December 19, 2009

VIA E-MAIL

Michael S. Barr
Acting Under Secretary for Domestic Finance and Assistant Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Re: Recommended Steps to Enable Market Participants to Allocate Principal Forborne under
HAMP as a Realized Loss in a Securitization Trust

Dear Mr. Barr:

The American Securitization Forum (the “ASF”)1 submits this letter on behalf of its membership,
including institutional investor, primary servicer, master servicer, trustee and securities
administrator members to describe the obstacles currently preventing transaction parties from
appropriately allocating principal forborne under the Home Affordable Modification Program
(“HAMP”) as a realized loss in securitization trusts and provide recommendations that would
substantially assist in eliminating those obstacles. The ASF Board of Directors approved by vote
the submission of this letter to Treasury although certain constituent members voiced concern
over its submission.2

Because forborne principal under HAMP is not addressed in existing pooling and servicing
agreements (“PSAs”), primary servicers, master servicers, trustees and securities administrators
(collectively, the “transaction parties”) believe that they risk legal liability if they determine such
amounts to be realized losses. Therefore, to ensure that Treasury’s guidance on this subject is
followed by all applicable transaction parties, the ASF requests that Treasury undertake four

1
The American Securitization Forum is a broad-based professional forum through which participants in the U.S.
securitization market advocate their common interests on important legal, regulatory and market practice issues.
ASF members include over 340 firms, including issuers, institutional investors, servicers, financial intermediaries,
rating agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in
securitization transactions. The ASF also provides information, education and training on a range of securitization
market issues and topics through industry conferences, seminars and similar initiatives. For more information about
ASF, its members and activities, please go to www.americansecuritization.com.
2
Certain members with significant exposure to RMBS, including subordinated investors and financial guarantors,
believe that the determination of how to treat forborne principal in a securitization is a contract matter, between
private parties, which is best settled directly between those parties or through the judicial system as necessary.
initiatives. First, the Servicer Participation Agreement and the HAMP Guidelines (as released
on March 4, 2009, the “HAMP Guidelines”3) should be revised to require that, in order for any
applicable loan modification to be effective, (i) the primary servicer shall report to the securities
administrator any forborne principal as a realized loss and (ii) the securities administrator shall
allocate any such reported forborne principal as a realized loss to the trust and the primary
servicer shall presumptively rely that such allocation has occurred. To eliminate any potential
ambiguity, the HAMP Guidelines and the Servicer Participation Agreement should also be
revised to clarify certain statements included therein relating to restrictions contained in existing
PSAs or other servicing contracts. Second, Treasury should issue a preamble to the revised
HAMP Guidelines stating its intention that (a) these changes constitute a standard industry
practice and (b) transaction parties who rely upon these changes act in a manner consistent with
the safe harbor provisions. Third, Treasury should issue guidance in the form of an FAQ
clarifying that the reporting and allocation of forborne principal as realized losses are a necessary
part of implementing a qualified loss mitigation plan pursuant to HAMP. Fourth, Treasury
should request that the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”) issue either a regulation or an interpretive letter clarifying that the safe harbor provision,
15 U.S.C. § 1639a—which, as discussed further below, shields servicers and other transaction
parties from liability stemming from the implementation of, or cooperation necessary for the
implementation of, a qualified loss mitigation plan, including a residential loan modification
undertaken under HAMP—covers actions taken by primary servicers, master servicers, trustees
and securities administrators to effectuate or enable the reporting and allocation of forborne
principal as a realized loss. The ASF believes that these actions would provide necessary
comfort to transaction parties that they are protected by the safe harbor when reporting or
allocating, as applicable, forborne principal as a realized loss.

A key mechanic of HAMP to bring a troubled borrower’s payment to the target of 31% debt-to-
income ratio (“DTI”) is to forbear principal without accruing interest on that amount and adding
the forborne amount as a balloon payment to be paid on the loan’s maturity date or at the
resolution of the loan, whichever occurs first. This long-term, non-interest bearing forbearance
may be an effective means to avoid the moral hazard of borrowers seeking to reduce their overall
principal obligations, while simultaneously reducing their monthly payments to an amount that
they are able to meet. But historically, long-term, non-interest bearing principal forbearance has
not been employed by mortgage servicers, particularly for loans held in residential mortgage-
backed securities trusts (“RMBS”), and is only being used now largely in the context of HAMP
modifications. As such, the precise way to account for principal forborne under HAMP in
RMBS transactions is not clear, as most PSAs do not specifically address the issue. Explicit
provisions relating to modifications of mortgage loans are a relatively new addition to the PSAs
that govern each RMBS transaction and our members have raised significant concerns with

3
It is the March 4, 2009 guidelines that should be reissued or amended to reflect our proposed changes. Provisions
of the Servicer Participation Agreement carefully differentiate between “program guidelines” on one hand, and
supplemental documentation, instructions, bulletins, letters, directives, or other communications on the other. See
Paragraph 1.B. Furthermore, in the event of a conflict between the program guidelines on the one hand, and
supplemental guidance or FAQs on the other hand, the guidelines control. See Paragraph 11.G. Thus, in order to
assure transaction parties that the servicer safe harbor protections will apply, our recommended changes should be
incorporated into the March 4, 2009 HAMP program guidelines.

2
Treasury and others about the ambiguity of PSAs on the treatment of forborne principal. When
HAMP was introduced, this ambiguity gave rise to competing views of senior and subordinate
investors regarding forborne principal and the primary servicer, master servicer and trustee
members of the ASF held an extensive series of meetings to discuss the issue and determine the
existence of any market practice or potential solution. During this time, the ASF developed a
discussion paper to explain the effects of principal forbearance on RMBS transactions and
potentially facilitate a broad market view. On June 18, 2009, the ASF publicly released its
“Discussion Paper on the Impact of Forborne Principal on RMBS Transactions” (the “ASF
Discussion Paper”)4 which highlighted the cashflow issues resulting from forborne principal and
the various market views on the subject. The ASF Discussion Paper is attached hereto as
Exhibit A.

In response to the industry’s increasing concern regarding this issue, Treasury posted a
“frequently asked question” (“FAQ”) on HAMP’s Administrative Website on July 22, 2009
which effectively adopted the FDIC’s view5 that forborne principal should be allocated as a
realized loss in RMBS transactions. However, most transaction parties believe that Treasury’s
initial guidance did not provide sufficient clarity, especially because it included the statement
“unless directed otherwise by the applicable pooling and servicing agreement or trust agreement”
and because almost all existing PSAs do not explicitly provide for long-term, non-interest
bearing forborne principal as contemplated by HAMP. Treasury updated the FAQ on October
29, 2009 to more specifically address PSAs that did not contain provisions relating to this type of
forborne principal. As modified, the FAQ states that servicers and securities administrators “are
permitted not to treat HAMP principal forbearance amounts as realized losses if, and only if, (i)
the applicable securitization pooling or trust agreement specifically addresses principal
forbearance in the HAMP context (i.e., it includes the permanent forgiveness of interest and
postponement of principal repayment for a long period....) and (ii) such agreement explicitly and
affirmatively directs that such forborne principal not be treated as a realized loss.”6 Furthermore,
the FAQ specifically indicates that “principal forbearance in the context of HAMP” does not
include forbearance which only delays the date on which principal payments are due for short
periods and for which interest continues to accrue.

The ASF believes that the updated FAQ clearly sets forth Treasury’s view that principal forborne
under HAMP should be allocated as a realized loss in what essentially amounts to all outstanding
RMBS transactions. However, implementation of the FAQ by the market has proven difficult in
large part because some market participants believe that Treasury’s FAQ has limited legal effect
and may not offer sufficient legal protection for transaction parties. For this reason, such market
participants believe a party to a PSA that did not specifically provide for forborne principal as
contemplated by HAMP could risk legal liability if such party applied the forborne amount as a
realized loss. Furthermore, because PSAs do not specifically address forborne principal as

4
See http://www.americansecuritization.com/uploadedFiles/ASF_Principal_Forbearance_Paper.pdf
5
“FDIC Loan Modification Program,” page 9,
See http://www.fdic.gov/consumers/loans/loanmod/FDICLoanMod.pdf
6
See https://www.hmpadmin.com/portal/docs/hamp_servicer/hampfaqs.pdf. As of the date hereof, FAQ #33 relates
to forborne principal being allocated as a realized loss.

3
contemplated by HAMP, they are also generally silent as to which transaction party, if any, is
required to make a determination whether a forborne amount under HAMP constitutes a realized
loss. Generally, primary servicers report realized losses to the master servicer or trustee for
loans that have been liquidated. The amount of the realized loss reported would generally be the
difference between the principal balance of the loan and the net liquidation proceeds received in
foreclosure that represent principal on the loan. However, when principal is forborne pursuant to
HAMP, this type of liquidation does not occur because the forborne amount is still due and
primary servicers would generally report it as a forbearance.7 Upon receipt of reported loan
information from the primary servicer, the master servicer or trustee will use it to administer the
cashflows of the transaction in such party’s role as securities or bond administrator (in this role,
the “securities administrator”). Thus, the securities administrator is responsible for allocating
realized losses to the certificates issued by the trust but is generally not responsible for making a
determination that a realized loss exists on any given loan. Since long-term, non-interest bearing
principal was not explicitly contemplated, existing PSAs do not designate any particular party for
this type of realized loss determination and, notwithstanding the language of the safe harbor, the
risk of liability dissuades both primary servicers and securities administrators from volunteering
to make it.

Potential liability aside, most of the ASF’s institutional investor, primary servicer, trustee and
master servicer members agree that principal forborne under HAMP should be allocated to the
trust as a realized loss. This view is based on (i) the typical RMBS transaction structure, which
is designed to allocate payments to senior certificates before subordinate certificates and to
allocate losses to subordinate certificates before senior certificates, and (ii) the fact that principal
forbearance amounts under HAMP are, in effect, substantially similar to realized losses. When
principal is forborne under HAMP, the loan’s payment stream becomes impaired because the
forborne principal’s interest cashflows are terminated and the forborne amount becomes an
uncertain potential recovery at the maturity of the loan, particularly for ‘underwater’ borrowers.
For this reason, the forborne principal’s net economic value to the trust is extremely low and
very much akin to principal forgiveness. In fact, senior certificates generally experience a worse
outcome if principal forbearance is not treated as a realized loss than they would have otherwise
received if the loan were liquidated in full because the subordinate certificates ultimately receive
payments that would otherwise be payable to the senior certificates. The specific effects of
forborne principal on the cashflow structures used in RMBS transactions are described in
substantial detail in the attached ASF Discussion Paper.

The ASF and most of its members believe that allocating forborne principal as a realized loss at
the time of the modification is the most equitable solution to this problem. We believe that
upholding the integrity of subordination is critical to future investment in RMBS transactions
and that a solution promoting realized loss allocation would most effectively maintain that
integrity. Senior certificateholders, which represent over 90% of the RMBS market,
undoubtedly relied on subordination being available when the collateral underlying their
certificates became impaired. In addition, rating agencies also relied on subordination being
available for impaired collateral when assigning AAA ratings to the senior RMBS of each

7
Some ASF members believe that forbearance under HAMP results in a partial liquidation of the loan because the
interest on the forborne principal is fully liquidated and no longer due.

4
transaction. In fact, our senior investor members are extremely concerned that rating agencies
may eventually be forced to downgrade senior certificates if forborne principal is not treated as a
realized loss in a particular transaction. If this occurred, many institutional investors that have
ratings-based investment requirements, including 401(k) plans and pension funds, would have to
sell the downgraded securities at distressed prices, thereby reducing retirement fund balances
available for the individuals invested in those funds.

Primary servicers are generally required to report realized losses to securities administrators,
who then apply them to the trust. However, the limitations of most PSAs and the risk of legal
liability have inhibited primary servicers from making this determination as to forborne principal
since HAMP was introduced. Primary servicers do benefit from a legislative safe harbor for the
purpose of making modifications, but there have been questions within the industry as to whether
this safe harbor would extend to treating forborne principal as a realized loss. The “Helping
Families Save Their Homes Act of 2009”8 (the “Helping Families Act”) provides primary
servicers with a safe harbor for implementing a “qualified loss mitigation plan,” which includes
“a residential loan modification…that is described or authorized in guidelines issued by the
Secretary of the Treasury or his designee under the Emergency Economic Stabilization Act of
2008….” 15 U.S.C. § 1639a(b), (f)(1)(A). In addition, the safe harbor extends to other
transaction parties who cooperate with a servicer “when such cooperation is necessary for the
servicer to implement a qualified loss mitigation plan....” Id. § 1639a(d). Thus, the safe harbor
extends to primary servicers to the extent they modify a loan under HAMP and to other
transaction parties to the extent their cooperation is necessary to implement such a modification.
It is less clear, however, whether the safe harbor extends to a primary servicer’s determination
that forborne principal under HAMP be reported as a realized loss, or to actions taken by other
transaction parties to effectuate or enable the reporting or allocation of forborne principal as a
realized loss. Accordingly, the ASF requests that Treasury take action with respect to the four
initiatives outlined below.

First, the Servicer Participation Agreement and the HAMP Guidelines should be revised to
require that, in order for any applicable loan modification to be effective, (i) the primary servicer
shall report to the securities administrator any forborne principal as a realized loss and (ii) the
securities administrator shall allocate any such reported forborne principal as a realized loss to
the trust9 and the primary servicer shall presumptively rely that such allocation has occurred.
Furthermore, to eliminate any potential ambiguity, the HAMP Guidelines10 and the Servicer

8
See http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_public_laws&docid=f:publ022.111.pdf
9
The reported forborne principal should be allocated as a realized loss such that, for purposes of calculating
distributions to certificateholders, such forborne amount is no longer outstanding under the amortization schedule
applicable to the mortgage loan. Furthermore, the ASF does not believe that this realized loss allocation should
affect the calculation of mortgage insurance premiums, which are not the subject of Treasury’s directive.
10
The March 4, 2009 HAMP guidelines state that that “[p]articipating servicers are required to consider all eligible
loans under the program guidelines unless prohibited by the rules of the applicable PSA and/or other investor
servicing agreements.”

5
Participation Agreement11 should also be revised to clarify certain statements included therein
relating to restrictions contained in existing PSAs or other servicing contracts. The ASF
recommends specifically conforming such statements to the language set forth in the FAQ,
which states that forborne principal must be treated as a realized loss unless the applicable PSA
(or trust agreement) “specifically addresses principal forbearance in the HAMP context (i.e., it
includes the permanent forgiveness of interest and postponement of principal repayment for a
long period, as described below)” and it “explicitly and affirmatively directs that such forborne
principal not be treated as a realized loss.”12 Our proposed changes to the HAMP Guidelines are
attached as Exhibit B. If Treasury agrees in principle with the recommendations set forth above
with respect to the Servicer Participation Agreement, the ASF requests that it be provided an
opportunity to assist Treasury in revising the Servicer Participation Agreement prior to its
release.

Second, Treasury should issue a preamble statement when it releases the revised HAMP
Guidelines and set forth its intention that the program guideline changes discussed above
constitute a standard industry practice within the meaning of Section 201(c) of the safe harbor
provision. Like other HAMP Guideline provisions, these changes shall constitute standard
industry practice. Importantly, in this same preamble, Treasury should also affirmatively state its
intention in issuing these revisions that transaction parties who act in accordance with these
revised guidelines be protected under the safe harbor provisions and its request (set forth below)
that the Federal Reserve Board clarify that such provisions provide such protection. Proposed
text for the preamble is attached as Exhibit C.

Third, Treasury should issue guidance, in the form of an updated FAQ, stating that (i) a primary
servicer’s reporting of forborne principal prescribed by the revised HAMP Guidelines is
necessary to implement a qualified loss mitigation plan under HAMP and furthers Treasury’s
mandate under the Emergency Economic Stabilization Act of 2008 to restore liquidity and
stability to the financial system and (ii) master servicers, trustees or securities administrators who
allocate forborne principal as a realized loss to the trust for purposes of calculating distributions
and losses to certificateholders, or otherwise take any action to facilitate the treatment of

11
Section 2.B. of the Servicer Participation Agreement states that servicers “may be subject to restrictions set forth
in pooling and servicing agreements or other servicing contracts governing Servicer’s servicing of a mortgage loan;
Servicer shall use reasonable efforts to remove all prohibitions or impediments to its authority, and use reasonable
efforts to obtain all third party consents, waivers and delegations that are required, by contract or law, in order to
perform the Services.” The Servicer Participation Agreement goes on to state that if “the pooling and servicing
agreement or other servicing contract governing Servicer’s servicing of a mortgage loan prohibits Servicer from
performing such Services for that mortgage loan, Servicer shall not be required to perform such Services with
respect to that mortgage loan….” These statements (and a few other minor ones), would need to be revised before
servicers could effectively institute the steps taken in this letter to implement modifications under HAMP.
12
The FAQ continues, “For the avoidance of doubt, “principal forbearance” in the context of HAMP is non-interest
bearing and non-amortizing. Securitization pooling or trust agreements often use the term “principal forbearance” in
a context which only requires delaying of the date on which certain payments of principal are due for short periods;
interest typically continues to accrue and is required to be capitalized. For HAMP, not only must principal
forbearance delay the date in which such forborne principal is due to maturity sale or payoff, but no interest may
accrue on such forborne amounts.”

6
principal forbearance as a realized loss pursuant to the HAMP Guidelines, are providing
cooperation necessary for the servicer to implement a qualified loss mitigation plan under
HAMP. A proposed FAQ reflecting this guidance is attached as Exhibit D.

Fourth, Treasury should request that the Federal Reserve Board clarify that the terms of the safe
harbor include reporting and allocating forborne principal as a realized loss. The Federal
Reserve Board administers the Truth in Lending Act (“TILA”), into which the Helping Families
Act’s safe harbor provision was inserted, and has the statutory authority to “prescribe regulations
to carry out the purposes” of TILA. See 15 U.S.C. § 1604(a). The ASF therefore believes that
regulatory action by the Federal Reserve Board clarifying the terms of the safe harbor provision
would also substantially assist in ensuring that the safe harbor provides all applicable transaction
parties with necessary protection. Because, however, Treasury administers HAMP and has
expertise regarding HAMP and the purpose of the provisions governing treatment of forborne
principal under HAMP, the ASF believes that Treasury would play a crucial role in obtaining
such regulatory action by the Federal Reserve Board. The ASF therefore asks that Treasury
request that the Federal Reserve Board urgently issue either a regulation pursuant to 15 U.S.C. §
1604(a) (which could take the form of an interim final rule, see 5 U.S.C. § 553(b)(B)) or a staff
interpretative ruling pursuant to Appendix C of Regulation Z, the substance of either of which
could be to clarify that the accounting treatment of principal forbearance prescribed by Treasury
through the HAMP Guidelines and the Servicer Participation Agreement is a standard industry
practice within the meaning of Section 201(c) of the Helping Families Act. Treasury should also
ask the Federal Reserve Board to include a clarification in the regulation or staff interpretative
ruling that the treatment of forborne principal is an integral part of any applicable “qualified loss
mitigation plan”, and that any actions taken by primary servicers, master servicers, trustees or
securities administrators to carry out or enable such accounting treatment are thus within the
scope of the safe harbor.13 TILA contemplates that, in promulgating regulations, the Federal
Reserve Board “may obtain upon request the views of any other Federal agency which, in the
judgment of the Board, exercises regulatory or supervisory functions with respect to any class of
creditors subject to this subchapter,” 15 U.S.C. § 1608, and we believe it is thus appropriate for
Treasury to provide the Federal Reserve Board with its views on this subject. The ASF is
planning to submit a separate request to the Federal Reserve Board in the next few weeks.

If the above four initiatives are completed, transaction parties will be assured of the necessary
protection to report and allocate forborne principal as a realized loss. The ASF believes that the
changes to the Servicer Participation Agreement and the HAMP Guidelines should be made so

13
More specifically, such a regulation could clarify the safe harbor by providing that (1) both primary and master
servicers are “person[s] responsible for the servicing for others of residential mortgage loans” under 15 U.S.C. §
1639a(f)(2); (2) “agree[ing] to enter into a qualified loss mitigation plan” under § 1639a(a) encompasses actions
taken by both primary and master servicers with regard to a modified loan; (3) “implement[ing] a qualified loss
mitigation plan” for purposes of § 1639a encompasses both the determination to treat forborne principal as realized
loss in accordance with Treasury guidelines and the allocation of losses stemming from such treatment; (4) a
servicer is “deemed to be acting in the best interests of all investors or other parties” under § 1639a(b) when the
servicer implements a qualified loss mitigation plan as defined by the regulation; and (5) actions taken by master
servicers, trustees, and trust administrators in determining to treat forborne principal as a realized loss in accordance
with Treasury guidelines and in allocating resulting losses constitute “cooperation … necessary for a servicer to
implement a qualified loss mitigation plan” under § 1639a(d).

7
that each primary servicer participating in HAMP is contractually required to take these steps
before a HAMP modification involving forborne principal becomes effective. Primary servicers
believe that these recommendations put them in the best position for receiving the benefits of the
safe harbor, which would afford them the necessary protection to report forborne principal as a
realized loss. Similarly, master servicers and trustees, acting in their roles as securities
administrators, would have sufficient comfort to allocate forborne amounts as realized losses to
the securitization trust. This is consistent with the securities administrators’ long-held view that
they are not responsible for making a determination as to what constitutes a realized loss and
must rely solely on what is reported each month by the primary servicer. Furthermore, if the
Servicer Participation Agreement and the HAMP Guidelines only permit a primary servicer to
modify a loan in situations where the securities administrator allocates any forborne amount as a
realized loss to the trust, the safe harbor may extend to securities administrators. The Helping
Families Act extends the safe harbor to any person who cooperates with a servicer “when such
cooperation is necessary for the servicer to implement a qualified loss mitigation plan....” The
requirements for primary servicers set forth above would ensure that securities administrators
have the protection they need to allocate amounts forborne under HAMP as realized losses to
RMBS trusts. Treasury’s guidance as to what constitutes and is necessary to a qualified loss
mitigation plan under HAMP and any action taken by the Federal Reserve Board to clarify the
scope of the safe harbor will provide further assurance to transaction parties that their reporting
and allocation of forborne principal as a realized loss will not subject them to liability.

Finally, the ASF and its members believe that any cash received in respect of a forborne amount
should be considered a “recovery.” A recovery generally refers to an amount received in respect
of principal that has previously been allocated as a realized loss. Allocation of a recovery
generally involves increasing the balance of the most senior class outstanding that has taken a
loss14 and treating the recovery as an unscheduled payment that flows through the payment
distribution “waterfall” in accordance with priorities set forth in the particular PSA.
Furthermore, to the extent not prohibited by the terms of the related PSA, a class’ prior reduction
to zero should not prohibit such class from a subsequent increase in principal balance resulting
from a recovery.

************

14
The most senior class outstanding that has taken a loss may or may not be the class that initially bore the loss
associated with the recovery.

8
The ASF believes that the recommendations presented herein would enable primary servicers
and securities administrators to collectively ensure that forborne principal is allocated as a
realized loss to the securitization trust without significant risk of legal liability and help facilitate
appropriate implementation of HAMP and its policy goals. The ASF and its members are
available to assist Treasury with any of the steps necessary to implement the recommendations
outlined herein. Should you have any questions concerning our views and recommendations,
please do not hesitate to contact me at 212.313.1135 or at tdeutsch@americansecuritization.com,
or Evan Siegert, Associate Director, Advocacy of the ASF, at
esiegert@americansecuritization.com or at 212.313.1178.

Sincerely,

Tom Deutsch
Acting Executive Director
American Securitization Forum

9
 EXHIBIT A

American Securitization Forum

Discussion Paper on the Impact of Forborne Principal on RMBS Transactions

June 18, 2009

I. Introduction, Purpose and Assumptions

Many mortgage loan modification programs, including the Obama Administration’s HAMP
program, employ principal forbearance as part of a waterfall of loss mitigation options to reduce
a borrower’s debt-to-income ratio (“DTI”). Principal forbearance generally refers to situations
where a lender agrees to allow the borrower to pay a portion of a loan’s principal balance on a
later date. In almost all cases, a principal forbearance does not accrue interest and is added as a
balloon payment to be paid on the loan’s maturity date. The proper way to account for forborne
principal in residential mortgage-backed securities (“RMBS”) transactions is not entirely clear,
as most pooling and servicing agreements (each, a “PSA”) do not specifically address this
unforeseen issue. This lack of clarity has given rise to differing views from market participants
on how to treat principal forbearances. Some market participants would prefer the forborne
amount to be allocated as a realized loss at the time of the modification, while others would
prefer the forborne amount to not be allocated as a realized loss unless the loan is liquidated
without recovery on the forborne principal.

The American Securitization Forum (the “ASF”)1 is releasing this white paper to explain the
effects of principal forbearance on the cashflows of the two most frequently used structures in
the RMBS industry: the shifting interest structure and the overcollateralization structure. It
should be noted, however, that RMBS structures vary from deal to deal and issuer to issuer and it
would be impossible to cover every PSA iteration in this piece. For ease of discussion, we have
assumed a hypothetical transaction with one loan group containing pro-rata pay senior
certificates and sequential pay subordinate certificates. We have also assumed that there were no
unscheduled payments made or principal or interest losses incurred beyond what is included in
the scenarios below. Furthermore, explicit provisions relating to modifications of mortgage
loans are a relatively new addition to the PSAs that govern each RMBS transaction. Certain
agreements did not permit modifications and the ones that did were generally not explicit on how
to account for modifications when calculating payments and losses on the certificates. Because

1
The American Securitization Forum is a broad-based professional forum through which participants in the U.S.
securitization market advocate their common interests on important legal, regulatory and market practice issues.
ASF members include over 380 firms, including issuers, investors, servicers, financial intermediaries, rating
agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in
securitization transactions. The ASF also provides information, education and training on a range of securitization
market issues and topics through industry conferences, seminars and similar initiatives. For more information about
ASF, its members and activities, please go to www.americansecuritization.com. ASF is an independent affiliate of
the Securities Industry and Financial Markets Association (SIFMA).
of this inconsistency and lack of clarity, the descriptions below are further based on the
following two additional assumptions: (i) the PSA in question actually permits forbearances and
other types of modifications and (ii) the principal forbearance concept has been appropriately
incorporated into the PSA so as to address the fact that the borrower’s monthly payment has been
reduced.

II. The Impact of Principal Forbearance

The effects of allocating principal forbearance either at the time of modification or at the time of
liquidation depend on the type of RMBS transaction. There are two basic types of cashflow
structures for RMBS transactions: “shifting interest” and “overcollateralization” (“OC”).
Shifting interest structures are generally used for securitizations involving “prime” mortgages
and OC structures are generally used for securitizations involving “subprime” mortgages.2
Generally, both of these structures consist of classes of senior certificates and subordinate
certificates. The subordinate certificates are subordinate to the senior certificates in that they are
paid after the senior certificates and they absorb realized losses prior to the senior certificates.
PSAs generally define “realized losses” as the difference between the unpaid principal balance of
a loan and the proceeds received on that loan when it is liquidated.3

The main difference between shifting interest and OC structures is the amount of mortgage loans
included in the trust compared to the amount of certificates issued by the trust. In a shifting
interest deal, the aggregate principal balance of the mortgage loans equals the aggregate principal
balance of certificates issued. However, due to the lower credit quality of subprime loans, the
aggregate principal balance of mortgage loans in an OC structure is generally greater than the
aggregate principal balance of certificates issued4 and the difference between the two is called
the “overcollateralization amount” (or “OC amount”). The overcollateralization amount for each
deal is typically certificated and it represents the first-loss piece of the securitization, providing
increased subordination to the other classes of certificates. In both structures, subordination is
one of the main factors considered by rating agencies in assigning ratings to the certificates.

Effects on Shifting Interest Structures

As noted above, the aggregate principal balance of the certificates issued in a shifting interest
structure will equal the aggregate principal balance of the underlying mortgage loans. This
parity creates a “dollar for dollar” concept where all principal and interest received on the loans
will equal the principal and interest required to be paid on the certificates. In a typical deal, all
payments to the certificates are funded by the “pool distribution amount,” which consists of all
amounts, both principal and interest, received on the mortgage loans. These interest and
principal amounts are commingled in one account to pay the required interest and principal
payments on the certificates. Distributions on the certificates are normally made in the following

2
Both shifting interest and OC structures are also used in securitization of “Alt-A” mortgage loans, depending on
the loans’ credit quality. In certain situations, OC structures may also include second lien mortgages.
3
See Appendix I for specific examples of realized loss definitions.
4
Excluding the certificate evidencing the OC.

-2-
order of priority: (i) interest accrued on the senior certificates, (ii) principal required to be paid
on the senior certificates, (iii) interest accrued on the most senior of the subordinate certificates,
(iv) principal required to be paid on the most senior of the subordinate certificates and (v) then
interest and principal to the next most senior subordinate certificate, and so on (depending on the
number of subordinate classes).5

Principal payments received on the mortgage loans are classified as either “scheduled” or
“unscheduled” payments.6 Scheduled payments generally refer to those payments that are being
made on a schedule, such as the borrower’s monthly payment. Scheduled payments received on
the loans are passed-through to the senior and subordinate certificates based upon their senior
and subordinate percentages, which are calculated by dividing the aggregate principal balance of
the senior or subordinate certificates, as applicable, by the aggregate principal balance of the
loans in the pool. In other words, the senior and subordinate percentages represent the pro-rata
share of the senior and subordinate certificates in the payments received on the loans. For
example, let’s assume a senior percentage of 95% (i.e. the senior classes represent 95% of the
pool) and a subordinate percentage of 5% (i.e. the subordinate classes represent 5% of the pool).

Forborne principal affects how principal payments are allocated within the structure. If we
assume that the principal forbearance is not allocated as a realized loss at the time of the
modification, then the principal balances of the senior and subordinate certificates would remain
in the same proportion. In other words, the senior and subordinate percentages would not change
until the allocation of a realized loss. As such, scheduled principal payments would be divided
on each distribution date among the senior and subordinate certificates on a 95% to 5% basis
until a realized loss was allocated. If no other realized loss is allocated, the subordinate
certificates would continue to receive the same proportion of principal payments until either the
forborne amount was not received at maturity or the loan was otherwise liquidated (and the
forborne amount was not recovered). However, if we assume the principal forbearance was
allocated as a realized loss at the time of the modification, the subordinate percentage would be
reduced as a result of the loss being allocated to the most subordinate class outstanding. If we
assume this realized loss reduced the subordinate percentage to 4%, then the senior percentage
would be increased to 96%. Scheduled principal payments would then be divided on each
distribution date among the senior and subordinate certificates on a 96% to 4% basis until
another realized loss was allocated (at which time the senior percentage would increase again).
The effect of this mechanism is to pay more principal to the senior certificates when losses begin
to accrue on the mortgage loans in the trust. Ultimately, forborne principal being allocated as a
loss to the subordinate certificates at the time of modification results in more principal being
allocated to the senior certificates and less principal being allocated to the subordinate
certificates.

5
Distributions on the certificates are made after the servicing fee is paid to the servicer.
6
As noted in the assumptions, unscheduled payments, which refer to things like prepayments, are beyond the scope
of this basic cashflow discussion. Principal forbearance does have an effect on how unscheduled payments are
allocated, but the consequences are far less serious than those outlined herein. Generally, the rate at which the
senior and subordinate certificates receive unscheduled payments depends on the length of time the deal has been
outstanding (seniors receive a disproportionate share in the early stages) and/or certain triggers which occur when
delinquent loans or losses on loans reach a certain specified level.

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Forborne principal also affects how interest payments are allocated within the structure. If we
assume that the principal forbearance is not allocated as a realized loss at the time of the
modification, then all of the senior and subordinate classes of certificates would accrue interest
on their principal balances for that distribution date. However, the forborne principal amount
does not accrue any interest which results in a disruption of the “dollar for dollar” concept. After
principal is forborne, the amount of interest accrued on the mortgage loans will be less than what
is required to pay interest on the certificates.7 This disparity between interest accrued on the
loans and interest owed to the certificates will ultimately result in the most subordinate class
outstanding being shorted some or all of the principal that it is due. Then, because no realized
loss is taken, the same problem will occur on each ensuing distribution date. The forborne
amount will continue to create a disparity between interest accrued and interest owed until the
forborne amount is either paid or realized as a loss to the most subordinate class outstanding. If
a loss were taken at the time of the modification, this disparity would not occur because the most
subordinate class outstanding would be written down.

All shifting interest transactions contain PSA provisions dedicated to the allocation of realized
losses on the certificates. However, certain transactions also contain PSA provisions that further
adjust the aggregate certificate principal balance to equal the aggregate “stated” or “scheduled”
principal balance of the loans (see Appendix II for examples). Under these provisions, the
aggregate certificate principal balance is adjusted by reducing the principal balance of the most
subordinate class outstanding based on the difference between the aggregate certificate principal
balance and the aggregate “stated” or “scheduled” principal balance of the loans. This type of
provision would resolve the problems caused by principal forbearance in the prior two
paragraphs if the aggregate “stated” or “scheduled” principal balance to be paid on the loans was,
in fact, reduced to account for forborne principal. Whether this reduction occurs depends on
whether the definition of “stated principal balance” or “scheduled principal balance” contained in
the applicable PSAs (see Appendix I for examples of definitions relating to the provisions set
forth in Appendix II) is read to be decreased by the amount forborne.

Effects on Overcollateralization Structures

As noted above, the aggregate principal balance of the certificates8 issued in an OC structure will
generally be less than the aggregate principal balance of the underlying mortgage loans. The
difference between these two amounts is called the “overcollateralization amount”9 and it acts as
credit enhancement to all other classes of certificates. This increased subordination is necessary
due to the lower credit quality of subprime loans. In OC structures, more principal and interest is
scheduled to be received on the loans than is required to be paid on the certificates, which will

7
As an aside, a similar situation would occur after an interest rate modification in a shifting interest fixed-rate deal
because the certificate interest rate would remain at a specified fixed rate while the interest rate on the loans would
be reduced by the modification. This scenario would not occur in a shifting interest ARM deal because the
certificate interest rate is based on the weighted average coupon of the loans.
8
Excluding the certificate evidencing the OC.
9
In most deals, the overcollateralization amount remaining after it is used to cover any principal and interest
shortfalls on the senior and subordinated certificates is certificated as a “CE” or “X” bond.

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result in excess cashflow. The interest portion of excess cashflow is called “excess interest,” and
it results partly from interest accruing on the OC amount and partly from the mortgage loans
accruing interest on a higher rate than the certificates. In a typical deal, there are three
“waterfalls” out of which payments are made to the certificates. The interest payments to
certificates are paid from interest received on the mortgage loans (the “interest remittance
amount”) in accordance with the interest waterfall and principal payments to certificates are paid
from principal received on the mortgage loans (the “principal remittance amount”) in accordance
with the principal waterfall. After required interest and principal payments have been paid in
their respective waterfalls, the remaining interest and principal remittance amounts are combined
to fund the monthly excess cashflow amount, which generally pays (i) any principal not paid by
principal remittance in the principal waterfall, (ii) interest and principal shortfalls that were
previously incurred by the certificates and (iii) any remaining amounts to the OC
certificateholder.

From the beginning of the transaction, accrued interest is paid to both the senior and subordinate
certificates.10 However, principal is solely paid to the senior certificates until a specified date,
called the “stepdown date.” The stepdown date represents the date on which the subordinate
certificates can first receive principal and it usually refers to the later of a specified date or the
date on which the subordination that supports the senior certificates exceeds a specified amount.
Excluding the subordinate certificates from receiving principal payments increases the
subordination level of the senior certificates because the subordinate certificate balance remains
the same (assuming no losses) and the senior certificate balance is reduced. The subordinate
certificates are also excluded from principal distributions on any distribution date on which a
“trigger event” occurs. Trigger events occur when delinquent loans or losses on loans reach a
certain specified level.11 A recent review of the Intex database indicates that approximately 75%
of deals with overcollateralization structures have incurred a trigger event. In addition, all but
one deal represented in the ABX index have incurred a trigger event.

For any distribution date before the stepdown date (or for any distribution date on which a trigger
event occurs), all principal received on the loans is paid to the senior certificates until the
principal balance of each senior class is reduced to zero.12 For any distribution date on or after
the stepdown date (when there is no trigger event), the distribution of payments changes in two
ways: (i) the subordinate certificates will be entitled to distributions of principal and (ii)
distributions on all classes of certificates will be subject to specified “principal distribution
amounts.” These principal distribution amounts ultimately represent the amount that each class

10
Interest is paid to the certificates after the servicing fee is paid to the servicer.
11
Forborne principal may also affect whether a trigger event occurs. If the principal forbearance is applied as a
realized loss at the time of the modification, then it may also be counted as a realized loss for purposes of the loss
component of the trigger event. If it were so counted, the principal forbearance could cause the cumulative amount
of losses realized on the loans in the transaction to exceed the specified level of losses in the definition of trigger
event.
12
In a small number of transactions, if the OC amount exceeds the “target” OC amount, this excess principal amount
is permitted to skip the principal waterfall and be paid through the excess cashflow waterfall on distribution dates
prior to the stepdown date (or when a trigger event is in effect). If a principal forbearance was not treated as a
realized loss, the OC amount would be larger for purposes of this calculation.

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must be paid to reduce its principal balance to a specified amount, which is usually calculated as
a percentage of the aggregate mortgage loan balance. These specified amounts are determined at
the time the deal was structured and ensure that certain levels of subordination are met for each
class. They are also one of the factors that rating agencies consider when rating the certificates.

In OC structures, realized losses on the mortgage loans are absorbed first by excess interest and
the OC amount and then are applied as realized losses to the certificates if the aggregate
certificate principal balance is greater than the mortgage pool balance. Whether forborne
principal is treated as a realized loss affects how principal payments are allocated on distribution
dates after the stepdown date (when there is no trigger event13). In a typical deal, the senior
classes of certificates will be paid first up to their senior principal distribution amount and then
each subordinate class of certificates will be paid up to its specified principal distribution
amount. If we assume that the principal forbearance is not allocated as a realized loss at the time
of the modification, principal payments will be affected in two ways. First, because the
mortgage pool balance will not be reduced, each principal distribution amount will be less than if
a loss were allocated. This is because less cash would be required to pay each class down to its
required balance14 because its required balance would be greater than if a loss were taken. In
other words, if a realized loss is allocated to the mortgage pool balance, more principal will be
paid to each class, with the more senior classes receiving a higher percentage. The second effect
involves situations where no OC amount exists and realized losses on the loans begin to be
applied to the subordinate certificates. If the forbearance is not allocated as a realized loss, the
subordinate principal distribution amount of the most subordinate class outstanding will be
greater than if a loss were allocated. This is because more cash would be required to pay that
subordinate class down to its required balance because its beginning balance was greater than if a
loss were taken.

Forborne principal also affects how interest payments are allocated within the structure if no OC
amount exists. If we assume that the principal forbearance is not applied as a realized loss at the
time of the modification, then all of the senior and subordinate classes of certificates would
accrue interest on their principal balances for that distribution date. Because the forborne
principal does not accrue any interest, what happens next depends on the amount of excess
interest. If the excess interest is sufficient to cover the interest not accruing on the amount
forborne, there will be sufficient cash to pay each class its accrued interest. If the excess interest
is not sufficient, the most subordinate class outstanding will incur an interest shortfall which may
or may not be paid on a later date depending on the availability of future excess interest and OC.
On each ensuing distribution date where no OC amount exists, the same problem will occur until
the forborne amount is either paid or realized as a loss. The interest that does not accrue on the
forborne amount must be replaced by excess interest in order for an interest shortfall to not
occur. Furthermore, if excess interest is used to pay the certificates so that an interest shortfall

13
As noted above, many deals have incurred trigger events so this provision would not apply in those cases.
14
Note that paying a class “up to its principal distribution amount” or “down to its required balance” effectively
means the same thing.

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does not occur, there will be less excess interest available to pay principal to the certificates.15 If
a loss were taken at the time of the modification, this interest shortfall would not occur
irrespective of the available excess interest amount because the principal balance of the most
subordinate class outstanding would be reduced by the forborne amount and interest would no
longer accrue on the amount written down.

How to Treat Forborne Principal That is Paid

The next issue involves accounting for the forborne amount if it is paid by the borrower. This
issue affects both types of structures and there are different definitions in the industry relating to
this type of payment. If the forborne amount is treated as a realized loss at the time of the
modification, the cash received would most likely be considered a “recovery.” Although
definitions vary, a recovery is a fairly universal concept that generally refers to an amount
received in respect of principal which has previously been allocated as a realized loss.
Allocation of a recovery generally involves increasing the balance of the most subordinate class
outstanding and treating the recovery as an unscheduled payment that flows through the waterfall
in accordance with priorities set forth in the particular deal.

If the forborne amount is not treated as a realized loss at the time of modification, how the
applicable party (ie. servicer, master servicer, trustee or bond administrator) would treat the
ensuing payment would depend on the type of structure, the particular language of the PSA and
the timing of the payment. For example, in shifting interest deals, if the forborne amount was
received on the date it was due (ie. the final maturity date of the loan which is potentially 30+
years in the future), the applicable party may decide to treat it as a scheduled payment and the
forborne amount would flow through the waterfall as described above. If the forborne amount
was received prior to the date it was due, the applicable party may decide to treat it as an
unscheduled payment. If it was treated as an unscheduled payment, the forborne amount would
be allocated according to the particular percentages for unscheduled payments set forth in the
particular deal. In OC deals, no distinction is made between scheduled and unscheduled
payments, so the payment would flow through the waterfall as described above.

Effects on Interest Rate Caps

Subprime transactions and ARM prime transactions generally limit the amount of interest that
accrues on the certificates to the net mortgage interest rates of the loans.16 Interest rate caps are

15
As noted above, excess interest is distributed as part of the principal waterfall. For distributions prior to the
stepdown date (or on which a trigger event occurs), all excess interest is paid to the senior certificates as principal
until they are reduced to zero and then to the subordinate certificates as principal until they are reduced to zero. For
distributions on or after the stepdown date (on which no trigger event occurs), excess interest is paid as part of the
specified principal distribution amounts to the extent that the principal remittance amount is inadequate. Any
remaining excess interest is used to fund the monthly excess cashflow waterfall.
16
This is achieved in ARM prime deals by setting the pass-through rate at the interest rate cap and in
subprime deals by limiting the interest accrual amount to the interest rate cap (pass-through rates in
subprime deals are generally greater than the interest rate cap and carryover amounts are paid in the
excess cashflow waterfall).

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designed to limit the interest accrued on the certificates by imposing an interest rate that the
loans can support. An interest rate cap is calculated by weighting the net mortgage interest rates
of the loans based upon their principal balances. The effect of forborne principal on interest rate
caps depends on whether the forborne amount is included or excluded when weighting the
interest rates. For example, let’s assume there is a $2,000 certificate backed by a pool consisting
of two loans, each with a $1,000 balance and with interest rates of 4.00% and 6.00%,
respectively. If the 6.00% loan is modified and $100 is forborne, then only $900 of that loan is
still accruing interest. If the principal balance of the 6.00% loan is calculated as $1,000, then the
loan will be weighted for interest rate cap purposes based on a $1,000 balance and the interest
rate cap for the pool would be 5.00%. If the principal balance of the 6.00% loan is calculated as
$900, then the loan will be weighted for interest rate cap purposes based on a $900 balance and
the interest rate cap for the pool would be 4.95%. It is important to note that neither of these two
scenarios would fix the interest rate disparities that are caused by forborne principal (as
previously described). Those disparities would still exist because the certificates would accrue
interest on a balance that is greater than the balance of the loans. For example, a $2,000
certificate accruing interest at an interest rate cap of 5.00% would be owed $100.00 in interest
and the same certificate accruing interest at an interest rate cap of 4.95% would be owed $99.00
in interest (in both cases, assuming one annual payment). In this example, the $900 is accruing
interest at 6.00% and the $1,000 is accruing interest at 4.00%, which only produces $94.00 and
results in a shortfall in both cases.

The above example portrays a situation where the interest rate cap is reduced because the higher
interest rate of the two loans has been given less “weight” in the calculation. The opposite would
occur (ie. the interest rate cap would increase) if the loan with the lower of the two rates was
weighted on a smaller balance. This scenario would be more applicable to loans that have been
modified under the HAMP program, as the interest rate would be reduced to 2.00% before
principal could be forborne.

Effects on Servicing and Master Servicing

As noted above, PSAs typically do not set forth explicit guidance for servicers and master
servicers of loans that have forborne principal. Furthermore, it does not appear that the servicer
safe harbor contained in the Helping Families Save Their Homes Act will provide any relief for
this issue. This legislation provides a safe harbor for modifications performed by a servicer
pursuant to the HAMP program but it appears not to have an effect on the servicer, master
servicer, trustee or bond administrator who must ultimately decide how to allocate a principal
forbearance in a securitization.

Forborne principal may also affect the fee collected by servicers to service the mortgage loans.
Servicing fees are paid on each distribution date based on the scheduled principal balance of
each mortgage loan serviced by the servicer. Most deals allow servicing fees to be collected out
of interest payments on the mortgage loans, prior to any payments to the certificates. Some
issuers specify that the servicing fee for each mortgage loan can only be paid from the interest
portion of the monthly payment or other payment of interest received on the mortgage loan. In
most cases, these provisions do not specifically preclude a servicer from recovering the portion
of the servicing fee relating to the forborne principal (unless the definition of scheduled principal
balance is read to be reduced by the amount forborne), and there will generally be enough

-8-
interest accrued on the loan (even with non-interest bearing forborne principal) to pay the
servicing fee on the entire principal balance. However, there are some agreements that require
the servicing fee to be collected on the same principal amount on which interest on the loan
accrues. If the forborne principal is treated as a realized loss at the time of the modification,
servicers will not be able to collect the servicing fee relating to the forborne principal.

III. Views of Market Participants

The discussion below is included to provide a broader understanding of the views currently held
by market participants. These views are specific to each particular group and do not represent
the views of the ASF or the industry as a whole.

Senior Certificateholders

Senior holders believe that forborne principal should be allocated as a realized loss at the time of
the modification. Their view stems partly from the fact that, because forborne principal does not
accrue interest and is not scheduled to be repaid until the loan’s maturity date, its net economic
value to the trust is extremely low, similar to principal forgiveness. The interest cash flows on
the forborne principal have been liquidated permanently, and the principal balance has been
converted from an amortizing payment stream to an uncertain potential recovery at the maturity
of the loan. If the forborne principal is not treated as a realized loss at the time of the
modification, the certificates will effectively become under-collateralized as this forborne
principal is not able to support the expected payments on the certificates. Coupon-bearing
liabilities will be collateralized by non-coupon-bearing assets, and this problem becomes
exacerbated over time as the amortizing portion of the loans pay down, leaving the remaining
certificates collateralized by an increasing percentage of forborne principal over time. If the
forborne principal is not recognized as an immediate loss, senior certificates will be shorted
increasing amounts of cash while junior certificates are steadily paid down. Furthermore, senior
holders note that the PSAs never envisioned the concept of principal forbearance and therefore
are silent on the impact of forbearance on trust liabilities. PSAs do not contemplate
modifications conforming to the Treasury Guidelines, and therefore the definition of “Realized
Loss” is silent as to such modifications. Noting that the primary rule of contract construction is
to effectuate the intent of the parties, senior holders note that this treatment undermines the
senior-subordinate structure on which many investors relied in making their investment
decisions. Senior holders note that New York law, which typically governs the PSAs, imposes a
duty of good faith and fair dealing upon contracting parties, which prohibits depriving a party of
the benefits of the contract. Given that certain PSAs do not address the allocation of losses due
to modifications (and in many cases do not even address modifications), a condition is implied
that the contract should be administered in a manner that is consistent with the expected order of
payment and that ensures that the trust’s assets are able to support its liabilities. Stated another
way, there is an implied duty to administer the trust in a manner that does not create a fiction
with respect to the assets and liabilities of the trust. If principal forbearance amounts are not
characterized as realized losses, then that would breach the implied duty of good faith and fair
dealing by distributing funds to subordinate holders that will create an imbalance between the
trust’s liabilities and assets, which will become progressively worse over time and will likely
result in the trust becoming effectively insolvent. It is not good faith and fair dealing to pay out

-9-
funds based on a distribution schedule that is predicated on an assumption that the assets will
support the liabilities, when in fact all parties to the securitization know that is not the case.

As further support for their position, senior holders note that the FDIC’s Loan Modification
Program for IndyMac specifically states, “[f]or loans within securitizations, this principal
forbearance should be passed as a write-off of principal to the trust, with any future collections at
time of pay-off submitted to the trust as a recovery.”17 The FDIC reviewed hundreds of PSAs in
reaching this conclusion. Senior holders also note that over 90% of current RMBS
certificateholders are senior holders, meaning that over 90% of the market would benefit from
forborne principal being immediately allocated as a realized loss.

Senior holders believe that the forborne principal of a mortgage loan should be treated as a
partial liquidation of such loan. As noted above, “realized loss” is generally defined by reference
to a “liquidated mortgage loan” (see Appendix I for examples). Senior holders believe the
definition of “liquidated mortgage loan” is open to interpretation because the terms “liquidate,”
“liquidated” and “liquidation,” which are used in the definition, are generally not defined in the
PSAs. As such, senior holders believe that the realized loss definitions contained in PSAs should
be construed to include forborne principal. Senior holders believe that this approach is
consistent with the purpose underlying the concept of subordination in securitization (i.e. that
losses are allocated from the bottom up to protect senior holders). Senior holders point to several
of the definitions of “liquidate,” “liquidated” and “liquidation” contained in Black’s Law
Dictionary to support their reading of these terms in PSAs, including: “[t]o settle (an obligation)
by payment or other adjustment; to extinguish (a debt),” “[t]o ascertain the precise amount of
(debt, damages, etc.) by litigation or agreement,” “to adjust or settle a debt,” “([o]f an amount or
debt) settled or determined, esp. by agreement” and “the act or process of settling or making
clear, fixed, and determinate that which before was uncertain or unascertained.” They believe
the interest cashflows on the forborne amount have been liquidated and that therefore the
forbearance is a partial liquidation. In addition, senior holders note that the arguments based on
a restrictive definition of realized loss ignores the reason why the term realized loss is used in the
PSAs. The allocation of realized losses to reduce the balances of subordinate securities is a
necessary component of the capital structure of securitizations and is a feature that has been
required by investors and by rating agencies for thousands of securitizations to keep the assets
and liabilities of the trusts in balance. To focus on only those specific events included in the
definition of realized loss to the exclusion of economically equivalent events ignores the intent of
the parties in requiring the allocation of realized losses. Moreover, the fact that the rating
agencies would downgrade senior certificates if principal forbearance amounts are not treated as
realized losses at the time of the modification is further evidence that any other approach ignores
the intent and expectations of parties to the securitization.

In the case of shifting interest transactions containing provisions (see Appendix II for examples)
that further adjust the aggregate certificate principal balance to equal the aggregate “stated” or
“scheduled” principal balance of the loans, senior holders believe that the definition of “stated
principal balance” (or “scheduled principal balance”) of a loan should be read to decrease such

17
See http://www.fdic.gov/consumers/loans/loanmod/FDICLoanMod.pdf

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amount by the forborne principal. Examples of stated principal balance (or scheduled principal
balance) definitions contained in several publicly filed PSAs are included in Appendix I.

Senior holders also believe that principal forbearance must be treated as an immediate realized
loss to maintain equitable treatment of a modification. Modifications are performed on loans
that are either in default or in imminent risk of default. If these loans were to be liquidated, the
subordinate certificates would take an immediate loss. Loan modifications are applied only in a
positive net present value (“NPV”) scenario, where the NPV of the modified loan is greater than
the expected recovery through foreclosure and liquidation. Recognizing the forborne principal
as an immediate loss represents a better scenario for subordinate certificates relative to the
foreclosure/liquidation process because the upfront loss should be less than the expected
liquidation loss, and there still remains the possibility for an additional recovery of the forborne
principal. Essentially, both senior and subordinate certificateholders benefit through principal
forbearance modifications where the forbearance is recognized as an immediate loss. If principal
forbearance is not recognized as an immediate loss, the subordinate certificates will receive a
substantial and unintended windfall, as no loss is recognized and the subordinate certificates will
continue to receive payments despite the impairment to the collateral, while the senior holders
will experience a worse outcome than they would have otherwise received if the loan were
liquidated. It is entirely inequitable for a modified loan to be treated such that it creates a
windfall for one investor class at the expense of another class, when it should be treated in a
manner that benefits all classes.

Subordinate Certificateholders

Subordinate holders believe that, because forborne principal is still owed by the borrower, a loss
should not be taken until the loan is actually liquidated. As noted above, if forborne principal is
immediately allocated as a realized loss, the most subordinate class outstanding would generally
be reduced accordingly and it would no longer be entitled to interest on the amount written
down. Furthermore, if the borrower later pays the amount forborne, the subordinate class that
initially bore the realized loss may no longer be outstanding and may not benefit from either the
recovery flowing through the waterfall or the increase in a class’ principal balance resulting from
the recovery.

Subordinate holders believe that the realized loss definitions contained in PSAs cannot be
construed to include forborne principal. Subordinate holders do not believe principal
forbearance is akin to liquidation and point to the definitions of “liquidated mortgage loan” in
Appendix I which generally state that the servicer must make a determination that it has received
all amounts it expects to receive in connection with the liquidation of the mortgage loan. In the
case of shifting interest transactions containing provisions (see Appendix II for examples) that
further adjust the aggregate certificate principal balance to equal the aggregate “stated” or
“scheduled” principal balance of the loans, subordinate holders believe that the definition of
“stated principal balance” (or “scheduled principal balance”) of a loan should not be read to
decrease such amount by the principal forborne. Subordinate holders point to the definitions of
“stated principal balance” in Appendix I which reference the balance specified in the
amortization schedule “before any adjustment to such amortization schedule by reason of any
moratorium or similar waiver or grace period.” Subordinate holders believe a principal
forbearance would be excluded under that provision.

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 Senior and Subordinate Certificateholders

Senior and subordinate holders are concerned about the cashflow implications of servicers
collecting servicing fees on forborne principal. For example, if the servicer is following the
HAMP program and has reached the principal forbearance step of the modification protocol, then
the servicer has already reduced the interest rate on the mortgage loan to 2.00%. As most
servicing fees range from 25 to 50 basis points, the servicer will be collecting between 12.5%
and 25% of the interest collections on the mortgage loan as servicing compensation. That in and
of itself would be a substantial share of the interest collections on the loan. If the servicer
continued to collect the servicing fee on the forborne principal, then the servicer’s compensation
as a percentage of the interest collections on the loan would be even greater.

Master Servicers

Master servicers have expressed differing views on this issue depending on the substance of the
underlying PSA. From a liability standpoint, some master servicers believe that forborne
principal should not be allocated as a realized loss because the realized loss definitions contained
in PSAs do not specifically include forborne principal. Master servicers also have expressed
concern over the inconsistency of language from program to program. They believe it will be
very difficult to implement a general standard when each deal has different terms. From an
operations standpoint, master servicers believe that treating forborne principal as an immediate
realized loss is the better option because accounting for forborne principal can be very
complicated and difficult to administer. However, master servicers are concerned that treating a
forbearance as a realized loss will set a poor precedent because a potentially unwarranted
assumption regarding a borrower’s ability to pay must be made immediately after a loan is
modified.

Trustees and Other Bond Administrators

Trustees believe that, under the PSA, it is the servicer’s or master servicer’s responsibility to
determine whether to allocate forborne principal as an immediate realized loss. Trustees note
that it is extremely important for RMBS transactions that servicers keep accurate records of the
new scheduled principal balance and the amount forborne.

Primary Servicers

Servicers believe that master servicers or trustees should decide whether to allocate forborne
principal as a realized loss at the time of the modification. Servicers indicate that at least one
master servicer has agreed with this position. Servicers acknowledge that in a full liquidation,
they would be responsible for determining which amounts will be recoverable and which
amounts will be realized as a loss. However, servicers argue that their role is different when
principal is forborne because the borrower still owes the amount and servicers are unable to
determine whether it will actually be paid.

When principal is forborne, servicers report two amounts to the master servicer (or trustee): (i) a
reduced scheduled principal balance upon which monthly principal and interest payments are
calculated (and upon which the servicers will still advance) and (ii) a forborne amount that does
not accrue interest (and upon which the servicers will no longer advance). Servicers report

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forborne amounts as receivables or as a form of deferred principal. All servicers agree that if a
forborne amount was immediately allocated as a realized loss, any ensuing payment received on
the forborne amount would be a recovery because the amount received would not be a part of the
unpaid scheduled principal balance of the loan. Many servicers are not collecting servicing fees
on amounts forborne because interest is not accruing on those amounts, but other servicers have
yet to make a determination on that issue.

Financial Guarantors

Financial guarantors guarantee both first- and second-lien transactions as well as CDOs with
underlying first-lien collateral. They have exposure to senior as well as subordinate tranches in
RMBS transactions. Allocating forborne principal as a realized loss could have varying affects
on different portions of the financial guarantors’ portfolios. In the case of shifting interest first-
lien wrapped prime/Alt-A transactions, the financial guarantors would see their exposures
reduced more quickly. However, for second-lien transactions where financial guarantors usually
need to make parity payments, allocating forbearance as a realized loss at the time of
modification will directly lead to claims payments.

Given this all-round exposure, financial guarantors strongly believe in adherence to the legal
documents, such as the PSAs and to the generally accepted definition of forbearance.
Traditionally within securitizations, forbearance is viewed as a temporary respite to the
borrower, whereby the borrower’s obligation is transferred from the present to a future date.
Forbearance, typically, does not mean that the debt is forgiven, but that the payments may be
reduced and/or delayed for a period of time. Hence it is a clear contravention of the forbearance
definition to treat it as a write-down or a loss because forbearance is not forgiveness. Financial
guarantors assert that they wrapped the bonds – senior and subordinate - relying on the legal
documents, such as the PSAs and the traditional interpretations of the terms within such
documents and they may have to make additional claims payments if these documents are
modified to favor certain other parties involved in the transactions.

Finally, financial guarantors note that most OC structures have incurred a trigger event and the
current levels of delinquencies and cumulative losses would preclude any principal payments to
the subordinate certificates until all the senior certificates are completely paid off.

Other Market Views

An alternative approach was raised for calculating interest rate caps that would resolve for
subprime and ARM prime deals the interest disparities caused by forborne principal. Let’s once
again assume there is a $2,000 certificate backed by a pool consisting of two loans, each with a
$1,000 balance and with interest rates of 4.00% and 6.00%, respectively. If the 6.00% loan is
modified and $100 is forborne, then only $900 of that loan is still accruing interest. If the
portion accruing interest and the forborne amount are treated as separate pieces, we have a $900
piece accruing interest at 6.00% and a $100 piece at 0.00%. This effectively creates one $1,000
loan that accrues interest at 5.40% on a $1,000 balance, resulting in an interest rate cap for the
pool of 4.70%. The $2,000 certificate accruing interest at the interest rate cap of 4.70% would
be owed $94.00 in interest (assuming one annual payment). In this example, the $900 is
accruing interest at 6.00% and the $1,000 is accruing interest at 4.00%, which produces the

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required $94.00 to pay the certificate. It is important to note that the more senior holders would
not support this approach because it would lower their interest accrual amounts so that all classes
could be paid.

IV. Conclusion

The principal forbearance issues outlined in this piece are critical for many of our issuer,
servicer, trustee and investor members. We hope this piece helps illuminate the trust accounting
challenges that are created when principal is forborne under a modification program such as the
HAMP.

If you have any questions or concerns related to principal forbearance or to this discussion paper,
please do not hesitate to contact either Tom Deutsch, ASF Deputy Executive Director, at
tdeutsch@americansecuritization.com or 212.313.1135 or our counsel on this project, Evan
Siegert, Cadwalader, Wickersham and Taft LLP, at evan.siegert@cwt.com or 212.313.1178.

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 APPENDIX I

Listed below is a random sampling of PSA definitions relating to the above discussion for both
shifting interest and overcollateralization transactions. These definitions were taken from
publicly filed transactions and are listed in alphabetical order based upon the name of the
transaction’s sponsor. This list has been assembled to provide examples of certain definitions
found in RMBS transactions and it is not meant to include all possible iterations of these terms.
While these definitions have been provided to assist in the reader’s understanding of the issues
outlined in this paper, it is recommended that each applicable PSA be reviewed in order to obtain
a complete picture of the transaction.

Shifting Interest Transactions

Sponsor: Bank of America, National Association

Issuing Entity: Banc of America Mortgage 2007-4 Trust

Realized Loss: With respect to each Liquidated Mortgage Loan, an amount as of the date of
such liquidation, equal to (i) the unpaid principal balance of the Liquidated Mortgage Loan
as of the date of such liquidation, plus (ii) interest at the Net Mortgage Interest Rate from the
Due Date as to which interest was last paid or advanced (and not reimbursed) to
Certificateholders up to the Due Date in the month in which Liquidation Proceeds are
required to be distributed on the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in
which such liquidation occurred, to the extent applied as recoveries of interest at the Net
Mortgage Interest Rate and to principal of the Liquidated Mortgage Loan. With respect to
each Mortgage Loan that has become the subject of a Deficient Valuation, if the principal
amount due under the related Mortgage Note has been reduced, the difference between the
principal balance of the Mortgage Loan outstanding immediately prior to such Deficient
Valuation and the principal balance of the Mortgage Loan as reduced by the Deficient
Valuation. With respect to any Distribution Date and each Mortgage Loan that (i) has
become the subject of a Debt Service Reduction, the amount, if any, by which the principal
portion of the related Monthly Payment has been reduced or (ii) has become the subject of a
Servicer Modification, any permanent reduction in the principal balance thereof resulting
from such Servicer Modification.

Liquidated Mortgage Loan: With respect to any Distribution Date, a defaulted Mortgage
Loan (including any REO Property) that was liquidated in the calendar month preceding the
month of such Distribution Date and as to which the Servicer has certified (in accordance
with this Agreement) that it has received all proceeds it expects to receive in connection with
the liquidation of such Mortgage Loan including the final disposition of an REO Property.

Stated Principal Balance: As to any Mortgage Loan and date, the unpaid principal balance of
such Mortgage Loan as of the specified Due Date or, if not specified, as of the Due Date
immediately preceding such date as specified in the amortization schedule at the time relating
thereto (before any adjustment to such amortization schedule by reason of any moratorium or
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 similar waiver or grace period or any adjustment to such amortization schedule for any
Capitalized Advance Amounts other than the amount of such Capitalized Advance Amounts
which have been reimbursed to the applicable Servicer from payments on Mortgage Loans
other than the Mortgage Loans with respect to which such Capitalized Advance Amounts
relate) after giving effect to (A) any previous partial Principal Prepayments and Liquidation
Proceeds allocable to principal (other than with respect to any Liquidated Mortgage Loan)
and, (B) to the payment of principal due on such Due Date and irrespective of any
delinquency in payment by the related Mortgagor, (C) any Deficient Valuation and (D) any
Realized Losses as a result of Servicer Modifications incurred prior to such Due Date.

Sponsor: Chase Home Finance LLC

Issuing Entity: Chase Mortgage Finance Trust Series 2006-S4

REALIZED LOSS: With respect to (i) a Liquidated Mortgage Loan, the amount, if any, by
which the unpaid Principal Balance and accrued interest thereon at a rate equal to the Net
Mortgage Rate exceeds the amount actually recovered by the Servicer with respect thereto
(net of reimbursement of Advances and Servicing Advances) at the time such Mortgage Loan
became a Liquidated Mortgage Loan or (ii) with respect to a Mortgage Loan which is not a
Liquidated Mortgage Loan, any amount of principal that the Mortgagor is no longer legally
required to pay (except for the extinguishment of debt that results from the exercise of
remedies due to default by the Mortgagor).

LIQUIDATED MORTGAGE LOAN: Any Mortgage Loan (a) as to which the Servicer has
determined that all amounts which it expects to recover from or on account of such Mortgage
Loan or property acquired in respect thereof have been recovered, (b) as to which a Cash
Liquidation has taken place or (c) with respect to which the Mortgaged Property (or stock
allocated to a dwelling unit, in the case of a Co-op Loan) has been acquired by foreclosure or
deed in lieu of foreclosure and a disposition (the term disposition shall include, for purposes
of a repurchase pursuant to Section 11.01, any repurchase of a Mortgaged Property (or stock
allocated to a dwelling unit, in the case of a Co-op Loan) pursuant to such Section) of such
Mortgaged Property (or stock allocated to a dwelling unit, in the case of a Co-op Loan) has
occurred.

SCHEDULED PRINCIPAL BALANCE: With respect to any Mortgage Loan as of any

Distribution Date, the unpaid principal balance of such Mortgage Loan as specified in the
amortization schedule at the time relating thereto (before any adjustment to such schedule by
reason of bankruptcy or similar proceeding or any moratorium or similar waiver or grace
period) as of the Due Date in the month preceding the month of such Distribution Date, or as
the Cut-off Date, with respect to the first (1st) Distribution Date, after giving effect to any
previously applied prepayments, the payment of principal due on such first day of the month
and any reduction of the principal balance of such Mortgage Loan by a bankruptcy court,
irrespective of any delinquency in payment by the related Mortgagor.

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Sponsor: CitiMortgage, Inc.
Issuing Entity: Citicorp Mortgage Securities Trust, Series 2007-5

realized losses: For a distribution day, liquidated loan losses (including special hazard losses
and fraud losses) and bankruptcy losses incurred in the preceding month. For a realized loss
consisting of a liquidated loan loss, the interest and principal portions of the realized loss will
equal the interest and principal portions of the liquidated loan loss.

liquidated loan loss: For a distribution day, the aggregate losses for each mortgage loan that
became a liquidated loan prior to the first day of the month that contains the distribution day,
which for each such liquidated loan will equal the excess of (A) the unpaid principal balance
of the mortgage loan on the first day of the preceding month, plus (B) accrued interest in
accordance with the amortization schedule at the time applicable to the mortgage loan at the
applicable mortgage note rate from the first day of the month as to which interest was last
paid on the mortgage loan through the last day of the month in which the mortgage loan
became a liquidated loan, over the net liquidation proceeds for the mortgage loan.

liquidated loan: A mortgage loan for which the related mortgaged property has been
acquired, liquidated or foreclosed, and the relevant servicer determines that all liquidation
proceeds it expects to recover have been recovered, or the related mortgaged property is
retained or sold by the mortgagor, and the relevant servicer has accepted payment from the
mortgagor in consideration for the release of the mortgage in an amount that is less than the
outstanding principal balance of the mortgage loan as a result of a determination by the
relevant servicer that the potential liquidation expenses for the mortgage loan would exceed
the amount by which the cash portion of such payment is less than the outstanding principal
balance of the mortgage loan.

scheduled principal balance: For one or more mortgage loans on a date, the initial principal
balance of the loans, less the sum of (a) the aggregate of the principal portion of all scheduled
monthly loan payments required to be made on the loans on or before the first day of the
month in which the date falls (whether or not received), provided that after the bankruptcy
coverage termination date, the scheduled principal balance will not be reduced by the
principal portion of any debt service reductions, and (b) any principal prepayments on the
loans received or posted before the close of business on the last business day of the preceding
month.

Sponsor: Countrywide Home Loans

Issuing Entity: CHL Mortgage Pass-Through Trust 2007-11

Realized Loss: With respect to each Liquidated Mortgage Loan, an amount (not less than
zero or more than the Stated Principal Balance of the Mortgage Loan) as of the date of such
liquidation, equal to (i) the Stated Principal Balance of the Liquidated Mortgage Loan as of
the date of such liquidation, plus (ii) interest at the Adjusted Net Mortgage Rate from the
Due Date as to which interest was last paid or advanced (and not reimbursed) to
Certificateholders up to the Due Date in the month in which Liquidation Proceeds are

I-3
 required to be distributed on the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in
which such liquidation occurred, to the extent applied as recoveries of interest at the
Adjusted Net Mortgage Rate and to principal of the Liquidated Mortgage Loan. With respect
to each Mortgage Loan which has become the subject of a Deficient Valuation, if the
principal amount due under the related Mortgage Note has been reduced, the difference
between the principal balance of the Mortgage Loan outstanding immediately prior to such
Deficient Valuation and the principal balance of the Mortgage Loan as reduced by the
Deficient Valuation.

To the extent the Master Servicer receives Subsequent Recoveries with respect to any
Liquidated Mortgage Loan, the amount of the Realized Loss with respect to that Mortgage
Loan will be reduced by such Subsequent Recoveries.

Liquidated Mortgage Loan: With respect to any Distribution Date, a defaulted Mortgage
Loan (including any REO Property) which was liquidated in the calendar month preceding
the month of such Distribution Date and as to which the Master Servicer has determined (in
accordance with this Agreement) that it has received all amounts it expects to receive in
connection with the liquidation of such Mortgage Loan, including the final disposition of an
REO Property.

Stated Principal Balance: As to any Mortgage Loan and Due Date, the unpaid principal
balance of such Mortgage Loan as of such Due Date, as specified in the amortization
schedule at the time relating thereto (before any adjustment to such amortization schedule by
reason of any moratorium or similar waiver or grace period) minus the sum of: (i) any
previous partial Principal Prepayments and the payment of principal due on such Due Date,
irrespective of any delinquency in payment by the related Mortgagor, (ii) Liquidation
Proceeds allocable to principal (other than with respect to any Liquidated Mortgage Loan)
received in the prior calendar month and Principal Prepayments received through the last day
of the related Prepayment Period, in each case with respect to that Mortgage Loan and (iii)
any Realized Loss previously incurred in connection with a Deficient Valuation. The Stated
Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage Loan will be
zero on each date following the Due Period in which such Mortgage Loan becomes a
Liquidated Mortgage Loan.

Sponsor: IndyMac Bank, F.S.B.

Issuing Entity: IndyMac IMJA Mortgage Loan Trust 2007-A3

Realized Loss: With respect to each Liquidated Mortgage Loan, an amount (not less than
zero or more than the Stated Principal Balance of the Mortgage Loan) as of the date of such
liquidation, equal to (i) the Stated Principal Balance of the Liquidated Mortgage Loan as of
the date of such liquidation, plus (ii) interest at the Adjusted Net Mortgage Rate from the
Due Date as to which interest was last paid or advanced (and not reimbursed) to
Certificateholders up to the Due Date in the month in which Liquidation Proceeds are
required to be distributed on the Stated Principal Balance of such Liquidated Mortgage Loan

I-4
 from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in
which such liquidation occurred, to the extent applied as recoveries of interest at the
Adjusted Net Mortgage Rate and to principal of the Liquidated Mortgage Loan. With respect
to each Mortgage Loan that has become the subject of a Deficient Valuation, if the principal
amount due under the related Mortgage Note has been reduced, the difference between the
principal balance of the Mortgage Loan outstanding immediately prior to such Deficient
Valuation and the principal balance of the Mortgage Loan as reduced by the Deficient
Valuation. With respect to each Mortgage Loan that has become the subject of a Debt
Service Reduction and any Distribution Date, the amount, if any, by which the principal
portion of the related Scheduled Payment has been reduced.

To the extent the Servicer receives Subsequent Recoveries with respect to any Mortgage
Loan, the amount of the Realized Loss with respect to that Mortgage Loan will be reduced by
such Subsequent Recoveries.

Liquidated Mortgage Loan: For any Distribution Date, a defaulted Mortgage Loan
(including any REO Property) that was liquidated in the calendar month preceding the month
of the Distribution Date and as to which the Servicer has certified (in accordance with this
Agreement) that it has received all amounts it expects to receive in connection with the
liquidation of the Mortgage Loan, including the final disposition of an REO Property.

Stated Principal Balance: As to any Mortgage Loan and Due Date, the unpaid principal
balance of such Mortgage Loan as of such Due Date, as specified in the amortization
schedule at the time relating thereto (before any adjustment to such amortization schedule by
reason of any moratorium or similar waiver or grace period) after giving effect to the sum of:
(i) the payment of principal due on such Due Date and irrespective of any delinquency in
payment by the related Mortgagor and (ii) any Liquidation Proceeds allocable to principal
received in the prior calendar month and Principal Prepayments received through the last day
of the Prepayment Period in which the Due Date occurs, in each case with respect to such
Mortgage Loan.

Sponsor: Residential Funding Corporation

Issuing Entity: RFMSI Series 2006-S4 Trust

Realized Loss: With respect to each Mortgage Loan (or REO Property): (a)....as to which a
Cash Liquidation or REO Disposition has occurred, an amount (not less than zero) equal
to (i) the Stated Principal Balance of the Mortgage Loan (or REO Property) as of the date of
Cash Liquidation or REO Disposition, plus (ii) interest (and REO Imputed Interest, if
any) at the Net Mortgage Rate from the Due Date as to which interest was last paid or
advanced to Certificateholders up to the Due Date in the Due Period related to the
Distribution Date on which such Realized Loss will be allocated pursuant to Section 4.05
on the Stated Principal Balance of such Mortgage Loan (or REO Property) outstanding
during each Due Period that such interest was not paid or advanced, minus (iii) the
proceeds, if any, received during the month in which such Cash Liquidation (or REO
Disposition) occurred, to the extent applied as recoveries of interest at the Net Mortgage

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Rate and to principal of the Mortgage Loan, net of the portion thereof reimbursable to the
Master Servicer or any Subservicer with respect to related Advances, Servicing Advances
or other expenses as to which the Master Servicer or Subservicer is entitled to
reimbursement thereunder but which have not been previously reimbursed, (b)....which is the
subject of a Servicing Modification, (i) (1) the amount by which the interest portion of a
Monthly Payment or the principal balance of such Mortgage Loan was reduced or (2) the
sum of any other amounts owing under the Mortgage Loan that were forgiven and that
constitute Servicing Advances that are reimbursable to the Master Servicer or a
Subservicer, and (ii) any such amount with respect to a Monthly Payment that was or would
have been due in the month immediately following the month in which a Principal
Prepayment or the Purchase Price of such Mortgage Loan is received or is deemed to have
been received, (c)....which has become the subject of a Deficient Valuation, the difference
between the principal balance of the Mortgage Loan outstanding immediately prior to
such Deficient Valuation and the principal balance of the Mortgage Loan as reduced by the
Deficient Valuation, or (d)....which has become the object of a Debt Service Reduction,
the amount of such Debt Service Reduction.

Notwithstanding the above, neither a Deficient Valuation nor a Debt Service Reduction
shall be deemed a Realized Loss hereunder so long as the Master Servicer has notified the
Trustee in writing that the Master Servicer is diligently pursuing any remedies that may
exist in connection with the representations and warranties made regarding the related
Mortgage Loan and either (A) the related Mortgage Loan is not in default with regard to
payments due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable primary hazard insurance
policy and any related escrow payments in respect of such Mortgage Loan are being
advanced on a current basis by the Master Servicer or a Subservicer, in either case without
giving effect to any Debt Service Reduction.

To the extent the Master Servicer receives Subsequent Recoveries with respect to any
Mortgage Loan, the amount of the Realized Loss with respect to that Mortgage Loan will
be reduced to the extent such recoveries are applied to reduce the Certificate Principal
Balance of any Class of Certificates on any Distribution Date.

Cash Liquidation: As to any defaulted Mortgage Loan other than a Mortgage Loan as to
which an REO Acquisition occurred, a determination by the Master Servicer that it has
received all Insurance Proceeds, Liquidation Proceeds and other payments or cash
recoveries which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.

Stated Principal Balance: With respect to any Mortgage Loan or related REO Property, at
any given time, (i) the sum of (a) the Cut-off Date Principal Balance of the Mortgage Loan
plus (b) any amount by which the Stated Principal Balance of the Mortgage Loan is
increased pursuant to a Servicing Modification, minus (ii) the sum of (a) the principal
portion of the Monthly Payments due with respect to such Mortgage Loan or REO Property
during each Due Period ending prior to the most recent Distribution Date which were
received or with respect to which an Advance was made, and (b) all Principal Prepayments
with respect to such Mortgage Loan or REO Property, and all Insurance Proceeds,

I-6
 Liquidation Proceeds and REO Proceeds, to the extent applied by the Master Servicer as
recoveries of principal in accordance with Section 3.14 with respect to such Mortgage
Loan or REO Property, in each case which were distributed pursuant to Section 4.02 on
any previous Distribution Date, and (c) any Realized Loss allocated to Certificateholders
with respect thereto for any previous Distribution Date.

Sponsor: Wells Fargo Bank, N.A.

Issuing Entity: Wells Fargo Mortgage Backed Securities 2007-11 Trust

Realized Losses: With respect to any Distribution Date, (i) Liquidated Loan Losses incurred
on Liquidated Loans for which the Liquidation Proceeds were received during the Applicable
Unscheduled Principal Receipt Period with respect to Full Unscheduled Principal Receipts
with respect to such Distribution Date and (ii) Bankruptcy Losses incurred during the period
corresponding to the Applicable Unscheduled Principal Receipt Period with respect to Full
Unscheduled Principal Receipts for such Distribution Date.

Liquidated Loan: A Mortgage Loan with respect to which the related Mortgaged Property
has been acquired, liquidated or foreclosed and with respect to which the applicable Servicer
determines that all Liquidation Proceeds which it expects to recover have been recovered.

Liquidated Loan Loss: With respect to any Distribution Date, the aggregate of the amount of
losses with respect to each Mortgage Loan which became a Liquidated Loan during the
Applicable Unscheduled Principal Receipt Period with respect to Full Unscheduled Principal
Receipts for such Distribution Date, equal to the excess of (i) the unpaid principal balance of
each such Liquidated Loan, plus accrued interest thereon in accordance with the amortization
schedule at the time applicable thereto at the applicable Net Mortgage Interest Rate from the
Due Date as to which interest was last paid with respect thereto through the last day of the
month preceding the month in which such Distribution Date occurs, over (ii) Net Liquidation
Proceeds with respect to such Liquidated Loan.

Scheduled Principal Balance: As to any Mortgage Loan and Distribution Date, the principal
balance of such Mortgage Loan as of the Due Date in the month preceding the month of such
Distribution Date as specified in the amortization schedule at the time relating thereto (before
any adjustment to such amortization schedule by reason of any bankruptcy (other than
Deficient Valuations) or similar proceeding or any moratorium or similar waiver or grace
period) after giving effect to (A) Unscheduled Principal Receipts received or applied by the
applicable Servicer during the related Unscheduled Principal Receipt Period for each
applicable type of Unscheduled Principal Receipt related to the Distribution Date occurring
in the month preceding such Distribution Date, (B) Deficient Valuations incurred prior to
such Due Date and (C) the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. Accordingly, the Scheduled Principal
Balance of a Mortgage Loan which becomes a Liquidated Loan at any time through the last
day of such related Unscheduled Principal Receipt Period shall be zero.

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Overcollateralization Transactions

Sponsor: Bank of America, National Association

Issuing Entity: ABFC 2006-HE1 Trust

Realized Loss: With respect to a Liquidated Mortgage Loan, the amount by which the
remaining unpaid principal balance of the Mortgage Loan exceeds the amount of Net
Liquidation Proceeds applied to the principal balance of the related Mortgage Loan. With
respect to any Mortgage Loan, a Deficient Valuation or a reduction in the Principal
Balance thereof resulting from a Servicer Modification.

Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage Loan in respect of
which the related Servicer has determined, in accordance with the applicable Servicing
Standard, as of the end of the related Prepayment Period, that all Liquidation Proceeds,
Condemnation Proceeds and Insurance Proceeds which it expects to recover with respect to
the liquidation of the Mortgage Loan or disposition of the related REO Property have been
recovered.

Principal Balance: As to any Mortgage Loan and any day, other than a Liquidated
Mortgage Loan, the related Cut-off Date Principal Balance, minus the sum of (i) all
collections and other amounts credited against the principal balance of any such Mortgage
Loan, (ii) the principal portion of Advances, (iii) any Deficient Valuation and (iv) any
principal reduction resulting from a Servicer Modification. For purposes of this definition,
a Liquidated Mortgage Loan shall be deemed to have a Principal Balance equal to the
Principal Balance of the related Mortgage Loan as of the final recovery of related
Liquidation Proceeds and a Principal Balance of zero thereafter. As to any REO Property
and any day, the Principal Balance of the related Mortgage Loan immediately prior to such
Mortgage Loan becoming REO Property minus any REO Principal Amortization received
with respect thereto on or prior to such day.

Sponsor: Countrywide Home Loans

Issuing Entity: CWABS Asset-Backed Certificates Trust 2007-5

Realized Loss: With respect to each Liquidated Mortgage Loan, an amount (not less than
zero or more than the Stated Principal Balance of the Mortgage Loan) as of the date of such
liquidation, equal to (i) the Stated Principal Balance of such Liquidated Mortgage Loan as of
the date of such liquidation, minus (ii) the Liquidation Proceeds, if any, received in
connection with such liquidation during the month in which such liquidation occurs, to the
extent applied as recoveries of principal of the Liquidated Mortgage Loan. With respect to
each Mortgage Loan that has become the subject of a Deficient Valuation, (i) if the value of
the related Mortgaged Property was reduced below the principal balance of the related
Mortgage Note, the amount by which the value of the Mortgaged Property was reduced
below the principal balance of the related Mortgage Note, and (ii) if the principal amount due
under the related Mortgage Note has been reduced, the difference between the principal

I-8
 balance of the Mortgage Loan outstanding immediately prior to such Deficient Valuation and
the principal balance of the Mortgage Loan as reduced by the Deficient Valuation.

Liquidated Mortgage Loan: With respect to any Distribution Date, a defaulted Mortgage
Loan that has been liquidated through deed-in-lieu of foreclosure, foreclosure sale, trustee’s
sale or other realization as provided by applicable law governing the real property subject to
the related Mortgage and any security agreements and as to which the Master Servicer has
certified in the related Prepayment Period that it has received all amounts it expects to
receive in connection with such liquidation.

Sponsor: Goldman Sachs Mortgage Company

Issuing Entity: GSAMP Trust 2007-H1

Realized Losses: With respect to any date of determination and any Liquidated Mortgage
Loan, the amount, if any, by which (a) the unpaid principal balance of such Liquidated
Mortgage Loan together with accrued and unpaid interest thereon exceeds (b) the Liquidation
Proceeds with respect thereto net of the expenses incurred by the applicable Servicer in
connection with the liquidation of such Liquidated Mortgage Loan and net of the amount of
unreimbursed Servicing Advances with respect to such Liquidated Mortgage Loan.

Liquidated Mortgage Loan: With respect to any Distribution Date, a defaulted Mortgage
Loan (including any REO Property) which was liquidated or charged-off in the calendar
month preceding the month of such Distribution Date and as to which the applicable Servicer
has certified (in accordance with this Agreement) that it has made a Final Recovery
Determination.

Sponsor: IndyMac Bank, F.S.B.

Issuing Entity: IndyMac INDX Mortgage Loan Trust 2006-AR12

Realized Loss: With respect to each Liquidated Mortgage Loan, an amount (not less than
zero or more than the Stated Principal Balance of the Mortgage Loan) as of the date of such
liquidation, equal to (i) the Stated Principal Balance of the Liquidated Mortgage Loan as of
the date of such liquidation, plus (ii) interest at the Adjusted Net Mortgage Rate from the
Due Date as to which interest was last paid or advanced (and not reimbursed) to
Certificateholders up to the Due Date in the month in which Liquidation Proceeds are
required to be distributed on the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any, received during the month in
which such liquidation occurred, to the extent applied as recoveries of interest at the
Adjusted Net Mortgage Rate and to principal of the Liquidated Mortgage Loan. With respect
to each Mortgage Loan that has become the subject of a Deficient Valuation, if the principal
amount due under the related Mortgage Note has been reduced, the difference between the
principal balance of the Mortgage Loan outstanding immediately prior to such Deficient
Valuation and the principal balance of the Mortgage Loan as reduced by the Deficient
Valuation. With respect to each Mortgage Loan which has become the subject of a Debt
I-9
 Service Reduction and any Distribution Date, the amount, if any, by which the principal
portion of the related Scheduled Payment has been reduced.

To the extent the Servicer receives Subsequent Recoveries with respect to any Mortgage
Loan, the amount of the Realized Loss with respect to that Mortgage Loan will be reduced by
such Subsequent Recoveries.

Liquidated Mortgage Loan: For any Distribution Date, a defaulted Mortgage Loan (including
any REO Property) that was liquidated in the calendar month preceding the month of the
Distribution Date and as to which the Servicer has certified (in accordance with this
Agreement) that it has received all amounts it expects to receive in connection with the
liquidation of the Mortgage Loan, including the final disposition of an REO Property.

Sponsor: Residential Funding Corporation

Issuing Entity: RALI Series 2006-QA4 Trust

Realized Loss: With respect to each Mortgage Loan (or REO Property): (a) as to which a
Cash Liquidation or REO Disposition has occurred, an amount (not less than zero) equal to
(i) the Stated Principal Balance of the Mortgage Loan (or REO Property) as of the date of
Cash Liquidation or REO Disposition, plus (ii) interest (and REO Imputed Interest, if any) at
the Net Mortgage Rate from the Due Date as to which interest was last paid or advanced to
Certificateholders up to the Due Date in the Due Period related to the Distribution Date on
which such Realized Loss will be allocated pursuant to Section 4.05 on the Stated Principal
Balance of such Mortgage Loan (or REO Property) outstanding during each Due Period that
such interest was not paid or advanced, minus (iii) the proceeds, if any, received during the
month in which such Cash Liquidation (or REO Disposition) occurred, to the extent applied
as recoveries of interest at the Net Mortgage Rate and to principal of the Mortgage Loan, net
of the portion thereof reimbursable to the Master Servicer or any Subservicer with respect to
related Advances, Servicing Advances or other expenses as to which the Master Servicer or
Subservicer is entitled to reimbursement thereunder but which have not been previously
reimbursed, (b) which is the subject of a Servicing Modification, (i) (1) the amount by which
the interest portion of a Monthly Payment or the principal balance of such Mortgage Loan
was reduced or (2) the sum of any other amounts owing under the Mortgage Loan that were
forgiven and that constitute Servicing Advances that are reimbursable to the Master Servicer
or a Subservicer, and (ii) any such amount with respect to a Monthly Payment that was or
would have been due in the month immediately following the month in which a Principal
Prepayment or the Purchase Price of such Mortgage Loan is received or is deemed to have
been received, (c) which has become the subject of a Deficient Valuation, the difference
between the principal balance of the Mortgage Loan outstanding immediately prior to such
Deficient Valuation and the principal balance of the Mortgage Loan as reduced by the
Deficient Valuation, or (d) which has become the object of a Debt Service Reduction, the
amount of such Debt Service Reduction.

Notwithstanding the above, neither a Deficient Valuation nor a Debt Service Reduction shall
be deemed a Realized Loss hereunder so long as the Master Servicer has notified the Trustee

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 in writing that the Master Servicer is diligently pursuing any remedies that may exist in
connection with the representations and warranties made regarding the related Mortgage
Loan and either (A) the related Mortgage Loan is not in default with regard to payments due
thereunder or (B) delinquent payments of principal and interest under the related Mortgage
Loan and any premiums on any applicable primary hazard insurance policy and any related
escrow payments in respect of such Mortgage Loan are being advanced on a current basis by
the Master Servicer or a Subservicer, in either case without giving effect to any Debt Service
Reduction.

To the extent the Master Servicer receives Subsequent Recoveries with respect to any
Mortgage Loan, the amount of the Realized Loss with respect to that Mortgage Loan will be
reduced to the extent such recoveries are applied to reduce the Certificate Principal Balance
of any Class of Certificates on any Distribution Date.

Cash Liquidation: As to any defaulted Mortgage Loan other than a Mortgage Loan as to
which an REO Acquisition occurred, a determination by the Master Servicer that it has
received all Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally recoverable with
respect to such Mortgage Loan.

Sponsor: Wells Fargo Bank, N.A.

Issuing Entity: Wells Fargo Home Equity Asset-Backed Securities 2007-2 Trust

Realized Loss: With respect to a Liquidated Mortgage Loan, the amount by which the
remaining unpaid principal balance of the Mortgage Loan exceeds the amount of Net
Liquidation Proceeds applied to the principal balance of the related Mortgage Loan. With
respect to any Mortgage Loan, a Deficient Valuation or a reduction in the Principal Balance
thereof resulting from a Servicer Modification.

Liquidated Mortgage Loan: As to any Distribution Date, any Mortgage Loan in respect of
which the Servicer has determined, in accordance with the servicing procedures specified
herein, as of the end of the related Prepayment Period, that all Liquidation Proceeds,
Condemnation Proceeds and Insurance Proceeds which it expects to recover with respect to
the liquidation of the Mortgage Loan or disposition of the related REO Property have been
recovered.

Liquidation Proceeds: The amount (other than amounts received in respect of the rental of
any REO Property prior to REO Disposition) received by the Servicer in connection with (i)
the taking of all or a part of a Mortgaged Property by exercise of the power of eminent
domain or condemnation or (ii) the liquidation of a defaulted Mortgage Loan by means of a
trustee's sale, foreclosure sale or otherwise.

I-11
 APPENDIX II

Listed below are examples of PSA provisions that further adjust the aggregate certificate
principal balance to equal the aggregate “scheduled” (or “stated”) principal balance of the
loans. These provisions were taken from publicly filed transactions and are listed in
alphabetical order based upon the name of the transaction’s sponsor. This appendix is not
meant to provide a complete list of all transactions that contain this type of provision. It is
recommended that each applicable PSA be reviewed in order to obtain a complete picture of
the transaction.

Sponsor: Countrywide Home Loans

Issuing Entity: CHL Mortgage Pass-Through Trust 2007-11

Section 4.04 (b) The Class Certificate Balance of Subordinated Certificates then outstanding
with the highest numerical Class designation shall be reduced on each Distribution Date by
the sum of (i) the amount of any payments on the Class PO Certificates in respect of Class
PO Deferred Amounts and (ii) the amount, if any, by which the aggregate of the Class
Certificate Balances of all outstanding Classes of Certificates (after giving effect to the
distribution of principal and the allocation of Realized Losses and Class PO Deferred
Amounts on such Distribution Date) exceeds the Pool Stated Principal Balance for the
following Distribution Date.

Sponsor: IndyMac Bank, F.S.B.

Issuing Entity: IndyMac IMJA Mortgage Loan Trust 2007-A3

Section 4.05(b) The Class Certificate Balance of the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation shall be reduced on each
Distribution Date by the sum of (i) the amount of any payments on the Class PO Certificates
in respect of Class PO Deferred Amounts and (ii) the amount, if any, by which the aggregate
Class Certificate Balance of all outstanding Classes of Certificates (after giving effect to the
distribution of principal and the allocation of Realized Losses and Class PO Deferred
Amounts on such Distribution Date) exceeds the aggregate Stated Principal Balance of the
Mortgage Loans for the following Distribution Date.

II-1

Proposed Changes To March 4, 2009 Home Affordable Modification Program Guidelines
(emphasis added to show changes)
Eligibility Requirements
Pooling and Servicing Agreements:
Loan Modification and Standard Waterfall
Standard Waterfall Process
EXHIBIT B
The program guidelines reflect usual and customary industry
standards for mortgage loan modifications contained in
typical servicing agreements, including pooling and
servicing agreements (PSAs) governing private label
securitizations. Participating servicers are required to
consider all eligible loans under the program guidelines
unless prohibited by the rules of the applicable PSA and/or
other investor servicing agreements. Participating servicers
are required to use reasonable efforts to remove any
prohibitions and obtain waivers or approvals from all
necessary parties.
For the avoidance of doubt, the rules of the applicable
PSA and/or other relevant investor servicing agreement
shall be deemed to not prohibit the treatment of forborne
principal as a realized loss unless such concept is expressly
and explicitly prohibited by the rules of the applicable
agreement as set forth under Step 6 of the “Standard
Waterfall Process” below. The reported forborne principal
should be allocated as a realized loss such that, for
purposes of calculating distributions to certificateholders,
such forborne amount is no longer outstanding under the
amortization schedule applicable to the mortgage loan.
Step 6: If the Front-End DTI Target has not been reached,
forbear principal such that the amount of principal
forbearance is non-interest bearing and non-amortizing. If
there is a principal forbearance amount, a balloon payment
of that forbearance amount is due on the maturity date, upon
sale of the property, or upon payoff of the interest bearing
balance. If the modification does not pass the NPV Test and
the servicer chooses to modify the loan, the modified
balance must be no lower than the current property value.
The term “principal forbearance” as used in these
guidelines does not refer to the forbearance concept in
securitizations where the due date of certain principal
payments may be delayed for a short period of time. In the
context of the Home Affordable Modification Program,
principal forbearance includes the permanent forgiveness
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 of interest and postponement of principal repayment for a
long period (herein referred to as HAMP Principal
Forbearance).

For loans within securitizations, except under the

circumstances described below, the principal forbearance
amounts must be reported by servicers, and allocated by
securities administrators (which shall be deemed to refer to
any and all parties whose function within a securitization
is to determine and/or allocate losses), and all other
applicable transaction parties as realized losses as of the
applicable loan modification dates under any applicable
securitization PSA, pooling agreement or trust agreement.
If both of the following two conditions are met, the parties
are permitted to not treat the principal forbearance
amounts as realized losses: (i) the applicable agreement
specifically addresses HAMP Principal Forbearance in the
context of HAMP and (ii) such agreement explicitly and
affirmatively directs that such forborne principal not be
treated as a realized loss.

Modification Terms

Principal Forbearance: No interest will accrue on the forbearance amount and the
amount shall be non-amortizing.

If the option to forebear principal is selected, the servicer

shall forbear on collecting the deferred portion of the
Capitalized Balance until the earliest of (i) the maturity of
the modified loan, (ii) a sale of the property, or (iii) a pay-
off or refinancing of the loan.

If the modified loan is within a securitization, servicers,

securities administrators and any other transaction parties
shall report and allocate, as applicable, the principal
forbearance amounts as realized losses as set forth in Step
6 of the “Standard Waterfall Process”.

In order for a modification of a loan within a

securitization to be effective, the following two steps must
take place with respect to forborne principal (and shall be
considered part of the qualified loss mitigation plan)
unless the exception set forth in Step 6 of the “Standard
Waterfall Process” is applicable to such securitization: (i)
the primary servicer must report to the securities
administrator any forborne principal as a realized loss and
(ii) the securities administrator shall allocate any such
reported forborne principal as a realized loss to the trust
and the primary servicer shall presumptively rely that such
allocation has occurred.

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 EXHIBIT C

Suggested Language for Preamble to Revised HAMP Guidelines

The United States Department of the Treasury (“Treasury”) is today amending the March
4, 2009 Home Affordable Modification Program (“HAMP”) guidelines to clarify that
principal forbearance amounts shall be treated as realized losses in HAMP loan
modifications absent an express contrary intent set forth in applicable securitization
pooling or trust agreements (“PSAs”). Treasury is also amending the guidelines to
provide that the reporting and allocation of forborne principal as realized losses pursuant
to this guideline amendment, including the cooperation of primary servicers, master
servicers, trustees and securities administrators (the “transaction parties”), is a necessary
part of the implementing of a qualified loss mitigation plan pursuant to HAMP. To help
to effectuate these changes, Treasury will request that the Board of Governors of the
Federal Reserve System (the “Board”) issue a regulation or staff interpretative ruling
explaining that the HAMP program guidelines, including this amendment to those
guidelines, shall constitute standard industry practice. Treasury will further request an
interpretative ruling establishing that transaction parties who enter into a qualified loss
mitigation plan which is consistent with the amended guideline’s treatment of principal
forbearance amounts shall enjoy the benefits of the legislative “safe harbor,” a provision
of law Congress enacted as part of Helping Families Save Their Homes Act of 2009
(“Helping Families Act”), and amending Section 129A of the Truth in Lending Act
(“TILA”). TILA is subject to the regulatory authority of the Board.

The clarifications announced today are the product of extensive interaction and
cooperation with many industry representatives, including the American Securitization
Forum, a broad-based professional forum for participants in the U.S. securitization
market. On July 22, 2009 and October 29, 2009, Treasury issued guidance in the form of
a response to a Frequently Asked Question (“FAQ”) in which, in substance, it directed
transaction parties to treat principal forbearance amounts as realized losses as of the
applicable loan modification dates under applicable PSAs absent an express contrary
intention in the PSA. In issuing these clarifications to the HAMP program guidelines, as
well as in making its request for an interpretative ruling from the Board, Treasury intends
to afford transaction parties additional clarifications with respect to the scope of the
legislative “safe harbor”.

These changes will help to promote the continued success and growth of the HAMP
program. Principal forbearance is a key mechanism available to servicers and those who
cooperate with them to achieve a qualified loss mitigation plan. Having conducted a
careful analysis of the statutory issues, and having solicited the views of industry, and
carefully weighed the competing interests, Treasury has concluded that the clarifications
made to the HAMP guidelines, as well as the requests made to the Board, are appropriate
and are needed to achieve the objectives of the Emergency Economic Stabilization Act of
2008 and the Helping Families Act, and strike an appropriate balance between the
interests of competing stakeholders.

1
 EXHIBIT D

F. Principal Forbearance

Q___. Are the applicable transaction parties required to report and allocate
forborne principal as realized losses to the trust?
Yes. The reporting and allocation of forborne principal as a realized loss requires
the cooperation of all of the applicable transaction parties. The reporting and allocation
of forborne principal as a realized loss is a necessary part of implementing a qualified
loss mitigation plan pursuant to HAMP, and furthers Treasury’s mandate under the
Emergency Economic Stabilization Act of 2008 to restore liquidity and stability to the
financial system because it promotes stability in the residential mortgage-backed
securities market. Master servicers, trustees or securities administrators who allocate
forborne principal as a realized loss to the trust for purposes of calculating distributions
and losses to certificateholders, or otherwise take any action to facilitate the treatment of
principal forbearance as a realized loss pursuant to the HAMP Guidelines, are providing
cooperation necessary for the servicer to implement a qualified loss mitigation plan under
HAMP.