Number range CHAPTER**Appendix B: Cash Flow Analysis**

**I. Introduction**

The calculation of the economic value of the MMI Fund involves the
estimation of the present value of future cash flows generated by the
existing portfolio and future books of business. This requires the
projection of future prepayment and claim incidences and cash flow items
associated with each type of outcome. This appendix explains the details
related to the attribution of cash flows by source.

The evaluation of the Fund\'s economic value is done similarly to
corporate valuation. An investor would estimate the value of a firm as
the present value of net assets plus the present value of new business
expected to be undertaken. Assuming FHA continues to insure loans, the
economic value of the MMI Fund would be determined by valuing both its
current portfolio of loans and its future books of business.

In order to analyze future changes in the Fund\'s economic value, we
developed a model that incorporates projections of the loan performance
and information about the existing portfolio composition to project the
Fund\'s various cash flow sources. The actuarial model used the
projections from the econometric models discussed in Appendix A. We
estimated econometric models for conditional claim and prepayment
probabilities for each individual loan depending on its origination
year, age, interest rate, initial LTV ratio, credit history, refinancing
incentive, probability of negative equity, loan term, burnout, and other
characteristics. Using detailed loan-level characteristics, we were able
to estimate more accurately the prepayment and claim probabilities and
then generate respective cash flows to each loan.

######## Exhibit B-1

+---------------------------------------+--------------+--------------+
| **Cash Flow Components**              |              |              |
+---------------------------------------+--------------+--------------+
| ##### Cash Flow Components            | **Cash       | **Cash       |
|                                       | Inflow**     | Outflow**    |
+---------------------------------------+--------------+--------------+
| Upfront Premiums                      | √            |              |
+---------------------------------------+--------------+--------------+
| Annual Premiums                       | √            |              |
+---------------------------------------+--------------+--------------+
| Net Claim Payments                    |              | √            |
+---------------------------------------+--------------+--------------+
| Refunded Upfront Premiums             |              | √            |
+---------------------------------------+--------------+--------------+
| Administrative Expenses^a^            |              | √            |
+---------------------------------------+--------------+--------------+
| Distributive Shares^b^                |              | √            |
+---------------------------------------+--------------+--------------+

> ^a^ The administrative expense was discontinued since the FY 2002
> Actuarial Review according to the Federal credit reform requirement.
>
> ^b^ The distributive share has been suspended since 1990. There is no
> indication that it would be resumed in the foreseeable future.

Based on the mortgage termination rates projected by the econometric
model, the major components of cash flows are projected into the future.
Future interest income is included in the present value discounting
process. The relevant cash flow components are listed in Exhibit B-1.
These components were projected for each loan on a probabilistic basis
and then aggregated according to the product type, origination year, and
policy year for reporting purposes. Below, we discuss the derivation of
each of these cash flows.

**II. Background Information**

The following definitions and background information help clarify our
discussion of the cash flow components:

-   **Insurance-in-force (IIF):** the nominal value of the unamortized
    original mortgage loan balances of the surviving mortgages insured
    by FHA. This is distinct from the conventional notion of amortized
    insurance-in-force, which includes only the current outstanding
    balances on surviving loans.

-   **Conditional Claim Rate (ccr):** the number of loans that become
    claims during a time period divided by the number of surviving
    loans-in-force at the beginning of that period for a specific pool
    of loans.

-   **Conditional Prepayment Rate (cpr):** the number of loans being
    completely prepaid during a time period divided by the number of
    surviving loans-in-force at the beginning of that period for a
    specific pool of loans.

-   **Policy Year:** a single Federal fiscal year. The year in which the
    mortgage is originated is assigned as fiscal policy year one, even
    though it may not be a complete year. The MMI Fund's policy year
    follows the definition of the Federal fiscal year, which runs from
    October 1^st^ of the previous calendar year to September 30^th^ of
    the specific calendar year. For example, the time frame from October
    1, 2006 to September 30, 2007 is considered as Fiscal Policy Year
    2007, or FY 2007.

```{=html}
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-   **Termination Year:** the fiscal year in which a mortgage terminates
    through a claim, prepayment or other reasons.

**Unpaid Principle Balance (UPB) Factor:** the principal balance
outstanding divided by the original mortgage amount. The UPB factor is
calculated based on the amortization term, the type of mortgage, and the
mortgage contract rate. For FRMs, the UPB factor for each quarter in the
future can be directly computed with the initial contract rate and the
amortization term. For ARMs, the UPB factor decreases at different rates
depending on the interest rate of the particular loan, updated according
to the contractual rate-adjustment rule. In this model, the contract
interest rate of ARM loans are updated by using changes in the one-year
Treasury rate as an approximation for changes in the underlying index,
subject to limits implied by standard annual and lifetime
rate-adjustment caps.

**III. Cash Flow Components**

**A. Premiums**

**1. Premium Structure**

The primary source of revenue to the Fund is the insurance premium. If
the Fund\'s mortgage insurance is priced to be premium-sufficient, the
insurance premiums collected and interest earned on them will cover all
costs associated with insuring pools of specific mortgage loans.
According to current and past FHA mortgage insurance policy, the
insurance premium has been structured in different ways over time:

-   For loans originated through September 1, 1983 the mortgage premium
    was collected on a monthly basis at an annualized rate of 0.50
    percent of the outstanding principal balance for the period. To
    align this change with fiscal quarters, we assumed for this analysis
    that the annual premium policy was in effect through September 30,
    1983.

-   Between September 1, 1983 and June 30, 1991 the mortgage premium was
    based on a percentage of the original mortgage amount at the time of
    origination. This amount was 3.80 percent for 30-year mortgages and
    2.40 percent for 15-year mortgages.

-   Effective July 1, 1991, the NAHA specified a new premium structure.
    This structure specified an upfront premium of 3.80 percent for all
    product types except for 15-year non-streamline refinance loans (for
    which the upfront premium was set at 2.00 percent) and an annual
    renewal premium of 0.50 percent per year on the outstanding balance.
    The annual premium would cease at different mortgage ages depending
    on the initial LTV of the loan.

-   On October 1, 1992, the upfront premium was reduced from 3.80
    percent to 3.00 percent. The annual premium of 15-year mortgages was
    lowered to 0.25 percent or completely waived if the initial LTV
    ratio was less than 90 percent.

-   As of April 17, 1994, FHA lowered the upfront premium rate on
    30-year mortgages from 3.00 percent to 2.25 percent. To align this
    change with fiscal quarters, we started applying this policy change
    on April 1, 1994.

-   Starting from October 1, 1996, FHA lowered the upfront premium rate
    on 30-year mortgages for first-time homebuyers who receive homeowner
    counseling from 2.25 percent to 2.00 percent. This rate was further
    reduced to 1.75 percent for mortgages executed on or after September
    22, 1997. This favorable treatment for borrowers with homeownership
    counseling was terminated shortly thereafter.

-   Effective January 1, 2001, FHA lowered the upfront premium rate of
    all mortgages to 1.50 percent. The annual premium was reduced to
    0.50 percent on the UPB and the annual premium would stop as soon as
    the current LTV ratio of the loan was below 78 percent according to
    the home price as of the loan origination date. The annual premium
    must be paid for a minimum of five years for 30-year mortgages.

The upfront and annual premium rates are summarized in Exhibits B-3 and
B-4.

####### Exhibit B-3

  -------------------------------- ------------------- -------------------
  **Upfront Premium Rates for New                      
  FHA Originations**                                   

  **Fiscal Year**                  **30yr Loans, Fixed **15yr Loans, Fixed
                                   or Adjustable Rate  or Adjustable Rate
                                   (%)**               (%)**

  9/1/83 to 6/30/91                3.80                2.40

  7/1/91 to 9/30/92                3.80                2.00/3.80^b^

  10/1/92 to 4/16/94               3.00                2.00

  4/17/94 to 9/30/96               2.25                2.00

  10/1/96 to 9/21/97               2.25/2.00^a^        2.00

  9/22/97 to 12/31/00              2.25/2.00/1.75^a^   2.00

  1/1/01 to present                1.50                1.50
  -------------------------------- ------------------- -------------------

^a^ For first-time homebuyers who received homeowner counseling.

^b^ For 15-year streamline refinance loans.

#### Exhibit B-4

  ------------- ------- -------------- ------------- ------- -------------- ------------------
  **NAHA Annual                                                             
  Premium Rate                                                              
  for 15- and                                                               
  30-Year                                                                   
  Mortgages**                                                               

                                                                            

  **Fiscal              **30yr Loans,                        **15yr Loans,  
  Year**                Fixed or                             Fixed or       
                        Adjustable**                         Adjustable**   

                                                                            

  Prior to              0.5% for life                        0.5% for life  
  9/1/1983              of loan                              of loan        

  9/1/83 to             None                                 None           
  6/30/91                                                                   

  7/1/91 to             varies by LTV                        varies by LTV  
  9/30/92               category^a^                          category^a^    

  10/1/92 to            varies by LTV                        varies by LTV  
  12/31/00              category^b^                          category^c^    

  1/1/01 to             0.5% until                           varies by LTV  
  present               loan balance                         category^d^    
                        reaches 78% of                                      
                        original                                            
                        property                                            
                        value, minimum                                      
                        of 5 years                                          

  **LTV         **a**                  **b**         **c**                  **D**
  Range:**                                                                  

  below 90%     0.5%                   0.5% for 7    0%                     0%
                for 5                  yrs                                  
                yrs                                                         

  Between       0.5%                   0.5% for 12   0.25%                  0.25% until LTV
  90%\~95%      for 8                  yrs           for 4                  reaches 78%
                yrs                                  yrs                    

  above 95%     0.5%                   0.5% for 30   0.25%                  0.25% until LTV
                for 10                 yrs           for 8                  reaches 78%
                yrs                                  yrs                    
  ------------- ------- -------------- ------------- ------- -------------- ------------------

Insurance premium rules for streamline refinance (SR) loans are
summarized in Exhibit B-5.

Exhibit B-5

  ---------------- ------------- ------------- ------------- -------------
  **Premium Rates                                            
  for Streamline                                             
  Refinance                                                  
  Loans**                                                    

  **Period of      **30-Year                   **15-Year     
  Origination**    Mortgages**                 Mortgages**   

                   **Upfront     **Annual      **Up-front    **Annual
                   Premium**     Premium**     Premium**     Premium**

  Prior to         None          None          None          None
  9/1/1983                                                   

  9/1/83 to        3.80%         None          2.40%         None
  6/30/91                                                    

  7/1/91 to        3.80%         0.5% for      3.80%         0.5% for
  9/30/92                        first 7 years               first 7 years

  10/1/92 to       3.00%         0.5% for      2.00%         None
  4/16/94                        first 7 years               

  4/17/94 to       2.25%         0.5% for      2.00%         None
  12/31/00                       first 7 years               

  1/1/01 &         1.50%         0.5% until    1.50%         varies by LTV
  subsequent                     loan balance                category^a^
                                 reaches 78%                 
                                 of original                 
                                 property                    
                                 value,                      
                                 minimum of 5                
                                 years                       
  ---------------- ------------- ------------- ------------- -------------

^a^ 0% if original LTV is below 90 percent; 0.25% until LTV reaches 78%
if original LTV is 90 percent and above.

**2. Upfront Premium**

The upfront premium is assumed to be paid fully at the mortgage
origination date and the amount is calculated as follows:

> *Upfront Premium Payment =*
>
> *Origination Amount before upfront premium \* Mortgage Insurance
> Premium Rate (%)*

In practice, FHA offers a premium finance program to those qualified for
mortgage insurance. Borrowers do not have to pay the upfront premium at
the beginning of contract. Instead, the borrower can add it to the
original loan balance, in essence paying the upfront premium at the same
schedule as their principal balance. Nearly all borrowers finance their
upfront premiums.

# 

# **3. Annual Premium**

The annual premium is calculated as follows:

> *Annual Premium =*
>
> *Amortized UPB (excluding any upfront premiums) \* Annual Insurance
> Premium Rate (%) / 4*

The annual premium is actually collected on a monthly basis. The above
formula models the premium as being collected at the beginning of each
quarter for purposes of our analysis. In addition, the termination rate
will have impacts on annual premium flows similar to the characteristics
of an interest-only strip security. That is, all potential future annual
premium income would no longer exist when the particular mortgage loan
is prepaid or claimed.

Although FHA is effectively insuring the financed upfront premiums, the
annual premium is not assessed on the amount of the financed upfront
premium.

**B. Losses Associated with Claims**

The MMI Fund's largest expense component comes in the form of losses due
to claims. FHA pays the claim to the lender when a lender files a claim.
In most cases, FHA takes possession of the foreclosed property and sells
the property to partially recover the loss. This particular type of
claim is called a conveyance.

Based on this practice, claim cash flows can actually be decomposed into
two components:

-   the cash outflow of the claim payment at the claim date and

-   the cash inflow of any net proceeds received in selling the conveyed
    property at the property disposition date.

For tractability, we simplify this two-steps cash flow into one lump-sum
amount. The single claim loss payment estimated in our model is

> *Claim Payment~t~ =*
>
> *Amortized Surviving UPB~t~ \* Conditional Claim Rate~t~ \* Loss Rate*

The *Amortized Surviving UPB~t~* is the amount of the unpaid balance of
the loan after amortization multiplied by the probability that the loan
will survive until the beginning of time *t*. The conditional claim rate
is estimated from the multinomial mortgage termination model presented
in Appendix A. Note that the claim rate and the prepayment rate are in
terms of the number of loans instead of the UPB. Claim and prepayment
rates do vary by loan size. We conducted the analysis by cohort and
aggregated across cohorts. One of the dimensions of determining cohorts
is the loan size, so using the rates in terms of the number of loans
produces the same results as using the rates in terms of UPBs.

The loss rate is usually referred to as the loss given default (LGD) or
severity in the banking industry. It measures the amount of principal
not recovered divided by the unpaid balance at the time of default.
Based on the historical data of claimed mortgages provided by FHA, the
average claim loss rate declined from 40 percent in 2000 to about 35
percent during the 2001 through 2003 exposure years. Then, this rate
rose in the most recent three fiscal years to over 39 percent in FY
2006. Although significant efforts have been invested by FHA to improve
the loss rate, with the rising loss-severity rate observed toward the
end of the historical time series and the forecasted slowdown in house
price appreciation rates over the next few years, we assumed the future
loss rates will be similar to those in FY 2006, representing the highest
single-year experience in the recent history.

######### Exhibit B-6

  ---------------- -------------- ---------------- ------------ ------- ------- ------- ------- ------- -------------
  **Average Loss                                                                                        
  Severity Rate                                                                                         
  (%) of Claimed                                                                                        
  Loans by Claim                                                                                        
  Year**                                                                                                

  **Termi-nation   **Non-profit   **Judicial       **Mortgage                                           
  Year**           Gift**         Foreclo-sure**   Product                                              
                                                   Type**                                               

                                                   **1**        **2**   **3**   **4**   **5**   **6**   **Portfolio
                                                                                                        Average**

  2004             no             no               34.72        39.44   28.83   29.83   34.29   31.05   36.21

                                  yes              39.01        60.50   38.56   37.06   60.17   36.80   

                   yes            no               39.41        46.69   36.29                           

                                  yes              47.90        56.68   44.93                           

  2005             no             no               35.72        41.01   30.23   29.76   27.01   29.67   37.82

                                  yes              43.33        57.25   39.42   41.18   63.66   37.28   

                   yes            no               37.88        43.39   32.45                           

                                  yes              47.88        48.49   45.47                           

  2006             no             no               36.00        39.11   31.48   31.27   31.39   32.42   39.05

                                  yes              47.40        61.42   42.01   42.79   51.10   42.75   

                   yes            no               37.49        39.15   33.84                           

                                  yes              47.97        43.05   45.97                           
  ---------------- -------------- ---------------- ------------ ------- ------- ------- ------- ------- -------------

Exhibit B-6 shows the historical loss severity rate experience by claim
year, mortgage product types, if the loans received a downpayment gift
from a non-profit organization, and if the collateral housing is located
in a judicial foreclosure state. It clearly shows that the loss severity
rate is higher among the judicial foreclosure states. The longer time
required to dispose a foreclosed properties in those states tend to
increase the loss severity. We also observe that the loss rates of
15-year mortgages tend to be higher. However, due to the low claim rate
of the 15-year mortgage products, the impact of the higher loss rate is
less severe as it appears. For property dispositions that occurred
during FYs 2004, 2005, and 2006, FHA's loss rates averaged 36.21, 37.82,
and 39.05 percent of unpaid principal balance, respectively. FHA,
however, often expresses its loss rate in terms of a percentage of its
acquisition cost, which is the sum of the unpaid principal balance and
other allowable costs (such as interest during the foreclosure period
and foreclosure expenses) for which FHA reimburses the lender upon the
filing of a claim when the property is conveyed to FHA. Following FHA's
definition, the loss rates for property dispositions occurring during
FYs 2003, 2004 and 2005 would be 30.75, 32.05, and 33.02 percent,
respectively, when expressed as a percentage of acquisition cost.

For the FY 2006 Actuarial Review, the cash flow model expressed the
loss-severity rate in terms of the unpaid principal balance. The loss
rates for each product type, the utilization of non-profit organization
downpayment gifts, and the foreclosure law of the state during the
termination year of FY 2006 are used as the expected loss severity rates
for all future terminations, and are shown in the shaded areas of
Exhibit B-6.

To provide insights into the impact on the economic value and capital
ratios, this year's Review also includes an alternative scenario under
which we assumed that the loss rate for each product was five percentage
points higher than the above rates. This is discussed further in
Appendix D.

**C. Refunded Premiums**

FHA first introduced the upfront premium refund program in 1983. It
specified that FHA would refund a portion of the upfront premium when a
household prepaid its mortgage. The upfront premium was considered to be
"earned" over the life of the loan. Upon prepayment, an approximation of
the unearned upfront premium is returned to the borrower. Therefore, the
amount of the refund depends on the time since origination that the
mortgage is prepaid. The refund payments are calculated as follows:

> *Refund Payments =*
>
> *Original UPB \* Upfront Premium Rate \* Conditional Prepayment Rate
> \* Refund Rate*

In the past, borrowers could receive the upfront premium refund when
they prepaid their mortgages before the maturity of the mortgage
contract. In 2000, FHA policy changed so that borrowers can obtain
refunds only if they prepay within the first five years of their
mortgage contracts. The most recent policy change at the end of 2004
eliminated refunds for early prepayments of any mortgages endorsed
afterward, except for those occurring within 3 years following the
original endorsement date, but only if the borrower refinanced with a
new FHA loan.

The current and past policies relating to the upfront premium refund
schedule are presented in Exhibit B-7.

Exhibit B-7

+---------+-----------+-----------+-----------+-----------+-----------+
| **Per   |           |           |           |           |           |
| centage |           |           |           |           |           |
| of      |           |           |           |           |           |
| Upfront |           |           |           |           |           |
| Premium |           |           |           |           |           |
| Ref     |           |           |           |           |           |
| unded** |           |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| **Years | **        |           | **1       | *         | **12      |
| since   | 9/1/83\~1 |           | /1/94\~** | *1/1/01** | /8/2004** |
| Origin  | 2/31/93** |           |           |           |           |
| ation** |           |           | **12/3    | **and     | **and     |
|         |           |           | 1/00^a^** | l         | l         |
|         |           |           |           | ater^b^** | ater^c^** |
+---------+-----------+-----------+-----------+-----------+-----------+
|         | **30-Year | **15-Year | **All**   | **All**   | **If      |
|         | Mo        | Mo        |           |           | R         |
|         | rtgages** | rtgages** | **Mo      | **Mo      | efinanced |
|         |           |           | rtgages** | rtgages** | into      |
|         |           |           |           |           | Another   |
|         |           |           |           |           | FHA       |
|         |           |           |           |           | Loan**    |
+---------+-----------+-----------+-----------+-----------+-----------+
|         |           |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 1       | 0.99      | 0.99      | 0.95      | 0.85      | 0.58      |
+---------+-----------+-----------+-----------+-----------+-----------+
| 2       | 0.94      | 0.93      | 0.85      | 0.65      | 0.34      |
+---------+-----------+-----------+-----------+-----------+-----------+
| 3       | 0.82      | 0.81      | 0.70      | 0.45      | 0.10      |
+---------+-----------+-----------+-----------+-----------+-----------+
| 4       | 0.67      | 0.66      | 0.49      | 0.25      | 0.00      |
+---------+-----------+-----------+-----------+-----------+-----------+
| 5       | 0.54      | 0.51      | 0.30      | 0.10      |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 6       | 0.43      | 0.39      | 0.15      | 0.00      |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 7       | 0.35      | 0.29      | 0.04      |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 8       | 0.29      | 0.21      | 0.00      |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 9       | 0.24      | 0.15      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 10      | 0.21      | 0.11      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 11      | 0.18      | 0.08      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 12      | 0.16      | 0.06      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 13      | 0.15      | 0.04      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 14      | 0.13      | 0.03      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 15      | 0.12      | 0.02      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 16      | 0.11      | 0.00      |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 17      | 0.10      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 18      | 0.09      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 19      | 0.09      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 20      | 0.08      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 21      | 0.07      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 22      | 0.07      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 23      | 0.06      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 24      | 0.05      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 25      | 0.05      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 26      | 0.04      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 27      | 0.04      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 28      | 0.04      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 29      | 0.04      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+
| 30      | 0.00      |           |           |           |           |
+---------+-----------+-----------+-----------+-----------+-----------+

^a^ Based on Mortgagee Letter 94-1, which provides a monthly schedule of
refund rates

^b^ Based on Mortgagee Letter 00-38

^c^ Based on Mortgagee Letter 05-03, which provides a monthly schedule
of refund rates. Applicable only if refinanced into a new FHA loan.

######### IV. Economic Value and Capital Ratio

Once all the above future cash flow components are determined, the
present value can be measured through an appropriate discounting method.
Then the economic value is the sum of the present value of future cash
flows plus the current capital resources.

**A. Discount Factor**

The discount factors applied in discounting the cash flows are the
official Federal credit subsidy present value conversion factors. The
discount factor varies depending on how far into the future a cash flow
will occur. The discount factors are shown in Exhibit B-8.

## Exhibit B-8

  -------------------------------- --------------------------------------
  **Years that Cash Flow Occur**   **Discount Factor**

  2008                             0.9516

  2009                             0.9074

  2010                             0.8654

  2011                             0.8248

  2012                             0.7854

  2013                             0.7477

  2014                             0.7114

  2015                             0.6765

  2016                             0.6429

  2017                             0.6106

  2018                             0.5797

  2019                             0.5503

  2020                             0.5223

  2021                             0.4957

  2022                             0.4704

  2023                             0.4463

  2024                             0.4234

  2025                             0.4016

  2026                             0.3809

  2027                             0.3612

  2028                             0.3426

  2029                             0.3248

  2030                             0.3080

  2031                             0.2920

  2032                             0.2768

  2033                             0.2624

  2034                             0.2487

  2035                             0.2357

  2036                             0.2234

  2037                             0.2117
  -------------------------------- --------------------------------------

**B. Calculating the Economic Value and Capital Ratio**

The economic value of the MMI Fund as of the end of FY 2007 was
calculated first by determining the present value of the future cash
flows for all existing books of business as of September 30, 2007. This
figure was then added to the current capital resources of the MMI Fund.
The capital ratio is defined as the economic value divided by the
unamortized IIF of the Fund.

For each fiscal year beyond 2007, the economic value of the fund as of
the end of the fiscal year is calculated by the following equation:

> *Year End Economic Value =*
>
> *Economic Value at the beginning of the year + Total Return on the
> Beginning Economic Value + Economic Value of the New Book of Business*

The return on investment of the beginning economic value for each of the
future fiscal years is assumed to equal the one-year Treasury forward
rates implied by the discount factors. Specifically, these rates are
shown in Exhibit B-9.

## Exhibit B-9