UK Mortgage-Backed Securities: A Primer

March 10, 2001

Krishna S. Prasad212-526-2050

kprasad@lehman.com

Fixed Income Research

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This document is for information purposes only. No part of this document may be reproduced in any manner without the written permission of LehmanBrothers Inc. Under no circumstances should it be used or considered as an offer to sell or a solicitation of any offer to buy the securities or otherinstruments mentioned in it. We do not represent that this information is accurate or complete and it should not be relied upon as such. Opinionsexpressed herein are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states orcountries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchangerates, interest rates or other factors.

Lehman Brothers Inc. and/or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options orother derivative instruments based thereon. In addition, Lehman Brothers Inc., its affiliated companies, shareholders, directors, officers and/or employ-ees, may from time to time have long or short positions in such securities or in options, futures or other derivative instruments based thereon. One or moredirectors, officers and/or employees of Lehman Brothers Inc. or its affiliated companies may be a director of the issuer of the securities mentioned in thisdocument. Lehman Brothers Inc. or its predecessors and/or its affiliated companies may have managed or co-managed a public offering of or acted asinitial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this document within the last three years,or may, from time to time perform investment banking or other services for, or solicit investment banking or other business from any company mentionedin this document. This document has also been prepared on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ©2001Lehman Brothers Inc. All rights reserved. Member SIPC.

Publications: L. Pindyck, A. DiTizio, B. Davenport, W. Lee, D. Kramer, S. Bryant, J. Threadgill, R. Madison, A. Acevedo

The author would like to express his appreciation to Milind Chaukar, John Dziadzio, and Ron Miao for contributingsignificantly to the content of this report. Jerome Bire, Rob Collins of Abbey National, Colin Hector, Nur Khan,David Johnson of Northern Rock, Prafulla Nabar, Brett Olson, Chris Patrick and Nick Turnor also providedcomments on earlier drafts.

CONTENTS

Overview .............................................................................................................. 3The Retail Market ................................................................................................ 3The Securitised Market ........................................................................................ 7The Mortgages ..................................................................................................... 8

Types of Mortgages ...................................................................................... 8The Terms of the Mortgage ........................................................................ 10Underwriting Criteria .................................................................................. 11Non-Conforming Mortgages ...................................................................... 12

Prepayment and Credit ....................................................................................... 12Factors Affecting Prepayment and Credit .................................................. 13Recent Prepayment Performance ................................................................ 16Recent Credit Performance ......................................................................... 16

Institutional Infrastructure ................................................................................. 18Distribution Channels ................................................................................. 18Appraisal and Approval Process ................................................................. 18Foreclosure Procedures ............................................................................... 18

Structures ............................................................................................................ 19Abbey National (Homes Funding) Structure.............................................. 19Northern Rock (Granite) Structure ............................................................. 22Bank of Scotland (Mound) Structure ......................................................... 23

Relative Value .................................................................................................... 24Conclusions ........................................................................................................ 24Appendix ............................................................................................................ 26

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OVERVIEWThe mortgage market in the United Kingdom is among the most promising asset-backed markets to emerge in the last few years. Due to high home ownership rates,significant home price appreciation, attractive interest rates, and intense compe-tition among mortgage originators, the retail market has grown at an impressiverate since 1995. Meanwhile, changes in the UK banking industry have made itmore attractive for lenders to tap the securitised market for funding. Thesecuritised mortgage market has grown from virtually zero in 1995 to about £12billion in 2000.

This paper is an introduction to the mortgage market in the United Kingdom(England, Northern Ireland, Scotland, and Wales). We start with an overview ofthe retail market, including a discussion of the major types of lenders. We thendiscuss the securitised market and its potential. Since the underlying mortgagesrepresent the collateral for securitisation, we devote a section to discussing thetypes of mortgages and the common terms and conditions, including underwritingcriteria. We also discuss the data available and the factors that affect prepaymentsand credit performance of UK mortgages, and the institutional infrastructure in theUK. Finally, we close with a description of the structures most commonly used inUK mortgage securitisations and our view of relative value in the sector. Theprimary focus of this paper is prime mortgages, but we briefly discuss the non-conforming market as well. A note about currencies: since the collateral is inpound sterling, we will show all numbers in £. When the data were available ineuros or in dollars, they have been converted to pounds on the basis of $1.5 = £1and €1.58 = £1, which are the prevailing rates as of writing.

THE RETAIL MARKETThe mortgage market in all of Europe (excluding Eastern Europe) is about£1,867 billion (€2,951 billion) or about half the size of the US mortgage market.The UK mortgage market is the second largest in Europe, accounting for about28% of all mortgages outstanding. The German market is larger, primarilybecause of the much larger population, while Denmark, Norway, and Switzerlandall have more mortgages outstanding per capita, but since they are much smallercountries, the overall volume is smaller.

The UK mortgage market has experienced steady growth over the past few yearsat the retail level ( Figure 1). The size of the retail mortgage market has grown innominal terms from £298 billion in 1995 to £533 billion in 2000 in outstandingbalance, and from £57 billion in 1995 to £119 billion in 2000 in new origination,representing a compounded annual growth rate of about 12% on the outstandingbalance and about 16% on new origination. While this may seem surprisinglyhigh, it must be viewed in the context of the economic boom that the UK has beenexperiencing over the past few years. Home prices have increased at an annual rateof about 7%, unemployment rates have dropped from 8.8% in 1995 to 5.4%currently. Interest rates have remained at a fairly low level during this entire

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period, and home ownership has remained at a very high level of 67%. On a percapita basis, outstanding mortgages are about £9,111, which is comparable to theamount outstanding in the US, and higher than in Germany and France. OnlySweden and Holland have higher per capita mortgage balances. Most analysts nowproject that the market’s growth will slow, but will continue at a lower rate of about5%-6% for the next two years and 3%-5% over the longer term.

While there are a large number of originators in the UK mortgage market, the topfive lenders account for about 50% of the entire market. There have been severaldevelopments in the mortgage banking industry over the past few years that haveincreased the concentration in the sector. Figure 2 shows the 15 largest originatorsof mortgages at year end 1999, which have already consolidated to 13. The total

Figure 1. Growth of the UK Mortgage Market

1995 1996 1997 1998 1999 2000Retail Mortgages Outstanding (£ billion)* 298 318 393 443 495 533Retail Mortgages Advanced (£ billion)** 57.3 71.7 77.2 89.4 114.3 119.3Mortgages Outstanding per capita (£)* 5,135 5,485 6,769 7,620 8,505 9,111

* Source: Datamonitor and Bank of England statistics.** Source: Council of Mortgage Lenders.

Figure 2. The Largest Mortgage Lenders

Mortgage Assets (£ billion)Rank Name of Group Fiscal YE 1999 Fiscal YE 1998

1 Halifax plc 93.0 83.72 Abbey National plc 64.9 62.43 Lloyds TSB plc 47.5 44.74 Nationwide Building Society 36.9 33.75 Woolwich plc* 25.5 24.16 Alliance & Leicester plc 19.4 18.27 Barclays Bank plc 18.7 17.78 National Westminster Bank** 18.6 17.89 Bradford & Bingley plc 17.1 16.1

10 Northern Rock plc 15.8 14.211 Bank of Scotland 13.6 11.112 HSBC Bank plc 13.1 12.313 Bristol & West plc 12.8 11.0

(incl Bank of Ireland Home Mortgages)14 Britannia Building Society 9.9 9.515 The Royal Bank of Scotland 9.2 7.3

* Now part of Barclays Bank.** Now part of Royal Bank of Scotland.Source: Council of Mortgage Lenders.

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assets shown include assets that have been securitised. To understand the retailmarket, it is useful to group lenders into three major categories: building societies,banks, and specialty finance companies.

Until recently, mortgage lending was dominated by building societies. Theseare mutual entities which are owned by depositors and borrowers, who arecollectively known as members. Over time, some building societies havedemutualized and converted to stock corporations initially owned by theirformer members. Many other building societies have retained their mutualstatus, e.g., Nationwide and Britannia are the bigger of these. Buildingsocieties, which accounted for over 60% of outstanding balance as recently as1993, accounted for less than 20% of all mortgage lending by 2000. Buildingsocieties are regulated by the Building Societies Commission and are subjectto a number of restrictions in addition to capital and reserve requirements, inaccordance with the Building Societies Act. While they have become gradu-ally less onerous over the years, some restrictions remain. For example, theymust hold at least 75% of their business assets in residential mortgages.Further, they must raise at least 50% of their funds from individual members.Finally, since securitisation usually involves the transfer of ownership of theloan to a trust, it could cause a borrower to lose mutual membership. Thesefactors limit the degree to which building societies can securitise their assets.Since they are mutual companies, building societies in effect distribute theirprofits by offering lower mortgage rates—building society rates have typicallybeen 45-65 bp lower than bank rates, but the differences are rapidly disappear-ing as banks have become more competitive.

The bank category consists of converted building societies, as well as “high street”banks. Some of the former building societies that have converted to stockcorporations are Abbey National and Halifax. Both of these have further devel-oped their branch networks, deposit base, and other investments and are nowalmost indistinguishable from other banks, except perhaps for their business mix.Since Abbey National has been a stock entity for much longer, they have a morediversified mix of both lending and funding, with mortgages accounting for 36%of their assets, compared with about 53% for Halifax. There are a number of highstreet banks that are active in the mortgage market as well. These include LloydsTSB, The Royal Bank of Scotland, Barclays, HSBC, and Bank of Scotland. Banks,including high street banks and building societies which have converted to banks,now account for over 70% of all mortgage lending.

The other class of lenders is finance companies. These typically lend to “non-conforming” borrowers, a broad category which includes borrowers with imper-fect credit or borrowers who are unable to document their income. The largestlenders in this segment include I Group, Kensington, RFC, Mortgages PLC, andSPML. This has traditionally been an under-served market, and we expect this togrow quite substantially over the next few years.

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Select LendersAbbey National plc: Abbey National started as a building society and converted toa stock company in 1988. It now has diversified retail banking and insuranceoperations with 765 branches and over 15,000 employees. Abbey National has totalassets of £180 billion, of which mortgage assets account for £64.9 billion. They havebeen active in the securitisation market with two transactions in 1999 and twosecuritisations totaling about £5.0 billion under the Holmes Financing Master Trustin 2000.

Halifax plc: Founded in 1853 as a building society, it has since converted to a stockcompany. It offers a wide range of consumer financial services, including mortgageand auto loans, credit cards, home and auto insurance, retail banking, and stocktrading. The Halifax has total assets of £173 billion, of which mortgages account for£93 billion. 68% of the new mortgage business is variable rate. Halifax generates48% of their new loans through retail channels. The three-month arrears amount to1.39% of the total portfolio, which is slightly lower than the average for Council ofMortgage Lenders.

Northern Rock plc: Founded in 1965 as a result of the merger of two smallerbuilding societies, Northern Rock acquired over fifty more societies, before convert-ing to a public limited company in 1997. It is primarily engaged in the mortgage andpersonal finance business. It has smaller businesses in general insurance throughAXA and life insurance through a relationship with Legal & General. It also acceptsdeposits through a small branch network of 89 branches and a postal and telephonebased operation. About 60% of the mortgage business is originated throughintermediaries. Northern Rock has completed three securitisations (one in 1999 andtwo in 2000) totaling £2.6 billion. Assets under management totaled £20 billion, ofwhich mortgages accounted for 79%. The historical performance of the NorthernRock portfolio has been very good, with arrears of three months or more being onlyabout 0.9% of the total portfolio.

Nationwide Building Society: Nationwide is now the largest of the buildingsocieties. It was formed as the result of a series of mergers of over a hundredbuilding societies and has retained its mutual status. At the end of 2000,Nationwide had mortgage assets of £48 billion out of total assets of £64 billion.Mortgage assets grew almost 17% compared with 1999. They transact througha network of 681 building society branches. Nationwide is also active in personallending, life insurance, mortgages for self-employed and commercial lendingthrough subsidiaries.

Bank of Scotland: Founded in 1695 by an act of Scottish Parliament, the Bankof Scotland is the UK’s oldest bank. It has a history that is inextricably interwovenwith that of Scotland. It now operates through a network of 325 branches, mainlyin Scotland. The Bank of Scotland is a diversified consumer and commercial bank.The total mortgage portfolio stood at £15.9 billion at YE2000, an increase of morethan £2 billion over 1999. The total lending portfolio is £55.5 billion, and totalassets amount to £71.8 billion. The bank is also active in motor vehicle financeand in unsecured consumer finance. Bank of Scotland has completed twosecuritisations to date, one in 2000 amounting to £765 million and another inJanuary 2001 amounting to £740 million.

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THE SECURITISED MARKETAlthough the securitised residential mortgage market lagged until recently, it hasbeen fairly active over the past two years. Total issuance was about £6,141 millionin 1999 and almost doubled to £12,150 million in 2000 (see Appendix for a listof transactions in 2000). Among the major issuers over the past two years havebeen Abbey National, Northern Rock, and Bank of Scotland in the prime marketand Kensington, Mortgages plc, I Group, and RFC in the non-conformingmarket. The issuance in 2000 represents almost half the issuance of securitisedmortgage products in Europe, but is still a tiny part of the assets on the books ofthe mortgage lenders.

There are a number of reasons why the securitisation market in the UK has notgrown historically as fast as the US’s. However, as we discuss below, each of thosefactors is in the midst of fundamental change, which is likely to lead to stronggrowth in the market for securitised UK mortgages.

1) Banks and building societies have traditionally had a cheap source of fundingin the form of retail deposits. However, retail deposits have not grown asrapidly as mutual funds and equity holdings. Relative to household assets,retail deposits have dropped from about 30% in 1990 to about 20% in 1999.In absolute terms, they have grown much slower than mutual funds or equityor bond holdings by individuals. This has put pressure on banks to findalternative sources of funding, and the securitisation market represents amajor source.

2) The securitised market offers lenders diversification of funding sources awayfrom the unsecured corporate market. While the economics of fundingdepends on a number of factors, including the credit rating of the lender,collateral quality, and market conditions, we expect most major lenders soonto be tapping the securitised market to some degree.

3) Many institutions, including banks and building societies, are required by theregulatory bodies to hold capital against assets. Securitisation has the effectof taking some of these assets off the balance sheet and, hence, lowering thecapital requirements. Regulatory approval for these capital requirementchanges was slow in coming, but is unlikely to be a bottle-neck going forward.

4) Much of the mortgage lending was done by building societies, which werelimited in the activities in which they could participate. These restrictionsbecame less severe following the Building Societies Act of 1997, a trend that islikely to continue. Moreover, as the building societies convert to banks, they areno longer subject to these restrictions and are much more likely to securitise.

5) Since most mortgages are adjustable rate, banks hold them as a natural hedgeagainst the deposit base, which is usually also floating rate. Further, since

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floating rate mortgages have virtually no duration or convexity, banks havenot found it necessary to transfer any interest rate risk. However, we seeincreasing demand at the retail level for fixed-rate products of different kinds.Fixed-rate mortgages have option costs embedded in them due to the prepay-ment option, causing them to have negative convexity. In the long run, it iseconomically optimal for this convexity to be sold into the capital markets,and securitisation represents the most efficient way to do this.

6) Securitisation also requires changes in the internal systems of manylenders, which has taken some time, but are now mostly complete for thelarger lenders.

As a result of the changes in these factors, we believe that the UK securitisedmortgage market is on the cusp of dramatic growth. We expect about £15 billionof newly securitised product in the market in 2001, growing to £20 billion a yearover the next three years.

THE MORTGAGESThe mortgage market is competitive, and lenders have responded by developinga wide range of products to serve the differing needs of borrowers. Rates have notonly become competitive, but may also have dropped to the level where manyquestion the profitability of mortgage lending. Our analysis to date indicates thatthere are several collateral factors that affect the prepayment and credit behaviorof mortgages. These include the type of mortgage, the rate the borrower iscurrently paying, the best remortgaging rate available, and the credit quality of theborrower. We discuss how each of these is treated in the market.

To alleviate confusion regarding the terms and conditions of a mortgage, the UKgovernment has set certain guidelines. The standard mortgages are often referredto as CAT mortgages (Charges, Access and Terms). The standards are not bindingin that lenders are not required to offer CAT mortgages, and, in fact, they are notthe most widely popular mortgages, precisely because the terms are somewhatrigidly defined. Each lender has historically published a rate called the StandardVariable Rate (SVR), to which the interest rates on its various programs are linked.However, developments over the recent past indicate that the market is movingaway from SVRs towards using rates tied directly to the Bank of England repo rate.

Types of MortgagesThere are two ways to classify the mortgages made: by rate type and by producttype. When classified by rate type, there are typically fixed rate and variable ratemortgages. Fixed-rate mortgages are somewhat misnamed, since the rates aregenerally fixed only for a period of 2-5 years irrespective of the repayment periodof the loan. Variable-0rate mortgages are typically linked to the SVR of the lender.There are many variations on these two basic rate types, including discountmortgages, cash-back mortgages, and capped rate mortgages, which typically

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come with attached conditions such as redemption periods. As of 1998, about 41%of all mortgages were fixed rate, 37% were variable rate, and the remaining 22%were capped or other types of mortgages.

In terms of payment, there are several types of mortgages: repayment mortgages,interest only mortgages, endowment mortgages, and flexible mortgages.

• Repayment mortgages amortize fully over the life of the mortgage. The termof the loan, as with all types of mortgages, can be as long as 35 years, but ismore commonly 20 or 25 years.

• Interest only (IO) mortgages require the payment of only the interest portionof the loan, while the principal balance remains unchanged. Borrowerstypically make a parallel investment in a savings plan (such as an IndividualSavings Plan, a Personal Investment Plan, etc.) which has a similar maturityto the mortgage. When the mortgage and the plan both mature, the proceedsof the investment may be used to pay off the principal balance of the mortgage.These mortgages appeal to borrowers who have shorter horizons or areplanning to downsize their housing in the near future.

• Endowment mortgages are similar to IO mortgages except that the investmentis made in the form of an insurance policy. Endowment mortgages do offerthe advantage of giving the borrower the potential upside of alternativeinvestments (e.g., equity), as well, and offer the borrower a wide choice fundsin which to invest. However, when the endowment does not perform toexpectations, the borrower is liable for the difference. Over the past few years,some adverse publicity about the adequacy of the endowment accounts has ledto a drop in the popularity of IO and endowment policies to back mortgages.

• Flexible mortgages are the other major category of mortgages and have growngreatly in popularity over the past 3-5 years. These are mortgages which allowa borrower to draw more from a mortgage account or pay more into an accountwithout additional transaction costs, paperwork, or penalties, subject tomaintaining the conditions of the loan, such as the loan to value ratio. Thereare many variations on the terms of the mortgages, but in general, there aretypically three elements of the loan: the initial loan, the drawdown facility, andthe reserve account, which are all defined at the time the mortgage is made.Borrowers may draw additional amounts from the drawdown facility at anytime. The reserve facility can be used to cover an underpayment, fund adrawdown, or repay principal. Underpayments, including missed payments,are typically allowed if there is sufficient balance in the reserve account.Overpayments are credited to the account in a predefined order, starting withoverdue payments. This allows borrowers flexibility in managing theirfinances and has caused flexible mortgages to grow rapidly in popularity.

The rate types and payment types that we have discussed above apply to the primequality loans made by the large building societies and the larger banks. In addition,there are a number of finance companies that offer alternative products for

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borrowers who do not meet the credit or documentation needs of the mainstreamlenders. These include borrowers with mortgage arrears, the unemployed or self-employed, as well as those with County Court Judgements against them. By someestimates, there are as many as 8 million people who fall into one of thesecategories.

The Terms of the MortgageAs explained above, the variety of rate and payment types means that theindividual rate may vary greatly depending on the type of mortgage and the typeof borrower. Figure 3 shows the average variable and fixed rate charged by themajor lenders. The average mortgage rate is closely related to the Bank ofEngland repo rates, particularly in the past 3-4 years, when the market has beenmore competitive.

The past few months have also been characterized by intense competition amongmortgage originators. Several lenders have realized that the dichotomy of ratesbetween existing mortgages and new mortgages is untenable. The average ratesfor existing borrowers has remained above 7.5%. However, discount mortgageshave become much more common, with the average variable rate now about6.08%. Although the discount rate typically has early redemption penaltiesattached, this means that many borrowers have a substantial incentive to redeemtheir mortgages and remortgage. In recognition of this situation, many lendershave started to offer lower rates for their existing borrowers, as well. This couldcause the remortgaging incentive to disappear unless there is a general rally ininterest rates. It is likely that over the next few months, the variable rate paidby new and existing customers will be comparable and there will be fewer

Figure 3. History of Mortgage Rates in the UK

Rate (%/year)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00

Average Variable Rate

Average Fixed Rate

Bank of England Repo Rate

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discount mortgages. If this happens, remortgaging will be of value only to fixed-rate borrowers.

There are also differences in rates offered by different institutions. In particular,building societies have typically set their SVRs about 50 bp below those of banksto demonstrate the benefits of mutuality.

Mortgages are also available over any term to a maximum of 30 years andoccasionally longer. This is because IO and endowment mortgages usually havean accompanying investment that vests at a fixed time. Hence, if the borrowerstarts with a 20-year mortgage and remortgages four years into the mortgage, itwould be unduly cumbersome to replan the investment. Hence, lenders usually setthe term of the mortgage to match the existing investment.

Most fixed-rate mortgages have a redemption penalty that applies for thefixed period. Penalties also typically apply to discount mortgages and cash-back mortgages.

Underwriting CriteriaWhile the specific criteria used by the major lenders vary, the measures used arevery similar. They can be broadly thought of as borrower credit measures,affordability measures (usually measured by the salary multiple), and the value ofthe property (which is measured by loan to value ratio).

Credit Measures: The most widely used indicator of the credit quality of anindividual borrower is the existence of County Court Judgements (CCJ) againstthe person. Creditors typically sue delinquent borrowers in a magistrate’s court,which issues a County Court Judgement. A debt repaid within 28 days of thejudgement is “cancelled” and is removed from the record. A debt repaid after 28days is “satisfied” and remains on the borrower’s record for six years. A CCJ thatis neither cancelled nor satisfied is considered “outstanding.” There are cur-rently about 5.8 million CCJs on record against a total of 3.3 million persons. Asthe total population of the UK is about 55 million, the number of people withCCJs against them is about 8% of the population. Since CCJs represent actualmissed payments that have been confirmed by the courts, they are a logical andvery effective measure of credit quality. Some lenders also pay attention to theamount of the judgement, choosing to ignore judgements that are for only a fewhundred pounds.

Credit bureau scoring has also become common over the past few years. Severalcredit bureaus, including Experian and Equifax, collect data on borrowers,including payment history and credit inquiries. Fair, Isaac and Company recentlyannounced a credit scoring system for UK borrowers similar to the widely usedFICO scores in the US. Many lenders have also developed scoring systems usingsuch data that allow them objectively to value a borrower’s creditworthiness. It is

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likely that credit scoring will become more common and standardised within thenext few years.

Salary Multiple: Another criterion commonly used by lenders is the salarymultiple. This is the multiple of the salary that lenders are willing to lend. Thismeasure is somewhat different from the one used in the US, where the monthlydebt payments as a fraction of the monthly income (called debt to income) isused. The two measures may be different if the interest rates are considerablydifferent. Some lenders also have programs in which they lend to borrowers whoare unable or unwilling to disclose their income, sometimes referred to as specialstatus borrowers.

Loan-to-Value Ratio: Most banks and larger building societies lend to a maximumloan-to-value ratio of 75%. A borrower who requires a higher loan to value isusually required to pay a Mortgage Guarantee Insurance fee.

Other Factors: Other factors may also be factored into underwriting a loan as well.For example, there may also be exclusions, i.e., a lender may perceive some typesof property as being too risky and refuse to lend on it even if the borrower satisfiesall other conditions.

The loan characteristics of the conforming lenders are generally similar, as Figure4a shows. Generally, these lenders do not lend to borrowers with CCJs.

Non-Conforming MortgagesThe high street banks and larger building societies have strict conditions based onthe borrower and loan characteristics discussed above. Borrowers who do notmeet the requirements generally borrow in the alternative or non-standard market.While the alternative population has actually fallen in the past few years with theimprovement in economic conditions, the market continues to be under-served andfairly lucrative from the lender’s point of view, and we expect that the securitisedmarket is likely to continue to grow over the next few years. The biggest lendersin this market are I Group, Kensington, Mortgages plc, and SPML. Going forward,some prime lenders are likely to develop non-conforming programs, as well.

This so-called “non-standard” market charges rates which currently average about10%/year, which is 200-250 bp above the SVRs for most mainstream lenders. Atypical pool of alternative mortgages is also likely to have a higher proportion ofloans in arrears and a higher percent of re-mortgagers. Figure 4b shows somecharacteristics for recently originated non-conforming mortgage pools.

PREPAYMENT AND CREDITSince the securitised mortgage market is relatively young, data on the performanceof mortgage assets in the UK are sparse. Our ongoing research will discussprepayment and default data as they become available. Meanwhile, we discuss the

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factors that typically affect mortgages. There are several reasons why a borrowerwould prepay a mortgage. These include mobility, remortgaging for rate-relatedreasons, and remortgaging to move to a bigger or better house. The factors thataffect credit performance can broadly be classified as borrower ability andwillingness to pay and the economic environment. We start by discussing thefactors that affect prepayment and credit performance and then discuss someaggregate prepayment and credit trends over the past few years.

Factors Affecting Prepayment and CreditA major driver of prepayments is borrower mobility, which is generally causedby their relocating because of changed job or family situations. While somemortgages are portable (i.e., the buyer can choose to continue the samemortgage), most are not. Hence, when a borrower moves to a different home,this results in a prepayment. Mobility in a society is generally the net result ofwell-established socioeconomic conditions and does not change dramaticallyover time. However, mobility has historically tended to be higher in good

Figure 4a. Characteristics of Selected Conforming Pools at Cut-off Date

Holmes Financing Granite Mortgages Mound FinancingNo. 2 2000-2 plc No. 2

Originator Abbey National Northern Rock Bank of ScotlandTransaction Date Nov. 20, 2000 Sep. 19, 2000 Jan. 25, 2001LTV:

Average LTV 82.31% 67.60% 75.93%Highest LTV 95.00% 95.00% 133.06%

Loan Purpose:Purchase 90.42% NARemortgage 9.58% 26.00%Buy to Let 14.70%Others 59.30%

Arrears:Current (< 1 month) 99.67%* 100.00% 98.00%

Geographical Spread:London 16.97% 18.97% 44.69%South East (excl. London) 27.86% 22.47% 26.29%

Property Type:Detached 27.50% 50.73% 34.03%Semi-Detached 29.99% 27.29% 21.54%Mid-Terrace 29.97% 16.33% 15.95%Purpose Built Flat 8.12% 1.66% 11.22%Other 4.42% 3.99% 17.26%

Wtd Average Seasoning 35.3 months 36.1 months 32.2 monthsRate Type:

Fixed 52.50% 35.00% 16.00%Variable 47.50% 65.00% 84.00%

Other Factors - - 55% of borrowers haveundisclosed income

* Arrears < 2 months.

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economic times. Home price appreciation, which we discuss more below, hasalso tended to increase mobility.

Another important driver of mortgage prepayments is rate incentive. Borrowerswho currently have mortgages at rates higher than the rates available in the markethave an incentive to remortgage and reduce their payments. However, this has tobe balanced against the costs of remortgaging. On the other hand, borrowers whohave mortgages at or below the current market rate are likely to prepay only whenthey change their residence. In fact, borrowers who are sufficiently out-of-the-money will likely have a disincentive to move, a phenomenon known as lock-in.Figure 3 showed the history of mortgage rates in the UK. For example, a borrowerwho took out a fixed rate loan in mid-1997 at 7% could have reduced his/her

Figure 4b. Characteristics of Selected Nonconforming Pools

Originated KensingtonMortgages Mortgage Loans RMAC 2000 Platform Home Mortgage Co

Transaction No. 2 plc No. 7 plc NS3 plc Loans No. 2 plc RMS9Originator Mortgages plc I Group RFC Mortgage Platform Homes Kensington

Services Ltd. Mortgage Co.Transaction Date Nov 6, 2000 Nov 15, 2000 Nov 2, 2000 Sep 27, 2000 Sep 8, 2000Wt. Avg. LTV 73.86% 68.53% 72.57% 80.73% 77.34%Maximum LTV 100.00% 90.00% 95.00% 97.37% 95.00%Avg. Seasoning NA 3.1 months NA 5.6 months NAAvg. spread over Libor 254 bp 10.47% 385 bp 365 bp 429 bpArrears > 2 months 9.17% 0.70% 1.22% 0.92% 0.13%Loan Purpose

Purchase 34.44% 12.25% 43.36% 74.55% 68.62%Remortgage 58.32% 47.39% 56.64% 25.45% 31.38%Right to Buy 7.25% 5.86%Consolidation 21.26%Home Improvements 7.58%Others 5.66%Second Mortgages 0% 21.93% 0% 0% 0%

Average term to maturity 256 months 234 months 257 months 268 months 274 monthsRepayment Vehicle

Capital Repayment 48.44% 72.44% 52.01% 52.71% 48.52%Interest Only 51.56% 27.56% 45.83% 47.29% 51.07%Part Rep./Part IO 2.16% 0.41%Endowment 16.52%Pension 0.12%

Rate TypeVariable 16.52% 35.28% 91.24% 3.92%Fixed 0.12% 22.01% 4.04% 3.37%CappedDiscount 83.36% 42.71% 4.72% 92.71%

Geographical DistSouth East 43.41% 28.20% 26.36% 29.79% 27.47%Greater London 16.78% 34.47% 13.67% 7.71% 35.87%Self Certification 51.35% 31.55% 55.38% NA NA

March 10, 2001 15

interest rate by as much as 1.5% by remortgaging in mid-1999. Borrowers withfixed-rate loans are much more likely to be affected by rate changes than borrowerswith adjustable rate loans.

Remortgaging Costs: The economics of mortgage lending in the UK are such thatlenders make most of their profits from the margin between lending rates andfunding costs. The revenue that the lender gets from the origination process isrelatively small. Further, the third party costs associated with remortgaging are£1,000-£2,000, including costs of appraisal, credit checking, etc. Even these costsare often borne by lenders. This implies that we would expect borrowers to be quiteresponsive to rate declines.

Home Price Appreciation: An important driver of mortgage volume is homeprices. Strong home price appreciation typically drives purchase activity bygiving the owner greater mobility and freedom to upgrade to better housing. It alsoallows an existing owner to remortgage to take advantage of the increased equityin the home, either to take cash out or to obtain more favorable interest rates. Aftera period of relative stagnation in the early 1990s, home prices rose appreciablythroughout the UK in the second half of the 1990s. However, one of thecharacteristics of this home price appreciation is the sharp difference in home priceappreciation between the more prosperous areas in and around London and theNorth. Figure 5 shows average home prices for each region. Lenders differ quitesubstantially in their geographical mix. This may have implications for the defaultand prepayment rates for mortgages generated over the past few years.

Figure 5. Home Price Appreciation Has Not Been Uniform Across the UK

000 Pounts

0

40

80

120

160

1991 1992 1993 1994 1995 1996 1997 1998 1999

NorthYorks & HumberEast MidlandsEast AngliaGreater LondonSth East (excl GL)UK

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Credit Quality of Borrower: Borrowers with poorer credit histories generallyprepay at higher rates than those with better credit in the absence of any rateincentives. This is generally because borrowers with poorer credit are morelikely to have a need for additional cash, and remortgaging with a higher loanamount is one way to get additional cash. Further, borrowers with poorer creditmay also be able to take advantage of better conforming rates if they improvetheir credit histories.

Recent Prepayment PerformanceThe end result of the combination of these factors is that aggregate prepaymentson UK mortgages has been fairly high over the past few years, as shown in Figure6. Aside from the strong seasonal component that is evident in the data, aggregateprepayment rates on the Bank of Scotland portfolio have increased from an annualaverage of about 10% CPR in 1994-1995 to about 17% CPR in 1999. During 1997and later, Abbey National and Bank of Scotland portfolios both showed a similarpattern. Moreover, as shown in Figure 7, the percent of newly issued mortgageswhich are due to remortgaging has been increasing steadily over the past few years,rising to the current level of 31%. As discussed earlier, current developments inthe market could reverse this trend in the near future.

Recent Credit PerformanceAs we have discussed, there is wide variation in credit quality among lenders, witha number of lenders specializing in non-standard or alternative mortgages.However, in aggregate, the credit performance of UK mortgages has been verygood, as shown in Figure 8, which shows data representing 98% of all lenders in

Figure 6. Aggregate Prepayments—Recent Historical Experience

CPR (%)

0%

5%

10%

15%

20%

25%

1/94 7/94 1/95 7/95 1/96 7/96 1/97 7/97 1/98 7/98 1/99 7/99 1/00

Bank of Scotland

Abbey National

March 10, 2001 17

Figure 7. Remortgaging Is a Larger Part of the Market

% All Mortgages

0

5

10

15

20

25

30

35

2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00

0

1

2

3

4

1H86 1H87 1H88 1H89 1H90 1H91 1H92 1H93 1H94 1H95 1H96 1H97 1H98 1H99 1H00

Repossession Rate

Total 6+-Month Arrears

Figure 8. Aggregate Credit Performance of UK Mortgages

% Outstanding Balance

the UK. The repossession rate (which is roughly comparable to the default rate)has never exceeded 0.5% of outstanding balance, while the total 6+ month arrearspeaked at only about 3.5%. It is also interesting to note that both the arrears rateand the repossession rate increased quite sharply during the economic downturnof the early 1990s. Subsequent to that, a strong economy, along with substantialhome price appreciation in most of the country (as discussed earlier), has ensuredthat both the arrears rate and the repossession rate have remained very low. Manyof the best quality lenders, including Abbey National, Halifax, and Northern Rock,actually have arrears rates significantly below the national average.

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INSTITUTIONAL INFRASTRUCTUREThe impact of institutional details on the performance of mortgage-backed poolsis very significant, although it is sometimes difficult to quantify. We discussthree aspects in particular: distribution channels, the appraisal process, andforeclosure procedures.

Distribution ChannelsMortgages are distributed through a number of channels. The most commonamong these are branch networks and brokers, although new-economy channelssuch as telephone and the Internet are growing rapidly. The largest lenders,including the high street banks and the large building societies, use branchnetworks for most of their lending—several of them have hundreds of branches.However, some other lenders also make extensive use of intermediaries, whichtypically work with several lenders, and offer the initial contact with the borrower.Underwriting and appraisals are still typically done by the lender. As of now, abouthalf of all lending is done through branch networks, and the other half is donethrough intermediaries.

Appraisal and Approval ProcessThere is a certification program for real estate appraisers, and, in addition, mostlenders have more stringent requirements that appraisers must pass to be on theirapproved list. Appraisals are done on both a fundamental basis, by measuringthe square footage, number of bedrooms, etc. in a house, as well as on a marketbasis. Many lenders are moving closer to an automated appraisal process as well,since this represents the slowest part of a mortgage approval process. With this,lenders are now able to approve mortgage applications in minutes, pendingverification of information. Several recent developments have made the ap-praisal process easier than before. There are now companies that offer auto-mated appraisal and property information to reduce the time and cost involvedin the appraisal process.

The UK government has also instituted a standard appraisal process as a pilotscheme. Sellers are required to do such an appraisal, called the home-buyersreport, and make the results available to any potential buyer. The transaction is notbound by the result of the standard appraisal, i.e., the buyer and seller can stilltransact at any price, but the standard appraisal gives a benchmark for comparison.Also aiding in the process is the “land registry”. Although not new (almost all landin the UK is registered), this eliminates the need for title deed searches to showownership of the property.

Foreclosure ProceduresThe UK has well-established procedures that govern repossession in the event ofborrower default. The timelines and procedures are generally considered morelender friendly than many European countries and most states in the US. Wedescribe the process below and also show a typical time-line in Figure 9. There are

March 10, 2001 19

some differences between Scottish and English law, but they are too small to affectthese timelines significantly.

Assuming the mortgage is properly issued so that the lender owns the mortgage,the lender brings possession proceedings against the borrower in the CountyCourt, which has exclusive jurisdiction over repossession cases. At the CountyCourt hearing, the lender is expected to establish the validity of his claim. If theplea is successful, the Court issues an order for repossession. However, suchorders are usually suspended, pending compliance by the borrower with termsimposed by the court. The suspensions are common and are intended to preventperemptory repossession. This allows time for the borrower to sell the property orfind other ways to pay the mortgage. After the suspension has expired, or if theborrower is unable to comply, the Court issues a repossession order, which thenhas to be executed.

STRUCTURESThere are essentially two types of structures that have been used in the UKmortgage market: the master trust structure and the stand-alone structure. Bank ofScotland was the first to introduce the master trust structure to the UK mortgagemarket. This structure is also now being used in the Abbey National transactionsand is very similar to the credit card master trust structures used in the US. Thestand-alone structures (e.g., the Northern Rock structure discussed below) aresimilar to the structures used in home equity loan transactions in the US. Wedescribe the structures used in some of the largest transactions.

Abbey National (Holmes Funding) StructureAbbey National has issued its last few mortgage backed securities under a mastertrust structure. The assets of the master trust currently amount to about £6 billion.The structure allows for the creation of either true soft-bullet or controlledamortisation securities through the accumulation of payments on the underlyingmortgage portfolio. This has the advantage of de-linking the legal final maturityof the AAA securities from the maturity of the underlying mortgages. Addition-ally, the use of both accumulation and controlled amortising securities allows the

Figure 9. Estimated Timeline for Repossession

Procedure Estimated TimeNotice to Borrower 1 weekCounty Court Hearings scheduled and held 6 weeksSuspension of Judgement 1 month to 12 months (typically 16 weeks)Issue and Execute Repossession Order 2 to 6 weeksTotal Time 12 to 65 weeks (typically 26 weeks)

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issuer to balance issuance to better match the principal payment profile of theunderlying mortgages and, thus, improve collateral efficiency.

Under this structure, which is depicted in Figure 10, Holmes Trustees Limitedholds the portfolio under trust for the benefit of Abbey National and HolmesFunding. Abbey National continues to own a Seller’s Interest in the mortgages,

Figure 10. Holmes Financing: Structural Overview

Abbey National plc(Originator/Seller)

Holmes Trustees Ltd(Trustee)

Mortgage Trustee

GIC Account

Funding InterestRate Swaps

(ANTS)

Funding GIC andLiquidity Facility

(inc. Reserve Fund)

Issuer Currency andFixed-Floating Swaps

Issuer Liquidity Facility

FUNDING

Holmes Funding Ltd

HFC-2

Holmes Financing 1 plc(Issuer)

Noteholders

�

�

�

�

�

�

�

Servicing Cash Management

Initial Portfolio

Sellers Shareof TrustProperty

�

CashFunding Share of

Trust Property

Cash IntercompanyLoan

Principal andInterest

Cash(Issuer Proceeds)

Note Principaland Interest

March 10, 2001 21

(required to be at least 4% of the mortgage pool) to protect against non-assetperformance risks, including potential set-off risks associated with both bor-rower deposits held at Abbey National and Abbey’s failure to fund redrawsunder flexible mortgage loans. The remaining interest in the portfolio is ownedby Holmes Funding Limited, which pays for them through an inter-companyloan from the Issuer, which in turn raises funds by selling securities into thecapital markets. As with other master trusts (e.g., credit card trusts in the US),losses in the trust are allocated pro rata between the investor’s interest and theseller’s interest. A new issuer is created for each transaction, with each issuerentering into the same arrangement with Holmes Funding and ranking pari passuin payment priority and loss allocation. Credit enhancement for each senior noteis provided through a combination of excess spread, a reserve account, and thesubordinated notes of all series.

For each transaction, there is a revolving period and an accumulation period.During the revolving period, all notes receive interest only, and the principalpayments on the mortgages will be reinvested into new mortgages meeting certaineligibility criteria. The senior notes (Class A) receive payments from the cashflows of the trust, while the subordinate notes (Class B and Class C) havescheduled maturity dates at which time they are repaid subject to certain portfolioperformance criteria, which include no debit to the reserve fund to cover creditlosses; arrears are less than 5% of the outstanding principal in the Trust; and thetotal Trust Size is above £5 billion.

During the accumulation period, the proceeds are normally paid to HolmesFunding Limited so as to enable the payment of the note balance on the duedate. If certain trigger events occur during the revolving period, an earlyamortisation occurs and the proceeds go to Holmes Funding until the FundingShare is paid down.

The revolving period will end, and principal payments will be used to amortise thesecurities upon the occurrence of certain trigger events. An asset trigger eventoccurs when an amount is debited to the AAA principal deficiency sub-ledger.Upon occurrence of an asset trigger event, principal receipts on the loans will beallocated to Funding and the Seller proportionately based upon their percentageshares of the trust property. The payments to Funding will be allocated pro rataamongst each Issuer. Each Issuer will in turn make payments sequentially to thenotes, beginning with the highest rated outstanding securities, regardless ofscheduled maturity.

Following the occurrence of a non-asset trigger event, all principal receipts will bedistributed to investors until the Funding Share of the Trust Property is zero. EachIssuer will make payments sequentially to the notes, beginning with the highestrated outstanding securities, with the triple-A rated notes allocated paymentssequentially to the Series with the earliest scheduled maturity. A non-asset trigger

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event occurs when one of the following events occurs: there is an insolvency eventin relation to Abbey; Abbey’s role as servicer is terminated and a suitablereplacement is not appointed; the seller share less than the minimum required sellershare; or the outstanding balance of mortgages in the trust falls below certain pre-specified levels.

When prepayments occur, Abbey National PLC maintains the trust size bysubstituting loans into the portfolio. The notes are sized so that with substitu-tions of prepaid loans, a payment rate of at least 4.5% is required to pay downthe notes. If there is no substitution, a payment rate of about 7.0% is required.Since payment rates have historically been about 20.0%, this provides a reason-able cushion to ensure that the notes are paid on schedule. There are restrictionson the loans that can be substituted into the pool, e.g., no substituted loan can bein arrears of more than one month, the principal balance of loans in the trustwhich are in arrears of more than three months is less than 5%, certain LTVrestrictions are met, etc.

Various swap agreements are also part of the structure. This is because themortgages are variable rate based on Abbey Nationals’ SVR, or fixed rate for someperiod. The notes, by contrast, are tied to 3-month LIBOR rates. Further, someof the transactions were denominated in dollars or euros, so that a currency swapagreement is necessary as well.

Northern Rock (Granite) StructureNorthern Rock has completed three transactions to date, one in 1999 and two in2000. The structures used in these transactions were all similar to those used in atypical home equity loan transaction in the U.S. The loans are sold by NorthernRock into a special purpose vehicle, which is called the Granite Mortgages.Granite then issues AAA rated, AA rated and BBB rated securities.

The bonds have several layers of protection. The first layer of protection isexcess spread, which is essentially the difference between the rate charged tothe borrower and the coupon of the bonds, with adjustments made for servicingfees and swaps costs. As is usual in such structures, excess interest is notcarried over to future periods, so that any unused excess spread is paid back toNorthern Rock. The excess spread is also used to fund the interest rate swapagreement (described below). The next layer of protection is the Cash ReserveFund, which starts at 1.75% of the original balance of the loans and does notstep down during the life of the transaction. The final layer of protection is thesubordination of lower rated bonds. There are triggers on the Cash ReserveFund and on arrears which must be passed for the bonds to pay down pro rata.If the transaction fails the triggers, the bonds will pay sequentially. One triggercondition, intended to ensure that the portfolio continues to be serviced by anstable and healthy entity, is that the long-term credit rating on Northern Rockmust be at least A3.

March 10, 2001 23

Since the loans are typically based on the SVR of the lender, Northern Rock alsoprovides a basis swap which converts the SVR into a 3-month £ LIBOR-basedreturn. In addition, since a significant portion of each of the pools consists offixed rate loans, the trust has also entered into a swap with Northern Rock to swapthese fixed-rate loans into 3-month £ LIBOR-based rates. Since Northern Rockis the swap counterparty in each of these swaps, the swaps are conditional onNorthern Rock’s maintaining a P-1 rating, failing which it must find a suitablyrated replacement.

Some other features of the transaction deserve mention. If prepayments on thepool exceed 20% CPR, Northern Rock is allowed to substitute loans into thepool to maintain prepayments at a 20% level. The substitutions are subject tocertain conditions about the quality of the loans and the performance of thepools. This gives Northern Rock the ability to ensure that the pool does not hitbalance triggers.

Bank of Scotland (Mound) StructureThe structure used by the Bank of Scotland transactions is very similar to themaster trust structure used in the Abbey National transactions. The Seller isthe Bank of Scotland, the Mortgages Trustee is Mound Trustees Limited, andFunding is Mound Funding Limited. As before, there may be number ofissuers, representing different series of notes. Although most of Bank ofScotland’s mortgages are in Scotland, the Mound transactions consist mainlyof assets in England.

Since most of the structural features are similar, we focus on other aspects of thetransaction that may be of interest.

• The transaction allows for the inclusion of flexible loans, but any drawingsbeyond the original amount are funded by the seller.

• The substitution of new loans for paid off loans is governed by a number ofconditions. These include amount in arrears of more than 3 times the monthlypayment should not exceed 6%; buy-to-let has to be less than 15% of thebalance; market LTV does not exceed the market LTV at origination plus0.3%. Substitutions may occur if repayments are faster than required to paythe bonds on their scheduled dates.

• A minimum payment rate of 7% is required to pay the bonds on their due dates.If the payment rate is lower than 7%, then the issuer liquidity facility may bedrawn on.

• The sellers’ interest was initially set at 17%, but is allowed to drop as lowas 3%.

• There are two kinds of trigger events: asset trigger events and non-asset triggerevents (including seller insolvency, reduction in the seller’s share, etc.) In anasset trigger event, the seller and the investor are paid pro rata. In a non-assettrigger event, investors will be paid first before the seller is paid.

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RELATIVE VALUEThe market is relatively young, but liquidity is expected to improve quite rapidlyover the next few months as the volume of new originations increase. New issuespreads have been quite stable over the past year. In addition to the factors thatusually affect spreads on fixed income products, such as credit rating and averagelife, a number of factors should be considered that are specific to this market.These include:

• Currency of issuance: dollar bonds tend to trade to 2-4 bp tighter than sterlingor euro denominated bonds. This is primarily because of the deeper investorbase in the dollar market.

• Soft bullet versus controlled amortisation: The controlled amortisation periodin a master trust structure is usually about 6 months. The market generallytrades bonds with controlled amortisation features 1-2 bp wider than softbullets, which is more than the valuation difference justifies.

• Quality of issuer: The market is currently tiered into three parts: prime,non-conforming, and buy-to-let. The non-conforming market typicallytrades about 15 bp wider than the prime market, while buy-to-let tradesabout 8 bp wider.

In general, UK mortgages have been trading significantly wider than USABS sectors such as credit cards. However, as the number of issuers in themarket increase and liquidity improves further, we expect these spreads totighten. Mortgage lenders face pressure on a number of different fronts,including pressure on their deposit base and increasing competition leadingto lower rates. However, on a fundamental basis, UK mortgages offer theasset-backed investor diversification away from the U.S. consumer market ina high-growth, prime-quality sector with rapidly improving liquidity. Bondsfrom prime quality issuers such as Abbey National typically trade 5 -8 bpwider than US credit card securities. We do not believe that the credit qualityof the issuers and the enhancement levels in these transactions justify thesedifferences in spreads.

It is also useful to compare UK mortgages with other European mortgage-backed securities. UK mortgages have tended to trade tighter due to betterinformation about the products, as well as better liquidity. German mortgagesthat are available in the asset-backed market are effectively second liens sincemost amounts below 60% loan-to-value are absorbed by the Pfandbriefemarket. Denmark and Holland both have well-developed mortgages markets,but they are both relatively small and, therefore, will never be as liquid as theUK prime market.

CONCLUSIONSThe UK mortgage market represents one of the largest growth areas in themortgage backed market over the next few years. We project that industry and

March 10, 2001 25

regulatory changes will cause huge growth in securitisation. The presence of largewell-capitalized issuers, the well-established underwriting procedures, a stronginstitutional infrastructure, and strong economic growth make for a potentiallyliquid market. Spreads have been stable over the past year.

GLOSSARY OF TERMS

Although the US and UK mortgage markets have much in common, they often use differentterms. We list some commonly used equivalent terms.

UK USArrears DelinquenciesBuy to let Investment PropertyConveyancing Transfer of titleEndowment Insurance Term-life insuranceFlexible Mortgage Home Equity Line of CreditIntermediary BrokerLegal Charge LienMortgage Guarantee Insurance Private Mortgage InsurancePortable loan Assumable loanRemortgage RefinanceRepayment Loan Amortizing MortgageRedemption Prepayment

26M

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an Brothers

Appendix: UK Mortgage-Backed Transactions in 2000

Prime Residential Mortgages

Launch Exchange Amt in Moody’s Effective Margin ReferenceDate Transaction Name Originator Tranche Tranche Description Currency Amount Rate Euro Rating Maturity (bp) Rate08-Feb-00 Granite Mortgages 2000-1 plc Northern Rock plc Class A Step Call 13 Feb 07 GBP 694.8 0.6 1158 Aaa 3.7 25 3-mo. LIBOR08-Feb-00 Granite Mortgages 2000-1 plc Northern Rock plc Class B Step Call 13 Feb 07 GBP 32.7 0.6 55 Aa3 7.0 45 3-mo. LIBOR08-Feb-00 Granite Mortgages 2000-1 plc Northern Rock plc Class C Step Call 13 Feb 07 GBP 22.5 0.6 38 Baa2 7.0 130 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class A1 Soft Bullet 10 Feb 03 USD 208 0.88 236 Aaa 2.8 17 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class A2 Soft Bullet 8 Feb 05 USD 200 0.88 227 Aaa 4.8 21 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class A3 Soft Bullet 8 Feb 07 USD 200 0.88 227 Aaa 6.8 24 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class A4 Step/Call 8 Feb 07 GBP 285 0.6 475 Aaa 6.8 29 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class B Step/Call 8 Feb 07 GBP 37.5 0.6 63 A1 6.8 80 3-mo. LIBOR10-Apr-00 Mound Financing (No 1) plc Bank of Scotland Class C Step/Call 8 Feb 07 GBP 37.5 0.6 63 Baa 6.8 160 3-mo. LIBOR17-Jul-00 Auburn Securities 2 Plc Capital Home Loans Class A1 Step/Call 1 Jun 06 GBP 70 0.6 117 Aaa 0.9 20 3-mo. LIBOR17-Jul-00 Auburn Securities 2 Plc Capital Home Loans Class A2 Step/Call 1 Jun 06 GBP 200 0.6 333 Aaa 4.8 29 3-mo. LIBOR17-Jul-00 Auburn Securities 2 Plc Capital Home Loans Class M Step/Call 1 Jun 06 GBP 30 0.6 50 A2 5.9 85 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 1 Class A Soft Bullet 15 Jul 03 USD 900 0.88 1023 Aaa 3.0 14 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 1 Class B Step up 15 Jul 10 USD 31.5 0.88 36 Aa3 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 1 Class C Step up 15 Jul 10 USD 42.5 0.88 48 Baa2 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 2 Class A Soft Bullet 15 Jul 05 USD 975 0.88 1108 Aaa 5.0 19 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 2 Class B Step up 15 Jul 10 USD 34.5 0.88 39 Aa3 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 2 Class C Step up 15 Jul 10 USD 45 0.88 51 Baa2 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 3 Class A1 Soft Bullet 15 Jul 05 GBP 375 0.6 625 Aaa 5.0 19 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 3 Class A2 Soft Bullet 15 Jul 05 EUR 320 1 320 Aaa 5.0 19 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 3 Class B Step up 15 Jul 10 GBP 24 0.6 40 Aa3 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 3 Class C Step up 15 Jul 10 GBP 30 0.6 50 Baa2 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 4 Class A Soft Bullet 15 Jul 05 GBP 250 0.6 417 Aaa 5.0 19 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 4 Class B Step up 15 Jul 10 GBP 11 0.6 18 Aa3 10.0 38 3-mo. LIBOR18-Jul-00 Holmes Financing (No 1) Abbey National Series 4 Class C Step up 15 Jul 10 GBP 14 0.6 23 Baa2 10.0 38 3-mo. LIBOR14-Sep-00 Granite Mortgages 2000-2 plc Northern Rock Plc Class A1 Step/Call 13 Sep 07 GBP 500 0.6 833 Aaa 3.7 23 3-mo. LIBOR14-Sep-00 Granite Mortgages 2000-2 plc Northern Rock Plc Class A2 Step/Call 13 Sep 07 USD 1000 0.88 1136 Aaa 3.7 23 3-mo. LIBOR14-Sep-00 Granite Mortgages 2000-2 plc Northern Rock Plc Class B Step/Call 13 Sep 07 GBP 48.1 0.6 80 Aa3 7.0 42 3-mo. LIBOR14-Sep-00 Granite Mortgages 2000-2 plc Northern Rock Plc Class C Step/Call 13 Sep 07 GBP 39.7 0.6 66 Baa1 7.0 130 3-mo. LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class A USD 1000 0.88 1136 Aaa 9 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class B USD 37 0.88 42 Aa3 35 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class C USD 49 0.88 56 Baa2 120 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class A USD 1000 0.88 1136 Aaa 18 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class B USD 37 0.88 42 Aa3 44 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class C USD 49 0.88 56 Baa2 135 3-mo. US LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class A GBP 500 0.6 833 Aaa 24 3-mo. LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class B GBP 19 0.6 32 Aa3 45 3-mo. LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class C GBP 25 0.6 42 Baa2 150 3-mo. LIBOR17-Nov-00 Holmes Financing (No 2) plc Abbey National Class A EUR 500 1 500 Aaa 27 3-mo. Euribor17-Nov-00 Holmes Financing (No 2) plc Abbey National Class B EUR 21 1 21 Aa3 50 3-mo. Euribor17-Nov-00 Holmes Financing (No 2) plc Abbey National Class C EUR 35 1 35 Baa2 160 3-mo. Euribor

March 10, 2001

27

Appendix: UK Mortgage-Backed Transactions in 2000

Launch Exchange Amt in Moody’s Effective Margin ReferenceDate Transaction Name Originator Tranche Tranche Description Currency Amount Rate Euro Rating Maturity (bp) Rate06-Mar-00 RMAC 2000 - NS1 plc Residential Mortgage Securities plc Class A1 Step Up/Call 12 Jun 07 GBP 99 0.6 165 Aaa 1.0 22 3-mo. LIBOR06-Mar-00 RMAC 2000 - NS1 plc Residential Mortgage Securities plc Class A1 Step Up/Call 12 Jun 07 GBP 104 0.6 173 Aaa 4.6 42 3-mo. LIBOR06-Mar-00 RMAC 2000 - NS1 plc Residential Mortgage Securities plc Class A1 Step Up/Call 12 Jun 07 GBP 15.2 0.6 25 A1 5.1 110 3-mo. LIBOR06-Mar-00 RMAC 2000 - NS1 plc Residential Mortgage Securities plc Class A1 Step Up/Call 12 Jun 07 GBP 6.8 0.6 11 Baa2 5.1 200 3-mo. LIBOR06-Mar-00 Residential Mtg Securities No 8 plc Kensington Mortgage Co Class A - USD 452.2 0.88 514 Aaa 2.4 37 3-mo. LIBOR06-Mar-00 Residential Mtg Securities No 8 plc Kensington Mortgage Co Class M - GBP 31.3 0.6 52 A2 7.2 110 3-mo. LIBOR06-Mar-00 Residential Mtg Securities No 8 plc Kensington Mortgage Co Class B - GBP 11.6 0.6 19 Ba2 7.2 445 3-mo. LIBOR07-Aug-00 Originated Mortgage Loans 6 plc Igroup limited Class A - GBP 264 0.6 440 2.2 40 3-mo. LIBOR07-Aug-00 Originated Mortgage Loans 6 plc Igroup limited Class A - GBP 24 0.6 40 4.9 125 3-mo. LIBOR07-Aug-00 Originated Mortgage Loans 6 plc Igroup limited Class A - GBP 12 0.6 20 4.9 265 3-mo. LIBOR07-Jan-00 Originated Mortgage Loans 4 plc Ocwen UK Ltd Class A Step Up/Call 15 Jan 07 EUR 335 1 335 Aaa 2.4 55 1-mo. Euribor07-Jan-00 Originated Mortgage Loans 4 plc Ocwen UK Ltd Class B Step Up/Call 15 Jan 07 EUR 40 1 40 A2 4.6 150 1-mo. LIBOR13-Apr-00 Originated Mortgage Loans 5 plc OSWEN UK Class A Step/Call 15 Apr 07 GBP 198 0.6 330 Aaa 2.4 45 1-mo. LIBOR13-Apr-00 Originated Mortgage Loans 5 plc OSWEN UK Class A Step/Call 15 Apr 07 GBP 18 0.6 30 6.2 135 1-mo. LIBOR13-Apr-00 Originated Mortgage Loans 5 plc OSWEN UK Class A Soft Bullet 15 Apr 07 GBP 9 0.6 15 7.0 275 1-mo. LIBOR03-May-00 Mortgages No 1 plc Mortgages plc Class A Step/Call 12 Apr 07 GBP 154 0.6 257 Aaa 2.3 40 3-mo. LIBOR03-May-00 Mortgages No 1 plc Mortgages plc Class M Step/Call 12 Apr 07 GBP 10.5 0.6 18 A1 6.8 140 3-mo. LIBOR03-May-00 Mortgages No 1 plc Mortgages plc Class B Step/Call 12 Apr 07 GBP 13.5 0.6 23 Baa2 6.9 300 3-mo. LIBOR19-Jun-00 RMAC 2000 - NS2 plc RFC Mortgage Services Ltd Class A1 - GBP 89.5 0.6 149 Aaa 1.0 20 3-mo. LIBOR19-Jun-00 RMAC 2000 - NS2 plc RFC Mortgage Services Ltd Class A2 Step/Call 12 Jun 07 GBP 90 0.6 150 Aaa 4.6 37 3-mo. LIBOR19-Jun-00 RMAC 2000 - NS2 plc RFC Mortgage Services Ltd Class M Step/Call 12 Jun 07 GBP 11.5 0.6 19 A2 5.5 110 3-mo. LIBOR19-Jun-00 RMAC 2000 - NS2 plc RFC Mortgage Services Ltd Class B Step/Call 12 Jun 07 GBP 4 0.6 7 Baa1 5.5 200 3-mo. LIBOR07-Sep-00 Kensington Mortgage Co - RMS9 Kensington Mortgage Class A1 Step/Call 9 Feb 08 USD 142.4 0.88 162 Aaa 0.7 20 3-mo. LIBOR07-Sep-00 Kensington Mortgage Co - RMS9 Kensington Mortgage Class A2a Step/Call 9 Feb 08 USD 260.3 0.88 296 Aaa 3.4 35 3-mo. LIBOR07-Sep-00 Kensington Mortgage Co - RMS9 Kensington Mortgage Class A2b Step/Call 9 Feb 08 GBP 50 0.6 83 Aaa 3.4 38 3-mo. LIBOR07-Sep-00 Kensington Mortgage Co - RMS9 Kensington Mortgage Class M Step/Call 9 Feb 08 GBP 31.9 0.6 53 7.4 120 3-mo. LIBOR07-Sep-00 Kensington Mortgage Co - RMS9 Kensington Mortgage Class B Step/Call 9 Feb 08 GBP 13.1 0.6 22 7.4 225 3-mo. LIBOR15-Nov-00 Mortgages No 2 plc Mortgages plc Class A GBP 190 0.6 317 Aaa 42 3-mo. LIBOR15-Nov-00 Mortgages No 2 plc Mortgages plc Class M GBP 11.5 0.6 19 Aa3 90 3-mo. LIBOR15-Nov-00 Mortgages No 2 plc Mortgages plc Class B GBP 18.5 0.6 31 Baa2 290 3-mo. LIBOR23-Nov-00 Originated Mortgage Loans 7 plc I Group Class A GBP 220 0.6 367 42 3-mo. LIBOR23-Nov-00 Originated Mortgage Loans 7 plc I Group Class M GBP 22.5 0.6 38 130 3-mo. LIBOR23-Nov-00 Originated Mortgage Loans 7 plc I Group Class B GBP 7.5 0.6 13 285 3-mo. LIBOR09-Nov-00 RMAC 2000 - NS3 plc RFC Mortgages Services Class A1 - GBP 80 0.6 133 Aaa 15 3-mo. LIBOR09-Nov-00 RMAC 2000 - NS3 plc RFC Mortgages Services Class A2 - GBP 100 0.6 167 Aaa 30 3-mo. LIBOR

Flexible Mortgages23-May-00 First Flexible No 2 plc First Active Financial plc Class A Call Jun 06, step Jun 07 GBP 276 0.6 460 Aaa 5.3 29 3-mo. LIBOR23-May-00 First Flexible No 2 plc First Active Financial plc Class A Soft Bullet, Call Jun 06, GBP 24 0.6 40 A2 7.03 80 3-mo. LIBOR

Step Jun 07Buy-To-Let Mortgages23-Feb-00 Paragon Mortgages (No 2) plc Paragon Mortgages Ltd Class A Step Up/Call 15 Mar 06 GBP 166.5 0.6 278 Aaa 4.1 30 3-mo. LIBOR23-Feb-00 Paragon Mortgages (No 2) plc Paragon Mortgages Ltd Class B Step Up/Call 15 Mar 06 GBP 18.5 0.6 31 A2 6 87.5 3-mo. LIBOR