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A Case for a Strategic 
Investment in Impaired 
  Non‐ Prime Mortgage  
             Securities 
 

By:   Robert M. Pardes, CPA, JD
 
A Case for a Strategic Investment in Impaired Non-Prime Mortgage Securities

Over the last six months a confluence of fundamental and environmental factors have joined
forces to decimate the market and carrying values of most recent vintage (late 2005-2007) non-
prime mortgage securities (“Target MBS”). The virtual collapse of the credit markets has
revealed flaws in the general perception that segments of the credit markets are insulated from
the stresses experienced in totally distinct segments of the market. To the contrary, recent events
have only highlighted the degree of spillover that upheaval in one market can create. A prime
example is the adverse impact that the rating downgrades for certain bond insurers attributable to
sub-prime exposure may have on the cost and availability of financing for municipalities. The
continued uncertainty as to the breadth and nature of additional and more discreet exposures
increases the challenges to restoring confidence and liquidity to the market on an expedited
basis.

While the meltdown of the non-GSE mortgage market can rightly be attributed to the
unanticipated and alarming rate of defaults in the underlying mortgage collateral supporting
Target MBS, raising uncertainties as to related ratings and cash flows and the impact on the
housing market in general, a compelling argument can be made that the economic value of many
Target MBS well exceeds present values. Additional factors driving, what appears to be,
excessive impairment charges are:

• The absence of liquidity


• Regulatory uncertainty
• Perceived flaws in the benchmarking of value against the ABX index (trading activity of Credit
Default Swaps for a limited subset of sub-prime securities that establishes the trading range for
the larger population)

Moreover, a thorough analysis of the structure and counterparties for specific Target MBS
reveals a realistic possibility of future cash flows for specified tranches that are vastly superior to
projections based upon current performance data. Thus, while the market presently paints all
recent vintage non-prime mortgage securities with the same brush from a relative value
perspective, there are distinct opportunities based on the nature of the structure and
counterparties to extract considerable added value. Additionally, a strategic portfolio of impaired
Target MBS may be the unintended beneficiary of certain components of proposed legislation
intended to provide economic stimulus – thereby realizing additional incremental value.


 
The core elements that underlie the hypothesis that superior returns can be generated by a
strategic investment in impaired MBS is threefold:

• Environmental conditions, including adverse market sentiment, pressure on capital levels,


regulatory uncertainty and general illiquidity coupled with a flawed benchmark (the
ABX) has embedded value in a large population of Target MBS due to the exaggerated
levels of the perceived or mandated impairment to value. Thus, there is an initial premise
that the passage of time and market stabilization will ultimately lift values above present
levels;
• A considerable population of the non-performing collateral contains elements of fraud or
other defect that amounts to a breach of the representations and warranties that followed
the transfer of the collateral pool to the Special Purpose Trust (SPV) responsible for
administering the securitization for the benefit of investors. Through a diligent forensic
effort, these defects can be documented and the Trust can exercise the contractual right
to require the Depositor or Warranty Party to repurchase the defective collateral at the
full transfer price plus any accrued interest and expenses. For purposes of this
commentary, the potential to exercise a put with respect to defective collateral is referred
to as “Recourse Recovery”.
• Components of the Economic Stimulus package and related political proposals are
gaining traction and will serve to accelerate the prepayment speeds and reduce or
eliminate loss severities that are presently impacting value negatively.

The environmental factors and legislative initiatives referenced above tend to be moving targets
and have received an abundance of coverage in the press. Additionally, the value that can be
added by piggy backing on forthcoming regulatory intervention is based on similar dynamics and
principles applicable to the Recourse Recovery strategy. Accordingly, the balance of this
discussion will focus on the value embedded in a strategic investment that relies, in part, on
Recourse Recovery to extract considerable added returns.

I. Background

Up to now, much of the focus and resources dedicated to the sub-prime debacle has centered on
causation, blame, general impact to the housing market and economy, homeowner assistance and
the related political debates. Only recently, has there been greater dialogue recognizing the role
that intentional malfeasance or fraud has played in the present and anticipated rate of defaults
and foreclosure activity adversely impacting real estate markets across the nation. 1 One recent
article noted that a sampling of loans that defaulted within the first 12 months revealed that two

                                                            
1
  See, “Fraud Seen as a Driver In Wave of Foreclosures”, Wall Street Journal, December 21, 2007.  


 
thirds of the sample contained occupancy fraud (i.e. where the borrower misrepresented that the
property to be purchased would be occupied as a primary residence). 2

Having spent the better part of 10 months buried in the morass of toxic mortgages created in the
latter period of the securitization and real estate boom, it becomes apparent that the layering of
risks embodied in ill conceived loan products laid the foundation for a loose conspiracy among
buyers, sellers, real estate and mortgage professionals to exploit these flawed products in pursuit
of the greater American dream – not homeownership, but a quick buck.

The common characteristics driving the alarming rate of defaults and foreclosures are the
combination of little or no equity (i.e. 100% financing) coupled with little or no documentation
as to the assets or income needed to afford the purchase over the longer term. A typical sampling
of defaulted loans will fall into one of the following categories:

• Multiple undisclosed real estate purchases accompanied by the related undisclosed


mortgages, all acquired at the same time or within a short time frame, rendering the
lender incapable of assessing the borrower’s capacity to carry a portfolio of properties
and a seven figure debt burden;
• Misrepresented intent to occupy as a primary residence, allowing the borrower to utilize
the more aggressive features of an owner occupied financing;
• Grossly exaggerated representations of income (sometime 5- 10 times actual earnings)
and fabricated employment to provide the color of reasonableness to the represented
income level.
• Collusion amongst appraisers, title companies, and sellers to create fictional or “straw”
buyers to abscond with the inflated mortgage proceeds.

It would be no surprise to learn that more than half the defaults that have occurred to date
relating to Target MBS can be attributed to one or more of the criteria described above. Based on
my own experience, the percentage of fraud and misrepresentation could be significantly higher.

To date, the approach taken by regulators and law enforcement to extract compensatory damages
for the myriad of investors that have suffered losses relating to non-prime MBS is somewhat
circuitous in nature and relies on the failure to properly disclose investment risks. 3 There has
been virtually no focus on the structure of the securities and the contractual representations and
warranties that follow the collateral into the investment vehicle supporting the various classes of
outstanding securities. Referencing the maxim that the shortest distance between two points is a
straight line, it appears that quickest and fairest route to compensate investors has been largely

                                                            
2
  See,” Speculators may have accelerated Housing Downturn”, Wall Street Journal, February 6, 2008. 
3
  See , “Due Diligence Firm to Aid New York Subprime Probe”, Wall Street Journal, January 28, 2008; FBI         
    Investigating 14 Companies for Possible Subprime Fraud”, Daily News, January 31, 2008; “State Subprime Probe  
   Takes a New Tack”, Wall Street Journal, January 31, 2008. 


 
missed. At some point, this more direct path will be recognized and will be added to the array of
tactics employed in the pursuit of compensatory damages.

In the early stages of the crisis, the defects in the underlying collateral manifested itself in what
is referred to in the industry as Early Payment Defaults (“EPDs”). EPDs are monetary defaults
that occur so early in the life of the loan (1-3 months) that a contractual repurchase provision is
triggered. In essence, the EPD provision is a strict liability provision that eliminates the need to
identify and substantiate a substantive defect in the origination process.

The enforcement of the EPD provisions against large originating lenders is what has been the
primary factor in the failure of many leading national lenders and the downsizing of others, as
the repurchase obligations coupled with mark to market of collateral (performing and non-
performing) absorbed much needed liquidity.

Ensuing waves of repurchase obligations have been based upon substantive breach of loan level
representations and warranties. These loan level representations and warranties typically deal
with the absence of misrepresentations regarding occupancy, income, disclosed debt, etc…
Breach of these representations and warranties gives rise to a contractual remedy of forced
repurchase of the defective collateral. Depending on the deal structure, these representations and
warranties are often included in the document that covers the transfer of the pool of loans to the
trust that will maintain legal ownership for the benefit of the various security holders. The
enforcement of breaches of this nature requires research into the credit file and identification and
substantiation of underlying defects (essentially a forensic assessment).

The recourse potential described above will continue to create financial stress for many players
in the housing finance arena as waves of demands for repurchase and/or indemnification
continue to generate losses that, at this point, are not reflected in the reserves of those institutions
with the economic capacity to honor the breaches of loan level representations and warranties.
This is because the claims have not yet been made and therefore the estimation of future losses
does not meet the accounting requirements for current recognition. It is the failure of the broader
market to distinguish securities based upon the collectability of associated cash flows that forms
of the foundation of the opportunity described herein. As noted above, all MBS and related
derivative securities are being painted with the same brush from a mark to market perspective-
regardless of the more discreet characteristics that will ultimately differentiate cash flow
performance.

Over the last year, there has been much activity in the area of generating and defending claims to
repurchase mortgage loans. However, for the most part, this activity has centered on the
corollary representations and warranties in Loan Purchase Agreements and collateral that did not
make it into securitizations (i.e., the resolution of breaches relating to loans on the balance
sheet). Because of the passive nature of the securitization structure and the incestuous
relationship between the Depositor (or Issuer) and the Servicer, the Trustee is not likely to be


 
aware of many of the defects that could trigger a repurchase obligation—nor does the Trustee
have the obligation or resources to conduct its own forensic inquiry.

II. Mechanics

The repurchase of a mortgage loan is the economic equivalent of a payoff to the special purpose
vehicle (“SPV”) formed in the securitization process. The Trustee for the SPV plays an
essentially passive role as a conduit for reporting information and cash flow for the benefit of the
various classes of securities holders -- hence, the need for specialized talent to identify the most
opportunistic investments and to direct the recourse recovery effort.

While many of the originating lenders that are ultimately responsible for loan level warranties
and representations are no longer operating or lack the financial capacity to honor the repurchase
obligations that are coming, leading investment banks and financial institutions developed
conduit operations for the purposes of blending the collateral of multiple lenders . In many cases,
these institutions are exposed to repurchase obligations from the SPVs without the benefit of
back to back warranties and representations from the originating lender. This population of
intermediaries in the securitization process includes such high profile institutions as Deutsche
Bank, Lehman, Morgan Stanley, Bear Stearns, Credit Suisse, Nomura, Countrywide, Indymac
Bank, UBS, etc… The degree of recourse and the nature of the warranting entity is a function of
the specific securities structure. To the extent that sizeable populations of defaulted loans are
ultimately repurchased out of the securities as a result of rep and warranty breaches, then
improvements in the anticipated cash flows, prepayment speeds and loss severities can be
expected, translating to higher values.

No doubt there are some loans that are being repurchased out of securitizations as a result of
identified breaches to representations and warranties. I can only speculate that there is a high
correlation between these repurchases and the Depositor’s ability to enforce a back to back
repurchase obligation from the originating lender. There is a question as to whether the Trustee
would have been notified of the defective collateral absent the back to back recovery.

III. Example

Exhibit A below is a fair representation of a portfolio composition and pricing. The total
portfolio investment is $ 100 million and the notional unpaid principal balance based upon a
weighted average price of 38.26 is $ 261.3 million.

The mezzanine tranches selected below are subordinate to the AAA tranches and have a
preference over several subordinate tranches with respect to cash flow. In addition to subordinate
tranches amounting to at least 10% of the total principal balance of the securitization, there is


 
also the excess yield generated by all of the underlying collateral that is available to service these
mezzanine tranches subject to any shortfall in cash flow required to service the AAA tranches.
Included in the tranches subordinate to the mezzanine securities in Exhibit A are tranches rated
below BBB and the unrated equity component of the securitization.

EXHIBIT A

PROJECTED PORTFOLIO COMPOSITION

Original Original
Rating Coupon Spread* % of Portfolio Price ** Bond Balance Market Value
AA 5.69 30 35% 65 53,846,154 35,000,000
A 5.79 40 35% 40 87,500,000 35,000,000
BBB 7.19 180 30% 25 120,000,000 30,000,000

100% 38.26 $ 261,346,154 $ 100,000,000

* Spread to LIBOR; Does not reflect additional spread attributed to any discount at time of issuance
** Prices are based upon current mark to market and trading activity of late 2005 and early 2006 vintages where
prepayment speeds are in the range of 25-30 CPR. More recent vintage tranches reflect considerably greater
discounts due to extension to duration as prepay speeds have declined substantially driven by declines in
real estate values. For those tranches, market value is substantially lower. For example, based upon the
present ABX index, AA tranches in the later series are valued in the 40-60 range, reflecting anticipated
extended duration.

Exhibit B that follows compares anticipated returns generated by a portfolio with a recourse
recovery strategy against a portfolio managed on a passive basis. Embedded in the structure of
most securitizations are certain tests which redirect cash flow in the event that the test is not met
(failed). Exhibit B also reflects the lift to returns if the Recourse Recovery strategy improves the
overall cash flow for the related securitization to passing the cash flow trigger from a position of
failing the trigger. In that event, the improvement to returns is in excess of 17%. Even if the cash
flow trigger is not met, the lift to returns hovers around 10%. The example assumes that all
defaulted loans are equal in terms of loan size and loss severity. However, in practice the loans
bearing characteristics to support repurchase tend to be larger and present greater loss exposures.

As described above, the improvement to returns is a function of converting defaults and the
related loss severity into the economic equivalent of a payoff at no loss. Accordingly, downward
adjustments to the default rate are accompanied by corresponding increases to the prepayment
speed. The combined effect accounts for the anticipated increase to yield. Also reflected are the
assumptions as to prepay speeds, default rate and loss severity.


 
EXHIBIT B

Active Management Strategy vs. Passive Strategy

% Increase
Assumptions Active Management Strategy Passive Strategy to Yield
WAL 4.3 6.7
Mod Durn 3.2 4.5
Prepay Rate (CPR) 25-35 (mos 4-11) 25
Default Rate (CDR) 20 to10 over 8 months 20
Loss Severity 40% 40%
Servicer Advance (% of P&I) 100 100
Recovery Lag (month) 12 12
Cash Flow Test FAIL FAIL
Yield 31.30% 22.4% 39.7%

% Increase
Assumptions Active Management Strategy Passive Strategy to Yield
WAL 3.5 6.7
Mod Durn 2.0 3.3
Prepay Rate (CPR) 25-35 (mos 4-11) 25
Default Rate (CDR) 20 to10 over 8 months 20
Loss Severity 40% 40%
Servicer Advance (% of P&I) 100 100
Recovery Lag (month) 12 12
Cash Flow Test PASS PASS
Yield 41.50% 22.4% 85.3%

Rating Base Yield Yield‐Fail Yield‐Pass


AA 13.0% 18.0% 21.4%
A 21.0% 29.0% 33.0%
BBB 35.0% 49.0% 75.0%
WA ‐Yield 22.4% 31.3% 41.5%

Exhibit C attached hereto is the monthly cash flows for each scenario above. As you can see,
when the cash flow trigger fails, principal payments are not received until 42 months out. When
the cash flow test is passed; principal payments are as early as 13 months out. Of course,
variances to the underlying assumptions will impact performance.


 
IV. Impact of Pending Regulatory Intervention

The proposals under consideration as part of an economic stimulus package may impact cash
flows for outstanding securitizations. Specifically, proposals are pending that would:

• Impose a freeze on interest rates for certain subprime mortgages


• Would substantially increase the loan limits (as high as $ 725,000) for loans purchased by
Fannie Mae or Freddie Mac or guaranteed by the FHA.

In my view, both of these proposals have the potential to improve the underlying values of
non-prime securitizations.

With respect to a freeze on interest rates, there is the potential to minimize defaults on the
underlying collateral, thereby favorably impacting default and loss severity components to value.
The anticipated average life of subprime loans has historically been in the 3-4 year range at best.
Current market conditions will undoubtedly extend the average life of a subprime pool, but
excess yield beyond 3 years is not a dominant factor in the valuation of mezzanine tranches rated
BBB and above. Moreover, any curtailment of excess interest would impact the interest cushion
intended to cover losses in excess of the capacity of the subordinate tranches.

As for the temporary increases to loan limits eligible for Fannie Mae, Freddie Mac and FHA,
such increases will facilitate higher prepayment speeds as borrowers that can refinance into those
programs avail themselves of the opportunities. To the extent that there is any material impact, it
is likely to result from the increase in FHA limits, as the more flexible credit standards and lower
equity requirements create a greater possibility of refinance. In any event, at this point the
increases would be temporary through the end of 2008. Given the abbreviated window from
passage of legislation to expiration of the increases, any material impact is unlikely.

Whereas the Recourse Recovery strategy is based on improving returns through the payoff of
non-performing collateral, any increase to prepayment speeds related to an increase in the loan
limits for GSE and government loans is likely to involve higher quality, performing collateral.
Nevertheless, the overall impact to the securitization should be positive.

V. Operating Forecast

Attached as Exhibit D are cash flow projections covering the first 36 months of a $ 100 million
investment in portfolio of impaired MBS based on the sample portfolio described above. These
projections are based on the more conservative returns in the case of a fail of the cash flow
trigger. As you can see, current returns after the cost of the portfolio management run in the 8%-
9% range. Excluded from the operating budget are incentive bonuses which are typical of this
type of venture.

The returns reflected herein are based upon holding to maturity. Actual returns are likely to be
based upon the discount recouped at the time of disposition –anticipated to occur at some point
during the initial 18 – 36 months. The returns can also be adjusted by changing the composition
of the portfolio to reflect a different risk tolerance.


 
EXHIBIT C - Fail Trigger
Period Date Principal Interest Cash Flow Balance
Total 261,346,153.85 48,606,915.36 309,953,069.21

0 2/3/2008 0 0 0 261,346,153.85
1 2/15/2008 0 0.00 0.00 261,346,153.85
2 3/15/2008 0 967,387.75 967,387.75 261,346,153.85
3 4/15/2008 0 866,185.69 866,185.69 261,346,153.85
4 5/15/2008 0 905,163.08 905,163.08 261,346,153.85
5 6/15/2008 0 926,266.89 926,266.89 261,346,153.85
6 7/15/2008 0 811,464.62 811,464.62 261,346,153.85
7 8/15/2008 0 835,274.68 835,274.68 261,346,153.85
8 9/15/2008 0 828,033.93 828,033.93 261,346,153.85
9 10/15/2008 0 778,498.37 778,498.37 261,346,153.85
10 11/15/2008 0 774,504.46 774,504.46 261,346,153.85
11 12/15/2008 0 675,675.62 675,675.62 261,346,153.85
12 1/15/2009 0 756,116.21 756,116.21 261,346,153.85
13 2/15/2009 0 755,004.25 755,004.25 261,346,153.85
14 3/15/2009 0 723,205.05 723,205.05 261,346,153.85
15 4/15/2009 0 675,105.82 675,105.82 261,346,153.85
16 5/15/2009 0 799,293.23 799,293.23 261,346,153.85
17 6/15/2009 0 707,674.11 707,674.11 261,346,153.85
18 7/15/2009 0 739,472.54 739,472.54 261,346,153.85
19 8/15/2009 0 798,532.04 798,532.04 261,346,153.85
20 9/15/2009 0 734,024.95 734,024.95 261,346,153.85
21 10/15/2009 0 797,129.42 797,129.42 261,346,153.85
22 11/15/2009 0 810,823.15 810,823.15 261,346,153.85
23 12/15/2009 0 798,898.08 798,898.08 261,346,153.85
24 1/15/2010 0 895,303.90 895,303.90 261,346,153.85
25 2/15/2010 0 774,216.03 774,216.03 261,346,153.85
26 3/15/2010 0 873,700.91 873,700.91 261,346,153.85
27 4/15/2010 0 804,304.55 804,304.55 261,346,153.85
28 5/15/2010 0 936,743.04 936,743.04 261,346,153.85
29 6/15/2010 0 864,893.68 864,893.68 261,346,153.85
30 7/15/2010 0 941,530.85 941,530.85 261,346,153.85
31 8/15/2010 0 958,273.53 958,273.53 261,346,153.85
32 9/15/2010 0 943,166.60 943,166.60 261,346,153.85
33 10/15/2010 0 1,054,257.05 1,054,257.05 261,346,153.85
34 11/15/2010 0 908,085.69 908,085.69 261,346,153.85
35 12/15/2010 0 1,052,382.09 1,052,382.09 261,346,153.85
36 1/15/2011 0 1,032,542.32 1,032,542.32 261,346,153.85
37 2/15/2011 0.00 976,979.66 976,979.66 261,346,153.85
38 3/15/2011 0.00 1,054,776.84 1,054,776.84 261,346,153.85
39 4/15/2011 0.00 960,940.37 960,940.37 261,346,153.85
40 5/15/2011 0.00 1,150,164.11 1,150,164.11 261,346,153.85
41 6/15/2011 0.00 1,121,447.34 1,121,447.34 261,346,153.85
42 7/15/2011 562,146.19 1,242,714.31 1,804,860.50 260,784,007.66
43 8/15/2011 7,882,341.87 1,060,134.78 8,942,476.64 252,901,665.79
44 9/15/2011 7,517,084.62 1,151,585.89 8,668,670.51 245,384,581.17
45 10/15/2011 7,181,136.64 1,166,759.05 8,347,895.69 238,203,444.53
46 11/15/2011 6,878,411.84 1,038,189.18 7,916,601.02 231,325,032.69
47 12/15/2011 6,556,270.38 1,089,969.18 7,646,239.56 224,768,762.31
48 1/15/2012 6,255,328.58 1,105,503.03 7,360,831.61 218,513,433.73
49 2/15/2012 25,163,327.08 984,787.08 26,148,114.16 193,350,106.65
50 3/15/2012 29,619,710.51 988,294.21 30,608,004.72 163,730,396.14
51 4/15/2012 23,903,700.28 714,274.65 24,617,974.93 139,826,695.86
52 5/15/2012 22,700,897.66 639,943.12 23,340,840.78 117,125,798.19
53 6/15/2012 21,696,748.39 519,748.08 22,216,496.47 95,429,049.80
54 7/15/2012 7,929,049.80 417,195.34 8,346,245.14 87,500,000.00
55 8/15/2012 0.00 362,616.70 362,616.70 87,500,000.00
56 9/15/2012 11,763,304.22 401,625.02 12,164,929.24 75,736,695.78
57 10/15/2012 16,315,700.96 307,571.46 16,623,272.42 59,420,994.82
58 11/15/2012 15,505,629.59 251,310.35 15,756,939.94 43,915,365.23
59 12/15/2012 14,672,868.11 199,429.71 14,872,297.82 29,242,497.12
60 1/15/2013 14,119,948.17 125,314.65 14,245,262.82 15,122,548.95
61 2/15/2013 13,499,519.33 65,226.74 13,564,746.07 1,623,029.62
62 3/15/2013 1,623,029.62 7,280.36 1,630,309.98 0.00

10 
 
Exhibit C - Pass Trigger
Period Date Principal Interest Cash Flow Balance
Total 261,346,153.85 36,783,703.09 298,129,856.94

0 2/3/2008 0 0 0 261,346,153.85
1 2/15/2008 0 0 0 261,346,153.85
2 3/15/2008 0 967,387.75 967,387.75 261,346,153.85
3 4/15/2008 0 866,185.69 866,185.69 261,346,153.85
4 5/15/2008 0 905,163.08 905,163.08 261,346,153.85
5 6/15/2008 0 926,266.89 926,266.89 261,346,153.85
6 7/15/2008 0 811,464.62 811,464.62 261,346,153.85
7 8/15/2008 0 835,274.68 835,274.68 261,346,153.85
8 9/15/2008 0 828,033.93 828,033.93 261,346,153.85
9 10/15/2008 0 778,498.37 778,498.37 261,346,153.85
10 11/15/2008 0 774,504.46 774,504.46 261,346,153.85
11 12/15/2008 0 675,675.62 675,675.62 261,346,153.85
12 1/15/2009 0 756,116.21 756,116.21 261,346,153.85
13 2/15/2009 4,867,144.59 755,004.25 5,622,148.84 256,479,009.26
14 3/15/2009 37,062,167.27 707,393.54 37,769,560.82 219,416,841.99
15 4/15/2009 4,229,268.65 547,955.88 4,777,224.54 215,187,573.34
16 5/15/2009 0 633,680.93 633,680.93 215,187,573.34
17 6/15/2009 0 561,206.15 561,206.15 215,187,573.34
18 7/15/2009 0 586,647.71 586,647.71 215,187,573.34
19 8/15/2009 0 633,794.86 633,794.86 215,187,573.34
20 9/15/2009 0 582,902.94 582,902.94 215,187,573.34
21 10/15/2009 0 633,380.64 633,380.64 215,187,573.34
22 11/15/2009 0 644,655.80 644,655.80 215,187,573.34
23 12/15/2009 0 635,577.60 635,577.60 215,187,573.34
24 1/15/2010 9,328,934.39 712,734.33 10,041,668.72 205,858,638.95
25 2/15/2010 19,021,574.00 584,908.56 19,606,482.57 186,837,064.95
26 3/15/2010 2,041,260.10 587,547.63 2,628,807.73 184,795,804.85
27 4/15/2010 1,949,732.92 534,323.58 2,484,056.50 182,846,071.93
28 5/15/2010 1,862,468.53 615,066.80 2,477,535.33 180,983,603.40
29 6/15/2010 0 561,547.31 561,547.31 180,983,603.40
30 7/15/2010 0 612,039.92 612,039.92 180,983,603.40
31 8/15/2010 0 623,634.31 623,634.31 180,983,603.40
32 9/15/2010 0 614,462.21 614,462.21 180,983,603.40
33 10/15/2010 0 687,524.36 687,524.36 180,983,603.40
34 11/15/2010 0 592,747.54 592,747.54 180,983,603.40
35 12/15/2010 0 687,515.47 687,515.47 180,983,603.40
36 1/15/2011 3,687,432.84 675,065.84 4,362,498.68 177,296,170.56
37 2/15/2011 9,762,801.19 623,666.95 10,386,468.14 167,533,369.37
38 3/15/2011 1,181,211.71 629,488.43 1,810,700.14 166,352,157.66
39 4/15/2011 1,127,943.71 568,977.64 1,696,921.35 165,224,213.95
40 5/15/2011 1,077,241.41 645,749.83 1,722,991.24 164,146,972.54
41 6/15/2011 1,028,837.46 624,715.21 1,653,552.67 163,118,135.08
42 7/15/2011 1,544,742.77 687,096.73 2,231,839.50 161,573,392.31
43 8/15/2011 8,820,690.20 581,078.07 9,401,768.27 152,752,702.11
44 9/15/2011 8,413,096.14 612,967.20 9,026,063.34 144,339,605.96
45 10/15/2011 8,036,765.21 602,470.46 8,639,235.68 136,302,840.75
46 11/15/2011 7,695,564.18 519,463.28 8,215,027.46 128,607,276.57
47 12/15/2011 7,336,685.75 527,805.51 7,864,491.26 121,270,590.82
48 1/15/2012 7,000,649.51 517,474.26 7,518,123.77 114,269,941.31
49 2/15/2012 6,705,178.29 445,035.95 7,150,214.24 107,564,763.02
50 3/15/2012 5,699,620.59 480,044.78 6,179,665.37 101,865,142.43
51 4/15/2012 648,976.40 401,572.24 1,050,548.64 101,216,166.03
52 5/15/2012 619,775.44 429,710.71 1,049,486.15 100,596,390.59
53 6/15/2012 591,894.56 429,265.01 1,021,159.57 100,004,496.03
54 7/15/2012 565,260.80 443,213.19 1,008,473.99 99,439,235.23
55 8/15/2012 539,781.19 428,660.86 968,442.05 98,899,454.04
56 9/15/2012 12,278,710.25 471,346.94 12,750,057.19 86,620,743.79
57 10/15/2012 16,807,853.82 366,370.49 17,174,224.30 69,812,889.97
58 11/15/2012 15,975,623.12 309,679.75 16,285,302.87 53,837,266.85
59 12/15/2012 15,121,704.29 259,171.74 15,380,876.03 38,715,562.56
60 1/15/2013 14,548,573.85 179,054.03 14,727,627.88 24,166,988.71

11 
 
Period Date Principal Interest Cash Flow Balance
61 2/15/2013 13,908,811.61 116,786.48 14,025,598.08 10,258,177.10
62 3/15/2013 3,423,335.85 58,395.37 3,481,731.22 6,834,841.25
63 4/15/2013 1,857,757.70 36,718.73 1,894,476.43 4,977,083.55
64 5/15/2013 1,648,375.12 29,741.49 1,678,116.60 3,328,708.43
65 6/15/2013 1,147,496.04 21,270.20 1,168,766.24 2,181,212.39
66 7/15/2013 0 11,877.44 11,877.44 2,181,212.39
67 8/15/2013 0 12,779.07 12,779.07 2,181,212.39
68 9/15/2013 0 13,685.72 13,685.72 2,181,212.39
69 10/15/2013 0 12,879.64 12,879.64 2,181,212.39
70 11/15/2013 0 12,926.83 12,926.83 2,181,212.39
71 12/15/2013 0 13,404.26 13,404.26 2,181,212.39
72 1/15/2014 0 13,448.50 13,448.50 2,181,212.39
73 2/15/2014 0 13,925.55 13,925.55 2,181,212.39
74 3/15/2014 0 12,656.93 12,656.93 2,181,212.39
75 4/15/2014 0 12,254.12 12,254.12 2,181,212.39
76 5/15/2014 0 13,603.30 13,603.30 2,181,212.39
77 6/15/2014 0 14,078.81 14,078.81 2,181,212.39
78 7/15/2014 0 12,791.57 12,791.57 2,181,212.39
79 8/15/2014 0 13,265.83 13,265.83 2,181,212.39
80 9/15/2014 0 13,741.72 13,741.72 2,181,212.39
81 10/15/2014 0 13,774.85 13,774.85 2,181,212.39
82 11/15/2014 0 14,252.85 14,252.85 2,181,212.39
83 12/15/2014 0 12,946.67 12,946.67 2,181,212.39
84 1/15/2015 0 13,871.18 13,871.18 2,181,212.39
85 2/15/2015 0 13,902.37 13,902.37 2,181,212.39
86 3/15/2015 0 13,483.70 13,483.70 2,181,212.39
87 4/15/2015 0 12,612.19 12,612.19 2,181,212.39
88 5/15/2015 0 14,895.89 14,895.89 2,181,212.39
89 6/15/2015 0 13,117.30 13,117.30 2,181,212.39
90 7/15/2015 0 13,596.78 13,596.78 2,181,212.39
91 8/15/2015 0 14,531.41 14,531.41 2,181,212.39
92 9/15/2015 0 13,193.92 13,193.92 2,181,212.39
93 10/15/2015 0 14,129.66 14,129.66 2,181,212.39
94 11/15/2015 0 14,154.73 14,154.73 2,181,212.39
95 12/15/2015 0 13,721.69 13,721.69 2,181,212.39
96 1/15/2016 0 15,119.02 15,119.02 2,181,212.39
97 2/15/2016 0 12,848.98 12,848.98 2,181,212.39
98 3/15/2016 0 14,247.89 14,247.89 2,181,212.39
99 4/15/2016 0 13,348.77 13,348.77 2,181,212.39
100 5/15/2016 0 14,289.80 14,289.80 2,181,212.39
101 6/15/2016 0 13,847.49 13,847.49 2,181,212.39
102 7/15/2016 0 15,251.54 15,251.54 2,181,212.39
103 8/15/2016 0 12,956.03 12,956.03 2,181,212.39
104 9/15/2016 0 14,359.97 14,359.97 2,181,212.39
105 10/15/2016 0 14,838.29 14,838.29 2,181,212.39
106 11/15/2016 0 13,459.77 13,459.77 2,181,212.39
107 12/15/2016 0 14,400.27 14,400.27 2,181,212.39
108 1/15/2017 255,633.56 14,876.19 270,509.75 1,925,578.83
109 2/15/2017 1,703,496.57 11,909.64 1,715,406.21 222,082.26
110 3/15/2017 222,082.26 1,563.96 223,646.22 0

12 
 
EXHIBIT D

$ 100 MILLION IMPAIRED MBS FUND *


3 YEAR OPERATING PROJECTIONS

* Notional Principal Balance Based Upon Discount To Par is Approximately $ 261 Million.

Year 1

Month 1 2 3 4 5 6 7 8 9 10 11 12 Total

Interest Income 0 967,388 866,186 905,163 926,267 811,465 835,275 828,034 778,498 774,504 675,676 756,116 9,124,571 9.12%

Compensation (A) 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 1,023,500
Technology/Information Systems (B) 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 78,000 Current Yield Before Expenses
Legal 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000
Rent 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 39,000
Current Yield After Expenses
Total Expenses 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 1,200,500

Net Income Before Taxes $ (100,042) $ 867,346 $ 766,144 $ 805,121 $ 826,225 $ 711,423 $ 735,233 $ 727,992 $ 678,457 $ 674,463 $ 575,634 $ 656,075 $ 7,924,071 7.92%

Year 2

Month 13 14 15 16 17 18 19 20 21 22 23 24 Total

Interest Income 755,004 723,205 675,106 799,293 707,674 739,473 798,532 734,025 797,129 810,823 798,898 895,304 9,234,467 9.23%

Compensation (A) 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 1,023,500
Technology/Information Systems (B) 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 78,000 Current Yield Before Expenses
Legal 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000
Rent 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 39,000
Current Yield After Expenses
Total Expenses 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 100,042
100 042 1,200,500
1 200 500

Net Income Before Taxes 654,963 623,163 575,064 699,252 607,632 639,431 698,490 633,983 697,088 710,781 698,856 795,262 8,033,967 8.03%

Year 3

Month 25 26 27 28 29 30 31 32 33 34 35 36 Total

Interest Income 774,216 873,701 804,305 936,743 864,894 941,531 958,274 943,167 1,054,257 908,086 1,052,382 1,032,542 11,144,096 11.14%

Compensation (A) 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 85,292 1,023,500
Technology/Information Systems (B) 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 78,000 Current Yield Before Expenses
Legal 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000
Rent 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 39,000
Current Yield After Expenses
Total Expenses 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 100,042 1,200,500

Net Income Before Taxes $ 674,174 $ 773,659 $ 704,263 $ 836,701 $ 764,852 $ 841,489 $ 858,232 $ 843,125 $ 954,215 $ 808,044 $ 952,340 $ 932,501 $ 9,943,596 9.94%

A. Compensation Base Benefits Total Monthly

Lead Portfolio Manager 250,000 37,500 287,500 23,958


Trader 225,000 33,750 258,750 21,563
Forensic Team Leader 175,000 26,250 201,250 16,771
QC Analyst 1 95,000 14,250 109,250 9,104
QC Analyst 2 80,000 12,000 92,000 7,667
Support 65,000 9,750 74,750 6,229

$ 890,000 $ 133,500 $ 1,023,500 $ 85,292

B. Technology/Data

Intex 3,000
Bloomberg 1,500
Lexis/Nexis 1,000
Misc. (Debtor Discovery, Realquest, Hansen,etc…)
1,000

$ 6,500