ticks while IOS 4.5s of 2010 have outperformed by over 16 ticks.
Although pricing has tightened significantly, we believe that there is more upside potential in
some of these coupons, along with attractive hedged carry. We expect policy risk to these
cohorts exposed to a one-year HARP date expansion to have declined significantly.
However, pricing does not fully reflect this lower likelihood.
Looking at the valuation of multiples over the past six months, these coupons seem to be
fairly priced, with current valuations right in the middle of the overall range (Figure 6).
However, given the muted prepayment reports over the past two months, this figure
actually shows these coupons to be on the cheaper side, in our view.
Moving on to the OAS framework, we find that the greater clarity in policy direction is not
being fully reflected in pricing of 2010 cohorts. Although there has been some divergence
from 2009 collateral that still remains exposed to HARP, 2010 cohort continues to have
significantly wider spreads than the 2011 cohort, even after adjusting for collateral
characteristics (Figure 7). We believe that the spread should continue to move toward 4.5s of
2011 and away from the 2009 cohort, as the policy risk is more comparable with the 2011
cohort now.
FIGURE 5
TBA 3.5 and curve hedged daily returns across cohorts
ticks
40
30
FIGURE 6
Moneyness vs. IO multiples
8
IO Multiple
All
IOS 4 09
IOS 4 09
IOS 4.5 09
IOS 4.5 10
IOS 5 09
IOS 4 10
IOS 4.5 09
IOS 4.5 10
IOS 5 09
IOS 5 10
20
4
10
3
2
-10
-20
31-Dec
0
-100
7-Jan
14-Jan
21-Jan
28-Jan
Note: 30-year collateral. Source: Freddie loan level data, Barclays Research
31 January 2014
100
200
300
400
Moneyness (bp)
Note: 30-year collateral. Source: Freddie Mac loan level data, Barclays Research
FIGURE 7
OAs divergence between IOS 4.5 cohorts
FIGURE 8
Outstanding balances and notional
Outstanding balance ($bn)
LOAS (bp)
290
4.5
40.6
9.8
270
H1 09
23.3
250
H2 09
16.4
43.2
20.1
230
H1 10
2.8
29.2
22.9
210
H2 10
52.9
30.0
9.5
190
Net IOS notional ($bn)
170
150
2-Jan
6-Jan
10-Jan
IOS 4.5 09
14-Jan
18-Jan
IOS 4.5 10
22-Jan
26-Jan
IOS 4.5 11
Note: 30-year collateral. Source: Freddie loan level data, Barclays Research
4.5
2009
1.57
1.76
1.10
2010
3.66
2.88
2.97
2011
0.86
1.65
Note: 30-year collateral. Source: Freddie Mac loan level data, Barclays Research
We therefore initiate a long position in IOS 4.5s of 2010 in our portfolio. The coupon offers
attractive loss-adjusted yield of about 5% and hedged carry of 7.6 ticks a month. IOS 5s of
2010 also look attractive on these metrics but we like the less volatile position in 4.5s better.
The tranche has reasonable outstanding balance in the affected H2 09 - H1 10 time frame
(Figure 8). Additionally, the net notional outstanding for these coupons is also high relative
to other less liquid tranches.
The position does entail certain risks. Although very small, any discussion of a HARP cut-off
date extension from the FHFA would make these tranches retrace all their recent gains.
Additionally, if rates keep rallying, prepayment expectations may be revised upward, leading
to spread widening.
FIGURE 9
IOS analytics
Price
1y/3y CPR
Libor
OAS
Libor
ZV Yield
Loss adjusted
Hedge
yield
adjusted carry
IFN-34009 IO
22.4
15.4/14.9
76
4.88
3.2%
8.4
IFN-34509 IO
22.1
16.4/15.8
288
6.31
5.2%
9.1
IFN-34510 IO
23.5
14.3/14.1
266
5.85
5.0%
7.5
IFN-35009 IO
21.3
15.4/15.2
610
8.54
8.3%
7.7
IFN-35010 IO
22.7
14.5/14.4
512
7.55
7.4%
7.6
31 January 2014
FIGURE 10
FHA DTI thresholds and compensating factors
Compensating factors
Allowable
DTI
31/43
31/43
FICO bkt
Req number
Choices
of factors
Description
500-579
1. Cash reserves of at least

three mortgage payments
2. New payment cannot

increase by $100 or 5% higher
than prior loan. No more than
one DQ30 over the last 12m
580+
37/47
580+
1, 2, 4
40/40
580+
40/50
580+
1, 2, 3, 4
3. Significant additional
income that is not considered
effective income.
4. Residual income test (based
on VA guidance)
5. No discretionary debt (ie.,
revolving credit is paid-in-full
for the last 6m)
Note: For manually underwritten loans. Source: HUD, Barclays Research
FIGURE 11
Residual income test calculation
Gross monthly income
- State income taxes
- Federal income taxes
- Other taxes
- Retirement or Social Security
- Proposed monthly fixed payment
- Estimated maintenance and utilities
- Job related expenses (eg., child care)
= Residual income
Source: HUD, Barclays Research
HUD/FHA seeks to expand the credit box

A recent FHA mortgagee letter clarifies underwriting standards for certain debt-to-income
(DTI) thresholds. We believe the increased guidance is designed to encourage FHA lending
to the lower end of the credit spectrum. While it is unclear if lenders will embrace the
initiative, the net long-term effect is a loosening of the credit box in our view.
The guidelines are for loans that are underwritten manually (as opposed to the automated
Total Scorecard system). For purchase loans, borrowers with DTI ratios above the 31/43
base threshold could likely get flagged as a loan that must be underwritten manually.
Overall, the mortgagee letter accomplishes the following (Figure 10):
Compensating factors: The FHA has outlined acceptable compensating factors that
may help the borrower obtain financing. This includes sufficient cash reserves, new
payment and delinquency test, other income sources and the residual income test. The
residual income test is based off the Veteran Affair (VA) program, which takes gross
monthly income and nets out additional sources of potential debt to come up with a
residual value (Figure 11). The borrower passes the test provided the residual value is
greater than the threshold value, which varies depending on geography (Figure 12).
Stretch DTI ratios: For the first time, the FHA has addressed the relationship between
compensating factors and higher allowable DTI ratios. For instance, 37/47 DTI is
allowed provided one compensating factor from options 1, 2, or 4 is met (Figure 10).
40/50 DTI is permitted if two compensating factors out of options 1-4 are met.
No discretionary debt: The FHA is also addressing the case where the front-end DTI
exceeds 31 but the borrower does not have any discretionary debt (for instance, no
carry-over balance on a credit card). In this case, a 40/40 DTI threshold is permitted.
FICO score: Previously, compensating factors could only be cited for 620+ FICO
borrowers. Under the new guidance, this has been reduced to 580+ FICO.
Applicability: The application of DTI thresholds and compensating factors applies to

purchase loans and certain refinance transactions. However, it does not apply to noncredit qualifying streamline refinances. This type of refinance accounts for the bulk of all
FHA refinances and do not require an income/employment test.
31 January 2014

The improved guidance is designed to encourage lending to less pristine FHA borrowers, in
our view. Currently, many lenders set their own minimum FICO standard, which is well above
what is mandated (FHA requires a 10% down-payment for sub-580 FICO loans). This reflects
an effort on the part of lenders to mitigate their put-back liability. Lender overlays are a key
reason why average origination FICOs has improved so sharply in recent years (Figure 13).
Indeed, in the context of these changes, FHA Commissioner Carol Galante, stated:
We want to provide revised guidance for our lenders so that they are confident in offering
affordable mortgage loans to responsible borrowers under a reasonable set of guiding
principles. We hope to bring more certainty to the market by helping lenders apply a set of
consistent underwriting standards.
In terms of implications for GNMA MBS, non-credit qualifying FHA streamline refinances are
excluded from the updated rules, so the direct prepayment effect should be minimal.
Rather, the new rules reflect a recognition that the credit pendulum has swung too far and
is in need of normalization. To the extent that lenders reduce overlays, the increased
guidance point to a gradual loosening of the credit box.
FIGURE 12
Residual income thresholds by geography
Family size Northeast
Midwest
FIGURE 13
FHA FICO distribution has shifted sharply
South
West
Pct
1 $
450
441
441
491
2 $
755
738
738
823
3 $
909
889
889
990
4 $
1,025
1,003
1,003
1,117
5 $
1,062
1,039
1,039
1,158
6-7
Add $80 for each additional member
FY 2013 Q3
FY 2007 Q3
50
45
40
35
30
25
20
15
10
5
0
300-500 500-580 580-620 620-680 680-720
720+
FICO bucket
31 January 2014
PREPAYMENT COMMENTARY
Wei-Ang Lee
+1 212 412 5356
Leo Wang
+1 212 412 7571
We present our short-term prepayment projections for the February, March and April
reports. These numbers are unchanged from Short-term prepayment projections from
January 10, 2014.
FIGURE 1
FNMA 30y short-term Barclays forecasts
Cpn
3
3.5
4.5
5.5
6.0
6.5
Vintage
2012
2012
2011
2010
2012
2011
2010
2009
2012
2011
2010
2009
2011
2010
2009
2008
2005
2004
2003
2009
2008
2007
2006
2005
2004
2003
2002
2008
2007
2006
2008
2007
2006
WAC
3.59
4.01
4.04
4.13
4.47
4.47
4.49
4.56
4.96
4.93
4.94
4.94
5.37
5.36
5.42
5.65
5.65
5.55
5.51
5.94
6.04
6.14
6.16
5.99
5.94
5.95
6.03
6.53
6.57
6.56
6.99
7.07
7.03
No-point mortgage rate

Day count
Actual FNMA
$Bal
3m CPR
147.6
3.8
189.1
5.5
32.4
6.2
13.1
7.8
59.8
7.9
70.4
8.9
60.7
9.6
39.8
11.1
6.8
10.3
58.4
11.8
58.5
13.6
83.6
15.6
18.4
14.5
32.0
16.5
25.1
19.1
10.0
30.4
18.4
25.4
10.8
22.5
25.3
22.0
3.9
20.4
16.3
33.7
15.2
33.9
7.4
33.1
18.5
27.8
16.0
24.1
25.8
23.6
5.2
24.0
9.1
36.2
20.6
35.7
15.9
34.1
2.9
35.2
6.2
34.8
7.2
33.5
4.51
21
Jan-14
3.8
5.5
6.0
7.6
8.1
8.9
9.8
11.6
10.9
12.3
14.1
16.6
15.5
17.2
19.5
30.1
24.7
21.7
20.7
20.9
33.0
31.8
31.4
26.1
23.1
22.4
22.6
35.6
34.2
32.1
34.5
33.3
32.2
4.39
21
Projected (report month)

Feb-14
Mar-14
Apr-14
3.2
2.7
3.2
4.8
4.1
4.8
5.0
4.1
5.0
6.4
5.3
6.3
7.2
6.2
7.1
7.5
6.1
7.2
8.3
6.8
7.9
10.2
8.6
9.9
9.6
8.2
9.3
10.6
8.9
10.2
12.5
10.7
12.1
15.2
13.3
15.0
13.7
11.7
13.2
15.4
13.3
14.9
18.3
16.4
18.2
28.7
25.8
28.4
23.4
21.0
23.2
20.4
18.3
20.3
19.4
17.3
19.3
19.8
17.9
19.8
31.8
29.0
31.7
30.6
27.9
30.5
30.3
27.7
30.2
25.0
22.7
24.9
21.9
19.8
21.9
21.3
19.2
21.2
21.5
19.3
21.4
34.5
31.7
34.5
33.1
30.4
33.1
31.0
28.4
31.0
33.4
30.8
33.4
32.3
29.8
32.3
31.1
28.7
31.1
4.59
21
4.70
19
4.69
21
Note: Includes our estimated prepayment effect from HARP 2.0. As of January 30, 2014, no-point mortgage rate at
4.50% (10y at 2.75%). Source: Barclays Research
31 January 2014
10

FIGURE 2
FNMA 15y short-term Barclays forecasts
Actual FNMA
Coupon
2.5
3
3.5
4.5
Vintage
2012
2012
2011
2010
2012
2011
2010
2011
2010
2009
2010
2009
2008
2005
2004
2003
2009
2008
2007
2006
2005
2004
2003
2002
Mortgage Rate
Day-Count
WAC
$Bal
3m CPR
Jan-14
Feb-14
Mar-14
Apr-14
3.01
3.45
3.46
3.59
3.97
3.91
3.92
4.37
4.41
4.49
4.84
4.89
5.07
5.13
4.97
4.97
5.47
5.56
5.71
5.64
5.49
5.43
5.45
5.52
72.7
42.6
26.3
3.2
6.9
24.2
19.5
12.1
15.4
12.1
3.9
5.9
2.3
1.2
3.0
10.1
0.5
2.2
0.7
0.5
2.3
2.4
6.7
2.5
4.8
6.8
7.6
9.9
10.8
10.5
11.7
13.3
15.8
17.0
16.8
17.9
22.8
18.4
17.4
16.7
17.8
23.8
23.1
20.2
18.3
16.1
16.7
17.7
4.9
7.0
7.6
9.7
11.1
10.2
12.4
13.9
15.6
17.2
16.7
17.2
23.0
18.8
17.1
16.5
18.5
21.2
22.9
20.8
17.7
16.0
16.5
17.7
4.3
6.0
6.5
7.9
9.5
8.6
11.1
12.3
14.4
15.7
15.3
15.6
21.5
17.5
15.9
15.3
17.4
20.0
21.8
19.6
16.6
14.9
15.4
16.7
3.6
4.9
5.4
6.1
7.5
6.9
9.3
10.2
12.3
13.3
13.0
13.2
18.4
15.1
13.8
13.2
15.2
17.5
19.1
17.1
14.5
13.0
13.5
14.6
4.3
5.8
6.4
7.2
8.7
8.1
10.8
11.8
14.1
15.2
14.9
15.0
20.8
17.2
15.7
15.0
17.3
19.8
21.6
19.3
16.6
14.8
15.4
16.6
3.55
21
3.45
21
3.60
21
3.71
19
3.71
21
Note: Includes our estimated prepayment effect from HARP 2.0. As of January 30, 2014, no-point mortgage rate at
3.55% (10y at 2.75%). Source: Barclays Research
31 January 2014
11

FIGURE 3
GNMAI 30y short-term Barclays forecasts
Actual
Coupon
Additional 1M CPR
Vintage
2012
WAC
Bal ($bn)
Apr
17.1
Jan
5.4
Mar
3.50
3m CPR
5.4
Feb
4.6
3.9
4.8
0.0
3.5
2012
4.00
23.4
9.9
10.3
9.2
8.0
9.5
0.7
2011
4.00
8.8
9.8
9.8
8.3
7.0
8.6
2.0
2010
2012
4.00
2.5
9.1
7.8
6.8
8.0
8.6
4.50
2.1
8.8
13.2
14.1
13.2
12.3
13.8
2.3
2011
4.50
18.9
12.1
11.9
10.3
8.8
10.7
5.3
2010
4.50
23.3
11.7
11.3
10.2
9.0
10.6
7.7
2009
4.50
7.6
12.5
12.7
10.2
9.0
10.6
8.4
Pre-May 09
4.50
2.1
12.9
12.6
9.5
8.1
9.9
8.6
Post-May 09
4.50
5.5
12.4
12.7
10.5
9.4
10.9
8.3
2011
5.00
7.4
14.5
13.8
12.2
10.8
12.8
10.3
2010
5.00
32.0
14.5
14.5
12.9
11.4
13.3
9.8
2009
5.00
48.2
16.8
16.2
13.9
12.4
14.4
14.2
Pre-May 09
5.00
16.4
19.9
18.9
16.1
14.1
16.6
17.3
12.1
4.5
5.5
6.0
6.5
if BoA buys out
Post-May 09
5.00
31.8
15.2
14.8
12.8
11.5
13.3
2011
5.50
0.6
15.6
16.9
13.6
12.3
14.2
3.4
2010
5.50
8.6
15.9
15.6
13.8
12.7
14.4
12.2
2009
5.50
34.1
19.2
18.6
16.3
14.9
16.9
15.9
Pre-May 09
5.50
11.8
23.1
22.6
20.3
18.5
21.0
17.1
Post-May 09
5.50
22.4
17.0
16.4
14.1
13.0
14.7
15.0
2008
5.50
3.4
26.1
26.6
23.6
21.4
24.3
19.1
2005
5.50
2.1
19.4
18.7
16.7
15.1
17.2
7.8
2004
5.50
1.4
16.4
14.6
12.8
11.2
13.2
3.6
2003
5.50
4.5
15.4
15.1
13.1
11.5
13.5
5.6
2009
6.00
3.7
22.3
20.9
19.4
18.0
20.1
8.3
9.6
Pre-May 09
6.00
1.8
27.5
25.0
23.0
21.2
23.8
Post-May 09
6.00
1.9
16.9
16.9
15.8
14.9
16.5
7.0
2008
6.00
7.8
30.7
28.2
26.5
24.7
27.3
14.7
2007
6.00
1.2
25.1
21.2
21.0
19.6
21.8
16.3
2006
6.00
1.1
24.1
26.2
24.1
22.0
24.6
11.6
2005
6.00
2.3
20.9
19.6
17.9
16.5
18.6
8.3
2004
6.00
2.5
18.2
18.2
16.8
15.3
17.3
5.7
2003
6.00
5.1
18.6
17.7
16.0
14.4
16.4
3.8
2002
6.00
0.9
18.8
17.8
16.4
14.7
16.7
3.4
2008
6.50
6.4
29.0
27.5
26.8
25.3
27.7
12.3
2007
6.50
2.2
26.8
23.5
22.8
21.5
23.7
13.4
2006
6.50
2.1
24.0
22.0
21.5
20.1
22.3
11.3
2008
7.00
1.2
26.9
24.8
25.3
24.2
26.4
12.4
2007
7.00
0.7
26.4
22.5
23.6
22.5
24.7
7.0
2006
7.00
0.7
24.2
22.3
21.7
20.6
22.7
10.8
4.51
21
4.39
21
4.59
21
4.70
19
4.69
21
Mortgage Rate
Day-Count
Note: BoA buyout effect assumes cleanup in one month. As of As of January 30, 2014, no-point mortgage rate at 4.50% (10y at 2.75%). Source Barclays Research
31 January 2014
12

FIGURE 4
GNMAII 30y short-term Barclays forecasts
Actual
Coupon
Additional 1M CPR
Vintage
2012
WAC
Cbal
Apr
81.7
Jan
5.4
Mar
3.38
3M CPR
5.3
Feb
4.7
3.9
4.7
0.0
3.5
2012
3.81
145.6
8.8
7.7
6.3
7.7
0.2
2011
3.89
21.8
9.7
9.9
8.1
6.6
8.1
0.0
2010
2012
4.01
0.9
11
8.0
6.3
8.1
0.0
4.31
27.3
11.4
14.1
13.7
11.9
9.9
11.1
1.5
2011
4.35
43.3
12.9
12.7
10.8
9.1
10.9
1.3
2010
4.37
28.8
11.7
11.4
9.4
7.9
9.5
1.6
2009
4.45
1.5
12.9
15.3
11.5
9.4
11.6
3.5
Pre-May 09
4.47
0.6
13.6
15.1
11.2
8.9
11.2
6.2
Post-May 09
4.44
0.9
12.5
15.4
11.7
9.7
11.8
2.2
4.5
5.5
6.0
6.5
if BoA buys out
2011
4.82
43.3
15.5
15
13.7
11.9
13.7
4.4
2010
4.87
47.1
14.7
14.6
12.9
11.3
13.0
4.8
2009
4.91
23.9
14.7
14.4
12.4
10.8
12.4
8.4
Pre-May 09
4.96
4.4
18.1
18
15.4
13.2
15.5
10.1
Post-May 09
4.90
19.4
13.9
13.5
11.7
10.2
11.7
7.0
2011
5.29
5.5
18.3
17.5
15.1
13.1
14.4
3.3
2010
5.29
29.4
16.6
16.1
14.7
13.0
14.7
14.6
2009
5.36
31.9
17.3
16.5
14.8
13.2
14.8
8.3
Pre-May 09
5.40
6.1
21.0
20.1
18.3
16.3
18.4
3.5
Post-May 09
5.35
25.8
16.4
15.7
13.9
12.4
14.0
8.9
2008
5.51
1.5
26.8
27.1
24.8
22.8
24.9
3.1
2005
5.61
2.2
19.6
19.4
17.0
15.1
17.1
0.6
2004
5.57
1.1
17.4
16.2
14.5
12.8
14.6
0.1
2003
5.56
2.0
16.3
16.0
13.2
11.4
13.2
0.1
2009
5.86
4.1
19.6
18.4
17.3
15.8
17.4
1.5
Pre-May 09
5.97
0.7
25.0
24.6
22.8
20.5
22.8
1.2
Post-May 09
5.84
3.3
18.3
17.0
16.1
14.8
16.2
1.5
2008
5.95
7.1
26.6
24.7
23.9
21.8
24.0
3.6
2007
6.01
2.2
24.9
22.1
21.8
20.0
21.8
4.2
2006
6.03
1.9
28.7
27.5
26.2
24.6
26.3
2.6
2005
5.98
2.8
20.4
19.8
19.4
17.7
19.4
1.9
2004
5.94
3.1
18.0
17.6
16.3
14.7
16.4
0.6
2003
6.01
2.6
18.4
18.5
17.5
15.8
17.6
1.2
2002
6.28
0.5
18.4
18.8
17.7
15.4
16.8
2.8
2008
6.46
5.9
28.7
27.1
26.9
24.9
26.9
3.7
2007
6.47
3.9
26.7
24.6
25.2
23.4
25.3
7.0
2006
6.48
2.1
25.7
23.5
23.1
21.3
23.1
2.8
2008
6.88
2.3
27.7
24.3
24.0
22.4
24.1
2.7
2007
6.90
1.8
25.6
22.8
21.9
20.4
21.9
5.6
2006
6.89
1.0
25.4
23.7
23.0
21.5
23.0
4.0
4.51
21
4.39
4.59
4.70
4.69
21
21
19
21
Mortgage Rate
Day-Count
Note: BoA buyout effect assumes cleanup in one month. As of As of January 30, 2014, no-point mortgage rate at 4.50% (10y at 2.75%). Source Barclays Research
31 January 2014
13
CONVEXITY PORTFOLIO
Portfolio outperforms
The convexity portfolio outperformed by 0.35% over the week.
Leo Wang
+1 212 412 7571
Our short FN 3.5s versus Tsy gained 1.3bp, and our long GN/FN 4 swap gained 4.7bp over
the week. The long FN 30y 4.5/3.5 swap gained 5.5bp.
Lokesh Chandra
The 2014 year-to-date return is 2.1%, while the one-year return is -9.7%.
+1 212 412 2099
Changes to the portfolio
We are adding a long position in IOS 4.5 of 2010 with $250mn notional, duration hedged
with TBA 3.5 and curve hedged with Treasury.
FIGURE 1
Convexity portfolio trade performance
Portfolio return statistics
Initial Equity
($mn)
YTD P/L
($mn)
Total P/L
($mn)
YTD %
ROE
1 yr % ROE
1-Week P/L 1-Week %

($mn)
ROE
Convexity portfolio
100
5.60
174.9
2.1%
-9.7%
Convexity trades
Total P/L
1-wk
(bp)
P/L (bp)
Equity
($ mn)
Avg. eq
($mn)
Leverage
Total P/L
($ 000)
% ROE
0.97
0.35%
1 week P/L
($ '000)
Start date
Long GN/FN 4
49.2
4.7
25
25
20
2,484
9.9
235
7/26/13
Long 15y 3.5s vs 30y 4s
51.1
1.1
50
50
20
5,148
10.3
108
9/7/13
Short 30y 3.5s vs treasuries
-30.3
1.3
25
47
20
-2,827
-6.0
67
9/7/13
Long FN 30y 4.5/3.5 swap
18.6
5.5
50
32
20
1,199
3.7
555
12/13/13
Note: The performance is from Thursday, January 23, 2014, close, to January 30, 2014, close. Past performance is not necessarily indicative of future results.
FIGURE 2
Current convexity portfolio trades
Trade
1
Short FN 3.5 vs. Tsy
Long GN/FN 4 swap
Long 15y 3.5 vs. 30y 4
Long FN 30y 4.5/3.5

swap
Long in face
value terms
Short in
face value terms
Hedge
details
Equity
Initiation Current Initiation
($mn) Leverage Notional
level
level
date
320 2y, 350 10y
500 FN 3.5
Curve hedge
25
20
500
18.3 bp
OAS
27 bp
OAS
10/4/13
500 GN 4
500 FN 4
1:1
25
20
500
18 ticks
40 ticks
7/26/13
1000 FN 15y 3.5s,

56 10y
597 FN 4s,
251 2y
Curve hedge
50
25
1000
1-30+
0-20
9/6/13
500 FN 4.5s
289 FN 3.5s
Duration hedge
25
20
500
6-19
5-25
12/13/13
Cash
119
Note: Pricing is as of the close on January 30, 2014. Source: Barclays Research
31 January 2014
14
FIGURE 3
Retired trades Past 12 months
Leveraged portfolio statistics
Retired trades
Start date
End date
P/L (bp)
total
Equity
($mn)
Avg
equity
Leverage
P/L
($mn)
% ROE
Long FN 4 fly
7/12/12
9/6/12
2.1
20
20
40
0.18
0.9
Short FN 3.5 fly
7/27/12
9/6/12
-13.9
20
20
40
-1.10
-1.1
Long GD/FN 3.5 swap
2/17/12
9/27/12
29.7
20
20
40
-1.10
2.4
Long 30y 3.5s vs. Tsy
5/31/12
10/5/12
122.8
25
25
20
6.14
24.6
Down-in-coupon FN 30y 4/3 swap
5/31/12
10/5/12
180.2
30
30
20
10.83
42.0
Long GN1 4.5s vs. 5y Swaps
9/7/12
10/5/12
-29.3
25
25
20
-1.46
-5.9
Long 30y 3s vs. Tsy
7/27/12
10/25/12
234.5
50
40.8
20
19.16
47.0
5/31/12
10/25/12
184.0
25
25
20
9.22
36.9
Long G1/G2 4.5 swap
10/5/12
12/6/12
78.4
25
25
20
3.93
15.7
10
Down-in-coupon FN 30y 3.5/3 swap
10/5/12
1/18/13
-13.8
30
30
20
-0.80
-2.7
11
Long Gold/FN 3
9/28/12
1/24/13
-33.2
20
20
40
-2.64
-13.2
12
Short GN2/FN 3.5 swap
9/21/12
2/15/2013
76.2
20
20
20
3.06
15.3
13
Short G1/G2 4 swap
14
Short GN2/FN 3
15
1/25/13
5/10/2013
25.0
25
25
20
1.26
5.1
4/19/2013
5/16/2013
16.0
20
20
15
0.48
2.4
Long MLB 3s vs. swaps
2/15/13
5/24/2013
-43.4
25
25
20
-2,154
-8.6
16
Short 15/30 2.5/3 swap
4/12/13
5/24/2013
-12.0
25
25
20
-594
-2.4
17
Long IOS 4 10 vs. IOS 3.5 10
4/26/13
5/24/2013
-87.7
20
20
15
-2,629
-13.1
18
Long 30y 3s vs. Tsy
12/14/12
8/23/2013
-215.5
60
60
20
-25,778
-43.0
19
1/18/13
8/23/2013
-138.2
30
30
20
-8,259
-27.5
20
Long IOS 4 2010 vs. FN 3s
1/18/13
8/23/2013
72.1
36
36
1,845
5.2
21
Short FN 5 fly
6/28/13
9/20/2013
-20.5
15
-254
-5.1
22
Short FN 30y 5/4.5 swap
8/16/13
12/13/2013
-77.2
13
13
20
-1922
-15.4
FIGURE 4
Cumulative ROE over the past year (%)
5%
0%
-5%
-10%
-15%
-20%
Jan-13
Apr-13
Jul-13
Oct-13
31 January 2014
15
RESIDENTIAL CREDIT TRENDS
Non-agencies pare gains

Sandeep Bordia
+1 212 412 2099
Jasraj Vaidya
+1 212 412 2099
jasraj.vaidya@barclays.com
Dennis Lee
+1 212 412 2099
dennis.lee2@barclays.com
Harkaran Talwar
+1 212 412 2099
harkaran.talwar@barclays.com
Tejvansh Thakral
+1 212 412 2099
tejvansh.thakral@barclays.com
Non-agencies pared some gains this week, in line with a global correction in risk assets.
The Bank of America $8.5bn settlement was approved except on modification claims.
January remittance reports showed severe drops in bond cash flows on many previously
BofA serviced deals that were transferred over to Nationstar in the past few months. The
Dutch state announced the auction of the remaining $2.1bn UPB of bonds from the ING
IABF. Case-Shiller HPI showed a 0.9% m/m increase in November, while home sales
indices declined.
Non-agencies pared some gains in tandem with risk assets, which dropped across the board
as EM risks flared up. Selling by legacy non-agency holders including the $1.2bn list put out
by Freddie Mac added to the downward pressure on prices. Cash bonds corrected pt
across sectors except for jumbo SSNRs, which held firm. The ABX 06-2 AAA dropped 2pt over
the week. The GSE credit bonds were unchanged. However, this reaction has been more
restrained than what has occurred in other risk asset classes, and prices remain higher than a
month ago by 1.5-2 points across the legacy non-agency sectors. TRACE data reported
average daily trading volumes of about $2bn, and we expect this to stay strong next week as
well, given the upcoming auction for the remaining part of the ING IABF portfolio.
FIGURE 1
Non-agency prices
Sector
Price
1w
1m
3m
Jumbo Fix SS AAA
97.5
0.0
0.5
0.8
Jumbo Hyb SS AAA
90.5
0.0
1.3
1.5
Alt-A Fix SS AAA
87.5
(0.5)
2.0
2.5
Alt-A Hyb SS AAA
73.5
(0.5)
2.3
3.0
MTA SS AAA
72.5
(0.5)
2.3
2.5
ABX 06-2 PAAA
85
0.0
2.0
3.0
ABX 06-2 AAA
75
(2.1)
(0.1)
(0.3)
ABX 07-1 PAAA
70
0.0
0.0
5.0
ABX 07-1 AAA
59
0.0
0.0
3.3
PrimeX FRM.2
103
0.0
0.0
0.0
PrimeX ARM.2
103
0.0
0.0
0.0
Re-REMIC SSNR AAA
S + 135
(15)
Re-REMIC SSNR A
S + 170
(5)
Note: Prices as of January 29, 2014, for cash bonds and January 30, 2014, for synthetic indices. Weekly changes are
Wednesday-Wednesday for cash bonds and Thursday-Thursday for synthetic indices. Source: Barclays Research
Notwithstanding the ongoing risk flare-up due to EM concerns, we expect the normalization
in rates, home prices, and credit performance to continue in 2014. Rates should be biased
higher, while home price growth and credit performance improvement will likely slow from
2013 levels. We expect demand-supply dynamics for non-agencies to go from being
lopsided in the past few years to being more evenly matched. That said, most of the positive
factors from 2013 including higher yields/spreads than comparable assets, continued
HPA/credit performance, and an accommodative Fed should persist, which bodes well for
non-agencies.
Overall, we remain constructive and recommend alt-A FRM SSNRs in cleaner collateral and
option ARM SSNRs/subprime PAAA/LCF AAAs in weaker credit. We also believe that a 3050bp pickup in new issue AAAs versus agency MBS more than compensates for worse
31 January 2014
16

liquidity, the lack of a government guarantee, and slightly worse convexity. We are neutral
on the GSE credit risk-sharing deal M1/M2 bonds after the rally in Q3/early Q4 13.
However, they have lagged the rally in cash bonds in the past few weeks and may start to
look attractive in relative terms if the dichotomy continues.
The biggest risk to our broadly optimistic view is a sharp spike in interest rates that would
cause an adverse reaction in risk premiums and slow HPA in certain areas. However, on the
flipside, rep and warranty scenarios could enhance non-agency returns significantly in an
upside scenario. We assign a very low likelihood to other risks, such as eminent domain, but
remain on the watch for any developments on that front.
Bank of America $8.5bn settlement approved except on modification claims

Justice Barbara Kapnick authorized the $8.5bn rep and warranty settlement between Bank
of America and Bank of New York (as trustee) on about 530 Countrywide shelf trusts.
However, the judgement excluded releases on certain modification related claims for which
the court found that the trustee acted unreasonably or beyond the bounds of reasonable
judgement.
BofA/trustee may need to re-approve this Final Order

Given that the full releases provided for in the proposed settlement were not fully accepted
by the Court, we believe that the parties involved may need to come to a written agreement
accepting this order, assuming that the exclusion of the modification claims is considered to
be material (see below for the relevant text from the Proposed Settlement Section 2a),
provided that if the Settlement Court enters an order that does not conform in all material
respects to the form of order attached as Exhibit B hereto, the Parties may, by the written
agreement of all Parties, deem that order to be the Final Order and Judgment
It is possible that BofA will view this as a minor issue and go ahead with the settlement
anyway since it provides broad relief from rep and warranty and servicing liabilities. Still, this
issue has the prospect of adding another wrinkle in the timing of the next steps and
eventually in determining when the cash flows get paid to bond holders.
What are the likely next steps?

Apart from the written agreement that may be required, as mentioned above, and the
possible pitfalls in obtaining that, there are a couple of things that could potentially delay
the payment of cash into deals. The first is if the intervenor-objectors decide to appeal the
judgement; the second is that the trustee will need to obtain IRS/state tax approvals to be
able to pass the cash flow on through the REMIC structure without any tax implications for
the investors. As such, if there are no adverse delays to any of these issues, it is possible that
the final approvals may be available by Q2 14. The cash has to be paid out within 90 days of
this, so investors could receive the cash sometime in H2 14. However, it is possible that
there are some delays in the process, which could push this timing to late 2014-15.
The excluded modification claims could be more valuable on certain deals

Some investors, such as Triaxx CDO, have been claiming that many of the PSAs require
Countrywide to repurchase loan modifications made in lieu of refinancing and a smaller
subset of PSAs also require it to repurchase mods regardless of the reason (refinancing or
loss mitigation). The court found that the trustee had not considered these distinctions and
had gone ahead and settled on those claims. As a result, the court decided to exclude these
releases from the settlement. It is hard to gauge the total magnitude of the potential claims
that could arise from this. While Triaxx has claimed in the past that these claims alone could
be worth $31bn across the trusts, the economic value of such buybacks is likely to be
smaller. However, if BofA were forced to buy back all the modified loans on certain deals
and a small part of them on a large fraction of the CWL shelf deals, the effect could still be
31 January 2014
17

significant. It remains to be seen how the trustee and BofA approach this subject. On one
extreme, it is possible that BofA will agree to increase the payout on a small fraction of deals
that were most affected by this PSA language. In the case at the other extreme, it is also
possible that BofA will determine that the best course is to fight on mod claims separately
or even try to delay the whole settlement as a bargaining chip to reduce its potential
payouts on the mod claims. As such, while we believe that cash flowing to deals in H2 14
remains likely, this exclusion could be another factor that delays the timing of the payouts
while possibly adding to the payouts on some of the deals.
Nationstar recoups advances on servicing transfers from BofA

Bonds in many previously Bank of America (BofA) serviced deals that were transferred over
to Nationstar received no principal payment and little or no interest payment this month
(Figure 2). For most deals, this seems to have resulted from Nationstars heavy recoupment
of P&I advances made by BofA in the past. These deals were part of the BofA to Nationstar
servicing transfer announced last January and seemed to have transferred over in
September/October 2013 based on the remittance reports. While typically the acquiring
servicers such as Nationstar and Ocwen increase modifications to recoup advances, in this
case, advances were recouped on a large number of delinquent loans without any
modifications as non-recoverable advances.
FIGURE 2
Select deals with no principal payment in January remit
Deal
Collateral Bal ($mn)
Last Month Payout ($k)
This Month Payout ($k)
Principal
Interest
Principal
Interest
383
233
FFMER 2007-H1
290
1,864
BOAA 2007-2
177
1,802
960
HVMLT 2005-3
289
1,705
648
273
HVMLT 2004-11
204
1,685
439
HVMLT 2005-1
186
1,358
405
BAFC 2007-B
156
1,259
50
42
HVMLT 2005-10
466
2,968
1,052
153
Source: Bloomberg, Barclays Research
Unusual loan-level reporting

The accounting of the advance recoupment on the above deals was somewhat unusual.
Normally when a servicer recoups past advances (eg, at loan modification), it usually
capitalizes the entire principal and interest that has been advanced. On the deals listed
above, Nationstar seems to have capitalized just the advanced principal while not
capitalizing the advanced interest amount; hence, the full amount of advances recouped
cannot be captured from the loan-level balance capitalization. The recouped interest
advances seem to have been directly recovered from the total cash flow collection for the
deals. In many cases, these were reported with a negative scheduled interest or nonrecoverable advances. In most of the affected deals, the total advanced P&I amount on all
delinquent loans is likely to be more than the January trust collection. It is possible that such
deals will possibly see the bond payouts close to zero in the next several months as well.
Mortgage insurers make payments on AHM/AHMA and RFC/GMAC shelves

As we highlighted in January Remittance Early Look, Part II, January 28, 2014, FGIC
wrapped RFC and GMAC bonds received payments this month as subsequent recoveries.
These payments were part of the settlement between FGIC and the Rescap estate, wherein
FGIC agreed to pay $253.3mn to trusts with FGIC wrapped bonds. All FGIC policies on these
bonds are now terminated, and FGIC will not pay any more claims on these bonds. This is
31 January 2014
18

different from FGICs payment plan for other shelves, where it will pay 17% of all
accumulated and ongoing claims.
Triad Mortgage Insurance Co. paid out 70-75% of outstanding claims on the AHM/AHMA
shelves. Triad had stopped making payments on American Home originated claims in 2009
and had filed a lawsuit to rescind all obligations related to American Home originated loans.
However, that lawsuit had been dismissed and a $140mn claim against Triad was admitted
by the bankruptcy court. 75% of those claims were paid out this month with the rest
recorded as deferred payment obligations due against Triad. So far, we have been able to
record about $58mn as payout to AHM and AHMA shelves from loan level data available. It
is possible that the rest of the money has gone to American Home originated loans in other
shelves or towards portfolio or GSE loans.
Dutch state announces auction for remaining $2.1bn of ING IABF assets
The Dutch State Treasury Agency (DTSA) announced the auction for the remaining $2.1bn
UPB of bonds. Bids are due Tuesday, February 4, 2014. The DTSA had earlier auctioned off
bonds with $5.1bn and $4.3bn UPB in auctions on December 11, 2013 and January 16,
2014, respectively. Both those auctions were well bid and did not depress prices.
SEC to consider revisions to the reporting requirements for ABS

The Securities and Exchange Commission announced that it will review the registration and
reporting requirements for ABS deals in a meeting on Wednesday, February 5. The SEC has
scheduled a vote on Regulation AB II, a revision of current Regulation AB that also applies to
non-agency securities. The Commission will consider whether to adopt rules revising the
disclosure, reporting, and offering process for asset-backed securities. The revisions would
require asset-backed issuers to provide enhanced disclosures, including information for
certain asset classes about each asset in the underlying pool in a standardized, tagged format
and revise the shelf offering process and eligibility criteria for asset-backed securities.
Case-Shiller HPI gains 0.9% in November, while home sale indices decline
The Case-Shiller Home Price Index for the top 20 MSAs reported a 0.9% m/m seasonally
adjusted increase. This is in line with the 0.9% increase in the Corelogic Home Price Index
released earlier this month. The index is up 13.7% y/y and up 12.7% year-to-November
seasonally adjusted. New home sales were down 7% m/m s.a. and pending home sales
declined 8.7% m/m sa. The new home sale index has been very volatile this year and we
would not read too much into a sales decline in a very cold December. The number of
homes sold each month has been on the decline since June 2013 when the Fed first hinted
at the taper, but inventories are now at pre-bubble levels. With an improving economy, lean
inventory levels, and widening mortgage credit availability, we expect housing demand to
remain robust and home prices to appreciate 7% in 2014.
31 January 2014
19
CMBS TRENDS
Volatility may present buying opportunity

Keerthi Raghavan
+1 212 412 7947
keerthi.raghavan@barclays.com
Aaron Haan
+1 212 412 2099
aaron.haan@barclays.com
The volatility in emerging markets and equities spilled into CMBS this week. We believe
the steady pace of improvement in the domestic economy provides a strong backdrop for
credit-sensitive bonds to outperform; we expect only a limited adverse effect on the
growth story from an emerging market slowdown. We revisit our low-quality 07 AM
recommendation from November 2013. Much of the alpha in this trade appears to have
been squeezed out, but the bonds remain attractive short duration tranches, paying
above-average yields compared with alternatives.
The volatility in emerging markets and equities spilled into CMBS this week. Despite a sharp
relief rally on Thursday, legacy bonds ended the week somewhat wider. Generic 07 dupers
gave up about 2bp, while AMs and AJs were wider by 5-10bp. Spreads in the 3.0 space were
relatively more stable: the new issue MSBAM conduit duper priced at S+89bp roughly
unchanged from earlier this month and down the capital stack, levels on the BBB were
stable at S+365. That said, guidance on the new WFRBS deal in the market indicated that
spreads were likely to move wider on Friday.
The agency CMBS market remained largely untouched by the general market weakness.
Impressively, Freddie-K unguaranteed mezzanine B and C tranches tightened this week by
10-20bp, diverging from similar non-agency CMBS A and BBB- rated tranches.
A buying opportunity
Last week, we reiterated our stance of staying long 2013 BBBs, with the view that the FOMC
would upgrade its assessment of the domestic economy at its January meeting while
continuing to taper its asset purchase program. The statement was broadly in line with our
expectations. As our economists pointed out in January FOMC: Embracing a stronger
growth environment (January 29, 2014), the Federal Reserve recognized that the economy
had picked up in recent quarters and with appropriate policy accommodation, economic
activity will expand at a moderate pace in the coming months.
While the ongoing jitters in emerging markets have the potential to cause short-term
volatility, we believe the steady pace of improvement in the domestic economy provides a
strong backdrop for credit-sensitive bonds to outperform. This weeks GDP release shows
that the US grew at 3.7% in H2 13, compared with 1.8% in H1 13 and 2.7% in H2 12. This is
the strongest half-year in a decade, although we do expect growth to moderate to 2.5% in
2014. A broad swath of other economic indicators has also shown improvement; most
recently, the U.Mich index of consumer confidence released Friday surprised to the upside.
Besides, as our rates strategists point out this week, a slowdown in EM will likely have only a
limited effect on the US economy and could, in fact, be compensated for by a decline in
commodity prices. Given this, we feel that any widening in CMBS spreads as a result of EM
fears, especially lower down the capital structure, would be a buying opportunity.
Clearly, there is some danger of getting into the trade too early; some accounts may elect to
wait for some stability in the broader markets before going long, and it is always hard to
time investor sentiment. On our side, we recommend taking advantage of any sharp move
wider; for instance, we continue to recommend expressing long views in CMBS credit
through 2013 vintage BBB-s and credit curve flatteners in CMBX. On the other hand, the
scope for credit spread tightening is more limited at the duper end of the capital structure;
especially in an environment where we expect rates broadly to head higher.
31 January 2014
20
CMBX.7 launches; BBBs pricing 10bp wide of cash

The latest series of the CMBX index began trading this week, backed by deals from H2 13. In
our weekly from January 17, 2014 (CMBX.7: First Impressions), we recommended going
long the BBB.7 if it opened significantly wider than the BBB.6. The synthetic index did, in
fact, open relatively wide due to the natural short interest from market participants, but
spreads quickly came in after trading began. As of Thursday, the BBB.7 was trading roughly
10bp wider off cash bonds at about S+380bp. As we have discussed previously, we believe
the 2013 conduit quality is roughly in line with 2005 vintage, which should keep the 7%
enhanced BBBs safe from losses even in a very stressful scenario.
Revisiting our lower-quality 07 AM recommendation

In our 2014 outlook published in November last year, we recommended going long lowerquality 2007 AMs, which we felt were trading well wide of similar 2005 AJ tranches, which had
experienced significant spread compression in 2013. In Figure 1, we revisit this analysis; once
again, we plot traded spreads on the y-axis versus C/E minus estimated case deal loss on the
x-axis for the universe of 07 AMs. Higher quality bonds with plenty of credit support cushion
to loss estimates are placed to the right of the x-axis; they have not really had any spread
tightening since November. On the other hand, lower quality bonds with lesser credit support
(and placed on the left of the x-axis) have come in roughly 150bp since November. At this
point, there is still some space for these bonds to tighten, but we expect much of the alpha
from the trade to have already been extracted. We do, however, still like the 07 AM trade as a
safe, short duration asset paying substantially higher spreads than comparable alternatives.
FIGURE 1
Lower quality AMs have come in substantially over the past two months
Spread, bp
750
2007 AM as of Dec 2012

2007 AM as of Nov 2013
2007 AM as of today
650
2007 AM Trendline (Dec 2012)
550
2007 AM Trendline (Nov 2013)

2007 AM Trendline (Today)
450
350
250
150
50
0
4
6
8
10
12
Credit Enhancement - Est. Base Case Deal Loss (%)
14
Starwood announces purchases from CWCapital REO sale

In a press release Wednesday, Starwood Capital announced it had purchased 11 assets
from the CWCapital REO sale for $191mn. The CWCapital sale, first reported in October,
included $2.7bn of assets to be sold via CBRE and $0.7bn of assets to be sold through
auction.com (see our notes from October 15 and November 1 for a complete list of assets
up for sale). The Starwood purchase appears to have come entirely from the CBRE auction,
the first reported sales from this group of assets.
Starwoods purchase included seven office properties and four retail properties. The assets
backed $318mn of loans spread across GSMS 2007-GG10 ($185mn), MLCFC 2007-5
($106mn), WBCMT 2006-C28 ($22mn), and BACM 2007-1 ($5.5mn). The properties sold at
$191mn, about 23% higher than the most recent combined appraisal of $155mn, which
could indicate that valuations for other auctioned assets may also surprise to the upside. The
31 January 2014
21

sale price equates to about 55% combined severity on the underlying 11 loans, after taking
into account assumed liquidation costs, ASERs, and advances. The exact price paid for each
individual property, which will ultimately determine deal level cash flows, is not yet known.
We expect most other properties from the CWCapital sale to also close in time for the
February remittance. The largest property in the auction, $468mn Two California Plaza in
GSMS 2007-GG10, may also close this month and, according to CRE News, may have been
sold to CIM. As we noted previously (CWCap to sell $2.6bn of distressed assets, October 11,
2013), special servicers have some incentive to push through large volumes of liquidations
on a particular deal within a fairly narrow time frame.
FIGURE 2
Properties sold from the CWCapital REO sale to Starwood Capital
Deal
Loan
Orig Bal
Current Bal
ASER
Advances
Appraisal
Appraisal date
Lincoln Ridge Retail
6,200,000
5,584,247
483,338
815,414
2,600,000
7/27/2013
GSMS 2007-GG10
Maguire Anaheim
Portfolio
103,500,000
103,500,000
8,138,458
6,123,328
48,700,000
4/17/2013
GSMS 2007-GG10
3800 Chapman
44,370,000
44,370,000
133,162
880,082
21,600,000
10/16/2013
GSMS 2007-GG10
Avion Lakeside
22,300,000
22,300,000
1,799,379
1,970,416
17,200,000
9/9/2013
GSMS 2007-GG10
BACM 2007-1
Arrowhead Creekside
14,500,000
14,500,000
1,189,483
765,621
5,100,000
1/17/2013
MLCFC 2007-5
Plaza Squaw Peak
50,000,000
50,000,000
1,059,241
955,859
20,700,000
1/9/2013
MLCFC 2007-5
East Thunderbird
Square North
50,000,000
43,078,768
3,926,178
5,446,910
23,000,000
4/29/2013
MLCFC 2007-5
Greenfield Gateway
15,600,000
12,864,333
1,166,592
1,261,636
5,100,000
9/13/2013
WBCMT 2006-C28
Howe Corporate
Center
12,750,000
12,750,000
581,843
783,510
6,400,000
5/14/2013
WBCMT 2006-C28
Southcreek Corporate
Center II
6,000,000
5,837,138
180,731
422,126
3,000,000
9/18/2012
WBCMT 2006-C28
Shoppes at Home
Depot
3,500,000
3,268,637
223,196
374,999
1,500,000
8/1/2013
328,720,000
318,053,122
18,881,600
19,799,900
154,900,000
Total
Source: Starwood, Trepp, Barclays Research
31 January 2014
22
CMBS FOCUS
Estimating lease renewal probability in CMBS

Keerthi Raghavan
+1 212 412 7947
Aaron Haan
+1 212 412 2099
Upcoming lease expirations can provide a downside shock to loan financials,

especially if tenants decide to vacate or reduce the leased areas.
We propose a method to predict renewal likelihoods from CMBS remittance data and
identify certain property and tenant types that are more at risk.
We estimate that in about 30% of leases expiring in 2012-13, the tenant did not
renew the lease in entirety. This is still substantially better than in 2009, when nearly
50% of leases were not renewed.
Office properties showed higher non-renewal rates of about 40%. Office occupancy
has not kept pace with increases in employment over the past few years, due partly
to the post-crisis focus on better space utilization and real estate efficiency.
Tenants associated with the finance industry are most at risk; we estimate nearly
50% of finance tenants vacated or downsized upon lease expiration in 2012-13.
Government tenants have been surprisingly stable in the aggregate; only 20% of
these leases were not renewed at expiration, notwithstanding high-profile vacancies
of GSA tenants, as in the case of the Skyline Portfolio.
Tenants in anchored retail malls are more likely to renew than their counterparts in
unanchored shopping centres. Under-pressure retailers such as JCPenney/Sears/Best
Buy do not show materially higher risk of non-renewals as yet, but this could change,
given the elevated credit risk for some of these names.
Areas that show negative net absorption (more supply, less demand) of real estate
space tend to have higher non-renewal rates, as tenants in these geographies have
alternate options to move out of existing leases. These include some areas with a
high concentration of finance tenants such as Chicago and Stamford/Hartford.
In contrast, properties in the Bay Area and Texas show strong net absorption, given the
strength of the tech and oil and gas sectors. Here, non-renewal rates are as low as 20%.
The potential loss of a large tenant is unlikely to push large volumes of loans into
term default; we find that most loans still report ~1.2x DSCR (down from ~1.5x), even
after the dip in occupancy.
The reduced NOI will likely be a bigger factor when it comes to finding a refinance
outlet at the maturity date; a 1.2x DSCR loan may be below the threshold required for
a successful refinancing.
Why worry about lease renewals?

CMBS credit has shown a substantial improvement over the past year, driven, in part, by higher
CRE valuations and the strong re-emergence of private label securitizations. In the vintage
CMBS space, for example, the monthly volume of new transfers to special servicing (a
commonly used marker for credit conditions) has dropped from roughly $3bn in 2012 to about
$1bn currently (Figure 1). Most market participants continue to expect a gradual recovery in
economic conditions over the coming years under these circumstances, it is somewhat
natural to underestimate the credit risks that are still present, albeit in a more subdued form.
31 January 2014
23
FIGURE 1
New transfers to special have been trending lower
4.5
FIGURE 2
But the share of loans on watchlist has been increasing,
especially in the office sector
27%
New Transfers to Special ($bn)
4.0
Retail
25%
3.5
3.0
Office
Multifamily
23%
2.5
21%
2.0
1.5
19%
1.0
17%
0.5
0.0
Sep-11
Feb-12
Jul-12
Source: Trepp, Barclays Research
Dec-12
May-13
Oct-13
15%
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13
Primary among these risks is the potential for upcoming lease expirations to provide a downside
shock to financials. We can get some indication of this by parsing through watchlist data
reported by servicers on currently performing loans, as an early indicator of upcoming credit
issues. The share of office loans in watchlist, for instance, has increased significantly over the
past few years in relation to other property types. This is largely due to the effect of upcoming
lease rollovers on large tenants, which has a disproportionate impact on office properties (please
see Watchlist: An early indicator of default?, March 1, 2013, for a complete discussion).
NOI trends still face some deflationary pressures

Is there any particular reason for investors to worry about lease renewals, especially in a
scenario where the economy continues to recover? We believe there is. First, several office
and retail leases were signed five to seven years ago and are still reflective of rents prevalent
in the pre-crisis period. In many geographies, rents may be substantially lower now, leading
to a step-down in cash flows when the lease renews.
Second, even with improving employment numbers, the amount of office space leased per
employee has been steadily declining for several years, as the drive toward real-estate
efficiency gains steam (Figure 3). As a result, office occupancy has not kept track with
employment gains; despite the fact that there is next to no new supply coming on to the
market (Figure 4). As such, even after accounting for fairly strong employment growth,
there are some deflationary pressures on office NOI growth.
Finally, the underperformance of several large retailers poses fresh questions as to whether
these stores will renew their leases when they come up to their expiry date. From the firms
point of view, closing stores at their lease expirations is a relatively easy way to cut costs;
otherwise it would require a bankruptcy filing to reject leases that are still several years away
from expiration. A case in point was the recent announcement by JCPenney; most of the 33
stores slated to close in 2014 had leases coming up for renewal over the coming year (see
JCPenney to close 33 stores in 2014, January 15, 2014).
31 January 2014
24
FIGURE 3
Office tenants are leasing lesser space per employee; this
trend has accelerated since the crisis
138
Square Footage per Employee
136
FIGURE 4
As a result, office occupancy has not kept pace with the
gains in employment despite non-existent new supply
88
27.0
87
26.5
86
134
26.0
85
132
84
130
83
25.5
25.0
24.5
82
128
81
126
80
124
01 02 03 04 05 06 07 08 09 10 11 12 13
Office Occupancy (LHS, %)
24.0
Office Employment (RHS, mn)
23.5
79
23.0
02 03 04 05 06 07 08 09 10 11 12 13
Source: Bloomberg, Census Bureau, Barclays Research
Modeling near-term lease-expirations

Given these still-present risks, a CMBS investor looking to model the performance of a
particular loan must, therefore, have some view on the underlying leases. More specifically,
it is important to get some sense of whether a tenant is likely to renew the lease on
expiration or whether there is some chance of a downsizing or even a vacancy,
The probability of lease renewal depends on two factors the asset itself and the tenant in
question. Some property types and certain geographies may fare better in terms of renewal
rates; on the other side particular types of tenants may be more likely to move out when
their lease expires. So far, reliable data on these questions have been hard to come by. We
propose a methodology to predict lease renewal rates from CMBS remittance data. We then
point out some trends in renewals which can better inform how investors approach the tricky
task of assigning default likelihoods and losses to the underlying loans in CMBS deals.
How we estimate lease renewal rates

We first isolate all loans where the lease on one of the top three tenants was scheduled to
expire in a given year. Of these, we select those loans where we have updated data on
financials as of the first reporting date after the original lease expiration has passed. We
then compare the reported occupancy and DSCR levels, before and after the lease
expiration with some margin for small changes in the financial metrics which may be
unrelated to the lease in question. If occupancy has fallen by a significant amount on a loan
- in the same period when an underlying lease was coming due we assume that the tenant
either vacated the property or reduced his leased area. We also compare how the
NOI/DSCR changed as a result of the lease expiration.
31 January 2014
25
FIGURE 5
About 30% of 2012-13 lease expirations were not renewed,
down from 50% in 2009
FIGURE 6
23% of office tenants vacated in full; another 15%
downsized their leased area
Share of 2013 Lease expirations where Tenant
Vacated
2009 Lease expirations; share of non-renewals
60%
2012-13 Lease expirations; share of non-renewals
50%
25%
Share of 2013 Lease expirations where tenant

downsized
20%
40%
15%
30%
10%
20%
5%
10%
0%
0%
Office
Retail
Industrial
All Properties
Office
Retail
Industrial
30% of 2012-13 lease expirations were not renewed

We examine some broad results in Figure 5, where we compare lease renewal rates in 2009 with
2012-13. Clearly, there has been a considerable improvement over the past four years; we
estimate that, on average, nearly 50% of leases which expired in 2009 saw the tenant either
vacating or reducing the leased space. This proportion has fallen to 30% now put another way,
70% of tenants whose leases came due in 2013-14 renewed with no dip in occupancy.
That said, there is substantial variation by property type. Office properties have
underperformed as we expected; we estimate about 40% of 2012-13 office lease
expirations were not renewed in their entirety. These numbers are significantly lower for
retail and industrial assets, where non-renewal rates are 20-30%.
Tenants could choose to vacate entirely or downsize their lease

Non-renewals could be of two types either the tenant vacates entirely or downsizes his
leased area. We break these out in Figure 6 if the fall in occupancy after lease expiration is
approximately equal to the GLA occupied by the particular tenant, we assume that the
leased area was fully vacated. If the occupancy decline is lower, we assume a partial renewal
of only a portion of the originally leased space.
In the retail sector, partial and full vacancies were roughly level in 2012-13, each accounting
for about 10% of all lease expirations across property types. Office tenants were more likely
to vacate in full about 23% of all lease expirations, compared with ~15% of tenants who
decided to downsize.
Clearly, these will have very different effects on property cash flows; Figure 7 highlights how
the asset DSCR and occupancy changed depending on whether the tenant coming up to
expiry in 2012-13 elected to vacate or reduce the leased space. For offices, DSCR fell to
about 1.2 for full-vacancies, with an average 21% drop in occupancy; for partial renewals,
the fall in DSCR was more subdued, to about 1.4, and occupancy was lower by about 8%.
31 January 2014
26
FIGURE 7
The effect of lease expirations on property financials
DSCR
FIGURE 8
Job growth in the finance and government sector has lagged
Occupancy (%)
Old
New
Chg
Old
New
Chg
1.5
1.2
-22%
88
67
21
Tenant OFF
Vacates in RET
Full
IND
1.4
1.3
-12%
92
73
19
1.6
1.2
-24%
92
69
22
OFF
1.6
1.4
-13%
88
79
1.4
1.4
-5%
91
83
1.4
1.3
-11%
92
79
13
Tenant
RET
Downsizes
IND
Employment
Index
1.20
1.15
Government
Finance
Services (Professional/business)
Leisure/Hospitality
1.10
1.05
1.00
0.95
0.90
2003 2004 2005 2006 2008 2009 2010 2011 2013
Source:: US Census Bureau, Barclays Research
Average DSCR drops to 1.2x, could increase risk of maturity default

In the average case, at least, the loss of a tenant at lease expiration does not push the loan
below 1.0x DSCR. As such, we do not expect these loans to default immediately, as long as
they are still covering debt service even at these somewhat reduced NOI levels. The key risk
from lease rollover, therefore, is not so much a spike in term defaults, but the prospect of
higher balloon defaults at the maturity date. Given current underwriting criteria, a 1.5-1.6x
DSCR loan may be reasonably expected to get a refinancing through the conduit channel.
However, a 1.2-1.3x DSCR asset (after a tenant has vacated or downsized) will likely fall
below the threshold required for a successful refi.
Finance tenants show higher non-renewal rates

Can we identify some tenants which are more at risk of not renewing? In the office space,
much of the focus has been on leases associated with finance firms and local/federal
government; both of which have seen a steep fall in payrolls since the downturn (Figure 8).
We matched tenant names to the Finance or Government industry by employing some
simple heuristics as a first pass, and then checking by hand. Figure 9 shows our estimated
non-renewal rates for these tenant types. Finance firms (including insurers/banks/
mortgage finance companies) have shown materially worse renewal rates over the past of
couple years, more than half of them have either vacated or downsized at their lease
expiration date, compared with the average of about 40% for office properties. On the other
hand, government tenants have been surprisingly stable in the aggregate; only 21% of these
leases were not renewed at their expiration notwithstanding high-profile vacancies of GSA
tenants such as in the case of the Skyline Portfolio.
For retail properties, under-pressure tenants such as JCP/Sears/Best Buy should clearly be
at most risk of vacating at their lease expiration date over the coming years. So far,
however, their lease renewal rates have been roughly similar to the broader retail sector and
have not shown any meaningful weakness. That said, unlike office properties, which
generally have a more diverse set of tenants, retail leases tend to be concentrated in a few
names, and, therefore, are prone to single-name credit risk. And given that the CDS for
some of these names is trading at very elevated risk of default, we continue to see a
relatively high likelihood of non-renewal for these tenants over the coming years.
31 January 2014
27
FIGURE 9
Finance tenants are more at risk of not renewing their leases;
GSA tenants are surprisingly resilient
FIGURE 10
Tenants in anchored malls show lower non-renewal rates
than their counterparts in unanchored shopping centers
Share of non-renewals for leases expiring in 2012-13
Share of non-renewals for 2012-13 lease expirations
60%
35%
50%
30%
40%
25%
20%
30%
15%
20%
10%
10%
5%
0%
Finance Tenants
All Office Tenants
Government
Tenants
0%
Anchored
Unanchored
Overall
Over the past two years, though, smaller tenants in unanchored retail properties appear to
have underperformed their counterparts in anchored malls. We estimate about 30% of
unanchored retail tenants either vacated or downsized their leases upon expiration in 201213, compared with 20% for anchored properties (Figure 10).
Negative net absorption areas face a higher risk

In an area where vacancy rates are high and demand is low, tenants with expiring leases will
typically have several alternate options to move out. In Figure 11, we look at some sample
metro areas, and plot the estimated non-renewal rates for office properties in 2012-13.
These appear to have a very strong inverse correlation to the net absorption reported for the
particular geography (essentially the net of the demand and supply). Geographies that
show negative absorption (more supply, less demand) typically tend to have higher nonrenewal rates (Chicago and Hartford that show 60-70% non-renewal rates typically have a
higher share of finance tenants). On the other hand, the Bay Area and Texas, boosted by the
outperformance of the tech/oil and gas sector, have shown positive absorption rates
accompanied by strong renewal statistics for existing tenants only 20-30% of properties
with lease expirations in these geographies experienced a decline in occupancy.
FIGURE 11
Geographies with negative net absorption show higher non-renewal rates
mn qft
Net Absorption in 2013 (LHS)
2.0
90%
Share of Office lease Non-renewals (RHS, %)
80%
1.5
70%
1.0
60%
50%
0.5
40%
0.0
30%
20%
-0.5
10%
-1.0
0%
Chicago
Hartford Sacramento
LA
San
Francisco
Dallas
San Jose
Source: Bloomberg, Trepp, Barclays Research
31 January 2014
28
Some key takeaways

Many CMBS investors are beginning to look at lease expirations as a potential credit risk to
the loan, which could provide a downward shock to financials. As we demonstrated above,
there are clear trends in renewal rates depending on property types, tenant industry, and
geography which can be incorporated into a model or analysis of CMBS loans. The
potential loss of a tenant is unlikely to push large volumes of loans into term default; in
most cases, we find that the loans still report 1.2-1.3x DSCR, even after a dip in occupancy.
However, the reduced NOI is likely to be a bigger factor when it comes to finding a refinance
outlet at the maturity date for instance, current underwriting standards for conduit deals
would typically not allow for a loan reporting DSCR in the 1.2x range.
31 January 2014
29
NON-MORTGAGE ABS TRENDS
A good start to the year for ABS

ABS issuance was healthy in January, while credit performance across ABS sectors was
mostly stable. ABS spreads tightened modestly during the month, giving the ABS
component of the Barclays Agg index a year-to-date return of +37bp. We also discuss
several developments in the ABS market during the month.
Dennis Lee
+1 212 412 2099
An overview of January ABS performance

January was fairly active for ABS issuance, despite the interruption from the SFIG
conference. We estimate that total ABS issuance climbed to around $14bn, from less than
$7bn in December 2013 (Figure 1). Auto ABS represented by far the largest portion, driven
by auto loan deals from Santander, Ford, Hyundai, Ally, and a handful of others (Figure 2).
Credit card ABS issuance was also strong, totalling $3.4bn during the month, with Chase,
Discover, and Citigroup each pricing a deal with at least $800mn in note balances. As an
indication of the demand for ABS paper recently, JPMs CHAIT 2014-1 deal was upsized to
twice its initial level, eventually increasing to $1.5bn from the $750mn that was initially
planned. Citigroup also disclosed that it added another $8.8bn of card receivables to its
master trust in late January, suggesting that the bank intends to issue additional ABS card
deals this year. On the esoteric ABS front, there were two series of servicer advance deals
issued by HLSS in mid-January, totalling $800mn, as well as a few SBAP deals.
Credit performance across the traditional ABS sectors was stable to modestly weaker in
January remittances. Prime and subprime auto loans experienced a slight deterioration in
60+ delinquencies and annualized net losses, though both metrics are still comparatively
low on a historical basis (Figure 3). We believe that some of the credit weakness is related to
seasonality factors, as some consumers may have been short on cash after Christmas
holiday spending. Additionally, as we have noted in the past, underwriting standards have
also been gradually loosened on some auto loans over the past few years, with average
original maturity terms on several shelves extending by a few months since 2007, especially
on subprime auto loans (Figure 4). For now, we will continue to monitor developments on
this front to see whether the credit deterioration represents a sustained trend or is simply a
temporary uptick in credit weakness.
FIGURE 1
Monthly ABS issuance over past 12 months
25
20
FIGURE 2
Composition of January ABS issuance
Nontraditional
ABS
8%
ABS
Issuance
($bn)
Student
Loan ABS
12%
15
10
Credit Card
ABS
24%
5
0
Feb-13
Apr-13
Jun-13
Aug-13
Auto
Credit Card
Equipment
Non-traditional
31 January 2014
Oct-13
Auto ABS
56%
Dec-13
Student Loan
30
FIGURE 3
January remittance auto ABS performance
2.5%
2.0%
Prime Auto
DQ and
Losses
FIGURE 4
Average maturity terms on new-issue deals each year
Subprime
Auto DQ
and Losses
14%
72
12%
70
WAVG Orig
Term
10%
68
1.5%
8%
66
1.0%
6%
64
4%
62
2%
60
0%
58
2006
0.5%
0.0%
Dec-06
Dec-08
Dec-10
Dec-12
60+ DQ (Prime)
Net Losses (Prime)
60+ DQ (Subprime)
Annualized Net Loss
Source: Bloomberg, Deal remittance reports, Barclays Research
2008
2010
2012
AMCAR
SDART
ALLYA
WOART
2014
FORDO
Note: There were no SDART deals issued in 2008 and 2009; thus, we extrapolate
the average maturity terms between 2007 and 2010 for this shelf.
Source: Bloomberg, prospectuses, Barclays Research
In credit card ABS, charge-offs increased modestly, while 30+ delinquencies mostly
declined. On a positive note, the GEMNT and WFNMT shelves saw 30+ delinquencies and
charge-offs drop m/m, though Citigroup and Cabelas did see a fairly large increase in
charge-offs during the month. The CCCIT shelf experienced a jump in charge-offs from
2.31% to 2.86%, while Cabelas shelf had an increase in charge-offs to 2.12% from 1.95%.
Despite this increase, we believe charge-offs will ease in the next few months for these
issuers, since 30+ delinquencies for both shelves have been on a stable to declining trend
over the past year.
In student loan ABS, among trusts that have already reported January remittances, credit
performance was relatively stable for both FFELP and private student loans (Figures 5 and
6). In FFELP ABS, SLMA and Nelnet deals experienced a drop in 30+ delinquencies in January
remits, while ACCSS deals had a small increase. Meanwhile, in private student loans, ACCSS
and SLMA deals experienced a modest drop in delinquencies, while SLCLT saw
delinquencies climb modestly. Tiering among issuers remains relatively stable as well, with
FIGURE 5
30+ DQ by shelf and factor date (FFELP Stafford, PLUS)
20%
30+ DQ
FIGURE 6
30+ DQ by shelf and factor date (private)
9%
30+ DQ
8%
15%
7%
6%
10%
5%
4%
5%
3%
2%
1%
0%
Jan-12
Jul-12
ACCSS
MHELA
SLMA
Feb-13
BRHEA
NSLT
Aug-13
GCOE
PHEAA
Note: Only deals issued in 2002 or later that are not re-REMICs are included.
Source: Bloomberg, deal remittance reports, Barclays Research
31 January 2014
0%
Sep-10
Sep-11
ACCSS
Sep-12
NCSLT
SLCLT
Sep-13
SLMA
Note: Only deals issued in 2002 or later that are not re-REMICs are included.
Source: Bloomberg, deal remittance reports, Barclays Research
31

ACCSS, GCOE, PHEAA, and BRHEA exhibiting the lowest delinquencies among securitized
FFELP loans and SLCLT exhibiting the best credit among securitized private student loans.
ABS spreads rallied or remained stable in January across all traditional ABS sectors, despite
weakness across the broader fixed-income markets, likely because of investors comfort
with the credit profile and liquidity of traditional ABS (Figure 7). Year-to-date, ABS total
returns have been respectable, with the fixed-rate ABS index rising 37bp during the month
and the floating-rate ABS index rising 15bp. Perhaps not surprisingly, fixed-rate credit card
ABS, which significantly underperformed in 2013, have rallied the most this year, increasing
47bp YTD.
FIGURE 7
Consumer ABS spread performance in January (bp)
Previous 12 Months
Asset Class
Avg Life
Benchmark
1/31/2014
1-month Change
Avg
High
Low
1y
EDSF
10
-2
13
19
Prime Auto ABS

AAA
AAA
2y
Swaps
17
-2
19
26
AAA
3y
Swaps
22
-3
25
31
15
3y
Swaps
55
-3
59
65
52
BBB
3y
Swaps
100
-3
105
111
98
Credit Card ABS

AAA
3y
1m Libor
22
21
26
11
AAA
5y
1m Libor
34
31
37
20
AAA
7y
1m Libor
45
40
46
30
5y
1m Libor
66
63
69
55
BBB
5y
1m Libor
96
93
99
85
Student Loan ABS

AAA
3y
1m Libor
37
34
43
22
AAA
5y
1m Libor
49
48
55
39
AAA
7y
1m Libor
64
64
70
56
We maintain our Overweight recommendation on the AAA securities of traditional ABS

sectors and particularly like senior credit card ABS, short-dated 3y and 5y student loan ABS
from recently issued deals, dealer floorplan, auto lease, and equipment ABS. Within the
subordinate ABS sector, we like equipment and dealer floorplan ABS, as well as private
student loan subordinates for investors able to take on some legislative headline risk.
Recent developments in the ABS markets

There were some notable developments in January relevant for ABS. Senator Warren
announced that she would be introducing legislation later in 2014 to allow student loan
borrowers with high interest rates to refinance into the governments Direct Loan Program,
while President Obama referenced additional policies to help students struggling with
student loan debt in his State of the Union speech earlier this week. In esoteric ABS,
Aircastle announced that it would call its ACST 2006-1 deal. On the regulatory front, the
SEC announced that it would hold a vote on Regulation AB II during the first week of
February. Finally, we discuss investors general views on ABS during the SFIG conference
that took place last week.
31 January 2014
32
Senator Warren announces plan to help borrowers refinance student loans

Last week, Massachusetts Senator Elizabeth Warren announced that she was planning to
introduce a bill later in 2014 that would allow student loan borrowers to refinance their
higher interest rate loans into the lower rates currently offered under the governments
Direct Loan Program (DLP). In many cases, current DLP rates are significantly lower than
rates that applied last year, suggesting that several borrowers could benefit considerably
from the refinance program (Figure 8).
FIGURE 8
Comparing student loan rates before and after June 2013
Prevailing Student Loan Rate
Jul 06 - Jun 13
Jul 13 - Jun 14
Subsidized Loans for Undergrads
3.4% - 6.8%
3.86%
Unsubsidized Loans for Undergrads
6.8%
3.86%
Unsubsidized Loans for Grad Students
6.8%
5.41%
PLUS Loans
7.9%
6.41%
Source: Department of Education, Barclays Research
President Obama also mentioned that his administration continues to explore programs to
see how we can help even more Americans who feel trapped by student loan debt in his
State of the Union speech earlier this week. Although it is not clear whether he was alluding
to Senator Warrens proposal, it does appear reasonable that the president and his
administration will throw their support behind the bill once it is introduced.
Since details of the program are still unavailable, it is difficult to speculate on the percentage
of FFELP borrowers in ABS trusts who would be eligible for the program. The bill that is
ultimately introduced may limit refinancings to borrowers who are current on their loans or
may restrict the program only to those who have not already consolidated their student
loans. Below, we show our estimates of the percentage of the FFELP ABS universe that may
refinance under the program assuming all borrowers, regardless of payment status, are
eligible (Figure 9).
FIGURE 9
Estimated percentage of student loan borrowers with an incentive to refinance
Type of Loan
Incentive to Refinance
No Incentive to Refinance
Stafford
73%
27%
PLUS
81%
19%
Consolidation
78%
22%
Note: For simplicity, we assume that consolidation loans have an incentive to refinance if their rates are greater than
the current prevailing DLP rate of 3.86%. Source: Bloomberg, Deal remittance reports, Barclays Research
Since a large majority of student loan borrowers in ABS trusts may have an incentive to
refinance under the program, we look at the potential effect of the bill on student loan ABS
under three scenarios:
In our base case, we assume that the refinance program is not implemented and that
future CRRs, CDRs, and severities are in line with their most recent historical 3-month
averages.
In our moderate refinance scenario, we assume that only borrowers with at least 200bp
of refinance incentive under prevailing DLP rates choose to refinance. We assume that
the program is implemented in 12 months and that all borrowers with at least a 200bp
incentive to refinance pay off at that time, regardless of what status they are in
(repayment, deferment, forbearance, etc).
31 January 2014
33
In our aggressive refinance scenario, we assume that all borrowers with rates higher
than prevailing DLP rates choose to refinance. We assume that the program is
implemented in 12 months and that all borrowers with any incentive to refinance pay
off at that time, regardless of what status they are in (repayment, deferment,
forbearance, etc).
As can be seen, returns vary greatly depending on where in the capital structure the ABS
bond sits. Current and front-pay bonds from recently issued deals that are trading near par
may not experience any change in yield or DMs from the refinance program, while secondand third-pay bonds, which tend to trade with higher premiums, may be adversely affected.
On the other hand, returns on subordinate ABS bonds, most of which trade at a substantial
discount to par, could see a considerable increase in returns, depending on how many
borrowers opt to refinance.
FIGURE 10
Estimated effect of refinance program across capital structure of SLMA 2012-1 and SLMA 2007-1
Yield
Deal
Class
Generic Price
No Refi
Program
Moderate Refi
Discount Margin (bp)

Aggressive
Refi
No Refi
Program
Moderate Refi
Aggressive
Refi
SLMA 2012-1
A1
100
0.4%
0.4%
0.4%
25
25
25
SLMA 2012-1
A2
100.5
0.5%
0.2%
0.1%
11
-3
-13
SLMA 2012-1
A3
102
2.4%
2.3%
-0.7%
58
54
-91
SLMA 2012-1
88.5
5.1%
5.1%
13.0%
225
226
1248
SLMA 2007-1
A4
99.5
0.9%
0.9%
0.9%
41
56
57
SLMA 2007-1
A5
96
2.7%
2.7%
3.7%
92
190
341
SLMA 2007-1
A6
87
4.5%
4.5%
6.7%
140
158
483
SLMA 2007-1
84
5.4%
6.0%
5.4%
271
350
269
Note: All calculations are run assuming that rates follow the forward curve. Source: Barclays Research
That said, excess spread to the trust will be reduced from the refinancings, as the highest
interest-rate loans are the most likely to refinance out of the pool. This could increase credit
and extension risks on the subordinate tranche, as the subordinate piece depends most
heavily on excess spread for principal paydowns and credit support. For example, among
the seasoned SLMA 2007-1 bonds, many of which are trading at discounts even in the
senior part of the capital structure the refinance program is likely to be beneficial for the
senior securities, which are paid off more quickly at par. On the other hand, the effect on
the subordinate tranche may be neutral or even slightly negative in an aggressive refinance
scenario, as the bond extends from reduced excess spread in the deal.
It is still unclear how likely this legislation is to pass the current divided Congress. Although
the bill will probably enjoy the support of the President and Democrats in both
Congressional chambers, House Republicans may balk if there are negative implications for
the US budget from the reduction in interest rates. We will continue to monitor this
legislation and keep investors updated on developments.
Aircastle to call ACST 2006-1 aircraft ABS deal

Earlier this month, Aircastle notified the trustee of the aircraft ABS deal, ACST 2006-1, that it
would prepay the entire class A note balance, together with accrued and unpaid interest, on
February 18, 2014. As such, class A noteholders will receive a full principal payment on the
ACST 2006-1 G1 bonds in February, a significant benefit for the securities, which had been
trading in the low to mid-90s prior to the announcement. The FGIC policy that had insured
the bonds will also be cancelled upon redemption of the deal.
31 January 2014
34

The deal was callable at any time by the issuer but was subject to a prepayment premium if
the notes were redeemed prior to 31 months from the closing date of the deal (ie, if called
before January 2009). 1 As of the latest remittance report, the ACST 2006-1 class A
securities had a total current balance of $220mn, down from $560mn at issuance. The
assumed portfolio value of the remaining 27 aircraft was approximately $529mn in January
2014, though this was set as of the issuance date in the offering documents and does not
necessarily reflect the actual value of the aircraft today. Since the deal had not been
refinanced by its expected maturity date of June 15, 2011, all excess cash flows are being
used to pay down principal on the senior notes, rather than being paid to Aircastle, as the
residual (Class E) owner in the deal. We believe that this, as well as easing conditions in the
aircraft financing market, may have driven Aircastle to redeem the securities at this time.
On the date of the ACST 2006-1 deal prepayment notification, the ACST 2007-1 G1
securities also rallied, rising from the low to mid-90s to the mid- to high 90s, likely as
investors factored in a higher probability that the securities would also soon be called. The
ACST 2007-1 deal is very similar to the ACST 2006-1 deal, in that all excess cash flows are
being used to pay down the senior notes, rather than being paid to Aircastle, since the deal
is now also past its expected maturity date of June 8, 2012. Additionally, there is no longer
any prepayment premium associated with a redemption of the ACST 2007-1 notes, now
that the deal has been outstanding longer than 31 months from the issuance date (ie, no
penalty if called after Jan 2010). However, the ACST 2007-1 deal is also significantly larger
than the ACST 2006-1 deal, with the Class A notes having a current face amount of
$590mn, down from $1.17bn at issuance, and backed by 41 aircraft. As such, it may be
more difficult for Aircastle to find an alternative financing source for this deal, so it may
choose to wait for the deal to amortize further before refinancing the notes.
We maintain our overweight recommendation on legacy aircraft ABS issued in 2005-07,
given their short durations and reasonably attractive yields (base case yields of 2-4% and
durations of 1-3y, depending on what assumptions are used). While a refinance of some of
these securities would certainly be an upside scenario for investors, even absent a
redemption, we continue to believe that these deals represent good value for investors
willing to incur some liquidity risk.
SEC to hold vote on Regulation AB II next week

Earlier this week, the SEC gave notice that it would hold a meeting on Wednesday, February 5,
2014, to consider whether to adopt Regulation AB II formally. The Regulation AB II proposal
was introduced in May 2010 and then re-proposed in August 2011. These rules mandate
additional disclosure, reporting, and offering requirements for ABS issuers. For example, they
require certain loan-level disclosures at issuance for ABS backed by residential and CRE loans,
auto loans and leases, equipment loans and leases, student loans, and dealer floorplans, as
well as ongoing reports detailing the composition of the pool in a standardized format as it
amortizes. For credit card ABS, certain group-level information on the pool of receivables
would be required.
Issuers would also be compelled to provide at least a five-day review period for investors to
analyze the preliminary prospectus before deciding whether to invest in the securities. Even
private placement deals issued under Rule 144A would be subject to certain new disclosure
requirements, including disclosures of loan-level details on deals. The rules also introduce a
new registration statement form for issuers and require the depositor to certify that the
collateral backing the pool is reasonably likely to generate enough cash flows to pay timely
interest and principal on the notes. If approved, the new Regulation AB II would likely become
effective either late this year or early in 2015.
1
The prepayment premium was also waived at any time if the redemption was made to avoid having the trust
withhold or pay taxes or if the deal was under an event of default.
31 January 2014
35
Tone at SFIG conference generally positive

The inaugural SFIG conference, called ABS Vegas 2014, took place on January 21-24. Most
investors we met with appeared cautiously optimistic about ABS this year, in terms of both
spreads and issuance. While they generally felt that spreads in traditional ABS sectors would
remain stable or tighten only modestly this year, most felt that total returns in 2014 would
be better than last year. Additionally, many exhibited considerable interest in esoteric ABS,
believing that yields in the space would compress further as liquidity improved amid
increased issuance and investor sponsorship. Finally, on the issuance front, investors
generally believe that 2014 ABS issuance will remain stable to or come in slightly higher
than 2013 issuance, despite the Feds tapering policy.
31 January 2014
36
CREDIT PORTFOLIO
Portfolio loses as non-agencies pare gains

Jasraj Vaidya
+1 212 412 2099
Keerthi Raghavan
+1 212 412 7947
The portfolio lost $0.8mn this week as RMBS prices dropped and CMBS spreads widened in
a sell-off of risk assets. In cash bonds, alt-A and option ARM SSNRs were down pt. CMBS
spreads were 5-10bp wider. The CMBX.6 BBB- widened 7bp relative to the CMBX.6 A.
The portfolio is down 0.4% for the week, taking the year-to-date gain to 1.7% and the oneyear return to 7.3%.
FIGURE 1
Credit portfolio trade performance
Portfolio return statistics
1 Yr
P/L ($ mn)
1 Yr
% ROE
YTD
P/L
($ mn)
13.1
7.3
3.2
Credit portfolio
YTD 1-wk P/L

% ROE ($ mn)
1.7
1-wk
% ROE
(0.8)
(0.4)
%
ROE
Start
date
Total P/L
(bp)
1-wk
P/L
(bp)
Equity
($ mn)
Avg. EQ
($ mn)
Long 2007 Alt-A Fixed WAC pass-through SSNR vs Basket of

shorts
9,059
160
4.9
6.2
79
5,646
90.6
7/31/2009
Long 2007 Alt-A Fixed SSNR
6,891
(37)
3.6
4.3
(13)
2,966
68.9
6/3/2010
Long 2007 Alt-A Fixed Levered
13,563
(158)
5.8
6.6
(92)
8,978
135.6
3/17/2011
Long 2007 Alt-A Fixed SSNR (2)
2,978
(38)
23.2
25.3
(89)
6,917
29.8
5/17/2012
Long 2006 Alt-A hybrid SSNR
2,760
(62)
10.0
10.0
(62)
2,760
27.6
9/14/2012
Long 2006 Option ARM SSNR
1,527
(77)
10.0
10.0
(77)
1,527
15.3
9/14/2012
565
(71)
5.0
5.0
(35)
282
5.6
6/14/2013
Credit trades
Long 2006 Option ARM SSNR (2)
1-wk P/L Total P/L

($ 000) ($ 000)
870
(74)
5.0
5.0
(37)
435
8.7
6/28/2013
Long ABX 07-2 AAA
1,295
10.4
10.4
1,346
12.9
7/12/2013
Long back end re-REMICs off 2007 GG10 A4s
9,265
55
1.0
1.0
927
92.7
2/4/2011
Long 2007 CMBS PAC IOs
4,057
27
1.0
1.0
406
40.6
2/4/2011
Freddie K 10y X-1 Senior IO
3,819
10.0
10.0
3,819
38.2
8/10/2012
Long 2006 CMBS AM
1,034
(18)
5.0
5.0
(9)
517
10.3
9/14/2012
Long CMBX.6 BBB- vs CMBX.6 A (initiated 3/28/2013)
2,514
(364)
7.0
7.0
(255)
1,760
25.1
3/28/2013
Long CMBX.6 BBB- vs CMBX.6 A (initiated 6/6/2013)
1,029
(364)
7.0
7.0
(255)
720
10.3
6/7/2013
478
12
5.0
5.0
239
4.8
6/28/2013
Long 2006 Option ARM SSNR (3)
Long 2013 CMBS X-A IO

Long Freddie K 10y A2
63
5.0
5.0
32
0.6
11/22/2013
Long 2013 CMBS BBB-
(128)
(39)
5.0
5.0
(19)
(64)
(1.3)
17/1/2014
Note: The performance is from Thursday, January 23, 2014, close, to Thursday, January 30, 2014, close. Past performance is not necessarily indicative of future results.
31 January 2014
37

FIGURE 2
Active credit portfolio
Trade
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Long Alt-A fixed WAC pass-through SSNR

vs basket of shorts
Long Alt-A 2007 Fixed SSNR
Long 2007 Alt-A fixed (repo-leveraged)
Long 2007 Alt-A Fixed SSNR
Long 2006 Alt-A hybrid SSNR
Long ABX 07-2 AAA
Long back-end re-REMICs off 2007 GG10
A4s (repo-leveraged and duration hedged)
Long 2007 PAC IOs (repo-leveraged and
duration hedged)
Long 2012 Freddie K 10y X-1 Senior IO
(repo-leveraged and duration hedged)
Long 2006 CMBS AM (duration hedged)
Long CMBX.6 BBB- vs CMBX.6 A
Long CMBX.6 BBB- vs CMBX.6 A
Long 2013 CMBS X-A IO
Long Freddie K 10yr A2 (duration hedged)
Long 2013 CMBS BBB-
Long
Short
Long
Long
Short
Short
notional notional Hedge Equity
current initiation current initiation
(mn)
(mn)
ratio ($ mn) Leverage level
level
level
level
7.7
12.9
6.6
34
34.8
10
10
5
5
20
98.1*
88.5*
Initiation
date
5.8
87.5
63
7/30/2009
4.2
6.6
26.9
10
10
10
10
10.4
1
4
1
1
1
1
1
1
77.8
87.5
87.5
76
73.3
73.3
73.3
58.3
65
82
78.4
64.8
64.8
69.8
67.3
52
6/3/2010
3/17/2011
5/18/2012
9/14/2012
9/14/2012
6/14/2013
6/28/2013
7/12/2013
S + 205
S + 270
2/4/2011
500
T + 200
T + 400
2/4/2011
229
10
2.9
S+160
S+300
8/10/2012
5
7.0
7.0
5.0
5.0
5.0
S+108
S+317
S+317
T+160
S+52
S+365
S+193
S+385
S+378
T+ 195
S+52
S+355
5
25
25
100
49.5
5.5
25
25
100
Equity invested
3.57
3.57
10
S+202
S+202
S+222
S+244
9/14/2012
3/28/2013
6/7/2013
6/27/2013
11/21/2013
1/17/2014
129
Cash available
52
Unrealized gain (loss)
12.3
Note: *Levels are calculated for a basket of shorts consisting of 1 part CMBX AJ.4 and 3 parts CDX.HY. The performance is from Thursday, January 23, 2014, close, to
Thursday, January 30, 2013, close. Source: Barclays Research
FIGURE 3
Retired trades since 2012
Trade
Equity
($ mn) Leverage
Initiation
date
Initiation
level
Closing
date
Closing
level
Total PL
($000)
Total ROE
(%)
Long ABX 2007-1 AAA (cash basis)
7.3
3/17/2011
43.25
1/13/12
36.4
(1,235)
(16.74)
Long ABX 2007-1 AAA (cash basis)
7.3
6/8/2011
36.8
1/13/12
36.4
(110)
(1.49)
Long PrimeX ARM.1
9.6
10.2
10/7/2011
101.5
1/13/12
101.1
773
7.03
Long 2007 AJ (duration hedged)
10
3/17/2011
S+800
1/20/12
S+1275
(2,618)
(26.2)
Long PrimeX FRM.2
3.6
10
5/6/2010
100
1/27/12
96.2
2,211
52.3
Long ABX 07-2 PAAA vs ABX 06-2 AAA
10
2/10/2012 36.1/52.3
4/13/12
37.3/48
2,223
22.34
2.7
7/10/2009
11
5/18/2012
7.8
21,525
215.25
3/12/2010
80
5/18/2012
93.8
3,206
32.06
16.07
Long 2007 Alt-A Hybrid MEZZ
Long Senior mezz off Prime/Alt-A re-REMIC
Long PrimeX ARM.1 Levered (2)
5.5
8.2
9/15/2011
104.4
5/18/2012
103.75
1,607
10
Long PrimeX FRM.1 Levered (2)
10.3
9.2
10/7/2011
102.7
5/18/2012
106.3
2,292
22.92
11
Long ABX 07-2 PAAA vs ABX 06-1 AA
9.9
(257)
(2.57)
12
Long ABX 07-2 PAAA vs ABX 06-2 AAA
7.5
3.3
13
Long 2007 CMBS LCF (duration hedged)
14
Long 2007 Jumbo Fix SSNR (repo-leveraged)
15
Long 2012 CMBS BBB+
4/26/2012 38.13/44 8/10/2012 45.75/51.1

12/13/2012 53.9/64.8 3/15/2013
60.9/69.4
610
8.1
9/14/2012
S+153
8/9/2013
S+102
350
7.0
9/14/2012
S+153
8/9/2013
S+102
350
7.0
Note: The initiation long price levels are the offer-side marks for the cash bonds as of the initiation date; the long current level is the bid-side mark for the cash bond at
the current reporting date. Similarly, the initiation short price is the offer-side mark for protection at the initiation date, and the short current level is the bid-side mark
for protection at the current reporting date. We will assume appropriate bid offers as observed in the market for our trade initiation and termination dates.
31 January 2014
38

FIGURE 4
ROE since inception (%)
100
80
60
40
20
0
-20
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
31 January 2014
39
US SECURITIZATION STRATEGY ANALYSTS

Ajay Rajadhyaksha
Head of Rates and Securitized
Products Strategy
+1 212 412 7669
ajay.rajadhyaksha@barclays.com
Sandeep Bordia
US RMBS and CMBS Strategy
+1 212 412 2099
Lokesh Chandra
Agency MBS Strategy
+1 212 412 2099
Sandipan Deb
Agency MBS Strategy
+1 212 412 2099
sandipan.deb@barclays.com
Aaron Haan
+1 212 412 2099
Dennis Lee
+1 212 412 2099
Wei-Ang Lee
Agency MBS Strategy
+1 212 412 5356
Keerthi Raghavan
+1 212 412 7947
Nicholas Strand
Agency MBS Strategy
+1 212 412 2057
Harkaran Talwar
+1 212 412 2099
harkaran.talwar @barclays.com
Robert Tayon
+65 6308 2767
robert.tayon@barclays.com
Tejvansh Thakral
+1 646 333 5954
tejvansh.thakral@barclays.com
Jasraj P. Vaidya
+1 212 412 2265
Leo Wang
Agency MBS Strategy
+1 212 412 7571
31 January 2014
40
Analyst Certification
We, Lokesh Chandra, Ajay Rajadhyaksha, Tejvansh Thakral, Leo Wang, Sandeep Bordia, Nicholas Strand, Sandipan Deb, Wei-Ang Lee, Dennis Lee,
Harkaran Talwar, Jasraj Vaidya, Aaron Haan and Keerthi Raghavan, hereby certify (1) that the views expressed in this research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this research report.
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Barclays Securitized Products Weekly Looking Past The EM Contagion

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Securitization Research

Securitized Products Weekly

Looking past the EM contagion

Barclays | Securitized Products Weekly

Short FN 3.5 vs Tsy

Long fixed coupon alt-A FRM SSNRs

Long option ARM SSNRs and subprime LCFs

Buy 2013 vintage BBB

Buy credit card, equipment, auto lease, and

Overweight dealer floorplan & equipment subs

Prefer new issue non-agency AAAs vs TBA

Buy aircraft ABS, SBC, cell tower ABS, and WBS

Source: Barclays Research

Barclays | Securitized Products Weekly

Looking past the EM contagion

Remain underweight on agency MBS, constructive on resi credit

Barclays | Securitized Products Weekly

AGENCY MBS TRENDS

Continuing down a straight path

+1 212 412 2099

income (DTI) thresholds. We believe the increased guidance is designed to encourage

+1 212 412 2099

Source: Federal Reserve, Barclays Research

Barclays | Securitized Products Weekly

Maturing agency debt owned by Fed $ mn

Durable goods orders

Source: Barclays Research

Barclays | Securitized Products Weekly

Barclays | Securitized Products Weekly

Source: Barclays Research

Barclays | Securitized Products Weekly

1. Cash reserves of at least

2. New payment cannot

Note: For manually underwritten loans. Source: HUD, Barclays Research

Source: HUD, Barclays Research

HUD/FHA seeks to expand the credit box

Applicability: The application of DTI thresholds and compensating factors applies to

Barclays | Securitized Products Weekly

Add $80 for each additional member

Source: HUD, Barclays Research

Barclays | Securitized Products Weekly

No-point mortgage rate

Projected (report month)

Barclays | Securitized Products Weekly

Barclays | Securitized Products Weekly

Projected (report month)

if BoA buys out

Barclays | Securitized Products Weekly

Projected (report month)

if BoA buys out

Barclays | Securitized Products Weekly

+1 212 412 2099

Changes to the portfolio

1-Week P/L 1-Week %

Long 15y 3.5s vs 30y 4s

Short 30y 3.5s vs treasuries

Long FN 30y 4.5/3.5 swap

Short FN 3.5 vs. Tsy

Long GN/FN 4 swap

Long 15y 3.5 vs. 30y 4

Long FN 30y 4.5/3.5

320 2y, 350 10y

1000 FN 15y 3.5s,