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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% _ 8g ° i) a 45% . c ; 40% 32 & 3000 ------------ ER ee eee A rs sas seas en cs eee es = ee eee Ses a 4 g J 35% x & + 5 J 30% < wo > 2,000 - cum & am er AMGo 2 m2 cen com mum = mem can gum om 8 EE 25% a 2 i ° 20% y = = gs 15% = 5 1,000 -- me ---- - - - tg - - - GR - - - - - - ---- + 3 v 2 10% E wa = a 5% & g a e 0: | 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 == Conventional =a: Jumbo mas Subprime am Alt-A mam Home Equity “as FHA/VA =——Total Non-Conventional as % of Total KP Source: Inside Mortgage Finance. BSF owe poo com 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% t 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. (@ EB) www.kpcb.com USA Inc. | Income Statement Drilldown 186 HOUSE_OVERSIGHT_020934