Aussie RMBS compared to US UK Spain

Table of Contents
 Overview
 Markets
 Legal Environments
 Underwriting Practices
 Delinquency Drivers
 RMBS Structural Features
 Housing Prices
 Australian Operating Framework
 Summary
Appendixes
 Delinquency Charts
 Rating Transition Tables
 Cheat Sheet
OVERVIEW
One of the hallmarks of the Australian Residential Mortgage Backed Securities (RMBS)
market is its outstanding level of collateral performance. To date, Australian RMBS have
performed well with no downgrades due to collateral performance, prompting many
investors to ask “Why?” and if the market will eventually meet the fate of some of those
overseas where numerous downgrades of Aaa notes have been observed.
This paper attempts to answer these questions by comparing the Australian mortgage
market landscape and RMBS structures with the US, UK and Spain.
When comparing markets, the paper examines and contrasts:
– legal frameworks
– underwriting practices
– borrower profiles (prime, credit impaired)
– RMBS delinquency levels and drivers
– collateral performance
– housing prices
– RMBS structural features
Why Compare Australia to US, UK and Spain?
The Australian mortgage / RMBS market is compared to the US, UK and Spanish
markets because they are the major RMBS markets in the world. They also have
relatively similar mortgage products.
International Structured Finance
Australia
Special Report
Australian RMBS compared to US, UK & Spain
Authors
Arthur Karabatsos
Vice President – Senior Analyst
+61 2 9270-8160
Arthur.Karabatsos@moodys.com
Contributors
Patrick Winsbury
Senior Vice President
+61 2 9270-8183
Patrick.Winsbury@moodys.com
Alberto Barbáchano
Vice President – Senior Analyst
+34 91 702-6601
Alberto.Barbachano@moodys.com
Kathryn Kelbaugh
Vice President – Analyst
+1 212 553-3645
Kathryn.Kelbaugh@moodys.com
Christophe De Noaillat
Senior Vice President
+44 20 7772-5536
Christophe.DeNoaillat@moodys.com
Additional Contacts
Andrew Zanchetta
Team Managing Director
+61 2 9270-8101
Andrew.Zanchetta@moodys.com
Josephine Brodsky
Associate Director
+61 2 9270-8117
Josephine.Brodsky@moodys.com
Client Service Desk
Sydney: +61 2 9270-8111
Frankfurt: +49 69 2222-7847
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Monitoring
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Website
www.moodys.com
17 November 2009

Chart 1:
Moody's Rated RMBS Issuance
(UK, Spain & Australia)
€ 0
€ 20
€ 40
€ 60
€ 80
€ 100
€ 120
€ 140
€ 160
€ 180
€ 200
2002 2003 2004 2005 2006 2007 2008 2009
Euro(billions)
Issuance Year
UK Spain Australia
2 • Moody’s Investors Service Australian RMBS compared to US, UK & Spain
Chart 2:
Moody's Rated US RMBS Issuance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2000 2001 2002 2003 2004 2005 2006 2007 2008
Issuance Year
$US(trillions)
Other Subprime Alt-A Prime (Non Agency)
High home ownership rates Additionally, all the markets considered in this report have high home ownership levels.
Australia1
and the US2
are about the same at around 66%. Spain has the highest rate in
Europe at 80% and the UK the fifth highest at 70%.3
1
Source: Australian Bureau of Statistic, 2006 Census data
2
Source: U.S. Census Bureau, Housing and Household Economic Statistics Division Last Revised: December 02, 2004
3
Barclays Capital Research, Guide to UK Prime RMBS.

MARKETS
The Australian mortgage market, together with the UK and US markets, and consequently
their respective RMBS markets are stratified into two parts, Prime and Non-Conforming.
Australian Prime MarketAustralian market
A unique characteristic of the Australian Prime RMBS market is the extensive use of
lenders mortgage insurance (LMI). A prime loan, broadly speaking, is one where the
borrower has no adverse credit history and meets the underwriting criteria for LMI.
An LMI policy provides protection for the lender, covering default losses equal to 100% of
the principal amount, accrued interest and reasonable expenses involved in enforcing the
mortgage.
Australian Non-Conforming Market
Conversely, a non-conforming loan is one that does not meet the underwriting criteria for
mortgage insurance, with the main reasons including:
1. Borrower’s adverse or deficient credit history. Borrowers with an impaired credit
history – which could include loan defaults, adverse judgments, or persons who have
been discharged from bankruptcy, as well as recent immigrants who have no
established credit histories – would not meet the underwriting criteria of the
mortgage insurers.
2. Loan Characteristics, e.g. large loan amount with high LTV
3. Unacceptable Collateral, e.g. inner city apartments of less than 50 square meters.
Collateral may also be considered unacceptable if it is in a geography where the LMI
has reached its exposure limits, or is considered problematic, such as because of an
oversupply of apartments, e.g. Melbourne’s Docklands development. Loans secured
by a country property, or by a company title unit, or a serviced apartment are also
considered as unacceptable collateral.
4. Product Type. Mortgage insurers may refuse to insure certain loan products. For
example, pre-2003, mortgage insurers would not insure low documentation loans
(low docs), which were hence classified as non-conforming. Post-2003, mortgage
insurers offered LMI to low doc loans, provided the LTV was below 80%. In recent
times, low docs have required a maximum LTV of 60%.
This dependence on what a mortgage insurer is prepared to insure – as a factor
differentiating prime / non-conforming loans – means constant refinement of the
definition. After 2002, mortgage insurers began insuring low doc loans, and they were
therefore eligible for inclusion in prime RMBS deals.
It should noted that non-conforming does not mean subprime or credit impaired as fully
verified loans – provided to non-credit-impaired borrowers – may be seen as non-
conforming due to reasons (2) or (3) above.
The best comparison to Australian non-conforming loans – from a US perspective – may
arguably be Alt-A loans, which do not meet the requirements of government-sponsored
agencies Fannie Mae and Freddie Mac. But, Australian non-conforming loan delinquencies
for 60+ day arrears are about 2.5x better in performance than Alt A loans.
Australian Credit-Impaired (Subprime) Market
A subset of the non-conforming market is the credit impaired borrower. Lending to credit
impaired borrowers began with a handful of specialist non-bank lenders in 2001, and
which were set up on business models developed in the UK in the mid 1990’s. Such
borrowers are those defined in 1) above.
US Market
US market The US private label RMBS market consists of three broad credit spectrums, viz. Jumbo
Prime, Alternative-A and Subprime. The jumbo and subprime markets can generally be
determined by FICO scores, and certain other salient attributes.
Loan with 620 and higher FICO scores can be considered prime if there is at least 20%
equity in the property; and the equity can be as low as 5%, providing mortgage insurance
Australian RMBS compared to US, UK & Spain Moody’s Investors Service • 3

is in place. Prime borrowers will also have clean credit history.
Subprime borrowers will typically have some credit impairment in their history. Subprime
borrowers are likely to have FICOs below 620, and they typically do not carry mortgage
insurance at loan level, regardless of the equity in the property. Alternative A loans have
620+ FICO scores. However, they have riskier characteristics than those of prime jumbo
collateral, such as higher LTVs for investment/vacation properties, low documentation
requirements for income and assets, and so forth. More difficult to define they can be
thought of as loans straddling the middle floor between Prime and Subprime borrowers.
FICO Scores
In the US market, a borrower’s credit quality is measured in terms of a FICO
score that is derived from a credit scoring model developed by the Fair Isaac
Company. FICO scores have become industry standard, and range between 300
and 850. There are three dominant provide of FICO scores, and there may be
divergence in the FICO score reported by them. A general way of thinking about
credit quality as evidenced by FICO score alone is presented below:
FICO Score Credit Quality
750-840 Excellent
660-749 Good
620-659 Fair
340-619 Poor / Subprime
Below 339 Unknown
Unlike FICO scores, which incorporate both the positive and negative financial information
of the loan applicant, only negative financial information is recorded in Australia and is
typically provided by Veda Advantage (formely known as Baycorp Advantage), the largest
credit bureau in Australia.
UK Prime Market
UK market A prime loan in the UK can be defined as a loan to a borrower with no adverse credit
history, verified income (with limited verification of income being performed only for very
high quality borrowers), and where the property is to be occupied by the borrower (i.e. not
rented out).
The prime RMBS market in the UK is dominated by the Master Trust structures originated
by large banks and building societies, which are highly rated and are the major players in
the UK mortgage market.
UK Non-Conforming
The UK non-conforming market consists of loans to credit-impaired borrowers; self-
certified products, where the borrower is not required to provide documents verifying
income; and Buy-To-Let loans, where the property is being acquired for the purpose of
being rented out by the borrower.
The LTVs of non-conforming loans are higher than those of prime mortgages (current LTV
based on original valuations of 65-70% for prime and 80-85% for non-conforming), and
with higher proportions of interest-only loans (in prime, this proportion is usually about
50%, but in non-conforming, specifically for Buy-To-Let portfolios, it can be as high as
90%).
The non-conforming market has been in the past dominated by smaller and lower rated
non-banking institutions, but many have since exited the market. Currently, the new
mortgages in the non-conforming sector are limited to the lower LTV Buy-To-Let and self-
certified products offered by few larger banks. The UK non-conforming RMBS market
consists mainly of smaller term transactions, the majority of which were closed before
the crisis.
Spanish Market
Spanish market Banks and savings banks account for 90% of mortgage lending in Spain and 10% by
specialised lenders. In the Spanish market, credit-impaired or limited documentation
loans have not been securitized.

Credit history and indebtness checks are performed through CIRBE (Bank of Spain data
base), ASNEF and RAI. The main product offered is a plain vanilla variable rate loan, with
a maximum maturity of 30-35 years, an LTV of 80%, and a DTI of a maximum 45%.
Size of Australian Non-Conforming and Credit- Impaired Market
Australia has very small number of
credit-impaired borrowers
Only 1.5% of Australian RMBS outstanding are non-conforming, and in turn a third (only
0.5% of the total RMBS market) of this number represents borrowers with some form of
credit impairment. The non-conforming market is the domain of non-bank lenders.
In the UK, specialised non-bank lenders dominate the non-conforming market. About 15%
of the UK RMBS market is non-conforming with approximately half buy-to-let, and the
other half credit impaired or self-certified.
These figures contrast greatly with the US experience where more than 20% of
originations backing RMBS deals were to subprime (credit-impaired) borrowers. The
Australian, UK and Spanish experiences are in stark contrast to the US, where subprime
is a much larger part of the market, significantly contributing thereby to the current US
situation.
Market Players
Australian market dominated by
investment grade banks
The Australian mortgage market is dominated by Authorised Deposit-taking Institutions
(ADIs), i.e. banks, building societies and credit unions, which are rated investment grade
by Moody’s. Those not rated by Moody’s are only minor players.
Before the current crisis, their market share was less than 80% but is now around 90%.
In order to maintain or increase market share, nearly all banks utilise large independent
broking channels and are compensated by typically via a combination of upfront and
ongoing trailing commissions. Broking channels typically account for 30% of a bank’s
originations.
ADIs are regulated by the Australian Prudential Regulation Authority (APRA)4
, which
requires securitized mortgages to be reflective of mortgages on a balance sheet. Less
than 20% of Australian mortgages are securitized, as opposed to 70% in the US, where
the origination and securitization (no skin in the game) model has been criticised for
contributing to lower lending standards.
US market Originators, as well as their regulators, are fragmented in the US mortgage market
compared to Australia. During 2006 and much of 2007, mortgage brokers solicited and
assisted borrowers in completing applications for about 80% of all the mortgages made
in the US. Mortgage brokers in the US are virtually unregulated at the national level and
have minimal regulation and oversight at the state level. Typically, after taking an
application and ordering a property valuation, the broker sends the application and
appraisal to a wholesale originator.
The wholesale originator then underwrites [and if approved] disburses funds to the
borrower. A wholesale originator could be a national bank, and state chartered bank, or
savings and loan, a non-bank mortgage company, or a credit union, among other types of
institutions. Each of these types of institutions is overseen by a different regulator.5
Additionally, many of the wholesale institutions originate loans directly with the borrower
(known as retail lending) as well as buy closed loans from each other (known as
correspondent lending) to place into an RMBS.
4
APRA is the prudential regulator of the Australian financial services industry and oversees banks, credit unions, building societies, friendly
societies, general insurance and reinsurance companies, life insurance and most members of the superannuation industry.
5
US Institution Charter Type Regulator
National Bank Office of the Comptroller of the Currency “OCC”
Thrift Institutions – Savings and Loans Office of Thrift Supervision “OTS”
State Banks who are members of the Federal Reserve Federal Reserve
State Banks not member of the Federal Reserve Federal Deposit Insurance Corporation “FDIC”
Non Bank Mortgage companies Federal Trade Commission “FTC” and State Regulators
Credit Unions The National Credit Union Association “NCUA”

UK market Like the Australian situation the UK mortgage market is dominated by large banks and
building societies. These entities are typically rated investment grade and are regulated
by the Financial Services Authority (FSA). Origination channels include branch origination,
telephone, as well as brokers.
Brokers are regulated by FSA and the quality of broker origination is closely monitored by
originators with controls in place to identify poor performance or brokers who do not
follow the underwriting process.
In most cases, prime UK originators do not securitize the majority of their mortgage
books. In addition, Master Trusts have an originator share component, which allows the
originator to own part of the trust and to receive a share of cash flows from securitized
assets, resulting in a significant alignment of interests between the originator and the
trust, and an incentive for the originator to add high quality assets to the trust.
The UK non-conforming market has been dominated by specialist lenders that appeared
during mid/late 1990s with some of these lenders owned by large investment banks.
However, the majority have exited the market or discontinued origination during the crisis
and currently there is only a small number of lenders, who offer non-conforming products.
And they are limited to low LTV self-certified and Buy-To-Let mortgages.
The specialist lenders have originated primarily through brokers, and are also regulated
by FSA, but to a lesser extent since they are, for the most part, non-deposit-taking
institutions. These lenders have historically securitized significant proportions of their
originations and relied heavily on the securitization markets.
Therefore, after the securitization market became inaccessible to them, they did not have
as much incentive – when compared to the prime lenders –to ensure the performances of
their mortgages.
Spanish market The Spanish mortgage market is wholly serviced by banks and saving banks. The majority
of the securitization players in Spain are rated investment grade by Moody’s. However,
the favourable evolution of the mortgage market in past years increased competition
among lenders and encouraged banks and saving banks to use alternative distribution
mortgage channels like broker or real estate agents (APIS) in areas of expansion.
Experience has shown that loans originated via intermediaries are twice as likely to
default. Although the underwriting (including salary verification) is performed by the
lender, broker-originated loans show worse performances than branch-originated loans in
Spain.
This is mainly due to the fact that borrowers using brokers are often first-time buyers,
unknown to the bank. Furthermore, some knowledgeable brokers have a tendency to
advise borrowers to present their applications in the most optimal fashion. Lastly, broker
remuneration is driven by volume rather than the credit quality of the loan generated. But
a broker’s contract with a bank may not be renewed if their loan defaults are high. The
latest RMBS deals contain up to 20% of loans originated via brokers.

LEGAL ENVIRONMENTS
Full Recourse
Australia, UK and Spain have
lender-friendly legal environments
In Australia, as in the UK and Spain, a borrower is personally liable for all moneys owed
to the lender, at and above the value of the house.
Following a borrower defaulting on his/her mortgage, if the moneys received from the
sale of the house are less than the amount owed to the lender, then the lender is able to
seek recourse to any other personal assets of the borrower, including future income.
The fact that lenders in Australia, the UK and Spain can pursue both the home and the
borrower’s personal assets – with the threat of bankruptcy – provides a significant
disincentive to borrowers against default.
The Australian legal framework also allows for a relatively quick and simple foreclosure
process with lenders typically taking a property in possession within 12 months of the
first missed payment.
In Spain, the recovery lag is longer as in the current economic climate, the reduced
demand for housing means that in many cases properties remain unsold after the auction
process, so the SPV acquires them without cash inflow in order to sell them when the
market performs better. Therefore, the severity of losses on the notes will be
exacerbated by the interest accrued during the long repossession period, if the long-term
recoveries prove insufficient.
By contrast, a significant proportion of the US market – 26 states plus the District of
Columbia – consists of single-action states, wherein the lender can either take back the
house, or pursue the borrower’s personal assets, but not both.
Situations wherein borrowers simply hand back their houses to the lenders – with no
further action against them – are seen as one of the factors behind the US housing crisis
and bad delinquency performance in the US. Moreover, with negative equity, there is very
little incentive for borrowers to continue mortgage repayments, as is well evidenced in the
single-action states of California and Florida, which have experienced great declines in
house prices. The time required to take a property in possession in the US is 6 months
to 1 year.
Lender Accountability
Australia In Australia, all lenders are governed by the Uniform Consumer Credit Code (UCCC) –
introduced in 1996 – which governs credit transactions. It places the emphasis on
mortgage lenders to ensure loan applicants have the capacity to repay their loans and
that it is not “unfair” or “misleading”.
Failure by the lender to comply with the code is an offence and subject to fines and may
result in the borrower not being liable to repay the loan. To date, there have been only
very limited occurrences of borrowers seeking protection under the code due to mortgage
lenders’ disciplined approach towards compliance with the code. High accountability on
the lenders under the UCCC helps temper aggressive lending.
US As shown in Footnote 5, each lending institution type is governed by different regulators
with different sets of rules. However, over the past 10 years, US regulators and lenders
had focused on increasing the rate of homeownership and fair lending (to minorities and
underprivileged classes) and not focused on ability and willingness to repay the loan.
This occurred primarily because lenders felt housing prices would continue to climb,
thereby enriching the owner [borrower] to the point at which they could afford the
payments by extracting the equity built up in the home through refinancing, reducing the
original interest rate by refinancing, or both.
UK The UK consumer market is regulated by the Consumer Credit Act, Unfair Terms in
Consumer Contracts Regulation, as well as by other regulations. FSA is responsible for
ensuring that lenders comply and borrowers may file claims against lenders if they
suspect that they have been treated unfairly.
It is also worth noting a number of initiatives from the UK government to support
borrowers who suffer sudden loss of income. The effect remains to be seen, but they
have clearly helped the performance of mortgage loans.

UNDERWRITTING PRACTICES
Teaser Rates
Australia has limited use of teaser
rates
Teaser rates (low but temporary introductory rates on adjustable rate mortgages) are
used in Australia, the US and UK to attract new loan applicants.
However, in Australia, teaser rates are restricted only to Prime borrowers on fully
documented loans. They are typically no more than 1 percentage point below the
reversionary rates.
By contrast, in the US the difference between the teaser and reversionary rates is much
larger and not restricted to prime applicants.
In the UK, fixed teaser rates used to be in the vicinity of 3% and 4.5% for Prime and non-
conforming loans with variable teaser rates as much as 0.5% below the base rate, which
could be LIBOR, the Bank of England Base Rate (BBR), or the bank’s own lending rate
(SVR). In, on average, 3-5 years, the interest rate would revert to floating rate, which
usually consisted of the base rate (BBR, SVR or LIBOR) plus a margin, where a margin
would most often be capped at 2%.
This was also the case for Buy-To-Let buyers. Except in this case, the loans reverted to
BBR plus a margin, rather than SVR, or LIBOR. In the 1990s, they accounted for 1% of
the market and then 10%.
Some Spanish lenders offer loan products that include repayment flexibility for debtors.
They offer the option of periods during which no principal is repaid, (a principal grace
period), such that the borrower pays only interest during this grace period, Typically the
principal grace period would be offered for the first 6 to12 months (sometimes even
longer) of the loan. In addition it is becoming more common to offer fixed-interest rates
during the first 2-3 years and then change to floating rates, which are reset every six
months or yearly.
The US widely used teaser rates for Alt-A and subprime borrowers. Those on some option
ARMS loans were as low as 1% with a 6% reversionary rate.
In the US and to a much lesser extent for UK non-conforming, the lower teaser was used
in a borrower’s serviceability assessment with no regard as to his/her ability to service
the loan once it went on the higher reversionary rate.
The Australian, US and UK markets all made use of teasers to attract loan applicants,
but Australia is the only market in which teaser rates were not used to qualify borrowers
in all categories.
Interest Rate Stress
Australian and UK Prime borrowers
always qualified at stressed
interest rates
In Australia, as well as in the UK prime mortgage market – unlike the US, UK non-
conforming and Spain – when assessing loan affordability, all lenders base it on the
standard or reversionary interest rate (not any low initial introductory teaser, known as a
honeymoon rate in Australia), which is itself then stressed by between 1.5 and 2
percentage points.
For example, if the teaser rate is 6% with a reversionary rate of 7%, the borrower’s ability
to repay the loan would be based on 9% (7% plus 2 percentage points). In the UK prime
mortgage market, since all mortgage loans revert to a floating rate, a stressed
reversionary rate (usually 7%-7.5%) is used to assess affordability.
This approach to underwriting ensures that borrowers can:
 afford the loan once the loan takes on the reversionary rate; and
 withstand any possible further interest rate rises
Affordability Measures
Net savings approach For many years now, Australian lenders have been using a net savings approach to
assess a borrower’s loan affordability. This approach looks at a borrower’s net monthly
income, and from which monthly outgoings – new loan repayments, living expenses and
other financial commitments – are subtracted and, if the result is positive (i.e. the
borrower has excess monthly cash), he/she passes the affordability measure.

Ratio approach By comparison, a ratio approach is commonly used in the underwriting process in the US,
UK and Spain. Under this approach, the lender examines an applicant’s total monthly
financial commitments (Debt) and compares it to the gross monthly income (Income),
wherein:
In the US, two ratios are used, Housing to Income and total Debt to Income (DTI).
US housing to income ratio The Housing to Income ratio (HTI or “front ratio”) measures the ratio of:
– monthly mortgage repayments (on first and second mortgage, if any); plus
– property taxes (annual amount due divided by 12); plus
– fire / hazard insurance (annual premium divided by 12); plus
– Home Owner Association6
dues, if any
divided by
 annual gross income divided by 12
US debt to income ratio The Debt to Income ratio (DTI or “back ratio”) measures the ratio of:
 All housing costs described above; plus
 Any other loan repayments or obligations, such as credit cards, student loans, auto
loans, child support payments, alimony payments, etc, all on a monthly basis
divided by
– annual gross income divided by 12
In the US, historically, lenders would target a front ratio of 28-32% and a DTI of 38- 42%.
During the 2004-2007 housing boom, ratios were stretched. An increase in the use of
“stated income loan”, in which the borrower did not have to verify income, often caused
the income to be overstated, so the actual HTIs and DTIs of these types of loans were
higher than originally thought.
It must be noted that certain lenders focusing on originating higher leverage loans did
employ an approach (Residual Income test) similar to net savings approach of Australian
market.
The UK and Spain also saw higher DTIs. The UK’s DTI increased from its 30% average in
the 1990s to 45% in 2007; however, it was used in parallel with other measures, such
as credit scoring and salary multiples. In addition, for the DTI calculation, UK prime
lenders usually use only a portion of seasonal/non-recurrent income, such as contract
income and bonuses. In Spain, in the late 1990s, the DTI was 30%, but it increased to
35% in the early 2000s, and then 45% by 2007.
One of the problems with a ratio approach, particularly for US subprime floating rate
loans, is that lenders typically do not account for any possible further interest rate
increases, as seen in Australia.
Living Expenses
Henderson Poverty Index In calculating an applicant’s total financial commitments, all Australian lenders include a
minimal cost of living expense, based on an independent third party (the Henderson
Poverty Index).
The index is transparent to the market and accounts for an applicant’s spouse and
number of dependent children to calculate a minimal cost of living expense. Some
lenders take a more conservative approach and stress the index.
US lenders do no utilise anything similar to the Australian Henderson Poverty Index and
only utilise the Housing to Income and Debt to Income ratios mentioned above.
In the UK, each lender will have its own way of calculating cost of living expenses;
sometimes based on national public tables, and sometimes based on proprietary
calculations. In Spain, expenses are estimated taking into account the borrower’s social
characteristics, such as family unit, marital status (divorced persons attract a penalty),
residency status and region (big cities assume higher expenses)
6
Home Owner Association fees are charged in many communities and covers the maintenance of common grounds in housing developments.

DELINQUENCY DRIVERS
US Geographic Concentrations
In the US, the housing boom states – such as California, Nevada, Arizona and Florida –
saw the percentage of new and refinanced loans of the “affordability loans” (i.e. loans
with riskier characteristics such as option ARMS type, loans to subpriem borrowers IO
loans and no documentation loans) become very high and surpassed 50%.
UK Specialist Lenders
In the UK, delinquency rates are typically driven by specialist lenders originating self-
certified loans and loans to borrowers with adverse credit histories. Borrowers on teaser
rates – who relied on easily available credit and continually increasing house prices to
refinance cheaper teaser rates before re-setting them at the higher reversionary rates –
are also contributing to the higher delinquency rates.
The UK credit-impaired and self-certified market accounts for approximately 8% of the
mortgage market
Australian Credit-Impaired Borrowers
Australia’s non-conforming market and credit-impaired borrowers make up only a very
small segment of the overall housing market (1.5% and 0.5% respectively of the total
RMBS market). But contrary to the UK experience, no Australia borrowers are qualified
with a teaser rate, but rather at a stressed interest rate (standard interest rate plus a
margin).
Spain Borrower Types
Non-residents Spain saw a high concentration of non-resident borrowers / new-resident borrowers (who
accounted for 10% of recent RMBS portfolios) buying homes in booming coastal areas.
For these kinds of borrowers, credit history checks are less standard and more complex
as Spanish banks may not easily have access to all information relating to a borrower.
For-new residents, as Spanish credit bureaus store information up to 6 years, their credit
history information may be relatively limited, or less reliable than for the indigenous
Spanish debtor.
Additionally, non-residents or new-residents are less incentivized to continue repayments
in contrast to a resident borrower. It may be more difficult to liaise with the borrower
when he/she is delinquent, given that his/her primary residence may be overseas.
Although Spain has a full recourse environment, chasing foreign borrowers may take
longer and prove difficult.
New residents (multiple
borrowers)
Spain also witnessed an increase in new residents (which accounted for 18% of recent
RMBS portfolios). These borrowers are usually low-income workers who individually do not
qualify for a mortgage due to DTI requirements or LTV requirements (loans greater than
80% LTV require a guarantor, typically parents). In addition, Moody’s notes that generally
these borrowers tend to work in sectors which are more vulnerable to recession, such as
the construction, manufacturing and the agriculture sectors.
In order to circumvent the DTI and / or 80% LTV requirements, multiple new residents
would apply for a single loan / home. The debt service of such a loan is jeopardized as
soon as one of the obligors in the group is in financial difficulties; the others, though also
jointly liable, often do not have the financial flexibility to cover for the defaulted borrower.
And there is greater risk of dispute among the obligors.
Performance data provided by several Spanish banks indicates greater delinquency levels
for non-resident, new-resident and multiple borrowers.

COLLATERAL PERFORMANCE
Australia performing well Australian collateral performance is in line with rating expectations. The non-conforming
market actually saw eight upgrades due to a combination of good collateral performance
and increased subordination.
Junior notes in Prime transactions – whose ratings highly correlate to the underlying
mortgage insurer – have been downgraded, but only as a result of the downgrades of
mortgage insurers. To date, there has not been any charge-off on any Moody’s rated
Australian RMBS notes.
UK non-conforming The performance of UK prime and buy-to-let deals lines within expectations and no
downgrades have occurred in this sector. All negative rating actions have been restricted
to the credit impaired/self-certified portion of the non-conforming sector, which accounts
for approximately 8% of the RMBS market.
Securitization was the preferred funding tool for UK non-conforming loans. In view of the
current lack of funding, a wide range of UK non-conforming providers has ceased lending,
leading to concerns over credit availability for many non-conforming borrowers, who rely
on refinancing their loans when cheaper-fixed or teaser rates are reset to higher standard
levels. This situation has contributed to about 13% of Aaa UK non-conforming notes
undergoing downgrades due to worse-than-expected collateral performances.
Spain Spanish collateral performance has been worst than expected, driven mainly by defaults
among new and non-residents, and loans originated via broker channels. These have
proven to be twice as likely to default.
This situation has led to downgrades, including about 5% of Aaa notes
For more details on the UK and Spanish RMBS markets, refer to Moody’s Special Report
“EMEA ABS & RMBS: 2008 Review & 2009 Outlook, 16 January 2009”.
US The decline in underwriting standards and the resulting worse-than-expected collateral
performance in the US have been well documented. An unprecedented home price
decline, weak economy and virtual shutdown of private label refinancing market have
contributed to the deteriorating performance. The impaired economy has pushed up
defaults, and the deteriorating housing market has resulted in an increase in loss
severity – upon the sale of a home – beyond initial rating expectations. This has meant
that majority of Aaa notes from 2005, 2006 and 2007 – across the jumbo, Alt-A,
subprime sectors – have been downgraded.
For more details on the US RMBS market, refer to Moody’s Special Report “2008 Year in
Review and 2009 Outlook, February 4 2009”.

RMBS STRUCTURAL FEATURES
Australian RMBS Structures
Typical Australian RMBS notes are issued via a special purpose vehicle (SPV) that buys
mortgages from a single originator with the proceeds of the sale of the RMBS notes going
to investors. Structures are typically closed end (i.e. once the notes are issued, no new
mortgages are bought by the SPV).
Principal pass-through Australian RMBS transactions are also principal pass-through structures where the
principal payments received from the mortgages by the SPV are passed directly through
to investors to gradually repay (redeem) the notes issued. The notes are redeemed in
sequential order: principal is applied to the senior-most note before being applied to the
next most-senior note.
Principal may also be applied pro-rata between senior and junior notes, if certain
performance and senior note subordination level criteria are met (e.g. senior note
subordination levels are doubled).
Prime Prime transactions have credit enhancement provided by (in order of application):
 Lenders mortgage insurance (LMI)
 Excess spread
 Subordination.
The use of LMI means that junior notes (whose ratings highly correlate to the rating of the
mortgage insurer) can be investment-grade ratings (Baa3 or greater) and sold to investors
rather than held by the originator.
The benefit allocated to LMI also lessens the subordination levels required by senior
notes, and deals typically have two or three note tranches.
The use of LMI exposes a note’s rating to the rating volatility of the mortgage insurers. In
fact, rating downgrades experienced in Australian RMBS have been restricted to junior
notes in prime deals as a result of downgrades of mortgage insurers, rather than the
poor performance of the mortgages.
Non-conforming deals – which only account for 1.5% of the RMBS market – are also
closed-end principal pass-through structures, but without mortgage insurance. This
results in structures with 5 to 7 tranches, with the most-junior notes unrated and held by
the originator.
Non-conforming
Non-conforming deals are not exposed to the ratings of the mortgage insurers and the
sequential principal pass-through nature of Australian RMBS structures results in the
rating of the most senior note benefiting from seasoning, due in turn to the increased
subordination levels.
The combination of the absence of any LMI exposures, healthy excess spreads,
increased subordination levels, and the good performance of the mortgages has resulted
in no downgrades, but rather eight upgrades in non-conforming transactions.
Spanish RMBS Structures
Spanish RMBS Structures are closed-end structures and they are principal pass-through.
Principal is initially allocated sequentially. If and while certain conditions continue to be
met, the allocation switches to pro-rata. Triggers are relatively straightforward (e.g. senior
note subordination levels are doubled, arrears levels and reserve funds fully funded).
Principal is always available in the structure to pay interest on the notes.
There are also interest deferral trigger mechanisms in place, and which can alter the
payment waterfall within the transaction. For example, If the cumulative default or the
principal deficiency exceeds a certain percentage, the interest on the junior notes may be
brought to a more junior position in the waterfall. The deferral of interest payments on
junior notes benefits the repayment of the senior notes, but increases the expected loss
on the junior notes themselves.
Transactions have credit enhancement provided by (in order of application):
 Excess spread
 Reserve Fund
 Subordination.

The reserve fund is always funded up front with a subordinated loan (granted by the
originator), or funded via equity notes. It provides both credit and liquidity protection to
the notes. The reserve fund is always available to cover shortfalls in interest and principal
during the life of the deal.
The amortisation of the reserve fund is subject to a certain triggers (e.g. the reserve fund
level is doubled, arrears levels, and reserve fund fully funded) and a floor in the reserve
fund is always included.
The structures benefit from an “artificial write-off” mechanism, which traps available
excess spread to cover losses (if any). This type of “artificial write-off” is hidden in the
definition of principal due, which is the difference between the notes outstanding and the
outstanding performing loans (loans less than 12 or 18 months in arrears).
The “artificial write-off” speeds up the amortisation of non-performing (NPL) loans; thus,
the amount of notes collateralised by NPLs is minimized and, consequently, as is the
negative carry. However, the most significant benefit for the transaction is that the
amount of excess spread trapped in the structure is larger. Therefore, the transaction
makes better use of the excess spread.
The issuer always has a clean-up call option: it can purchase the loans back when the
current portfolio balance is less than 10% of the initial portfolio balance.
UK RMBS Structures
Master Trusts Most UK prime transactions are issued using the Master Trust structures. A Master Trust
differs from other traditional securitizations in that special purpose companies can
perform multiple issuances of asset-backed bonds, where the asset portfolio backing the
issuance is not segregated in favor of any particular subset of investors. The bonds do
not have a claim to specific assets in the portfolio, but instead share the cash flows
derived from all the assets in the Master Trust.
On a continuous basis, new assets are sold to the Master Trust, and the new issuance of
notes may take place backed by the same overall pool of assets. The newly added
assets must meet certain eligibility requirements, such as maintenance of the average
minimum asset yield and average LTV thresholds. In addition, if certain performance and
originator rating triggers are breached, the addition of new assets is no longer permitted.
The seller of the assets typically retains an interest in the assets pool, being a
beneficiary to the trust via the Seller Share. Revenue receipts, as well as losses incurred
by the assets are allocated pro-rata between the seller and note issuances.
The note repayment is usually sequential within an issuance, with senior notes
sometimes having scheduled amortisation or bullet payment types (where some or all the
principal of the notes is due on a particular payment date) and the junior notes becoming
payable on a pass-through basis on their step-up dates. When no notes are due to
receive principal repayments, the principal received from the assets flows to the seller.
However, this is subject to complex repayment rules, which depend on the performance
of the Master Trust portfolio, and the breach of certain performance and rating triggers
leads to the entire Master Trust structure becoming fully sequential and pass through.
The credit enhancement in the Master Trust structures is provided by note subordination
(within each issuance as well as among issuances, due to the performance-based
repayment rules described above), and the non-amortising reserve fund, which is typically
fully funded at closing and, for most Master Trusts, is shared between different note
issuances and the excess spread.
When losses are incurred by the assets and allocated to the issuances, the excess
spread is captured to cover these losses and is used to repay the senior notes. In
addition, in some cases, as described above, the principal repayments of the notes may
also rank above the principal payments allocated to the seller.
Standalone structures There are several Master Trusts, which contain Buy-To-Let and self-certified mortgages.
However, transactions containing UK non-conforming mortgages are largely stand-alone
structures with pass-through note repayment. The note repayment is usually sequential,
but some transactions have pro-rata triggers, which lead to notes being repaid pro-rata
and subject to certain conditions.

The credit enhancement in these transactions is provided by the note subordination,
reserve fund (which may be building up during the life of the transaction), and the excess
spread. However, in many non-conforming transactions various mechanisms have been
put in place to extract excess spread from the transaction. This has been done through
the use of interest-only strips, which provide investors with just the interest payments
that rank senior in the revenue priority of payments, and turbo repayment equity notes,
which would receive all excess spread available at the end of the revenue priority of
payments. This allows non-conforming originators to sell to investors even the most junior
equity notes issued by their securitization transactions.
US RMBS Structures
Prime structures The credit enhancement method primarily used for prime deals is subordination. The
cash flows from the collateral into shifting interest structures where the scheduled
principal and interest payments are distributed pro-rata to the senior and subordinated
bonds, while early prepayments (known as curtailments and payoffs before the schedule
maturity date of the loan) are distributed from the senior-most bonds downward based
upon a schedule that shifts with time and performance. Conversely, losses are absorbed
by the most-junior bonds first.
Typically, for fixed-rate US RMBS, the diversion of all principal prepayments to the senior
class(s) are in effect for at least five years (10 years for Adjustable rate RMBS). While for
certain other loan types this intial prepayment diversion to senior notes (known as the
lockout period) can range from 3 years to 7 years.
As jumbo rates have risen, underwriting guidelines have tightened and property values
have decreased, it has become very difficult and/or uneconomical for prime jumbo
borrowers to prepay. Therefore, the senior bonds are paying down much slower than
originally anticipated, while the subordinated bonds are absorbing more and more losses,
deteriorating the available credit support, and therefore creating an environment for rating
downgrades.
Subprime structures The credit enhancement method primarily utilized for subprime deals is subordination,
over-collateralization and excess spread. Subprime mortgage note rates are typically
higher than the bond rates; the difference between the two rates is called excess spread.
This spread can be used to pay down the senior bonds faster than the actual collateral,
creating over-collateralization, or can be ‘reserved’ over time to build up another layer of
credit enhancement.
In a typical subprime structure, the excess spread absorbss losses first followed by the
over-collateralization, and then by the subordinated bonds from the lowest rated bonds
upward.
Simplistically speaking, during the first three years of the securitization, all principal is
paid sequentially, that is, only to the senior bond holders. After three years, if the
subordinated bonds have doubled in size relative to the senior bonds, and there are low
delinquencies and losses, the principal may start to be used to pay down the
subordinated bonds.
The excess spread originally anticipated as part of these transactions has been
overestimated as property values in the US have dropped and many borrowers are not
making payments, or their note rates are being reduced (modifications) in order to keep
them in their homes (to stabilize home prices). These events are eroding the excess
spread and over-collateralization tranches in many subprime RMBS deals.
To compound the matter, negative equity in the property – along with tightened
underwriting guidelines – has all but voided any chance for these borrowers to refinance
into new loans.
Like the shifting interest structure in US prime deals, investors find that the senior bonds
are paying down at historically low levels and simultaneously the credit enhancement is
shrinking, leading to numerous ratings downgrades

HOUSING PRICES
Soft landing 3 years before credit
crisis
The good performance of Australian RMBS collateral – when compared with some other
major markets – can partly be explained by the tighter underwriting criteria covered above.
The second part to the answer is in the fact that Australia’s housing boom (2001–2004)
ended three years before the current global credit crisis, giving the market time to adjust.
Australian policymakers made a deliberate effort to deflate the housing bubble through
monetary policy tightening prior to the current global credit crisis. This resulted in a “soft
landing” in housing prices and, as such, house prices have continued to hold up well.
Record low interest rates and a general undersupply in housing have kept prices stable.
By comparison, the US, UK and Spanish housing bubbles suddenly popped due to the
credit crisis. Prices fell sharply. The US and Spanish markets are also suffering from a
huge oversupply. It is estimated that 20% of dwellings built in Spain post-2005 remain
vacant.
Chart 5a:
Australian Median House Prices
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
1996Q4
1997Q4
1998Q4
1999Q4
2000Q4
2001Q4
2002Q4
2003Q4
2004Q4
2005Q4
2006Q4
2007Q4
2008Q4
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Price % yoy change
Soft Landing
- LHS - RHS
Source: REIA
Chart 5b:
US Median House Prices
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1995Q2
1996Q4
1998Q2
1999Q4
2001Q2
2002Q4
2004Q2
2005Q4
2007Q2
2008Q4
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Price % yoy Change - RHS- LHS
Source: National Association of Realtors

Chart 5c:
UK Median House Prices
£0
£20,000
£40,000
£60,000
£80,000
£100,000
£120,000
£140,000
£160,000
£180,000
£200,000
Q11995
Q11996
Q11997
Q11998
Q11999
Q12000
Q12001
Q12002
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Price % yoy Change- LHS - RHS
Source: Nationwide
Chart 5d:
Spanish Median House Prices
€ 0.0
€ 0.5
€ 1.0
€ 1.5
€ 2.0
€ 2.5
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
1000EuroPerSquareMetre
-10%
-5%
0%
5%
10%
15%
20%
National House Price - LHS % yoy change - RHS
Source: Spanish Ministry of Housing

AUSTRALIAN OPERATING FRAMEWORK
Operating Framework
APRA dis-incentivizes riskier loans
and incentivizes use of LMI
Australian ADI’s which account for about 80% of RMBS outstandings are regulated by
APRA-regulated and subject to higher risk weightings for “riskier” mortgages. For
example, pre-2008, under Basel I, APRA applied a 100% risk weighting for full doc loans
with a greater than 80% LTV, or 50% if the mortgage was covered by LMI.
Similarly, a 100% risk weighting was applied to loc doc loans with a greater than 60%
LTV, or 50%, if the mortgage was covered by LMI. Since the introduction of Basel II in
2008, more graduated weightings have been introduced under the Standardised
approach, but the fundamental incentive structure remains in place.
Table 8
Risk Weighting scheme for Residential mortgage loans
LTV (%) No LMI LMI
Full Doc 0 - 80 50% 50%
80+ 100% 50%
Low Doc 0 - 60 50% 50%
60+ 100% 50%
This risk weighting regime discourages lenders from writing riskier loans without the use
of LMI, especially since the LMI premium for such loans is paid for by the borrower.
APRA and mortgage insurers APRA also applies more punitive capital requirements to mortgage insurers for writing low
doc or high LTV loans. This combination of circumstance has discouraged the market
from heavily pursuing riskier loans. Low docs, for example, only account for 4% of the
Australian RMBS market.
Underwriting floor via LMIs The widespread use of LMI and relatively similar underwriting criteria by the two dominant
mortgage insurers – Genworth Financial Mortgage Insurance Pty Ltd and QBE LMI
(formerly PMI Mortgage Insurance Ltd), and which collectively have about 85% market
share – has helped create a consistent floor for credit standards.
Twice underwritten Loans greater than 80% LTV are typically mortgage insured on an individual basis with the
mortgage insurer underwriting each loan. Hence each loan is effectively underwritten
twice, first by the lender and secondly by the mortgage insurer. This helps maintain
mortgage quality.
LMI minimum underwriting
standards
The widespread use of LMI has also help avoid the concentration in riskier loans - unlike
as seen in the boom states of California and Florida, or the Spanish coastal areas - as
Australian mortgage insurers have self-imposed exposure limits to areas considered
problematic.
Few low doc loans Because low doc loans attract higher capital charges for both ADIs and mortgage
insurers, they were typically written by specialist non-ADI lenders (who entered the market
from 2002) as non-conforming loans (1.5% of the market) rather than by ADIs. And low
doc loans were geographically diverse.
Four Pillars
Australia’s four largest banks – Commonwealth Bank of Australia, Westpac Banking
Corporation, National Australia Bank and ANZ Bank – enjoy a combined 86% share of of
the mortgage market and operate under the government’s "four pillars" policy, which
prohibits mergers between them. This has arguably lessened the pressure for growth to
avoid takeover and hence the tempation to enter riskier segments of the mortgage
market.

SUMMARY
Australia’s RMBS has performed well to date. This is also the case with the UK Prime
and Buy-to-Let sectors, where a mild deterioration in collateral performance was off-set by
the strength of the structures and resulted in the absence of rating downgrades.
The Spanish RMBS market experienced some downgrades in a number of pools, which
were concentrated in coastal areas, had high LTVs and were broker originated. Other
issuances were unaffected to date. The US market, however, has experienced large
rating actions across most asset classes.
The good performance of the Australian RMBS market can be explained by a number of
factors including:
 Tight underwriting standards, such as assessing an applicant’s affordability, based
on a stressed interest rate and by ensuring that living expenses (which include a
spouse and dependents) are always considered.
 The widespread use of LMI has created a quasi-minimum underwriting standard for
lenders of prime loans (full doc & low doc loans greater than 80% and 60% LTV
respectively). The duopoly nature of the Australian LMI market has helped keep
minimum underwriting standards relatively high.
 The relative small size of the riskier mortgage market in Australian. The non-
conforming sector and credit-impaired borrowers represent only 1.5% and 0.5% of
the RMBS market (even smaller when compared to the whole mortgage market). This
situation contrasts greatly to the US where 20% was subprime.
 Less than 20% of Australian mortgages are securitized, meaning the vast majority
remain on balance sheets and the risk is retained by the lender.
 Australia’s housing boom had a soft landing a few years ago and housing prices
remain relatively steady.
 An operating framework that discourages origination of riskier loans.
 The government’s “four pillars” policy for the banking sector may have reduced
pressure to seek growth in the riskier segments of the mortgage market.

APPENDIX 1- DELINQUENCY CHARTS
Chart 3:
Spain US Aus 60+ Arrears
-
0.5
1.0
1.5
2.0
2.5
2003.03 2003.12 2004.09 2005.06 2006.03 2006.12 2007.09 2008.06
Spain UK Prime Australia
Chart 4a:
US Delinquencies
Subprime Serious Delinquencies
over Original Balance by Vintage Year
0%
4%
8%
12%
16%
20%
24%
28%
32%
3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Months After Issuance
%ofOriginalBalance
1999 2000 2001 2002 2003
2004 2005 2006 2007
Chart 4b:
Alt-A Serious Delinquencies
over Original Balance by Vintage Year
0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
%ofOriginalBalance
2001 2002 2003 2004 2005 2006 2007

Chart 4c:
Jumbo Serious Delinquencies
over Original Balance
by Vintage Year
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
%ofOriginalBalance
2001 2002 2003 2004 2005 2006 2007

APPENDIX 2- RATING TRANSITION TABLES
Australian Rating Migration Tables for 2008
Table 1:
Australian Prime RMBS: Rating Migration
Current Rating
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
Aaa 260
Aa1 24
Aa2 7 111 98
Aa3 4
A1 1
A2 6
A3
Baa1 1
Baa2 1
Baa3
Ba1
Ba2
Ba3
B1
B2
OriginalRating
B3
Table 2:
Australian Non Conforming RMBS: Rating Migration
Current Rating
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
Aaa 16
Aa1 2 3
Aa2 1 4
Aa3
A1
A2 2 1 6
A3
Baa1 1
Baa2 1 1 6
Baa3
Ba1
Ba2 4
Ba3 1
B1
B2 1
OriginalRating
B3 1

US Rating Migration Tables for 2008
Table 3:
US Prime Jumbo: Rating Migration
Current Rating
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C
Grand
Total
Aaa 606 113 119 259 463 132 178 220 138 113 37 242 88 5 22 23 3 1 6 2768
Aa1 39 5 13 4 33 20 18 17 23 20 9 46 11 8 16 15 6 1 304
Aa2 1 1 3 4 1 1 1 3 2 3 1 3 5 6 35
Aa3 1 1 1 5 1 2 1 3 9 24
A1 1 1
A2 1 1 3 2 1 10 2 20
A3 1 1
Baa1 0
Baa2 3 2 1 1 7
Baa3 3 1 1 5
Ba1 0
Ba2 0
Ba3 0
B1 0
B2 0
B3 0
Caa1 0
Caa2 0
Caa3 0
OriginalRating
Ca 0
Grand
Total 606 152 125 272 467 166 199 241 161 137 58 253 140 19 33 43 24 17 21 27 4 3165
Table 4:
US Alt-A OPrion Arm: Rating Migration
Current Rating
Grand
Total
Aaa 1371 29 51 38 29 45 15 42 57 42 30 20 20 5 5 2 191537 52 25
Aa1 50 13 13 12 6 6 9 5 14 4 16 22 56 52 95 27 10 8 20 1 439
Aa2 24 10 6 6 6 9 83 6 6 8 16 31 50 15 17 5 52 3 281
Aa3 14 3 5 6 3 2 8 2 4 6 11 11 45 14 8 14 50 2 208
A1 9 2 3 3 10 1 7 1 11 19 26 18 8 7 67 6 198
A2 11 1 4 2 4 4 8 17 15 39 15 7 7 83 18 235
A3 3 2 1 1 2 3 3 10 4 21 15 7 2 64 25 163
Baa1 2 3 1 2 10 11 15 18 3 7 72 31 175
Baa2 2 1 1 1 7 2 14 11 2 3 64 42 150
Baa3 2 1 1 3 8 8 3 63 47 136
Ba1 1 18 19 38
Ba2 31 29 60
Ba3 3 5 8
B1 0
B2 15 8 23
B3 1 1
Caa1 0
Caa2 0
Caa3 0
OriginalRating
Ca 0
Grand
Total 1371 87 66 88 65 59 67 81 39 93 76 80 82 164 168 333 147 70 53 604 237 4030

Table 5:
US SUBPRIME: Rating Migration
Current Rating
Grand
Total
Aaa 1409 92 138 111 123 89 113 157 119 92 103 73 85 64 97 109 92 84 26 10 2 3188
Aa1 72 6 6 22 14 12 31 31 11 39 28 21 26 17 28 10 72 12 39 128 625
Aa2 36 5 16 11 15 16 25 11 29 12 18 18 24 15 6 75 12 45 283 672
Aa3 26 5 8 6 15 14 10 10 12 13 16 27 10 49 4 24 381 630
A1 19 3 3 6 10 3 13 11 6 11 10 13 1 42 5 24 443 623
A2 14 4 6 3 5 5 5 6 5 14 8 1 28 4 16 537 661
A3 9 3 4 5 2 4 4 5 8 5 18 1 10 570 648
Baa1 9 2 1 1 3 3 4 4 4 14 3 3 616 667
Baa2 4 1 4 1 3 1 5 2 8 606 635
Baa3 1 2 2 1 4 8 566 584
Ba1 1 1 1 1 2 1 3 366 376
Ba2 1 1 1 2 192 197
Ba3 3 3
B1 1 1
B2 0
B3 0
Caa1 0
Caa2 0
Caa3 0
OriginalRating
Ca 0
Grand
Total 1409 164 180 148 185 139 162 243 212 140 207 146 158 152 202 196 116 394 71 192
469
4 9510
UK Rating Migration Tables for 2008
Table 6:
UK Prime RMBS Transition Matrix
Current Rating Count
Orig
Ratg Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C WR Total
Aaa 398 - - - - - - - - - - - - 1 - - - - - - - 80 479
Aa1 - 3 - - - - - - - - - - - - - - - - - - - - 3
Aa2 - - 20 - - - - - - - - - - - - - - - - - - 2 22
Aa3 - - - 134 - - - - - - - - - - - - - - - - - 43 177
A1 - - - - 4 - - - - - - - - - - - - - - - - 5 9
A2 - - - - - 111 - - - - - - - - - - - - - - - 15 126
A3 - - - - - - 2 - - - - - - - - - - - - - - - 2
Baa1 - - - - - - - 2 - - - - - - - - - - - - - - 2
Baa2 - - - - - - - - 133 - - - - - - - - - - - - 37 170
Baa3 - - - - - - - - - 2 - - - - - - - - - - - - 2
Ba1 - - - - - - - - - - 3 - - - - - - - - - - - 3
Ba2 - - - - - - - - - - - 12 - - - - - - - - - - 12
Ba3 - - - - - - - - - - - - - - - - - - - - - - 0
B1 - - - - - - - - - - - - - - - - - - - - - - 0
B2 - - - - - - - - - - - - - - - - - - - - - - 0
B3 - - - - - - - - - - - - - - - - - - - - - - 0
Caa1 - - - - - - - - - - - - - - - - - - - - - - 0
Caa2 - - - - - - - - - - - - - - - - - - - - - - 0
Caa3 - - - - - - - - - - - - - - - - - - - - - - 0
Ca - - - - - - - - - - - - - - - - - - - - - - 0
C - - - - - - - - - - - - - - - - - - - - - - 0
398 3 20 134 4 111 2 2 133 2 3 12 0 1 0 0 0 0 0 0 0 182 1007

Table 7:
UK Non Conforming: Migration Table
Current Rating Count
Orig
Ratg Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C WR Total
Aaa 263 3 - 16 - 2 1 1 - - 5 4 - 2 4 - - - - - - 99 400
Aa1 - 11 - - - - - - - - - - - - - - - - - - - - 11
Aa2 2 - 35 4 - 1 - - - - - - - - - - 1 - 3 - - - 46
Aa3 - - - 55 2 1 - - - - - - - - - - - - 1 - - - 59
A1 - - - - 3 - - - - 1 - - - - - - - - 1 - - - 5
A2 - 2 - - - 40 6 - 5 - - - - - - - - - 3 - - 1 57
A3 - - - - - - 32 - - - - - - - - - - - 1 - - - 33
Baa1 - - - - - - - 2 - 2 1 - - - - - - - 1 - - 1 7
Baa2 - - - - - - - - 27 3 7 3 3 2 - - - - 1 - - 4 50
Baa3 - - - - - 1 - - - 29 2 4 1 2 - - - - 3 - - 1 43
Ba1 - - - - - - - - - - 7 - 1 - 2 2 - - 1 - - - 13
Ba2 - - - - - - - - - - - 13 - - 1 7 - - - - - 1 22
Ba3 - - - - - - - - - - - - 4 - 2 2 - - - - - 1 9
B1 - - - - - - - - - - - - - - - - 1 - - - - - 1
B2 - - - - - - - - - - - - - - - - - - - - - - 0
B3 - - - - - - - - - - - - - - - - - - - - - - 0
Caa1 - - - - - - - - - - - - - - - - - - - - - - 0
Caa2 - - - - - - - - - - - - - - - - - - - - - - 0
Caa3 - - - - - - - - - - - - - - - - - - - - - - 0
Ca - - - - - - - - - - - - - - - - - - - - - - 0
C - - - - - - - - - - - - - - - - - - - - - - 0
265 16 35 75 5 45 39 3 32 35 22 24 9 6 9 11 2 0 15 0 0 108 756
Spanish Rating Migration Tables for 2008
Table 8:
Spanish RMBS: Rating Migration
Current Rating
Aaa Aa A Baa Ba B Caa Ca C
Aaa 249 17
Aa 61 7
A 2 147 8
Baa 110 9 1
Ba 42 7
B 2
Caa 11 1
Ca 20
OriginalRating
C

APPENDIX 3 – CHEAT SHEET
Comparing RMBS Markets
Australia U.S. U.K. Spain
Issuance Outstanding
(Billion)
Prime A$113.8
Non Conforming A$1.8
Prime US$240
Alt-A US$728
Subprime US$539
Other US$120
Prime £312
Non Conforming £29.3
Prime €148.4
Current Delinquencies Prime
60+ 0.88%
Non Conforming
60+ 12.60%
Prime 4.35%
Alt-A 21.9%
Subprime 39.1%
Prime
90+ 1.51%
Non Conforming
90+ 13.5%
60+ 2.84%
90+ 1.68%
Worst Performing Vintage Prime
2005 60+ 1.46%
Non Conforming
2007 60+ 8.06%
Prime
2007 60+ 5.86%
Alt-A
2007 60+ 27.5%
Subprime
2007 60+ 40.1%
Non Conforming
2005 90+ 17.7%
2007
60+ 4.7%
90+ 3.4%
Driven by high LTV deals
Delinquency Drivers Unemployment.
Currently 5.8%, expected to
hit 8% mid 2010
All sectors: Declined
property values.
Subprime: High Interest
Rates.
Jumbo: Increasing
unemployment.
Credit impaired borrowers.
Interest Reset rates.
Increasing unemployment.
New and non residents
Increasing unemployment –
Currently 17.4% expected to
hit 20% by end 2009
Arrears started rising when
interest rates increased
from 2% to 4% during Q1
2006 and Q1 2007.
Rating Actions No Aaa notes downgraded.
Junior notes downgraded
due to lenders mortgage
insurers downgrade
50% of Aaa across all
sectors downgraded
13% of Non Conforming
Aaa’s downgraded due to
collateral performance.
No Prime Aaa downgraded
due to collateral
performance.
5% of Prime Aaa
downgraded due to
collateral performance.
Housing Peak 2003-2004 Q4 2005 Q4 2007 Q1 2008
Latest yoy House Price
Growth
-6%
(Source: Real Estate
Institute of Australia)
-16%
(National Association of
Realtors)
-16.5%
(Source: Nationwide)
-6.8%
(Source: Bank of Spain)
Housing Undersupply
1.5% rental vacancy rate.
Oversupply Consistent lack of supply
that has underpinned the
housing market
Oversupply. 20% of dwelling
build since 2005 remains
vacant.
Sales down 25% (June
2007-2008)
61% yoy decline in new
housing permits in January
driven by cuts in residential
housing.
Forecast House Prices Steady to negative Further falls expected Further falls expected Further falls expected

Stress Qualifying Interest
Rate
Yes, 1.5% - 2.5% on top of
Reversionary rate
No No No.
Teaser Rates Yes
Teaser rates limited to
Prime fully customers with
full documentation loans
and typically no more that
1% below reversionary rate.
Yes
Have been used to qualify
Alt-A and Subprime
borrowers.
Yes
In some recent cases, used
to qualify borrowers.
Prime
Teaser ≈ 3%
Reversionary Rate ≈ 5
Non Conforming
Teaser ≈ 4.5%
Reversionary Rate ≈ 7%
No
Interest only for first 2-3 yrs.
Affordability Measure Net Savings approach is
used which looks at a
borrower’s income from
which their outgoings are
subtracted. If the result is
positive the borrowers
passes the affordability
measure.
In calculating outgoings all
lenders include a minimal
cost of living expense taken
from the an independent
third party (Henderson
poverty Index).
Common for lenders to
stress the index.
Only use Housing to Income
(Front) ratio & Total Debt to
Income ratio (DTI).
Pre 2004 Front ratio
targeted at 28%-32%. DTI
targeted at 38% -45%.
During 2004-2007 ratios
ignored DTIs of 60-75% were
common. Idea being house
price appreciation would
enable borrower to draw on
home equity to keep cash
flowing.
Use of Total Debt to Income
ratios.
DTI ratios increase to
45%. .
No stress rate on interest
rate
Use of Debt to income
ratios.
Other than “good lenders”
some lenders not taking into
account dependants.
Use of Total Debt to Income
ratios.
DTI late 1990s ≈ 30% by
early 2000s up to ≈ 35%
reaching ≈ 40%-45%.
Non Prime Market Yes
Non Conforming
1.5% of Market
Yes
Alt-A 13%
Subprime 20% of Market
Yes
Non Conforming
15% of Market
No
Not considered tradition non
prime - but UCI and
Credifimo have very high
LTVs that some market
participants sometimes refer
to as not traditional prime.
Credit Impaired Borrowers 0.5%
1/3 of Non Conforming
20%
100% Subprime
3%
20% of Non Conforming
0%
Lenders Mortgage Insurance Yes
100% Cover
Yes
Top Cover down to about
80% LTV.
No Yes
Very limited use.
Full Recourse Yes Significant states are single
actions states and do not
allow recourse to the
borrower if house
repossessed.
Yes Yes

New lending Tighten underwriting, but
still lending to 90% LTV.
First home buyers account
for 26% of new mortgages.
Very hard to get loan require
20% - 30% down payment
with high (680+) FICO score.
Lenders sticking tightly to
the old standards of 28%
Front ratio & 38% DTI ratio.
Mortgage approvals at
historically low levels. March
mortgage approvals 26,097,
significantly lower than the
long term average of
62,000.
Much harder to get loan. No
lending to non or new
residents. Max LTV 80%
Market ADI dominated who keep
majority of loans on balance
sheet.
18% of ADI loans
securitized.
75% of mortgages
securitized
Dominated by large bank
and building societies. The
UK non conforming market
has been dominated by (and
is now decimated by)
specialist lenders that
entered the market in force
during late 2005 and 2006
and have since exited the
market. A number were
owned by large investment
banks.
100% Bank market, but
recent deals had up to 20%
of loans originated through
broker channel which are
proving to be twice as likely
to default.
Other Comments 66% home ownership More option ARMS deals top
reset up to 2012 although
rates remain low and may
offset another wave of
defaults.
70% home ownership (5th
highest in Europe)
90% house price growth
between 2002-2007
(second highest in Europe
behind Spain)
Buy-to-Let ≈ 1% in 1990s
grew to ≈10% (speculative
buyers)
80% home ownership
(Highest in Europe)
201% house price growth
between 2000-2004
Mortgage rates fall from
10% (mid 1990s) to 2%
Construction 13% of 2008
GDP
Strong house buying from
non residents (English,
Germans, French, Italians)
Strong migration, 10%
population increase between
2000-2004
Strong income convergence
of Spanish incomes with
rest of Europe due to EU
membership.
≈100% variable rate loans

SF181855isf
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