DBRS Rates Potential Interest Rate Swap Termination Payments for Swap Agreements Between The Royal Bank of Scotland PLC (Swap Counterparty) and RMBS Trusts

DBRS, Inc. (DBRS) has assigned the following ratings to the ultimate payment of any potential interest rate swap (IRS) termination amounts which may be owed by the RMBS trusts to The Royal Bank of Scotland plc in the event of a failure to pay default where the trust is the defaulting party.

• Interest rate swap transaction between Supplemental Interest Trust, Lehman XS Trust Mortgage Pass-Through Certificates, Series 2007-14H and The Royal Bank of Scotland plc with a swap termination date of July 25, 2012 rated at AAA (sf).

• Interest rate swap transaction between Supplemental Interest Trust, Soundview Home Loan Trust, 2007-WMC1, Asset Backed Certificates Series 2007-WMC1 and The Royal Bank of Scotland plc with a swap termination date of March 25, 2012 rated at AA (sf).

• Interest rate swap transaction between Supplemental Interest Trust, Merrill Lynch Mortgage Investors Trust, Series 2006-HE6 and The Royal Bank of Scotland plc with a swap termination date of December 25, 2011 rated at AAA (sf)

• Interest rate swap transaction between Supplemental Interest Trust, ACE Securities Corp. Home Equity Loan Trust, Series 2006-ASAP6 and The Royal Bank of Scotland plc with a swap termination date of March 25, 2012 rated at AAA (sf).

• Interest rate swap transaction between Supplemental Interest Trust, Luminent Mortgage Trust 2007-2 and The Royal Bank of Scotland plc with a swap termination date of May 25, 2014 rated at A (sf).

• Interest rate swap transaction between Supplemental Interest Trust, First Franklin Mortgage Loan Trust 2006-FF17 and The Royal Bank of Scotland plc with a swap termination date of November 25, 2012 rated at AA (sf).

• Interest rate swap between Supplemental Interest Trust, BNC Mortgage Loan Trust 2006-2 and The Royal Bank of Scotland plc with a swap termination date of October 25, 2012 rated at AA (sf).

• Group 1 interest rate swap transaction between Supplemental Interest Trust, Lehman XS Trust Mortgage Pass-Through Certificates, Series 2007-3 and The Royal Bank of Scotland plc with a swap termination date of February 25, 2012 rated at AAA (sf).

• Group 2 interest rate swap transaction between Supplemental Interest Trust, Lehman XS Trust Mortgage Pass-Through Certificates, Series 2007-3 and The Royal Bank of Scotland plc with a swap termination date of February 25, 2012 rated at AAA (sf).

The interest rate swaps in the RMBS trusts provide for a fixed rate payment to The Royal Bank of Scotland plc in exchange for a floating rate (LIBOR) payment by The Royal Bank of Scotland plc to the trusts. The swaps were intended to protect the capital structure in the RMBS trusts 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 The Royal Bank of Scotland plc.

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.

When rating swap termination payments, DBRS is assessing the ability of the trust making the swap termination payments to the counterparty by the legal final maturity date of the transaction. DBRS uses its RMBS Insight loss model to assess the probability of default, loss severity and expected losses on the underlying pool. An enhanced cash flow analysis is then performed to assess the risk that the collateral may exhaust, due to fast prepayments and/or loss occurrence, before the interest rate swaps expire.

DBRS 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 these transactions, the swap termination payments owed to The Royal Bank of Scotland plc 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 the swap counterparty against b) the LIBOR payments which the counterparty would expect to pay to the trust. DBRS then aggregates the net swap cash flow for all future periods to derive the total potential swap termination payments. In these transactions there is a penalty rate assessed for any unpaid swap termination payments. DBRS uses its unified interest rate model to stress such penalty rate.

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

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 The Royal Bank of Scotland plc to the trusts and (c) termination payments owed by the trusts to The Royal Bank of Scotland plc if The Royal Bank of Scotland plc is the defaulting party.

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

The applicable methodology is RMBS Insight: U.S. Residential Mortgage-Backed Securities Loss Model and Rating Methodology, which can be found on our website under Methodologies.