The JP Morgan Prepayment Model

1. The JP MorganPrepayment Model “It’s all about the economics” Presenters: Cynthia Zander Joseph Cronin Richard Lyman

2. Key Model Features • Curve at Origination • Spread at Origination • Impact of Loan Size • Home Price Appreciation • Burnout • Turnover Model • Refinancing Model • GNMA Prepayments • Historical Performance

3. Key Model Features • Self-selection captured through the incentive function • Home Price Appreciation • No Media Effect • Transparency of inputs • Separate FNMA and FHLMC refinancing models

4. Key Model Features • “We define our baseline economic incentive to be the percent savings.” • Weighted Average Maturity – WAM

5. Curve at Origination (CATO) • Allows the JPMorgan model to capture the refinancing “seasoning ramp” • Predict the evolving WALA (Weighted Average Loan Age) • Reaffirming steepness vs. flatness of the curve at origination determines future refinance of the individual • Has IO and PO implications down curve

6. Spread at Origination (SATO) • Through SATO, various non-standard collateral characteristics are captured

7. Impact of Loan Size:

8. Impact of Loan Size

9. Home Price Appreciation

10. Home Price Appreciation

11. Burnout:

12. Turnover Model • Home Price Appreciation • Seasoning Ramp • Seasonality/Calendar Effects

13. Turnover Model Home Price Appreciation / Seasoning Ramp (14% Annually) (Loan Age) (Appreciation)

14. Turnover Model Seasonality / Calendar Effects (14% Annually) (Loan Age) (Appreciation)

15. Refinancing Model Shorter Amortization Schedules (incentive)

16. GNMA Prepayments • Loan Characteristics • Delinquencies • Servicer Buyouts • Loan Size

17. GNMA Prepayment Loan Characteristics

18. GNMA Prepayment Delinquencies

19. GNMA Prepayment Service Buyouts

20. GNMA Prepayment Loan Size

21. Historical Model Performance “Past performance is not an indication of future results”