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APPENDIX 2

Hypothetical Losses in Two Scenarios (with 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;

Scenario 1:
Losses on prime=1.2%% (assumes 3% foreclosure rate & 40% severity);
Losses on self-denominated subprime & Alt-A=14% ((assumes 35%
foreclosure rate & 40% severity);
Losses on FHA/VA=5.25% (assumes 15% foreclosure rate and 35% severity)

Scenario 2:
Losses on prime=1.6%% (assumes 3.5% foreclosure rate and 45% severity);
Losses on self-denominated subprime & Alt-A=25% (assumes 45%
foreclosure rate & 55% severity);
Losses on FHA/VA & unknown subprime/Alt-A=15% (assumes 30%
foreclosure rate & 50% severity)
Average size of mortgage:
Prime: $173,000 ($6.75 trillion/39 million)
Subprime/Alt-A/FHA/VA: $182,000 ($2.4 trillion/13 million

Losses in Scenario 1
Number of mortgages: 53 million
Prime=40 million
Subprime/Alt-A=7.7 million PMBS
FHA, and VA=5.2 million
Aggregate Value:
Prime =$6.9 trillion ($173,000 X 39 million);
Subprime/Alt-A=$1.7 trillion ($220,000 X 7.7 million)
FHA/VA= $700 billion ($130,000x5.2 million)
Total expected foreclosures: 4.7 million (3% X 39 million + 35% X 7.7 million
+ 15% X 5.2 million)
Losses on foreclosures: $360 billion ($6.9 trillion prime X 1.2%=$83 billion +
1.7 trillion subprime/Alt-A X 14%=$240 billion + $700 billion X 5.25%=37 billion)
Overall loss percentage: 3.9%

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