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Announcement:

Moody's reviews Aaa ratings in two UK reverse mortgage transactions

17 Feb 2012

London, 17 February 2012 -- Moody's Investors Service has today placed on review for downgrade the Aaa(sf) ratings of the senior notes in two reverse mortgage transactions: Equity Release Funding (No 5) Plc. and Equity Release Funding (No. 4) Plc. The primary driver for the reviews are Moody's updated long term loss projections, which showed that a slowdown in voluntary borrower repayment rates would likely affect the Aaa(sf)-rated senior notes in both deals under stressed home price and mortality assumptions.

Moody's has not placed on review the mezzanine and junior notes on the affected transactions or the notes in the earlier transactions of Equity Release Funding 1, 2 and 3. Today's detailed actions are as follows:

Issuer: Equity Release Funding (No.4) PLC

....GBP125M A1 Notes, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Jul 30, 2004 Definitive Rating Assigned Aaa (sf)

....GBP215M A2 Notes, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Jul 30, 2004 Definitive Rating Assigned Aaa (sf)

Issuer: Equity Release Funding No. 5 plc

....GBP315M A Notes, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Aug 26, 2005 Definitive Rating Assigned Aaa (sf)

Moody's review will assess the resilience of the senior notes to long-term stress scenarios including a permanent depression in UK house prices, slowing mortality and morbidity rates and voluntary repayment rates materially lower than those observed to date.

RATINGS RATIONALE

The updated loss projections over a long term horizon show that the affected ratings would be sensitive to a slowdown in voluntary repayment rates, under stressed mortality and house price assumptions. As an example, Moody's would expect Aaa rated notes to be able to withstand a permanent 30% house price decline, combined with a ten-year survival rate of 81% for a 70 year old borrower without suffering any loss. Moody's tested the resilience of the affected ratings using annual stressed loss projections based on stratified data, assuming a weighted average yield on the assets of 7% and excess spread levels around 1.5%.

The transactions placed on review have built-up significant credit enhancement in the form of overcollateralisation, as a result of steady voluntary repayments (around 2% per year), and significant excess spread (around 1.5% per year). Overall, repayment rates have been above Moody's initial expectations.

However, repayment rates have been largely driven by higher levels of voluntary repayments rather than by mortality and morbidity rates, with the latter below Moody's expectations. By nature, voluntary repayments are more volatile than mortality and morbidity rates.

In addition, on average, house-price appreciation since closing has been flat or slightly negative, preventing borrower-equity build-up from matching loan-balance increases due to interest accruals. Nonetheless, indexed loan-to-value ratios have remained low on average (at around 35%) with very few high LTV borrowers (with less than 1% of the portfolios above 75%).

--EARLIER TRANSACTIONS

The ratings of the Equity Release Funding 1, 2 and 3 transactions have not been placed on review. For these transactions, cumulative average house-price appreciation has been largely positive since closing, providing a buffer against a potential decline in house prices, despite interest accrual on loan balances.

In addition, high voluntary repayment rates and excess spread have resulted in large credit enhancement consolidation. As a result, the notes would be able to absorb significant house-price, mortality and voluntary repayment stress scenarios, commensurate with their current ratings.

METHODOLOGY APPROACH

Moody's rating approach for monitoring reverse mortgage transactions is based on projections of future payments and losses under house price and mortality and morbidity assumptions stressed according to each rating level . Other key assumptions are the rate of voluntary repayments, level of excess spread and interest rates (depending on hedging arrangements), and the costs associated with property sales.

--RATINGS SENSITIVITY

Larger house-price declines, higher survival rates, higher interest rates, lower voluntary repayment rates or lower excess spread than the levels assumed for each rating level would have a negative effect on ratings.

The transactions are also exposed to the creditworthiness of parties acting as liquidity providers, hedge counterparties and account banks. As a mitigating factor, transaction documents provide for corrective action subject to rating triggers being breached. However, the strong reliance of reverse mortgage transactions on lines of liquidity for payments on the notes make them particularly exposed to the provider of this liquidity, if a trigger breach is not cured rapidly.

The two transactions placed on review rely on liquidity facilities provided by ABCP conduit Thames Asset Global Securitization No. 1 (TAGS, Prime-1, on review), Inc, sponsored by Royal Bank of Scotland (RBS, A2, Prime-1, on review). Therefore, Moody's review will also assess the effect of the review of the ratings of TAGS, which was announced on 16 February 2012 ("Moody's reviews for downgrade Prime-1 (sf) ratings of 13 European ABCP programmes.")

--REVERSE MORTGAGES

Reverse mortgages allow senior home owners to borrow against the equity in their homes. With a reverse mortgage, lenders make payments to the borrowers in exchange for a mortgage on the home. Interest that accrues on the payments, and any other items, are summed to the loan balance over time.

The repayment of a reverse mortgage depends solely on receipts from the property when the loan matures, unless they voluntary repay the full balance of the loan before a maturity event. Maturity events are triggered either by a mortality event when borrowers die, or a morbidity event when they move out into long-term care. There is no recourse to either the other assets of the borrowers or to the borrowers' estates to compensate for shortfalls.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing this review.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Ariel Weil
Vice President - Senior Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Lyudmila Udot
Analyst
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Annick Poulain
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's reviews Aaa ratings in two UK reverse mortgage transactions
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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