INTERNAL USE ONLY DO NOT DISTRIBUTE IN PART OR IN WHOLE Structured Finance > Mortgage Credit GSE Mortgage Credit Risk Transfer Deals Updated: Sep 28, 2015 Trade Idea: Buy GSE Mortgage Credit Risk Transfer Deals Investment Rationale: Security: The bonds are unsecured debt obligations of the GSEs where the cashflows are linked to the credit and prepayment behavior of the underlying reference pool of mortgages currently held in agency MBS. These deals are linked to and designed to provide credit protection to the GSEs on the underlying reference pool of loans as mandated under Dodd-Frank. These are uncapped LIBOR-based floaters with a legal final maturity at the end of 10 years from issuance. Credit enhancement: These classes are the mezzanine tranches of the structure. Subordinate tranches provide credit enhancement for the senior tranche (which Freddie and Fannie retain) and for each class of more senior subordinate tranches as losses are allocated in reverse sequential order. Credit enhancement for the M-3 Notes is a first-loss piece (120bp of capital structure) with the M-2 and M-1 with 3.0% and 4.2% of credit enhancement, respectively. Structural attributes: Unlike typical cash transactions where investors are exposed to actual losses on the underlying pool, deal losses will be incurred upon pre-defined credit events defined as 180 days or more delinquent, short-sale, and deed in lieu of and REO. Loans will be removed from the reference pool should a credit event occur and the loss will be the net credit event amount times an applicable fixed severity based on a sliding scale, eliminating the potential for servicer action or government loss mitigation programs (ex. principal modifications) to impact ultimate losses. Performance has been very good with very few loans making it into late-stage delinquency which is attributed to the standardized pool selection criteria and positive housing market. ) Relative value: While this is a relatively new