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Rating Action:

Moody's downgrades several Spanish RMBS notes issued by FTA Santander Hipotecario 2, 3 and 4

12 Nov 2009

Approximately EUR 4.6 billion of debt securities affected.

London, 12 November 2009 -- Moody's Investors Service announced today that it has downgraded the ratings of:

- the junior notes (Class D, E and F) issued by FTA Santander Hipotecario 2 (Santander 2)

- all the notes issued by FTA Santander Hipotecario 3 (Santander 3)

- all the notes issued by FTA Santander Hipotecario 4 (Santander 4)

Last rating action date for Santander 2, 3 and 4 was 5 June 2009.

Today's rating action was prompted by the prolonged deterioration and worse-than-expected performance of the collateral backing the notes. The downgrades also reflect Moody's negative sector outlook for Spanish RMBS and the weakening of the macro-economic environment in Spain, including the expected increase in unemployment rates projected for 2009 and 2010 as well as the deterioration of the Spanish housing market.

PORTFOLIO PERFORMANCE, RESERVE FUNDS, PDLs

Santander 2, 3 and 4 closed in June 2006, March 2007 and September 2007 respectively. The transactions are backed by portfolios of first-ranking mortgage loans originated by Banco Santander S.A. (Aa2/P-1) and secured on residential properties located in Spain, for an overall balance, at closing, of EUR 1.95 billion (Santander 2), EUR 2.8 billion (Santander 3) and EUR 1.23 billion (Santander 4). The collateral consisted exclusively, at closing, of loans with a loan-to-value (LTV) over 80%. These high LTV loans represent 52%, 72.6% and 81% of the outstanding pool balance of, respectively, Santander 2, 3 and 4 as of October 2009. The portfolios are concentrated in the coastal area (Andalusia, Catalonia, Canary Islands, Valencia and Murcia), representing 57%, 58% and 63% of current pool balance in Santander 2, 3 and 4 respectively. Although Moody's did not receive loan-by-loan information on the borrowers' residency status, we understand that a sizeable share of loans was originated to non-Spanish nationals.

Moody's had already taken action on the three transactions in November 2008. But, the collateral performance in the transactions has deteriorated further since last rating review resulting in the depletion of the reserve fund and build-up in unpaid Principal Deficiencies Ledgers (PDL). Moody's observed a rapid increase in loans being written-offs as well as the number of properties being acquired by Banco Santander, mirroring the overall deterioration in loan pools. Banco Santander ends up holding mortgaged properties on behalf of the three fondos when (1) the properties fail to sell at auction or (2) after resorting to "dacion en pago". "Dacion en pago" is a voluntary agreement under which the lender accepts the property as a payment in kind, releasing the debtor from his debt. Cumulative property acquisitions currently represent 1.6%, 5.4% and 7.5% of initial pool balance in the Santander 2, 3 and 4 respectively -- up from 0.5%, 1.32% and 1.42% of Santander 2, 3 and 4 respectively as at the last rating review. Moody's believe that the higher share of property acquisition in the Santander RMBS is to a large extent associated with "dacion en pago", which may, in practice, be offered to non-Spanish nationals where access to the assets of the defaulted borrowers may be complex or unemployed borrowers with no additional assets available to repay the outstanding debt after the repossession process. Moody's has already previously expressed concerns over the future performance of the transactions given the rapid performance deterioration of these relatively low seasoned portfolios and the uncertainties relating to timing and amount of future recoveries.

The Santander 3 and 4 are currently performing well outside of Moody's revised expectations as of the latest rating review, in terms of late-stage arrears and defaults (including property acquisitions). Santander 2 is performing better than Santander 3 and 4, with credit trends now following market average for Spanish RMBS from the 2006 vintage. The 90+ delinquencies (excluding outstanding write-offs and property acquisitions) correspond to approximately 1.84%, 4.66% and 9.75% of the current portfolio balance, in Santander 2, 3 and 4 respectively. The aggregate of (1) cumulative balance of loans associated with property acquisitions, (2) net losses in relation to acquisitions (corresponding to the difference between outstanding debt and acquisition amount), and (3) cumulative defaulted loans (these being defined as 18 months in arrears) increased by between three to five times since the last rating review, having reached 2.38%, 6.18% and 8.5% of original pool balance in Santander 2, 3 and 4 respectively.

The weak performance of Santander 3 and 4 has been mainly driven by the high loan-to-value (LTVs) ratios of the securitised mortgage loans and by the exposure to borrowers without Spanish citizenship affected by difficult economic conditions such as increasing unemployment and declining house prices. We understand that Santander 3 and 4 portfolios include a share of loans originated via broker, as opposed to Banco Santander S.A. having originated all the loans securitised in Santander 2.

The increase in the volume of delinquent loans, artificial write-offs and property acquisitions ultimately resulted in the full depletion of the reserve fund and build-up in unpaid PDL in all three Santander transactions. According to the latest investor cash flow statements, unpaid PDL currently stand at EUR 8.7 million, EUR 111.7 million and EUR 73.7 million, or 0.7%, 5.0% and 7.4% of the current notes balance of Santander 2, 3 and 4 respectively. Available funds in both transactions will ultimately increase as recoveries from written-off loans are collected and properties being acquired are sold. However, the pace at which loans are moving from arrears into defaults suggests that current unpaid PDL will not be completely cured.

AMORTISATION AND INTEREST DEFERRAL TRIGGERS

In Santander 3 and 4, the Class A1, A2 and A3 are currently amortising sequentially following the breach of pro-rata amortization triggers (90d+ arrears exceeding 1.5% of current pool balance). The amortization of the senior, mezzanine and junior notes is expected to remain sequential for the remaining life of the deals given breach of triggers. Despite the increase in write-offs and property acquisitions, the interest deferral triggers on junior notes in the Santander transactions have not been breached at this stage. Although the Santander transactions provide for a full provisioning of all defaulted loans, including repossessions and "dacion en pago", the interest deferral triggers in the Santander transactions are based on the balance of the loans classified as "non-performing" which corresponds to loans with unpaid installments for more than 18 months and loans classified as unrecoverable by the servicer. (The "non-performing loans" currently represent 0.95%, 2.1% and 2.95% of original pool balance in Santander 2, 3 and 4 respectively).This definition excludes the full balance of loans associated with property acquisitions, but that are not more than 18 months delinquent. Under the servicer's interpretation of the meaning of non-performing loans, these interest deferral triggers are far from being breached as the non-performing loans have to exceed 7%, 6% and 7.7% of original balance in FTA Santander 2, 3 and 4 to divert payment on the most junior notes. In this review, Moody's took into account the servicer's interpretation of non-performing loans and modeled the interest deferral triggers accordingly.

REVISED LIFETIME LOSS AND MILAN Aaa CE

Moody's has reassessed its lifetime loss expectation for Santander, 2, 3 and 4 to account for the collateral performance to date as well as our expectations for these transactions in the context of a current macroeconomic environment in Spain. On the basis of the rapid deterioration in credit trends in Santander 3 and 4, we have updated the portfolio expected loss assumption from a range of 2.95%-3.35% to 7.2% of original balance in Santander 3 and from a range of 3.65%-4.05% to 10% of original balance in Santander 4. Santander 2 has shown stabilizing credit trends over the last two reporting periods with 90d+ arrears decreasing from 2.14% in April to 1.87% in the last reporting period. Additionally, the pace at which loans are moving into write-offs or the properties are being acquired in Santander 2 has been moderating over the same period. Moody's has therefore affirmed the expected loss of Santander 2 at 2.1% of original balance.

As part of its analysis, Moody's has also assessed loan-by-loan information for the outstanding portfolios to determine the credit support consistent with target rating levels and the volatility of the distribution of future losses. For this review, "Moody's Updated Methodology for Rating Spanish RMBS" was used. As a result, Moody's has revised its MILAN Aaa credit enhancement (MILAN Aaa CE) assumptions to 22% for Santander 3 and 27% for Santander 4. Moody's affirmed the Milan Aaa CE for Santander 2 at 15%. The loss expectation and the Milan Aaa CE are the two key parameters used by Moody's to calibrate its loss distribution curve, which is one of the core inputs in the cash-flow model it uses to rate RMBS transactions. Current credit enhancement under Aaa-rated Class A notes (including subordination and reserve fund and taking into consideration the amount of unpaid PDLs) is 11.7%, 5.1% and 3.2% for Santander 2, 3 and 4 respectively as at the last payment date in October.

Moody's ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's ratings address only the credit risks associated with the transaction. Other risks have not been addressed, but may have a significant effect on yield to investors.

Moody's initially analysed the transactions referred to in this press release using the rating methodology for Spanish RMBS transactions as described in the report "Moody's Approach to Rating Spanish RMBS: the 'Milan' Model," March 2005, and it monitors the performance of the transaction using rating methodologies described in the reports "Moody's Updated Methodology for Rating Spanish RMBS," July 2008, and "Revising Default/Loss Assumptions Over the Life of an ABS/RMBS Transaction," December 2008. These reports can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

LIST OF DETAILED RATING ACTIONS

Issuer: Fondo de Titulización de Activos Santander Hipotecario 2

- Class A, Confirmed at Aa1; previously on 5 June 2009, Aa1 Placed Under Review for Possible Downgrade

- Class B, Confirmed at Aa3; previously on 5 June 2009, Aa3 Placed Under Review for Possible Downgrade

- Class C, Confirmed at A3; previously on 5 June 2009, A3 Placed Under Review for Possible Downgrade

- Class D, Downgraded to Ba2; previously on 5 June 2009, Ba1 Placed Under Review for Possible Downgrade

- Class E, Downgraded to Caa2; previously on 5 June 2009, B3 Placed Under Review for Possible Downgrade

- Class F, Downgraded to C; previously on 5 June 2009, Ca Placed Under Review for Possible Downgrade

Issuer: Fondo de Titulizacion de Activos Santander Hipotecario 3

- Class A1, Downgraded to A3; previously on 5 June 2009, Aa1 Placed Under Review for Possible Downgrade

- Class A2, Downgraded to A3; previously on 5 June 2009, Aa1 Placed Under Review for Possible Downgrade

- Class A3, Downgraded to A3; previously on 5 June 2009, Aa1 Placed Under Review for Possible Downgrade

- Class B, Downgraded to B3; previously on 5 June 2009, A3 Placed Under Review for Possible Downgrade

- Class C, Downgraded to Caa3; previously on 5 June 2009, Baa3 Placed Under Review for Possible Downgrade

- Class D, Downgraded to C; previously on 5 June 2009, Ba3 Placed Under Review for Possible Downgrade

- Class E, Downgraded to C; previously on 5 June 2009, B3 Placed Under Review for Possible Downgrade

- Class F, Downgraded to C; previously on 5 June 2009, Ca Placed Under Review for Possible Downgrade

Issuer: Fondo de Titulizacion de Activos Santander Hipotecario 4

- Class A1, Downgraded to Baa3; previously on 5 June 2009, Aa2 Placed Under Review for Possible Downgrade

- Class A2, Downgraded to Baa3; previously on 5 June 2009, Aa2 Placed Under Review for Possible Downgrade

- Class A3, Downgraded to Baa3; previously on 5 June 2009, Aa2 Placed Under Review for Possible Downgrade

- Class B, Downgraded to Caa2; previously on 5 June 2009, A3 Placed Under Review for Possible Downgrade

- Class C, Downgraded to Ca; previously on 5 June 2009, Baa3 Placed Under Review for Possible Downgrade

- Class D, Downgraded to C; previously on 5 June 2009, Ba3 Placed Under Review for Possible Downgrade

- Class E, Downgraded to C; previously on 5 June 2009, B3 Placed Under Review for Possible Downgrade

- Class F, Downgraded to C; previously on 5 June 2009, Ca Placed Under Review for Possible Downgrade

Frankfurt
Marie-Jeanne Kerschkamp
Managing Director
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Carole Bernard
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades several Spanish RMBS notes issued by FTA Santander Hipotecario 2, 3 and 4
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