RMBS Rating Methodology Jerry Fang Associate, Structured Finance Ratings Taiwan Ratings Corporation July 7, 2004

RMBS Rating Methodology  Mortgage loan and property market research  Determine market value decline under a worst case scenario  Determine expected loss and required credit enhancement under a worst case scenario

Credit Analysis  What is the likelihood of default in the underlying mortgage portfolio?  If a obligor defaults, how much will be lost relative to the original amount of the loan with respect to the loan agreement?

Credit Risk Q: Why do we need to quantify credit risk? A: To know how much credit support is required in particular rating categories Required credit support Default Frequency Loss Severity Expected losses X =

Other Risks  Credit risk is only one of the risks considered in a securitization structure  Required credit support will also quantify other risks such as commingling risk, set-off risk, and servicer transition risk

RMBS Rating Methodology- Expected Credit Loss Assumption  Start with a benchmark pool  Then estimate the default frequency and loss severity of the loan pool to be securitized

Benchmark Pool  Pool size - minimum 300 loans  Loan term - 25 years  Max. loan size - Taipei NT$6 million; others NT$3.5million  Loan to value - maximum 70%  Geographic dispersion (by postal code) - maximum Taipei 10%; others 5%  Borrower status - salaried or professional  Property features - less than 10 years or in prime location  Loan record - no delinquency within the past 24 months  Use of funds - purchase home; no equity take-out

Determine Loss Severity - Market Value Decline Assumption  Based on loss experience, real estate status and macroeconomic conditions  Determine maximum market value decline under worst case scenario for its rating level  Categorize market value decline into four regions: Taipei City, northern Taiwan, central Taiwan and southern Taiwan

Market Value Decline Assumption* twAAA - twBBB Taipei City 30% - 18% Northern Taiwan 36% - 24% Central Taiwan 48% - 36% Southern Taiwan 48% - 36% * Ratio only applies to the benchmark pool

Determine Loss Severity  Original property value  Market value decline  Auction discount  Selling costs  Legal costs  Accrued interest

Loss Severity Assumption* twAAA - twBBB Taipei City 55% - 32% Northern Taiwan 61% - 38% Central Taiwan 72% - 52% Southern Taiwan 72% - 52% * Ratio subject to change to reflect risks of the loan pools

Credit Loss Assumption  Default frequency x loss severity = expected credit loss -----> required credit support  Default probability: twAAA - twBBB 11% - 5%  Expected credit loss twAAA - twBBB Taipei City 6.1% - 1.6% Northern Taiwan 6.7% - 1.9% Central and Southern Taiwan 7.9% - 2.6% * Ratio only applies to the benchmark pool

RMBS Case Study First Com’l Bank 2003 Special Purpose Trust  Issuer: Deutsche Bank AG, Taipei Branch as trustee of the First Commercial Bank 2003 Special Purpose Trust (SPT)  Closing Date: Mar. 2, 2004  Final Legal Maturity Date: Apr. 21, 2033  Originator/Account Bank: First Commercial Bank  Servicer: First Commercial Bank  Trustee/ Substitute Servicer: Deutsche Bank AG, Taipei Branch  Arranger: Deutsche Bank AG, Taipei Branch

RMBS Case Study First Com’l Bank 2003 Special Purpose Trust

Transaction Overview

The Underlying Mortgage Portfolio vs. Benchmark Pool FCB RMBS Benchmark Pool Pool size 2,026 loans Min. 300 Loan size Avg. 2.4 million Max. loan size - Taipei NT$6 million; others NT$3.5 million Age of property Avg. 12.5 years Less than 10 years or in prime location Geographical concentration (in terms of zip code) Below 6% Maximum Taipei 10%; others 5%

Credit Analysis  Based on TRC’s RMBS criteria  Specific attributes of loan pool  Historical performance of FCB’s overall mortgage loans and mortgage loans originated in northern Taiwan

Cash Flow Analysis  Stress levels in terms of default frequency and loss severity of the loan pool for each rated tranche  Flexibility that the servicer will have in reducing the interest margin no less than 1.1%. But this type of resetting limited to 25% of the loan pool in terms of loan balance.  Assume various levels of prepayment, interest indices, and delinquencies.

Structural Analysis  Interest rate risk  Prepayment risk  Commingling risk  Set-off risk  Servicer transition risk  Servicer of last resort vs. contracted back-up servicer  Cash reserves vs. liquidity facility  Earthquake risk

Legal Analysis  Legal analysis  Tax analysis  True sale  SPT bankruptcy remoteness  Tax analysis

What Ratings Do Not Address  Early maturity of certificates due to prepayment  Total return of certificates  Likelihood of downgrade  Fraud and mistakes on part of issuer