Banks & Other Mortgage Originators Helped Fuel Housing Bubble as They
Originated Lower Quality Mortgages — Alt-A & Subprime Origination Volumes Up 374% & 94% in 2006 vs. 2003
USA Residential Mortgage Origination by Product Type, 2001 — 2010
4,000 ~~~ ~~ ~~ nn 50% _ sg ° te) o 45% a & ° c F 40% x & 3000 -------------- ee een Ss sas seas a cs ees es = te ees Ses a ee 4 g J 35% x = 2 5 J 30% < wo > 2,000 - cum 6 fam er AMGa 2 m2 cen com mum mem sam gum a m8 eee 25% = 2 a ° 20% y = & s 15% = § 1,000 -- meg ---- i - - - Ge - - - RR - - - - - ---- + . 10% g v = cw 5% & g a 2 0: 1 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ==) Conventional “as: Jumbo mam Subprime mm Alt-A mam Home Equity “as FHA/VA =—— Total Non-Conventional as % of Total KP Source: Inside Mortgage Finance. i USA Inc. | Income Statement Drilldown 185
Real Estate Bubble: Investors Helped Fuel It, Too, as They Reached For Yield
Without Questioning AAA Ratings of A Subprime-Backed Investments
Investors picked up 25-35bps over U.S. Treasuries with comparable maturity, typically levered 10:1 and generated 2.5-3.5% yield, meaningful against an 8% annual yield target
Illustrative AAA-Rated Subprime RMBS Yield Spread* with 10x Leverage, 2/05 — 2/07 4.0%
3.6%
3.2%
2.8%
2.4%
Subprime RMBS Yield Spread vs. 7-Year Swap Rate
2.0% i T T T T T T T T T T T 2/05 4/05 6/05 8/05 10/05 12/05 2/06 4/06 6/06 8/06 10/06 12/06
Note: Illustrative AAA-rated subprime RMBS spread represented as Mezzanine CDO spread vs. 7-year swap rate.
KP Source: Betsy Graseck, Morgan Stanley Research. (@E) www.kpcb.com USA Inc. | Income Statement Drilldown 186
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