DBRS Rates Interest Rate Swap Termination Payments for Swap Agreements Between JPMorgan Chase Funding Inc. (Swap Counterparty) and RMBS Trusts

DBRS has assigned the following ratings to the ultimate payment of any potential interest rate swap termination amounts which may be owed by the RMBS trusts to JPMorgan Chase Financial Products Inc. in the event of a failure to pay default where the trust is the defaulting party.

• Interest rate swap transaction between Supplemental Interest Trust, Ace Securities Corp. Home Equity Loan Trust, Series 2007-HE5 and JPMorgan Chase Funding Inc. with a swap termination date of June 25, 2012 rated at ‘A’ (sf).

• Interest rate swap transaction between Supplemental Interest Trust, Option One Mortgage Loan Trust 2006-3, Asset Backed Certificates, Series 2006-3 and JPMorgan Chase Funding Inc. with a swap termination date of August 25, 2012 rated at ‘A’ (sf).

The ratings do not address a) the likelihood that a swap termination event occurs on or before the swap termination date (b) the payment of any swap termination payments owed by JPMorgan Chase to the trusts and (c) termination payments owed by the trusts to JPMorgan Chase if JPMorgan Chase is the defaulting party.

The interest rate swaps in the RMBS trusts provide for a fixed rate payment to JPMorgan Chase in exchange for a floating rate (LIBOR) payment by JPMorgan Chase to the trusts. The swaps were intended to protect the capital structure against rises in interest rates. Currently LIBOR rates have fallen since transaction issuance. If these swap contracts were to terminate today, there would be termination payments owed to JPMorgan Chase.

As part of the rating analysis, DBRS considers the adequacy of the collateral backing the RMBS trusts to cover the swap termination payments, the performance of the collateral as well as the quality of the legal and financial structure.

DBRS first uses the RMBS methodology to evaluate the collateral quality and project expected losses on the remaining collateral. We then assess the risk that the collateral may exhaust, due to fast prepayments and/or loss occurrence, before the interest rate swaps expire. DBRS’s cash flow analysis includes running multiple fast voluntary prepayment speeds and passing through expected losses in a front-loaded pattern under various rating scenarios. Once cash flows are run, the stressed collateral cash flow is then compared against each period’s swap termination payments to determine if there is sufficient coverage to make these termination payments by the legal final maturity of the RMBS trusts. In all of these transactions, the swap termination payments owed to JPMorgan Chase are senior in the payment priority to the certificate holders if the trust is the defaulting party.

To calculate the swap termination payments, DBRS first derives the net swap cash flow for each period by comparing a) the fixed stream of payments from the trust to JPMorgan Chase against b) the LIBOR payments which JPMorgan Chase would expect to pay to the trust. We then calculate the swap termination payments to be the present value of the future stream of net swap cash flow. In our analysis, swap termination payments are conservatively stressed for each distribution date by flooring interest rates at 0% and assuming a 0% discount rate for the present value calculation.

A rating is only assigned when under such rating scenario, there is sufficient coverage of collateral to ultimately pay the swap termination payment should the trust default on such obligation on any distribution date.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating U.S. Residential Mortgage-Backed Securities Transactions, which can be found on our website under Methodologies.