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20 Mar 2006
MOODY'S COMMENTS ON REPORTING AND CASH ALLOCATION ERRORS IN FIVE UK RMBS TRANSACTIONS OF PREFERRED MORTGAGES LTD (PML)
London, 20 March 2006 -- Moody's has been notified of cash management errors in Preferred
Residential Securities 5 (PRS 5), Preferred Residential Securities
6 (PRS 6), Preferred Residential Securities 7 (PRS 7), Preferred
Residential Securities 8 (PRS 8) and Preferred Residential Securities
05-1 (PRS 05-1) relating to: i) payment of accrued
interest and arrears of interest at closing; ii) understatement of
principal deficiency ledgers; and iii) overstatement of principal
In all the above transactions, apart from PRS 8, the accrued
interest on the mortgage pool up to the closing date was not sold to the
relevant Issuer and should have been returned to the seller as and when
received by the relevant Issuer. In each of these transactions,
the accrued interest, as and when received, was paid into
the transaction's revenue waterfall resulting in a faster-than-anticipated
build up of the reserve fund and therefore credit enhancement for the
Under the transaction documents a loss resulting from a sale of a repossessed
property is usually posted to the relevant principal deficiency ledger
(PDL). However, up to now PML has not recorded such losses
on the PDL as it treated any loss as a receivable which may be recovered
from the relevant borrower's other assets. Moody's
has been informed that PML has posted all past losses to the corresponding
PDLs of PRS 5, PRS 6, PRS 7, PRS 8 and PRS 05-1
on the March 2006 Interest Payment Date (IPD). In each of PRS 5,
PRS 6, PRS 05-1, either the excess spread on the March
IPD or the over-collateralisation in the transaction was sufficient
to cure the PDL. In each of PRS 7 and PRS 8, the debit balance
on the PDL exceeds available excess spread and in order to cure the PDL
without having to draw on the reserve fund, PML has advanced the
difference to the relevant Issuer. Moody's has been informed
that going forward, all losses resulting from sales of repossessed
properties will be posted to the relevant PDL in the period in which the
In each of PRS 5 and PRS 6, PML's payments into the principal
waterfall exceeded the correct amount. This administrative error
was caused by i) certain delays in allocation and misallocations of cash
flows to the transactions and ii) intercompany balances between the relevant
Issuer and PML not being substantiated on a timely and regular basis.
The overstatement of principal receipts has resulted in an acceleration
of certain note paydowns and therefore over-collateralisation and
note subordination in these transactions. Moody's has been
informed that the over-collateralisation in PRS 5 and PRS 6 will
be left in place to absorb losses in the mortgage pool going forward.
Furthermore, PML has now substantiated intercompany balances and
has made necessary intercompany adjustments.
Moody's does not plan any rating action at this time as i) PML has
taken the required remedial actions set out above and ii) PML has implemented
or will implement a range of actions to address these cash/bond administrative
errors. Moody's will continue to monitor these transactions
and liaise with PML on a regular basis to ensure the effectiveness of
preventive measures currently undertaken by PML.
The experience above shows the importance for investors of: i) the
quality of calculations and cash management; and ii) regular independent
checks and audits in structured finance transactions especially in the
UK Non Conforming RMBS segment where waterfalls are becoming increasingly
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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