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APPENDIX 1

Hypothetical Losses in Two Scenarios (No feedback)
Scenario 1 is what was known to market professional during the 2nd
half of 2007; Scenario 2 is the actual condition of the mortgage market. Second
mortgage/home equity loan losses are excluded.
Assumptions used:
Number of mortgages= 53 million;
Total value of fi rst mortgages=$9.155 trillion;
Losses on Prime=1.2%% (assumes 3% foreclosure rate & 40% severity);
Losses on Subprime/Alt-A=12% (assumes 30% foreclosure rate & 40%
severity);
Average size of mortgage: $173,000

Losses in Scenario 1
Number of mortgages: 53 million
Prime=40 million
Subprime/Alt-A = 13 million (7.7. PMBS million + FHA/VA=5.2 million)
Aggregate Value:
Prime =$6.9 trillion ($173,000 X 40 million);
Subprime/Alt-A=$2.25 trillion ($173,000 X 13 million)
Losses on foreclosures: $353 billion ($6.9 trillion prime X 1.2%=$83 billion
+ $2.25 trillion subprime/Alt-A X 12%=$270 billion
Overall loss percentage: 3.5%

Losses in Scenario 2
Number of mortgages: 53 million
Prime: 27 million
Subprime/Alt-A:
Original subprime/Alt-A: 13 million
Other subprime/Alt-A: 13 million (10.5 F&F (excludes 1.25 million already
counted in PMBS) + 2.5 million other loans not securitized (mostly held by the large
banks))
Aggregate Value:
Prime= $4.7 trillion ($173,000 X 27 million);
Subprime/Alt-A = $4.5 trillion ($173,000 X 26 million)
Losses on foreclosures: $596 billion ($4.7 trillion X 1.2%=$56 billion + $4.5
trillion X 12%=$540 billion)
Overall loss percentage: 6.5%, for an increase of 86%

Note: No allowance for feedback eff ect—that is, fall in home prices as a result
of larger number of foreclosures in Scenario 2. With feedback eff ect, losses would

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