RMBS

Structured Finance

20th December 2002

www.fitchratings.com

European RMBS Special Report A Guide to Cash Flow Analysis

for RMBS in Europe

Analysts Matthias Neugebauer +44 20 7417 4355 [email protected] Euan Gatfield +44 20 7417 6306 [email protected] Stuart Jennings +44 20 7417 6271 [email protected]

Contents • Cash Flow Structures • Building Blocks

− Excess Spread − Principal Deficiency Ledger − Reserve Fund − Swaps − Liquidity Facility − GIC Account, Negative Carry,

Authorised Investments − Step up Margins − XS Certificates

• Cash Allocation − Priority of Payments − Senior Notes Protection

• Specific Structures − Provisioning − Non standard Swaps − Pro Rata Amortisation

• Fitch’s Cash Flow Scenarios − Prepayments − Margin Compression − Default and Recovery Rates − Default and Loss Timing − Delinquency Assumptions − Interest Rates

• Appendix I − Prepayment Rates in Europe

• Appendix II − Fitch’s CPR Assumptions

Summary This report describes Fitch Rating’s approach to analysing residential mortgage-backed transactions, which rely on the cash flows generated by the underlying mortgage loans to meet the issuer’s interest and principal payment obligations under the notes. The report focuses primarily on structural analysis and supplements the country-specific Residential Default Model reports (available from www.fitchratings.com). Fitch’s RMBS ratings generally address timely payment of interest and ultimate payment of principal. The ratings depend among other factors, crucially on the performance of the mortgage collateral and may be jeopardised by defaulted and delinquent loans. Cash flow analysis is performed in order to test whether sufficient credit enhancement and liquidity support is available for the ratings to survive Fitch’s stress scenarios. Credit enhancement in European Cash Flow RMBS is provided by excess spread (“ExS”), sub-ordination and over-collateralisation (assets of the issuer exceed the liabilities). One of the primary objectives of cash flow analysis is to determine the amount of credit support provided by ExS, which depends not only on collateral performance – such as prepayments and default – but also on the effectiveness of the structure to utilise ExS in respect of losses. Another objective of cash flow analysis is to test whether the ‘liquid’ forms of credit enhancement (i.e. ExS and cash reserve) are sufficient to compensate for a temporary liquidity shortfall caused by delinquent mortgage loans and adverse interest rate movements. Additional liquidity support may be necessary in Fitch’s scenarios in order to ensure the issuer is able to meet its interest payment obligations under the notes in full and on time. This can take the form of external third party liquidity facilities or internal liquidity by way of ‘borrowing principal funds’ to pay interest. The agency models the cash flowing from the mortgage portfolio and its reallocation within the structure to pay interest and principal under the notes in accordance with the specific priority of payments (or ‘waterfall’). To ensure consistency across transactions, the agency has developed a cash flow model that can incorporate the various structures described in this report. The report is subdivided into five sections. The first section provides a brief description of cash flow structures. Sections two, three and four describe in some detail the main ‘building blocks’ and structures of cash allocation used in European RMBS. The final section provides an overview of the key variables affecting principal and interest payments generated by mortgage portfolios as well as their stressed levels assumed in Fitch’s cash flow analysis.

Structured Finance

A Guide to Cash Flow Analysis for RMBS in Europe

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Cash Flow Structures

Cash flow analysis is mostly associated with ‘true sale’ transactions, where the issuer acquires a portfolio of mortgages from the originator/seller, financed through the issuance of notes. The holders of such RMBS notes obtain a security right over the mortgages. Interest and principal payments under the notes are met with funds received from the mortgages. To administer the mortgage loan portfolio, the issuer will enter into a servicing agreement with either a third party specialised mortgage servicing company (common in the UK sub-prime market) or the seller of the mortgage portfolio (typical in most other transactions in Europe). In ‘synthetic’ structures (common only in German RMBS), the seller buys protection in respect of a portfolio of mortgages, but remains the legal owner of the mortgage loans. Cash flow analysis is typically not required, as the payment of interest under the notes is guaranteed by the seller and structures do not benefit from excess spread. One notable exception was the Swedish FARMS transaction, which benefited from synthetic excess spread.

The chart above depicts a typical ‘true sale’ arrangement, as is fairly standard in European RMBS. The issuer’s capital structure generally includes senior, mezzanine and junior notes, as well as either a reserve fund or unrated subordinated notes, which represent the first loss piece (FLP). Losses which exceed available ExS and the FLP will be allocated in reverse sequential order starting with the junior notes, then the mezzanine notes and finally the senior notes. Thereby the mezzanine and junior notes together with the FLP provide credit enhanced to the senior notes in the form of subordination. Principal funds received from the mortgages are usually ‘passed through’ by the issuer to amortise the notes sequentially starting with the senior notes, followed by the mezzanine notes and finally the junior notes. Pro rata payment is possible subject to certain conditions being fulfilled (see page 11). There are several other counterparties that play key roles in the transaction, which will be described in more detail in the following section.

Transaction Diagram

IssuerSpecial PurposeVehicle (SPV)

Reserve Fund

Interest Rate /Currency Swap

GuaranteedInvestment

ContractLiquidityFacility

SwapCounterparty

LiquidityProvider

Seller

Subordinatedloan

Senior Notesrated ‘AAA’

MortgagePortfolio

Junior Notesrated ‘BBB’

Servicer

InterestCollections

PrincipalCollections

ServicingAgreement

Mezzanine Notesrated ‘A’

Principal

3m Euribor + 30bps

Principal (if SeniorNotes are amortised)

3m Euribor + 70bps

3m Euribor + 90bps

Principal (if MezzNotes are amortised)

GICCounterparty

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Building Blocks Excess Spread (ExS) Excess spread is the difference between (i) the interest earned on the mortgages, and (ii) the coupon on the notes and senior expenses of the issuer. Most cash flow RMBS transactions are structured to generate a certain level of ExS, which can range from as much as 300bps or more in certain UK sub-prime mortgage transactions, to as little as 25bps in some Dutch RMBS. ExS represents the first layer of protection in European RMBS, and is used to absorb losses, top up the reserve fund, as well as to provide liquidity support. The amount of ExS available over the life of the transaction depends significantly on the level of prepayments experienced by the assets: the higher the rate of prepayment, the lower the lifetime volume of ExS. Moreover, the level of ExS is not constant for the life of the transaction (unless it is guaranteed by a swap, as is usual for example in Dutch RMBS), and depends on two factors: a. The weighted average margin (WAM) on the

notes: as lower margin senior notes pay down prior to higher margin subordinated notes, the note WAM will increase, reducing the level of ExS.1

b. The WAM on the mortgages: if borrowers paying higher margins repay their loans more quickly, the WAM of the mortgages will decline, and so with it the level of ExS. This is referred to by Fitch as ‘WAM compression’ and is discussed in greater detail on page 14.

The amount of ExS available to support the notes is dependent not only on the prepayment rate, or WAM compression, but also on how the structure is able to capture the additional revenues. In most cash flow RMBS structures, ExS is available to cover losses only on a ‘use it or lose it’ basis, so that prior to shortfalls occurring, all ExS will be paid back to the originator. In order to retain some of the ExS prior to losses, the reserve fund (see Reserve Fund on page 4) may be structured to build by capturing and retaining ExS up to a required amount. Alternatively

1 The reverse may be true temporarily for deals with high senior detachable coupons (fairly common in UK sub-prime RMBS). Also, where the notes amortise pro rata, the notes’ WAC will stabilise.

provisioning for defaults (see page 9) would capture more ExS prior to losses occurring. Principal Deficiency Ledger (PDL) The PDL is a record of uncovered losses on the mortgages (i.e. net of any ExS and monies in the reserve fund) that would result in a principal deficiency on the notes were the transaction to unwind at that point in time. The reader should note that the PDL is not a physical cash account but rather a ledger that is debited on each payment date in respect of losses (plus in certain structures, principal funds being used to cover interest shortfalls) and credited in respect of available funds. A PDL mechanism is usually associated with separate principal and interest priority of payment (waterfall) structures and allows the transfer of revenue funds to cover principal losses registered on the PDL, and thereby to accelerate the amortisation of the notes. Crediting of the PDL takes place in the revenue waterfall on each payment date using funds available after all items senior to it have been paid in full.2 Any funds credited to the ledger will reduce the debit balance (principal shortfall), and form part of available principal funds used to redeem the notes. If there is insufficient revenue to extinguish a debit balance, it is carried forward on the PDL to the following payment date. The PDL is usually split into sub-ledgers corresponding to each note class. If we assume two note tranches, a senior one (A) and a junior one (B), then a debit balance is first established on sub-ledger B. This is credited only after the full payment of interest on B is made. Note that funds credited to the B sub-ledger will be used to redeem the class A notes until fully redeemed. While uncovered losses may continue to accumulate, the maximum debit balance that can be recorded on the B sub-ledger is capped at the outstanding balance of that tranche. This reflects the fact that B note-holders could not lose more than the outstanding principal of their investment were the deal to unwind at that point. Hence, any further losses would be registered on the A sub-ledger, indicating that senior bondholders are now at risk of suffering an ultimate principal shortfall. In such circumstances, in order to protect the senior tranches, payment of interest under the B notes is subordinated to the payment of funds

2 With combined waterfall structures (which allocate principal and interest funds together according to a single schedule), there is no need to make this special transfer.

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needed to reduce to zero the debit balance on the A sub-ledger. Such a waterfall can be represented as follows: 1. Interest on Class A notes, 2. Amounts to reduce to zero any debit balance on

PDL sub-ledger A, 3. Interest on Class B notes, 4. Amounts to reduce to zero any debit balance on

PDL sub-ledger. Reserve Fund (RF) Most cash flow RMBS structures in Europe benefit from a reserve fund, which provides credit enhancement as well as liquidity support to the issuer. In order to fund the cash reserve at closing, the originator will typically grant a subordinated loan to the issuer (SPV), which is repaid from excess spread. Alternatively, the issuer may seek funding for the RF through the capital markets. This can be achieved by issuing XS certificates (see XS certificates page 6). The amounts standing to the credit of the RF will form part of available revenue funds on each payment date, and will be distributed in accordance with the revenue priority of payments. The RF will be credited again at some stage in the waterfall from remaining revenue funds after payment of all senior positions. Standard RFs are credited only after interest on the notes and payments in respect of the PDL, thereby providing credit enhancement as well as liquidity support. Some structures restrict the use of the reserve fund to provide liquidity only, by, for example, crediting the reserve prior to the PDL in the waterfall. This means that the reserve fund would not be available to credit the PDL and amortise the notes until the last payment date, when the reserve is no longer required to be replenished. A RF can also be used to ‘trap’ ExS before it is released from the structure. This is the case where the reserve fund ‘required amount’ is greater than the amount that was funded initially at closing. The amount of ExS retained in this way is limited by the required amount. Once the RF is fully funded, any further revenue funds are used to satisfy subordinated items in the waterfall before being released. If the required amount is expressed as a percentage of the current outstanding note balance, the reserve fund will amortise over time. In order to restrict this, Fitch usually introduces a delinquency and/or default trigger and asks that credit enhancement to the senior notes be a multiple (decided on a case-by-case basis)

of that at closing. Furthermore, amortising reserves are always subject to an absolute floor to protect noteholders from exposures to large loans remaining in the later stages of the transaction. The floor is determined in relation to the size of the largest loans in the mortgage portfolio. Swaps European RMBS typically pay a floating rate of interest based on either of the two main indices in Europe, STG Libor or Euribor. The mortgages, on the other hand, can be fixed or floating and variations thereof. Floating rate mortgages can also be based on indices other than Euribor or Libor (e.g. UK standard variable rates) or versions of Euribor or Libor (for example one-month, three-month or six-month) with reset dates that differ from that of the notes. The mismatch between the interest basis for the mortgages and that for the notes would therefore expose the issuer to interest rate risk. Another factor that may need to be hedged is currency risk, where the notes and mortgages are denominated in different currencies. To hedge such risks, European RMBS issuers generally enter into derivative agreements, which usually fall into the following categories: 1. Basis swap: issuer pays one index and receives

another; 2. Fixed-Floating swap3: issuer pays a fixed ‘swap

rate’ and receives Euribor/Libor; 3. Currency swaps: in respect of both principal and

interest, issuer pays an amount in one currency and receives an amount in another. Calculated with respect to a fixed exchange rate specified in the swap agreement at the closing date.

European RMBS typically involve ‘balance guaranteed’ swaps, whereby the swap notional is defined in relation to the mortgage balance (or occasionally the note balance). Prepayment risk in such swaps is thereby transferred to the swap counter-party, thus largely mitigating the risk to the issuer of under/over-hedging, which could arise were the amortisation of the swap notional set according to a fixed schedule. Although the use of swaps may mitigate the interest rate and FX exposure of the issuer, it introduces

3 An important point of departure from a swap is that a cap counterparty is never ‘in the money’ (at the expense of the issuer). This means that, ceteris paribus, the issuer is able to benefit from greater excess spread in a low interest rate scenario where a cap is incorporated compared to a swap. However, this is compensated for with the payment of premia to the cap counterparty.

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counter-party risk in respect of the swap provider. This risk is generally addressed through the use of rating triggers. For standard swaps the swap counterparty should generally be rated F1 or higher to support a ‘AAA’ rating Swaps used in European RMBS can, however, deviate considerably from ‘plain vanilla’ interest rate and currency swaps (see ‘Non-Standard Swaps’ on page 10). Any deviation from simple swap structures has to be analysed, and an assessment made as to how difficult it would be to replace or collateralise the swap. The minimum rating may be ‘F1+’, where the swap is more difficult to replace or collateralise. Liquidity Facility (LF) In order to ensure timely interest payments under the notes, the issuer may require some form of dedicated liquidity support to cover possible revenue shortfalls arising from delinquent and defaulted mortgage loans. Third-party liquidity facilities are usually associated with strictly separate waterfall structures that restrict principal from being used to fund revenue deficits. Under an ordinary LF contract, the issuer is entitled to draw down funds up to an agreed amount in order to cover interest shortfalls on the notes. Availability of the facility for junior notes is usually subject to the performance of the transaction, and will expire should the performance deteriorate beyond the level consistent with the rating of these notes (see Protection of Senior Notes page 8). For example, in Dutch RMBS, the issuer can draw on the LF to cover interest shortfalls on subordinated notes only as long as there is no debit balance on the PDL sub-ledger corresponding to that tranche. In order to ensure such facilities do not constitute credit enhancement, all amounts due to the facility provider including drawn amounts, as well as interest, are paid at the top of the revenue priority of payments (usually after senior expenses but ahead of interest payments to the senior notes). The cost of a facility includes a commitment fee currently in the region of 10 to 20bps on the available amount, together with a floating rate of Libor/Euribor plus a margin, which is currently between 15 to 30bps on any drawn amounts. Most facilities are 364-day commitments. Should the provider decide not to renew the facility, or if it were downgraded below the minimum rating and unable to find a suitable replacement in a given period, then the issuer would ordinarily have the right to draw down the available amount in full and place it on

deposit with an appropriately rated financial institution. Guaranteed Investment Contract (GIC), Negative Carry and Authorised Investments Under the guaranteed investment contract, the GIC counterparty agrees to pay a guaranteed rate of interest on the issuer’s transaction accounts (which will contain principal and interest collections between note payment dates and amounts standing to the credit of the reserve fund). The agreed rate of interest is usually Libor or Euribor minus a margin (currently between 15 and 25bps). Although the GIC account mitigates reinvestment risk exposure of the issuer by guaranteeing a margin, the issuer still incurs ‘negative carry’ costs associated with holding cash. For example, if the mortgages were to pay monthly and the notes quarterly, the issuer would be exposed to negative carry costs due to the differential between (i) the interest received on mortgages and the transaction accounts over a quarter, and (ii) the interest due on the notes. The impact of negative carry on ‘pass-through’ structures is usually negligible since neither interest nor principal is held in cash for any significant length of time. However, negative carry can reach considerable proportions, for example, during the cash accumulation periods necessary for controlled amortisation and bullet notes that are frequently seen in RMBS master trusts (used in France and the UK). Negative carry costs also arises over the first 18 months in Italian RMBS, during which period the notes can not be redeemed and any principal collections have to be held by the issuer. In order to mitigate negative carry, the issuer may invest such funds in ‘authorised’ (or ‘permitted’) investments, which would yield a return in excess of the guaranteed rate under a GIC. However, such investments would also carry a higher risk compared to holding cash. Therefore investments typically must mature by the next payment date to avoid loss in value due to market value risk, and should consist of highly rated, liquid securities (rated ‘F1’ or ‘F1+’ depending upon the frequency of payments under the notes) Step up Margin The terms and conditions of most RMBS notes in Europe include an increase in the note margin taking effect after the call date4 (also referred to as the step-up date). The increased cost of funding to the issuer provides an incentive to redeem the notes at their call 4 Fixed rate notes generally revert to floating at the step up date.

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option date from funds received from selling the mortgages (usually back to the originator). There is, however, no guarantee that the originator or another party will be able or willing to provide funding to the issuer to redeem the notes; hence Fitch is unable to rely on the exercise of such an option. The increased note margin post-step-up date will compress the level of excess spread available to the issuer considerably. This may lead to negative ExS post step-up, so that the issuer has to pay out more than it is receiving from the mortgages. In such situations Fitch assumes that the call option is not exercised and the negative excess spread post step-up is incorporated in the required credit enhancement.5 XS Certificates XS Certificates, prevalent for some time in the US, were only recently introduced in European RMBS transactions. They have been used in a number of Dutch and UK RMBS transactions including Arena I,II and III, Hermes III (all Dutch), and Holmes and Granite (both UK Master Trust) among others. XS certificates are issued mainly to fund the initial reserve account and transaction expenses; they act as an alternative to a subordinated loan granted by the seller to the issuer. XS certificates are not backed by mortgage collateral – rather, interest and principal is paid exclusively from ExS generated by the structure. Therefore the repayment of principal and interest under the XS certificates is crucially reliant on the level and timing of excess spread, which itself is dependent on the rate of prepayment (see page 13 for more detail), the timing of defaults, and also the possibility of the issuer to exercise its call option under the notes on the step up date. The higher the rate of prepayment the lower the volume and level of ExS received from the mortgages. To stress the volume of ExS, Fitch runs high prepayment scenarios assuming a certain rating dependent stress level of prepayments (see page 23 for Fitch’s prepayment stresses). Furthermore, ExS is the first source of credit and liquidity support to the issuer. Therefore any defaults and delinquencies will further diminish the volume of ExS available to the holders of the XS certificates. The timing of defaults is crucial for the rating of the

5 For the case that there is still a positive level of ExS post step up date Fitch assumes that the call option is exercised and no credit is given for the additional ExS.

XS certificate. The earlier defaults occur, the less ExS is available to repay the certificate. When analysing XS certificates, Fitch runs front-loaded recession scenarios starting soon after closing (see page 14 for timing of default). By exercising its call option, the issuer could also drastically reduce the volume of excess spread, if any remaining balance of XS certificates at the call date would be written off. This is usually the case in Dutch RMBS. Therefore, Fitch will assign a rating only if sufficient ExS is generated prior to the call date to repay the XS certificates. The ratings of XS Certificate address ultimate payment of principal and interest to the holders of the XS certificates, but may or may not address timely payment of interest. Given that interest is deeply subordinated, it is sometimes not possible to obtain a rating for timely payment of interest, since the PDL and reserve fund replenishment would absorb any available excess spread under stressful circumstances. Accordingly, to achieve timely payment of interest, it is usually necessary to structure the priority of payments so that XS certificate interest is paid prior to the most junior PDL/principal and any replenishment of the reserve fund.

Cash Allocation Priority of Payments The priority of payments or ‘waterfall’ of a transaction determines the order in which available funds are allocated at fixed intervals in satisfying the liabilities (interest and principal under the notes) of the issuer. Junior-ranking positions receive funds only after more senior items have been paid in full. There may be several priorities of payments in a single transaction, each corresponding to a category of funds (revenue or principal) and/or the status of the deal (e.g. pre- or post-enforcement of the notes). In combined waterfall structures, which are common in Spain, France and Italy, principal and interest collected from the loans are merged and distributed according to one priority of payments. Principal payments to each note class are typically subordinated to payment of interest on the related note tranche. The following example shows part of a two tranche combined waterfall: Interest A– Principal A – Interest B – Principal B Principal B will only be paid once the senior notes have been redeemed in full (except for ‘pro rata’ amortisation; see page 11).

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The amount distributed as principal in respect of the most senior notes outstanding is usually capped at the ‘Maximum Redemption Amount’, which is generally defined as the difference between the balance of notes as at the last payment date and the current balance of the mortgages. This cap ensures that items junior to principal can also receive payments. The definition of Maximum Redemption Amount is a critical component of many provisioning mechanisms, and will be looked at separately in the next section. With a waterfall structure as outlined above, principal funds only provide liquidity support to the most senior ranking notes outstanding on each payment date. Interest payments to the class B notes, (while class A notes remain outstanding), are subordinated to principal, and therefore more exposed to temporary interest shortfalls caused by a rise in delinquencies or interest rates. In order to achieve a rating for timely payment of interest on the junior notes, combined waterfalls usually begin as follows: Interest A – Interest B – Principal A - Principal B With such a schedule, principal payments on the senior notes are subordinated to junior note interest providing liquidity support to all tranches from day one. However, this is normally subject to certain performance triggers (see Senior Note Protection below), which, if breached, will promote the position of principal on the class A notes above interest to the class B notes. In the simple example above, this would revert to the following: Interest A – Principal A - Interest B – Principal B To illustrate such structures consider the following example of a combined waterfall, which was taken from the MECENATE transaction (Italian RMBS). The transaction includes senior, mezzanine and junior notes. All of which are rated for timely payment of interest and ultimate payment of principal. The waterfall incorporates separate triggers based on the proportion of defaulted mortgage loans for junior interest and mezzanine interest. With separate waterfalls, typical in Dutch and UK RMBS, principal and revenue funds (the latter being inclusive of the reserve fund) are kept segregated and applied in their own respective waterfalls.6

6 Any recovery amounts are also kept segregated as interest and principal recoveries. Interest recoveries are distributed through the revenue waterfall, while recoveries in respect of principal are usually allocated together with principal collections.

Example: MECENATE (Italian RMBS) (Summary – combined waterfall) Priority of Payments for Issuer Available Funds 1. Fees (Servicer; Paying Agent and others) 2. Prior to an event of default under the Swap

all amounts due to the swap counterparty 3. Interest due to the Class A notes 4. Interest due to the Class B notes 5. Interest due to the Class C notes 6. Principal Equivalent Amount up to the

Maximum Redemption Amount (see Section 3 - Provisioning )

7. Any shortfall of principal fund due but unpaid on the last payment date

8. Replenishing the Reserve Fund up to its required amount

9. Following an event of Default under the Swap all amounts due to the swap counterparty

10. Various subordinated items The waterfall will change subject to the ratio of (A) the aggregated amount of defaults to (B) the current outstanding balance of mortgages. If A/B >11% then Interest on Class C notes will be deferred and paid as item 7 If A/B >15% then Interest on Class B notes will be deferred and paid after as item 7

While it is possible to use revenue funds to cover principal shortfalls (via the PDL), the reverse is generally not allowed in Dutch RMBS. In order to ensure timely payment of interest on the notes the issuer usually has access to an external Liquidity Facility, which is initially available for both senior and junior notes. However, this is once again subject to performance triggers, which, if breached, would terminate the availability of such facilities to junior notes. Furthermore, to ensure timely payment of interest on the junior notes in separate waterfalls, payments associated with crediting the PDL are usually subordinated below interest on the junior notes. However, once the PDL debit balance exceeds the remaining outstanding balance of the junior notes, it should be credited prior to interest on the junior notes in order to protect the senior notes. This is typically achieved by splitting the PDL into sub-ledgers, each corresponding to a particular note tranche (see section 1 – PDL). This means the allocation of interest to repay principal deficiencies

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is ‘automatically’ regulated by the performance of the deal. The following example was taken from the Dutch transaction STReAM I. In this particular structure any remaining ExS after crediting the PDL was used to amortise the junior notes instead of being released, thereby creating overcollateralisation. The amount of credit enhancement remained unchanged.

Example: STReAM I (Dutch RMBS) (Summary – separate waterfall) Notes Interest Available Amount Interest on the Mortgages; GIC Interest; Prepayment Penalties; Drawings on the Liquidity Facility; Reserve Fund; Swap payments; Recoveries relating to Interest Interest Priority of Payments 1. Fees (Trustee; Servicer; Paying Agent etc.) 2. Payments to the Liquidity Facility Provider 3. Payments under the Swap (except termination

payment) 4. Interest on the class A notes 5. Class A PDL 6. Interest due to the class B notes 7. Class B PDL 8. Interest due to the class C notes 9. Class C PDL 10. Replenishing the Reserve Fund up to its

required amount 11. Payments under the Swap in respect of

termination payments 12. Additional amounts to the Liquidity Facility 13. Repayment of the notes starting with the

Class; then Class B and finally Class A Notes Redemption Available Amount Scheduled and Unscheduled Principal Receipts from the Mortgages; Recoveries with respect to Principal; Revenue Funds credited to the PDL Principal Priority of Payments Sequential starting with Class A, then Class B and finally Class C.

UK structures also have separate waterfalls for interest and principal, but often allow principal to be used within certain limits to cover revenue shortfalls. Any principal funds re-allocated to meet interest payments are debited to the PDL. Rather than using performance triggers, the ‘borrowing’ of principal to meet junior interest payments is only possible for as long as it does not create a debit balance on the next senior ranking PDL sub-ledger.

Any liquidity support to the notes (whether provided by principal and external facility) comes at a certain cost, which is inherent one way or another in both combined and separate waterfalls and which can be described as the economic cost of liquidity. Separate waterfall structures supported by external liquidity facilities incur a direct cost made up of a relatively small commitment fee for the availability of the facility (normally charged as a percentage of the available amount of the facility), and an interest rate charged on any drawn amount (see Liquidity Facilities on page 5). Using principal as a source of liquidity also incurs a ‘time value of money’ cost arising from continuing to pay interest on a note balance that would otherwise have amortised. This cost is equal to the coupon on the most senior class of notes in sequential structures, and the WAC on the notes in pro rata structures.7 Senior Note Protection The continued availability of liquidity sources (principal collections or external facilities) for junior note interest in a scenario where the performance of the mortgage collateral deteriorates beyond a level consistent with the rating of the junior notes represents a significant outflow of funds, which has to be addressed when sizing credit enhancement for the senior notes. For example, where principal is used to provide liquidity support, senior notes would only be repaid once interest on the junior notes has been paid in full. Similarly, since liquidity facilities are replenished prior to senior note interest in the waterfall, their unlimited availability to service junior notes would, in effect, redistribute funds away from the senior notes to the junior notes. In order to complete the subordination of junior notes and to preserve more funds for the senior notes, the availability of liquidity support to junior notes is typically conditional upon performance measures and/or ‘caps’, as is the case in some UK structures (see above). The challenge for structurers is to find an appropriate point in time for terminating the use of liquidity facilities or the application of principal in respect of junior note interest. If the switch happens too early, insufficient funds may be available for junior interest thereby causing a temporary interest shortfall. On the other hand, if such termination takes place too late, it may create a principal shortfall on the senior notes.

7 Note that there is no equivalent to the facility commitment fee.

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Very often, not one, but two triggers are used, which take into account defaults/arrears as well as losses. The default/arrears trigger (used for example in the Italian MECENATE transaction – see above) would capture a sudden deterioration of the asset performance, while the loss trigger is designed for a scenario where defaults and losses are more evenly spread over the life of the deal. A loss trigger alone, for example, might stop liquidity support for junior interest too late if a sudden spike in defaults occurred. This is especially pertinent to jurisdictions with long foreclosure periods, such as Italy, Spain and France, where it can take more than two years before recoveries and losses are realised. In such a scenario, liquidity support would continue to be provided to junior notes while the portfolio was deteriorating, but had not yet realised significant losses. Ideally, complementary triggers are sized with respect to an expected amount of defaults and losses. However, there are various ways in which such triggers can be calculated. The most common performance measures are current defaults and uncovered loss or principal deficiency.8 These can be expressed as a percentage of either the balance at closing or the current outstanding balance of the notes. In order to remove some complexity when sizing these triggers, Fitch recommends expressing them as a percentage of the balance at closing. This also confines the stress to ‘front-loaded’ scenarios, and hence is less likely to interrupt junior interest payments once the deal has substantially paid down. These triggers may or may not be reversible if the balance of current defaults or uncovered losses fall below the set trigger ratio. Fitch is able to model the breach of different types of trigger in its cash flow analysis to make sure that both its ratings for timely interest and ultimate principal survive under specific stresses. To illustrate the use of performance triggers in combined waterfall structures consider the following example.

8 Current defaults exclude the balance of previous defaults that have foreclosed, and therefore reflect the intensity of defaults at a point in time rather than their accumulation. Uncovered losses (as opposed to cumulative losses) could decline due to the reallocation of revenue funds to redeem the notes (see Provisioning or PDL).

Example Class A rated AAA; Class B rated A; Class C rated BBB Expected Principal Deficiency Loss AAA =7%; A= 5%; BBB = 2% Expected Maximum Current Defaults AAA = 20%; A = 15%; BBB = 10% x = Current Defaults as a percentage of the initial balance y = Current Principal Deficiency as a percentage of the initial balance x < 10% or y<2%

10% < x < 15% or 2%<y<5%

x > 15% or y>5%

Interest A Interest A Interest A Interest B Interest B Principal Interest C Principal Interest B Principal Interest C Interest C

Specific Structures

Provisioning Provisioning refers to the use of revenue funds or ExS to cover for expected losses (i.e. which have not yet been realised) in respect of highly delinquent and defaulted mortgage loans. In other words, instead of waiting for a loss to materialise, ExS will be captured and used to amortise the note balance in respect of the amount provisioned. This will temporarily create over-collateralisation and reduce the total interest due on the notes. Once recoveries are received and a loss is realised, any excess recoveries will flow back to the originator as ExS. Italy provides some interesting examples of provisioning techniques, mainly owing to a prohibitively lengthy foreclosure process, which in some Italian regions (‘tribunali’) can last up to ten years. This refers to the time it takes to recover property sale proceeds from loans in default (‘in sofferenze’). Similarly, RMBs structures in France and Spain also use provisioning to mitigate for the longer foreclosure periods which on average last 30 months. With such drawn-out foreclosure processes, and without accelerated amortisation/provisioning, a large differential could arise between the note balance and the balance of performing mortgage loans. This would cause a shortfall between the issuers’ income and expenses (referred to as ‘cost of carry’) for the issuer, who will have to service the notes inclusive of the proportion corresponding to such non-performing positions. Moreover, if subsequent recoveries are insufficient to cover both principal and interest up to an amount the issuer paid under the notes, such cost of carry will cause or compound principal deficiencies. Provisioning for defaults is usually achieved by defining the Maximum Redemption Amount (see

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Section 2 - Combined Waterfalls) to be inclusive of the balance of loans in default. A loan is considered defaulted if it is in arrears for a certain period of time. The definition of default can vary between transactions. As a result of provisioning, funds that would otherwise be paid to items ranking junior to the redemption amount in the priority of payments are used to accelerate the repayment of the notes. Some transactions even define the Maximum Redemption Amount to be inclusive of a proportion of highly delinquent loans, as was the case for example in the MECENATE deal. Here the redemption amount included, for example, 25% of the notional balance of those mortgage loans which were more than four months overdue. As a result, in such a structure accelerated repayment of the notes starts even earlier.

Example: MECENATE (Italian RMBS) Maximum Redemptions Amount on each payment date Outstanding Note Balance minus the Aggregate NotionalAmount outstanding of mortgage loans as of the precedingpayment date.

Aggregated Notional Amount Outstanding Defined as the product of (a) the outstanding principalamount of each mortgage loan, and (b) the PerformanceFactor applicable to each mortgage loan.

Performance Factor Arrears Level (No. of missed payments) Performance

For quarterly payment frequency 0-3 100% 4-6 75% >6 65%

Defaulted Loans 0% For semi-annual payment frequency

0-2 100% 3-4 75% >4 65%

Defaulted Loans 0%

Non-standard Swaps Swaps used in European RMBS can deviate considerably from the ‘plain vanilla’ interest rate swap described in Section 1. In this section we will consider two further departures from the ‘plain vanilla’ interest rate swap: (i) complex swap notionals and (ii) “total return swaps”. We have already described how European RMBS typically involve ‘balance guaranteed’ swaps whereby the swap notional is set in relation to the mortgage balance. Prepayment risk is thereby transferred to the swap counterparty. In addition to

the performing part of the portfolio, the swap notional can also be defined to include delinquent and defaulted mortgage loans, or even losses. This would be the case, for example, if the swap notional is based on the note balance. As a result, the counterparty could, in certain circumstances, have to make interest rate contributions on non-performing assets. Such contributions, although generally small in respect of a basis swap, could be substantial for a fixed-floating interest rate swap during periods of high interest rates. In the case of defaults arising, the issuer would be ‘over-hedged’, which would increase the extent that it would be ‘out of the money’ if Libor/Euribor fell below the swap rate. On the upside, the issuer’s exposure to rising interest rates in respect of defaulted loans (see ‘Cost of Carry’ on page 16) is locked in at the swap rate. Total Return Swaps – as the name suggests – exchange the ‘total return’ of the portfolio for a predictable cash flow. The hedge counterparty assumes the risk that the weighted average margin on the mortgage loans may decrease over time as a result of skewed prepayments. This could arise if higher yielding loans amortised more quickly. In contrast with a ‘plain vanilla’ fixed-floating or basis swap, WAM compression would be borne by the issuer. In order to give credit to such external support, Fitch imposes stringent replacement or collateralisation triggers upon downgrade of the counterparty; furthermore, full credit may not be given at higher rating scenarios if there are doubts over the ability of a replacement to be found or collateral to be posted in respect of a particular swap position that is not deemed a marketable liquid hedge. Such a complex swap structure is less marketable to alternative counterparties, and may go hand-in-hand with a ‘back-to-back’ swap arrangement between the swap counterparty and the originator, which fully mirrors the swap terms between the issuer and the swap counterparty. This means that the ability to replace a swap counterparty following a downgrade may also hinge upon the then credit quality of the originator – if this has deteriorated, then a replacement counterparty may view the originator as an unacceptable credit for a ‘back-to-back’ arrangement. Swap Examples: The following section takes a closer look at representative swap structures for Italy, the Netherlands and the UK.

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In Italy, most RMBS involve a total return swap based on the performing balance of the mortgage portfolio, with the counterparty guaranteeing a margin. As a result, the agency can set aside the risk of WAM compression in its cash flow analysis. In the GIOTTO transaction, the issuer and swap counterparty agreed to exchange the total scheduled interest minus a specified margin and senior expenses from the mortgages in return for the interest on the notes. This means the counterparty is effectively guaranteeing an amount of ExS on the swap notional. However, any shortfall owing to delinquent or defaulted loans would lead to a reciprocal proportional adjustment of payments due by the swap counterparty.9

Example: GIOTTO FINANCE

Exchanges of amounts actually received.

Giotto Finance

The issuer

ABN AmroThe SwapProvider

Scheduled Interest on the Mortgagesless margin and senior expenses

Interest due on the Notes

Proportional Adjustment

If the Issuer has insufficient funds to pay amounts due to the Swap counterparty, the Issuer’s payment obligations are reduced by such an amount and the payment obligations of the Swap counterparty will be reduced by the proportion the shortfall bears to the payment due by the Issuer

Swaps used in Dutch RMBS are also total return swaps, as the example of Delphinus III shows.

Example: Delphinus III

Exchanges of amounts actually received.

Delphinus 2001-I

The issuer

RabobankThe SwapProvider

Scheduled Interest on the Mortgagesplus interest on the Collection Accountless margin of 50bps * Note Balanceless senior expenses

Interest due on the Notesadjusted for

any debit balance on the PDL

Euro for Euro Adjustment

If the Issuer has insufficient funds to pay amounts due under the swap, the payment obligation of the Issuer will be reduced by an amount equal to such shortfall. At the same time the payment obligation of the Swap counterparty will be adjusted accordingly on a ‘euro for euro’ basis by the amount of the shortfall.

9 This mirrors a swap which is based on the performing balance of the mortgage portfolio.

Similarly to the Italian Swap, the issuer pays the scheduled interest on the mortgages minus a margin and senior expenses and receives the interest on the notes. Once more, this counteracts any WAM compression on the mortgages. Unlike the Giotto example, shortfalls in respect of the payment obligation of the issuer would lead to a ‘euro for euro’ adjustment. This means, if interest rates rose to place the issuer ‘in the money’ while a proportion of the portfolio was in default, then the net swap payment would effectively incorporate interest contributions on defaulted and delinquent loans.

Example: PERMANENT FINANCING (No.1)

Swap Notional: Note Balance less PDL and amounts in the GIC

Netted Payments

Permanent Funding

The issuer

HalifaxThe SwapProvider

weighted average of1. SVR basket rate2. Tracker Rate3. WA Fixed Rate

3 month STG Libor plus a spread

SVR basket rate is an average of SVR’s of Halifax’s main competitors. Although it has been highly correlated to the Halifax SVR over time, the two rates could deviate, leaving some sundry risk for the Issuer.

In the UK, most transactions use a more standard interest rate swap, whereby the issuer is due Libor in return for a swap rate. The swap used in the Permanent Master Trust was set against the note balance minus PDL and any amounts in the Redemption Account. This, therefore, also includes defaults as well as delinquencies. As both legs of the swap are netted the effect is similar to the ‘euro for euro’ adjustment in the Dutch swaps. The issuers’ leg is calculated by reference to a weighted average of mortgage rates while the swap counterparty ‘guarantees’ a margin over Libor, thus hedging the risk of WAM compression. The issuer remains exposed to a sundry risk of compression in respect of the standard variable rate mortgages, as the issuer’s leg of the swap is defined with respect to a basket SVR rate of the major mortgage lenders in the UK rather than Halifax’s own SVR. Pro Rata Amortisation Pro rata, as opposed to sequential, amortisation refers to the allocation of available principal funds to redeem the senior and junior notes proportionally in accordance with their respective outstanding

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balance. In order to demonstrate the effect of pro rata amortisation, consider the following example: Senior

Notes Junior Notes

Initial outstanding Balance 150 50Credit Enhancment 25% -Available Redemption Funds: 20 Sequential Allocation of Funds 20 0Remaining outstanding Balance 130 50Credit Enhancement 27.8% -Pro Rata Allocation of Funds 15 5Remaining outstanding Balance 135 45Credit Enhancement 25% -

As a result of sequential pay-down, credit enhancement as a percentage increases over time but remains the same in absolute terms. With pro rata amortisation, credit enhancement remains the same as a percentage and decreases in absolute terms. Pro rata amortisation has the benefit that the weighted average cost of funding remains constant over the life of the transaction, and hence the level of ExS is more stable (although it could still decline due to WAM compression on the mortgages). By contrast, under sequential pay-down structures that retire senior notes first, the weighted average cost of funding rises over time as the proportion of more expensive junior notes increases.10 The level of ExS therefore declines for a sequential structure as time goes on. Nevertheless, a pro rata allocation of unscheduled principal payments under the mortgage loans (prepayments) raises the risk of “adverse selection”: better credits will prepay first, leading to a deterioration of credit quality in the mortgage portfolio. Adverse selection is a particular concern for sub-prime mortgages since borrowers are likely to refinance with a prime lender (and thereby reduce their margin) at the earliest opportunity their credit profile allows. In recognition of the greater credit risks associated with pro rata pay-down, Fitch generally asks that a period of sequential pay-down takes place from closing to allow a certain percentage increase in credit enhancement prior to pro rata amortisation commencing. In addition, pro rata amortisation is subject to various other conditions; for example, if there is a PDL debit balance, an outstanding draw on the reserve fund or a material increase in arrears (all

10 For deals with high senior detachable coupons (fairly common in UK sub-prime RMBS) sequential amortisation may temporarily lead to a decrease of the cost of funding.

of which are indicators of deteriorating credit quality) allocation of principal funds should revert to sequential.

Fitch’s Cash Flow Scenarios Fitch runs various stress tests on the key variables affecting cash flows generated by the mortgage portfolio, including prepayment speed, interest rates, default and recovery rates, recession timing, WAM compression (if necessary) and delinquencies. The agency models the cash flows received from the mortgages (as well as from other sources such as hedging instruments and GIC accounts) and their reallocation in accordance with a specific deal structure. In order to ensure a consistent approach across transactions, Fitch has developed a cash flow model that can incorporate the various structures described in the previous parts. The following section provides an overview of Fitch’s assumptions for the individual risk factors, focusing primarily on the major markets in Europe including the UK, France, Germany, the Netherlands, Spain and Italy. Amortisation Profile To model the pay-down of the mortgages Fitch uses either the amortisation profile provided by the originator of the loans, or, if this is not available, an approximation that is based on loan-by-loan information. The expected amortisation is calculated for each loan assuming zero prepayments and no defaults, and taking into account the current mortgage rate, remaining term to maturity, the current balance and the repayment type (whether interest-only or repayment). The aggregated repayment profile forms the basis for modelling the pay-down of the portfolio. The following chart provides an example amortisation profile for a portfolio, which includes approximately equal proportions of interest-only and repayment loans.

0

20

40

60

80

100

120

1 41 81 121 161 201 241 281 321

Scheduled Amortisation Profile Assuming No Prepayments

M onths after Closing

(GBPm)

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The kinks in the curve are a result of interest-only loans redeeming in one amount at maturity (a “bullet” repayment) rather than amortising over time. Prepayments, delinquencies and defaults are ‘overlayed’ on the scheduled pay-down of the portfolio. Prepayment Speed Prepayment speed is a key variable in determining the lifetime volume and periodic percentage of excess spread received from the mortgage portfolio. The faster the amortisation of the portfolio, the lower the volume of ExS available for noteholders. Higher prepayments of high margin loans would lead also to a lower percentage of excess spread (unless guaranteed by a total return swap). The following chart demonstrates the effect of different prepayment rates on the amortisation profile of the mortgage portfolio.

0

20

40

60

80

100

0 50 100 150 200 250 300

Zero CPR 2% CPR 5% CPR15% CPR 25% CPR

Amortisation Profile for Various CPR

(GBPm)

With a prepayment rate of 25% per annum, 80% of the portfolio will have prepaid five years after closing. The level of prepayments experienced in Europe varies significantly across countries, and depends inter alia on interest rates, competition among lenders, the magnitude and term of prepayment penalties, the financial adeptness of borrowers, customer loyalty and administrative barriers to refinancing. A comparison of prepayment experience across different European countries is provided in Appendix I, including historical data where available. In the context of RMBS reporting, prepayments can also include mortgage loans repurchased by the seller. Such repurchase is usually required if a loan is found to be in non-compliance with the eligibility

criteria or representations and warranties given by the seller at closing. Although generally a small proportion, such repurchase can, under certain circumstances, significantly increase prepayment speed. This is, for example, the case in some UK master trusts where the seller is required to repurchase loans that have been subject to a further advance since closing. As a result, prepayment rates reported for these transactions (at around 40%) are approximately twice the borrower rate of prepayment. Nonetheless, owing to the impact of such inflated rates on ExS, Fitch will increase the assumed CPR rate whenever the seller is entitled or obliged to repurchase in respect of loans subject to a further advance. Taking actual experience in each country as the base case, Fitch has determined rating-specific prepayment stresses (see Appendix II). The applied prepayment stress increases for more severe rating scenarios. For example, prepayment rates experienced by UK prime portfolios have recently been as high as 25% p.a. (see data provided in Appendix I). Fitch assumes the following stressed prepayment rates for UK prime portfolios:

CPR AAA 35% AA 33% A 30%

BBB 27% BB 25%

The following chart shows the assumed country-specific ‘AAA’ prepayment vectors (for other rating scenarios see Appendix I).

0%

10%

20%

30%

40%

50%

1 9 17 25 33 41 49 57

Assumed AAA Prepayment Vectors


UK (prime)UK (sub-prime)

D;NL;FrSpain

Italy

Historical experience suggests that the propensity to prepay is low in the years immediately after origination, owing in part to incentive rates or

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prepayment penalties. Therefore Fitch models a ‘ramp-up’ period of up to three years for unseasoned portfolios. The prepayment rate is applied to the performing balance (i.e. exclusive of defaulted and delinquent loans). The effective prepayment rate therefore declines as the rate of defaults and delinquencies rises. These stress assumptions are based on currently available CPR data (see Appendix I), and may be adjusted on a case-by-case basis should an individual lender’s experience differ significantly (or, as mentioned above, where there are specific loan repurchase provisions as in some of the UK master trusts). Although under most circumstances high prepayments are generally more stressful for cash flow RMBS transactions (owing to the reduced volume of ExS), there may be circumstances under which low prepayment rates could pose an additional risk factor. This is the case, for example, for the ‘bullet’ notes (which are redeemed in full at maturity and have much shorter terms) issued from UK master trust programs, since it is necessary to accumulate sufficient cash in time to meet the repayment of such bullet notes. To test such structures Fitch will also run low prepayment scenarios. Margin Compression Prepayments will also lead to a decline in the weighted average margin (WAM) on the underlying mortgage portfolio, if high margin mortgage loans prepay faster than those with low margins. The magnitude of any compression depends on both prepayment speed and the dispersion of loan margins in the portfolio. A relatively homogenous pool will likely experience less margin compression than a portfolio with a wide range of margins. WAM compression will reduce the percentage of excess spread, unless otherwise guaranteed by a total return swap (see Sections 1 and 2). Fitch accounts for WAM compression by allocating a certain percentage of prepayments to the highest margin loans in the portfolio. As the assumed prepayment rate is higher for higher rating scenarios, the extent of WAM compression also increases. Default and Recovery Rates Fitch determines portfolio default and recovery rates using a loan-by-loan default model, customised for each country (see individual RMBS Default Model

criteria for the UK, Italy, Germany, Spain, France and the Netherlands available on www.fitchratings.com). The default models generate rating-specific default and recovery rates for each mortgage loan in the portfolio. The individual rates are then aggregated11 to yield a weighted average for the portfolio. These results, also referred to as WAFF (weighted average foreclosure frequency) and WARR (weighted average recovery rate), are used in the agency’s cash flow analysis. Recovery Rates are calculated based on the following formula: Minimum of:

i. Outstanding Balance + Accrued Interest ii. Estimated Recovery Value

Divided by the Outstanding Balance Accrued interest is calculated by reference to the current mortgage rate for fixed rate loans (or, in the case of Italy, the legal rate), or a stressed rate for floating rate mortgages equivalent to the Libor/Euribor stress applied during the recession scenario as outlined below. The estimated recovery value is based upon the property value, conservatively adjusted using house price indices in order to provide a cautious estimate of current values. This value is reduced by a market value decline factor; any prior charge amounts, accrued interest on prior charge amounts and costs incurred during the foreclosure process. For more information please refer to www.fitchratings.com for the country-specific residential mortgage default model reports. Default and Loss Timing The observed default pattern of residential mortgages suggests that defaults are more likely to occur during the first years after origination of the loan12. The following chart shows the timing and magnitude of repossessions for static portfolios of UK prime mortgages: 11 In the case of default probability, a pool average is determined by weighting the loan default rates by their corresponding current balances. However, loans with higher default probabilities also typically have lower recoveries, as both are dependent on LTV. Therefore a pool average must be derived by weighting the loan recovery rates by their respective current balances and default probabilities, which will ensure that loans with higher default probabilities would also receive greater weight in calculating the aggregated recovery rate.

12 This may be less likely for remortgages of seasoned loans.

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0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Years after origination

average (1982-1987) average (1988-1990)average (1991-1996)

Source: FitchRatings

Number of Repossessions per Year as Percentage of Total Number for Each Year of Origination

Please note that for UK prime mortgages the time to repossession measured from the first missed payment is typically in the range of 12 to 18 months. The available data shows that the rate of repossession rises during the first two to four years after origination peaking in years four to five. The propensity to default tends to decline as the ability of private borrowers to withstand financial stress increases. This has been due to several factors, including rising house prices and rising personal incomes. Moreover, the borrower often deleverages by amortising the mortgage loan over time. Amortisation and house price inflation increase the borrower’s equity in the property and reduce the LTV. The higher the equity held in the property the greater the incentive for the borrower to avoid default. In addition, the lower the LTV, the higher the recovery rate would be should the borrower indeed default. Therefore defaults are generally more stressful during the early years after closing of the transactions (although a greater amount of ExS - available on ‘use it or lose it’ basis - is captured). However, this pattern is also subject to economic factors such as the rate of interest and unemployment, as seems to be implied by the elongated peak in the 1991-1996 cohort. Based on the actual experience Fitch usually assumes a front-loaded stress, with defaults starting soon after closing of the transaction. The following table/chart illustrates Fitch’s standard default curve assumed for all rating levels, expressed as a percentage of the relevant WAFF.

Assumed Default Vector Months after

Closing 1-9 10-22 23-34 35-46 47-58 59-70 71-82

% of WAFF 2.5% 20% 30% 20% 15% 10% 2.5%The defaults for each period are spread evenly.

0%

1%

2%

3%

4%

5%

1 19 37 55 73 91 109 127 1450%

20%

40%

60%

80%

100%

120%

Fitch Default Distribution


The agency models 87.5% of the defaults occurring in the first five years after closing of the transaction. The amount of defaults is calculated in reference to the closing rather than the current balance, assuming that better credits are likely to prepay first. To illustrate the methodology consider the example on the following page (assuming a WAFF of 20% and a closing balance of 1000). Quarter New Defaults WAFF Defaulted Amount1 0.83% 0.167% 1.672 0.83% 0.167% 1.673 0.83% 0.167% 1.674 5.00% 1.000% 10.005 5.00% 1.000% 10.006 5.00% 1.000% 10.007 5.00% 1.000% 10.008 7.50% 1.500% 15.009 7.50% 1.500% 15.0010 7.50% 1.500% 15.0011 7.50% 1.500% 15.0012 5.00% 1.000% 10.0013 5.00% 1.000% 10.0014 5.00% 1.000% 10.0015 5.00% 1.000% 10.0016 3.75% 0.750% 7.5017 3.75% 0.750% 7.5018 3.75% 0.750% 7.5019 3.75% 0.750% 7.5020 2.50% 0.500% 5.0021 2.50% 0.500% 5.0022 2.50% 0.500% 5.0023 2.50% 0.500% 5.0024 0.63% 0.125% 1.2525 0.63% 0.125% 1.2526 0.63% 0.125% 1.2527 0.63% 0.125% 1.25 Total 100.0% 20.0% 200

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Nevertheless, a ‘back-loaded’ recession may be more stressful, for example, for replenishing portfolios, which allow the seller to add new loans to the mortgage portfolio (generally only for a limited time period). As a result, the portfolio will exhibit slower seasoning (if any) compared to static portfolios, which will delay the decline in default propensity associated with static portfolios. Modelling back-loaded defaults will significantly compress the amount of ExS available to cover losses; this would be exacerbated if there was a ‘step-up’ of interest (see page xx). The assumed length of the ‘work out’ process (time to foreclosure) is based on experience in each jurisdiction, and depends on the regulatory framework governing the foreclosure process. The following table lists the time to foreclosure assumed for all countries under consideration.

Average Time to Foreclosure

Italy WA time to foreclosure for each tribunale (up to 84 months)

France 30 months Germany 24 months UK 18 months Netherlands 12 months Portugal/Spain 36 months Measured since initial missed payment date

The following chart shows the nominal and performing collateral balance for a front-loaded default scenario.

0

20

40

60

80

100

120

1 41 81 121 161 201 241 281 321

Performing Notional

Notional vs. Performing Balance(Notional Balance Inclusive of Defaults and Losses)

(GBPm)


Delinquency Assumptions In order to achieve timely payment of interest, the structure has to provide sufficient liquidity support to the notes to sustain a stressed level of delinquencies in addition to defaults in a climate of rising interest rates.

In order to determine appropriate delinquency assumptions, the agency analysed available arrears data. The findings of this study are provided on page 23. Based on these findings, the agency assumes a multiple of the monthly defaulting loan balance falls delinquent for a certain period. Thereafter, the delinquent balance becomes fully performing again and the accrued arrears interest is assumed to be fully repaid over the following 10 months. Loans in arrears are usually restructured, allowing the borrower to repay the amount in arrears in addition to ongoing scheduled mortgage payments over a limited period. The length of such arrangements depends on an individual lender’s collection and servicing guidelines and on the financial means of the borrower. As the assumed level of delinquencies is based on the WAFF – which is always higher in more severe recession scenarios – arrears are more widespread under more stressful rating conditions. To temper this, and to support the assertion that in economic recessions a greater proportion of financially distressed borrowers will ultimately default, the multiple applied to the WAFF is reduced in more severe rating scenarios. The assumed duration of delinquency depends on the payment frequency of the mortgages. For example, the period of delinquency is expected to be longer for mortgage loans that pay quarterly and semi-annually compared to those which pay monthly. The tables below detail Fitch’s standard delinquency assumptions, which are primarily based on UK experience and may be adjusted for other countries as more data becomes available.

AAA AA A BBB BBMultiple of monthly defaults 1.5 2 2.5 2.75 3

Payment Frequency

Assumed Number of Missed Payments

Assumed No months

Monthly 7 7 Quarterly 3 9 Semi-annually 2 12 Annually 1 12

To illustrate our approach consider the following example: assuming ‘BBB’ scenario (multiple of 2.75) and a WAFF of 20%, which is evenly spread over a period of 36 months, the following schedule shows the amount assumed to become delinquent each month:

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Quarter New Defaults New Arrears Total Arrears1 1.7% 5.0% 5.0% 2 1.7% 5.0% 10.0% 3 1.7% 5.0% 10.0% 4 1.7% 5.0% 10.0% 5 1.7% 5.0% 10.0% 6 1.7% 5.0% 10.0% 7 1.7% 5.0% 10.0% 8 1.7% 5.0% 10.0% 9 1.7% 5.0% 10.0% 10 1.7% 5.0% 10.0% 11 1.7% 5.0% 10.0% 12 1.7% 5.0% 10.0% 13 0.0% 0.0% 5.0% 14 0.0% 0.0% 0.0%

The duration of non-payment is assumed to be two quarters, after which the loan becomes performing again. Hence in aggregate, after the initial six-month period, the outstanding balance of loans in arrears remains the same, as newly-delinquent loans are offset by those that become performing again. Interest Rates Interest rate risk (on any mismatch between assets and liabilities) may leave the issuer exposed to adverse movements in Libor/Euribor (the two main

indices in Europe). This is generally hedged in respect of performing mortgage loans through the use of balance guaranteed swaps (see section on Swaps on page 4).

Non performing positions (defaulted and delinquent loans) are usually un-hedged in European RMBS. Therefore a rise in interest rates would increase the differential between income and expenses (referred to as ‘cost of carry’) for the issuer, which will have to service the notes inclusive of the proportion corresponding to such non performing positions. Delinquent loans that subsequently return to performing (and pay off all accumulated arrears interest) apply a liquidity stress only, which lasts until full recovery of the delinquent amounts. The magnitude of the stress depends on the length of time a loan is delinquent, which is typically not more than six months, and on any change in interest rates. The cost of carry is significantly larger for defaulted positions, for which the time to recovery can last several years, depending on jurisdictions. If subsequent recoveries are insufficient to cover both principal and interest up to the amount the issuer paid under the notes, such cost of carry will cause or compound principal deficiencies. To mitigate cost of carry, certain transactions include provisioning

Delinquency Study In order to define the maximum expected amount of delinquent loans based on the assumed amount of defaults, Fitch analysed the arrears development of a large portfolio of UK mortgages (approximately 1.5 million loans, all of which pay monthly). The matrix below shows the migration rate between different arrears buckets over a period of six months. It can be seen that a sizable proportion of loans that at the outset were in arrears began to perform again during the six months, but fell into arrears again at the end of the observation period. This explains why, for example, 63% of the loans initially in arrears between one and two months remained at this level six months later.

Performing 1-2

Months 2-3

Months 3-4

Months4-5

Months5-6

Months6-7

Months7-8

Months8-9

Months 9+

Months Repo-

ssession Performing 96.0% 3.6% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%1-2 Months 31.1% 63.0% 3.1% 1.4% 0.6% 0.3% 0.2% 0.1% 0.0% 0.0% 0.2%2-3 Months 20.2% 27.0% 20.5% 14.2% 8.4% 4.1% 2.1% 1.2% 1.5% 0.0% 0.8%3-4 Months 15.1% 19.0% 11.7% 18.9% 13.9% 9.1% 4.5% 2.3% 1.4% 2.4% 1.5%4-5 Months 14.9% 14.6% 7.2% 10.8% 16.4% 14.9% 7.5% 4.4% 2.6% 4.4% 2.2%5-6 Months 12.0% 11.5% 5.2% 7.1% 10.3% 16.5% 14.1% 7.8% 4.2% 7.4% 3.8%6-7 Months 12.6% 11.5% 2.3% 3.7% 6.5% 9.0% 14.8% 12.8% 7.4% 13.7% 5.7%7-8 Months 10.8% 8.7% 1.5% 2.7% 2.8% 5.5% 9.8% 16.6% 12.9% 20.0% 8.7%8-9 Months 9.5% 7.7% 2.4% 2.1% 2.4% 3.3% 6.0% 9.1% 15.2% 31.9% 10.3%9+ Months 10.1% 5.5% 0.9% 1.3% 1.0% 1.1% 1.4% 2.5% 3.8% 58.7% 13.5%Repossession 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% Assuming that the migration rates remain constant, this matrix can be used to calculate the number of mortgage loans which migrate all the way to default. This was done using a Markov Chain methodology assuming that no new loans fall into arrears and that loans that became performing again would not fall back into arrears. Based on the six-month transition matrix, as shown above, the agency estimated that approximately 27% of loans initially in arrears for more than two month would be foreclosed upon, with the remaining 73% becoming performing again. In other words, the ratio of arrears to defaults for the portfolio in question was estimated to be around 2.7. Unfortunately no such detailed data is available for other European countries.

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mechanisms designed to capture revenue funds (including ExS), which are then used to amortise the notes in advance of any recovery being made on defaulted loans (see Provisioning on page 9).. In order to address a possible hedging mismatch (although rare in European RMBS), as well as to stress the ‘cost of carry’, Fitch assumes a rise in the note index during the first three years after closing. Stress scenarios for a rise in STG Libor and Euribor were developed based on the historical volatility of both indices. The following tables show the assumed rise in Libor and Euribor.

3 month STG Libor Year 1 Year 2 Year 3 Year 4 TotalAAA +4.9% +2.5% +1.1% -1.6% +6.9%AA +4.2% +2.2% +0.9% -1.3% +6.0%A +3.5% +1.9% +0.8% -1.2% +5.0%BBB +2.9% +1.4% +0.6% -1.0% +3.9%BB +2.2% +1.1% +0.6% -0.7% +3.2%

3 month Euribor Year 1 Year 2 Year 3 Year 4 TotalAAA +4.3% +2.2% +1.0% -1.4% +6.1%AA +3.7% +1.9% +0.8% -1.1% +5.3%A +3.1% +1.7% +0.7% -1.1% +4.4%BBB +2.6% +1.2% +0.5% -0.9% +3.4%BB +1.9% +1.0% +0.5% -0.6% +2.8%

Interest rate stress scenarios are more severe for investment-grade ratings. In a ‘AAA’ scenario, for instance, STG Libor is assumed to increase by 4.9% during the first year, 2.5% during the second year and 1.1% during the third year. In recognition of the assumed recession, Fitch decreases the interest rate stress in year four. The resulting rate is held constant for the remainder of the transaction’s life. For example, if three-month Libor equalled 4% at closing, Fitch would model the following forward curves for individual stress scenarios:

0%

2%

4%

6%

8%

10%

12%

14%

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96102108114


AAA AA ABBB BB

Applied Interest Rate Stress Vector for Libor(Assuming 3 month Euribor is 4% at closing)

The change is applied monthly, quarterly or semi-annually, depending on the length of the actual payment period under the notes.

0%

2%

4%

6%

8%

10%

12%

14%

0 7 14 21 28 35 42 49 56 63 70 77 84 91 98 105 112 119


AAA AA ABBB BB

Applied Interest Rate Stress Vector for Euribor(Assuming 3 month Euribor is 4% at closing)

These stresses may be adjusted depending upon future interest rates movements. In particular, the stress may be increased if Libor and Euribor were to fall significantly and vice versa for a rise in either of the indices.

Related Research The following research is available on the Fitch web site at www.fitchratings.com: • 'German Residential Mortgage Default Model

II', 7th September 2001 • ‘Italian Residential Mortgage Default Model',

14th June 2002 • 'UK Residential Mortgage Default Model II',

13th October 2000 • 'Dutch Residential Mortgage Default Model II',

28th January 2000 • 'Spanish Mortgage Default Model', 20th January

1999 • 'French Residential Mortgage Default Model',

14th June 2001

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Appendix I – Prepayment Rates in Europe The UK Unlike other European countries, the UK mortgage market is dominated by floating-rate mortgages. The majority of these products are based on the lenders’ standard variable rates (SVRs), which are adjusted at the discretion of each lender, but generally tend to move in tandem. Most lenders offer incentive periods of between three and five years in order to attract customers, who usually pay a discounted, capped or fixed rate during this initial period and revert to SVR thereafter. During the incentive period, most mortgages are subject to prepayment penalties of around 2–5% of the amount prepaid. Given the characteristics of the UK mortgage market, the level of prepayments is driven mainly by the competitiveness of the market, the level of prepayment penalties, the financial adeptness of borrowers and the volatility of interest rates. Chart one shows the static repayment experience of a large portfolio of UK prime mortgages. Although the data does include scheduled repayments too, these are likely to be minor compared to prepayments throughout the early years of a loan. In the past, repayment rates tended to peak around three to four years after origination at around 15% per annum. The timing reflects the average incentive period, after which there is an increased likelihood of refinancing. More recently, repayments have increased to over 20%, as borrowers become more financially adept, more able to process readily available information (especially on-line), and consequently more likely to ‘shop around’. These factors even led to an increase in repayment rates for highly seasoned loans, as seen in chart one. Prepayment experience in the UK also differs between prime and sub-prime mortgages, as shown in chart two. Prepayment rates have been significantly higher in the sub-prime sector than for prime mortgages. Like their prime counterparts, sub-prime lenders do charge prepayment penalties during the early years, but these are perhaps less of a deterrent to prepay than for prime borrowers. The decision to prepay is driven instead by a borrower becoming eligible for prime, and hence cheaper, credit. This, in turn, depends on a borrower fitting the lending criteria applied by the prime lender in terms of credit performance (e.g. following the expiry of impaired credit indicators such as CCJs or arrears recency) and suitability (e.g. ability to obtain external certification of income, moving out of a right-to-buy property).

0%

5%

10%

15%

20%

25%

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source: Citigroup

Total Redemption (Prepayment + Repayment) by Vintage YearBased on Outstanding Balance at the Beginning of Each Year

0%5%

10%15%20%25%30%35%40%45%

1 2 3 4

Average 1998 1999

Source: Fitch Ratings

Total Redemption (Prepayment + Repayment) by Vintage Year

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The Netherlands Approximately 90% of mortgages in the Netherlands are fixed rate loans that reset every five to 20 years (remaining fixed rate until maturity). Interest payments are fully tax-deductible, giving borrowers an incentive to maximise their borrowings over the whole life of the mortgage; for this reason most mortgages in the Netherlands are interest-only loans linked to repayment vehicles, such as savings accounts, life insurance policies or investment contracts. The return from such investment vehicles is also tax free. Dutch mortgages historically have had very long terms; however, this is now often limited to 30 years, when tax-deductibility expires. If borrowers prepay, they tend to refinance their entire mortgage (as a result of moving home or remortgaging) as opposed to making partial prepayments: given the tax advantages of borrowing, surplus cash flow can be more economically diverted in making higher contributions towards savings accounts, investments or life insurance policies. Refinancing fixed rate loans between reset dates is subject to prepayment penalties. Under fixed rate mortgages, borrowers are allowed to refinance at reset dates without incurring prepayment penalties. Between reset dates most lenders charge prepayment penalties designed to compensate for the cost of unwinding hedging instruments. Therefore the decision to refinance between reset dates is only economic for the borrower if the saving achieved under lower interest rates offsets the penalty incurred by prepaying. Consequently, prepayment activity in the Netherlands not taking place on reset dates is heavily influenced by movements in interest rates. The chart above shows annualised payment rates on five Dutch MBS portfolios between 1997 and 2001. For most of this period, payment rates were below 15%; however, in 1999, this increased sharply to as high as 35%, at a time when interest rates had fallen to a 25-year low. Spain The vast majority of Spanish residential mortgages are floating-rate loans linked to a variety of indices including Mibor (Madrid Interbank Offered Rate; now replaced by Euribor), CECA (Confederación Espanola de Cajas de Ahorros) or IRPH (Interés de Referencia del Mercado Hipotecario) to mention only the most prevalent. Most mortgage loans are also amortising with terms between 20 and 35 years. Prepayment penalties in Spain are among the lowest in Europe, capped by law (Real Decreto 3499/1994) at 1% of the prepaid amount. Prepayment behaviour of Spanish mortgage borrowers is less sensitive to changes in interest rates since most products’ rates are linked to indices highly correlated with Euribor. However, the royal decree from 1994 has contributed considerably to increased competition among lenders, by cutting prepayment penalties and giving borrowers the opportunity to refinance with minimal costs. The following chart shows the annualised constant payment rate of seven Spanish

0%

5%10%

15%

20%25%30%

35%

40%

09/97 01/98 06/98 11/98 03/99 08/99 01/00 05/00 10/00 03/01 08/01

EMS 1 Dutch MBS 97-1 Dutch MBS 97-2Dutch MBS 98-1 Dutch MBS 99-1

Source: Fitch Ratings

Annualised Constant Payment Rate (Prepayments and Repayments)

0%

5%

10%

15%

20%

25%

09/94 09/95 10/96 11/97 11/98 12/99 12/00 01/02

TDA2 TDA3 TDA 4 TDA 5TDA 6 TDA 7 TDA 8



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MBS portfolios (TDA 1 to TDA 7). The highest annualised rates were experienced during 1994 (around 20%) and 1997 (between 12% and 20%). The increasing popularity of flexible mortgage products in Spain is another factor that could increase prepayment rates as traditional loans are refinanced. In addition, such flexible loans encourage overpayments since such amounts can typically be redrawn. France While French mortgage products remain predominately fixed rate, the popularity of floating rates is on the increase. Specialised lenders, which are the main users of securitisation (as they have not access to retail funding) have shifted their production to floating rate loans over the last few years. As a consequence, the recent securitised portfolios are a mix of fixed and floating rate loans. Most lenders charge prepayment penalties, capped by law at 3% of the prepaid amount. Although at the moment the impact of interest rate variations on prepayments is slight compared to other European countries, a few transactions have been sensitive to rate variations. Titrilog 06-97 and Titrilog 11-98, which are composed mainly of fixed-rate mortgages originated in high interest rate environment, have experienced high prepayment rates as interest rate decreased (CPRs of 20% to 28% in 1999). However, these levels are not expected to occur again in the near future as the older, higher interest rate mortgages which have not yet prepaid are less likely to do so now, and fixed rate mortgages with lower rates as well as floating rate mortgages are less sensitive to future rate variations. Interestingly, prepayments start to show a cyclical trend in 2002, with increases during summer time, probably as families move houses in time before the school's start. Finally, loans granted at subsidised rates by French utilities EDF and Gaz de France to their employees demonstrate, as expected, a moderate prepayment pattern, at an average of 4% per annum in Electra 1. Italy The Italian mortgage market has been very fragmented to date, with small banks that focus on specific geographic regions constituting a major share of the market. Fixed rate products are estimated to account for approximately 53% of all outstanding mortgages in Italy (Source: Nomisma), with the remainder being either floating or mixed rate (which are initially either fixed or floating-rate for a set period of time, after which the borrower has the option either to refix or obtain a variable rate). Most newly-originated floating-rate mortgages are linked to one, three or six-month Euribor, which has largely replaced most of the other indices such as, for example, the ABI (Associazione Bancaria Italiana) prime rate and TUS (Tasso Ufficiale di Sconto). Most Italian mortgages are amortising annuity loans, with typical terms of around 15 years. Prepayment penalties have declined and are now in the region of between 1% and 3% of the prepaid amount.

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999

Seashell BancApulia

Source: Offering Circular

Annual Prepayments as % of Outstanding Principal

0%

5%

10%

15%

20%

25%

30%

09/97 02/98 07/98 12/98 05/99 10/99 03/00 08/00 01/01 06/01 11/01

TITRILOG 06-97 TITRILOG 11-98DOMOS 5 MASTERDOMOS



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Historically, Italy has experienced very low prepayment rates of between 2% and 6% per annum. Prepayment rates are very low during the first two years of a typical mortgage. Thereafter prepayment speed increases and peaks at a maximum of approximately 5% per annum (varying across lenders) three years after origination. The reasons for the relatively low propensity to prepay in Italy are the limited level of competition amongst lenders (owing to the regional fragmentation of the mortgage market), the high level of customer loyalty to their local branch, as well as the reluctance of most lenders to advance a remortgage loan. Germany The German mortgage market is dominated by fixed-rate mortgage loans with reset periods of five to 15 years. Most products are either repayment annuity mortgages or interest-only loans linked to savings contracts (‘Bausparverträge’) or life insurance contracts. Since 1996, interest payments on residential mortgages have only been tax-deductible for investment properties. Instead, each borrower receives a subsidy (‘Eigenheimzulage’) of up to 5% of the property value per year for a period of eight years. At reset dates, borrowers are allowed to repay the entire loan amount without being charged prepayment penalties. On reset dates, most lenders levy heavy prepayment penalties calculated as the ‘make whole’ amount in respect of interest that will be foregone until the next reset date. While common practice for some time with commercial banks, mortgage and savings banks (‘Sparkassen’) have only recently started to offer contracts allowing borrowers to partially prepay their mortgage (up to a contractually agreed amount) without penalty. Historical prepayment data is still limited in Germany. However, market participants estimate prepayments to be between 10% and 20% per annum, driven mainly by interest rate development. As in most other European countries, the rate of prepayment has increased over the 1990s as borrowers have become more financially adept and more information has become available.

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

1 2 3 4 5 6 7

1993 1994 19951996 1997 1998


Banco di Brescia San PaoloPrepayments Per Year After Origination

(%)

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23

Appendix II – FITCH’s CPR Assumptions

UK Prime Year 1 Year 2 Year 3 Year 4 Year 5 and thereafter

AAA 15% 22% 29% 35% 35%AA 14% 20% 26% 33% 33%A 13% 19% 25% 30% 30%BBB 12% 17% 22% 27% 27%BB 10% 15% 20% 25% 25%

UK SUB Prime Year 1 Year 2 Year 3 Year 4 Year 5 and thereafter

AAA 15% 27% 40% 40% 40%AA 15% 27% 40% 40% 40%A 15% 27% 40% 40% 40%BBB 15% 27% 40% 40% 40%BB 15% 27% 40% 40% 40%

Netherlands; Germany; France Year 1 Year 2 Year 3 Year 4 Year 5 and

thereafterAAA 15% 20% 25% 30% 30%AA 14% 19% 24% 28% 28%A 13% 17% 21% 25% 25%BBB 12% 16% 20% 23% 23%BB 10% 13% 16% 20% 20%

The key driver for prepayment speed in France, Germany and the Netherlands is the level of interest rates. Therefore Fitch assumes the same prepayment stresses for all three countries.

Spain Year 1 Year 2 Year 3 Year 4 Year 5 and thereafter

AAA 15% 19% 22% 25% 25%AA 14% 17% 20% 23% 23%A 13% 15% 18% 20% 20%BBB 12% 14% 16% 18% 18%BB 10% 12% 14% 15% 15%

Italy Year 1 Year 2 Year 3 Year 4 Year 5 and thereafter

AAA 10% 13% 17% 20% 20%AA 9% 12% 15% 18% 18%A 8% 11% 13% 15% 15%BBB 7% 9% 11% 12% 12%BB 5% 7% 9% 10% 10%

Copyright © 2002 by Fitch, Inc. and Fitch Ratings, Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified, and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at any time for any reason at the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services Act of 1986 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

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