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Rating Action:

Moody's takes action on Italian RMBS issued by Capital Mortgage S.r.l. (Capital Mortgages Series 2007-1)

30 Mar 2010

Approximately EUR1.6 billion of current outstanding debt securities affected.

Milan, March 30, 2010 -- Moody's Investors Service has taken the following rating actions on the notes issued by Capital Mortgage S.r.l. (Capital Mortgages Series 2007-1):

- EUR 1,736,000,000 Class A1, confirmed at Aaa, previously on 14 October 2009 Aaa placed under review for possible downgrade;

- EUR 644,000,000 Class A2, confirmed at Aaa, previously on 14 October 2009 Aaa placed under review for possible downgrade;

- EUR 74,000,000 Class B, downgraded to A3, previously on 14 October 2009 Aa2 placed under review for possible downgrade;

- EUR 25,350,000 Class C, downgraded to B1, previously on 14 October 2009 A3 placed under review for possible downgrade.

All classes of notes were placed on review on 14 October 2009 due to worse-than-expected performance. Today's rating actions conclude the review and take into account increased loss expectations for the mortgage portfolio backing the notes.

On 20 March 2008, Moody's affirmed the rating of all the notes at their issuance level, updated its portfolio expected loss assumption to 1.6%-1.8% and increased the credit protection required for a Aaa-equivalent credit risk (MILAN Aaa CE) to 7.4%-7.6%, after reviewing certain structural and performance aspects of the transaction. However, since this review, delinquencies and defaults have increased steeply in the transactions and the reserve fund has been nearly fully depleted. Cumulative defaults have risen to 4.3% of original balance (as of January 2010) from 0.62% since January 2008. On the latest payment date in January 2010, mortgage loans more than 60 and 90 days in arrears had reached approximately 1.9% and 1.3% of current pool balance, increasing from 1.7% and 0.9%, respectively, in January 2008. As of the last payment date, the reserve fund amounted to EUR485,948, which is only about 1.3% of its target amount of EUR 37.2 million. Based on the performance of the pool, Moody's expects the full usage of the reserve fund and the consequent creation of an unpaid principal deficiency ledger (PDL).

As part of its analysis, Moody's has assessed updated loan-by-loan information to determine the credit support consistent with target rating levels and the volatility of the distribution of future losses. As a result, Moody's has updated its MILAN Aaa CE assumptions to 10% of the current pool balance. Taking into account the cumulative amount of defaulted loans and applying a roll-rate and severity analysis on the rest of the portfolio, Moody's has increased its loss expectations for the portfolio to 2.9% of original balance. The loss expectation and the MILAN Aaa CE are the two key parameters Moody's uses to calibrate its loss distribution curve, which is one of the core inputs in the cash flow model it uses to rate RMBS transactions. These updated assumptions reflect the collateral performance to date as well as Moody's expectations for this transaction, in the context of a weakening macro-economic environment in Italy.

Today's review takes into account set-off risk. On the basis of data available for the Italian market, Moody's has made assumptions on the amount of deposits that debtors had when mortgage loans were assigned to Capital Mortgages 2007-1 at closing. Using the originator's rating (UniCredit Family Financing Bank S.pA, A1/P-1) in its cash flow analysis, Moody's has assessed the impact of set-off on the notes if the originator became insolvent at different time horizons. Moody's notes that in case of a downgrade of the originator the transaction could be exposed to higher risk of set-off than currently assumed and therefore the ratings of the notes could be also impacted.

The transaction benefits from a very strong swap provided by HSBC Bank plc (Aa2/P-1). The swap hedges against interest rate fluctuations and provides credit support to the structure by paying the 3-month Euribor due on the notes plus 0.13% margin, all calculated on the balance of the outstanding rated notes. The SPV, on the other hand, pays the swap rate or the loan indices on the performing (not defaulted and not delinquent) outstanding loan portfolio to the swap counterparty. The credit enhancement provided by the swap to senior notes makes it possible to confirm their Aaa rating even if the subordination and the reserve fund under the class A notes (6.6% of current balance) is below the MILAN Aaa CE (10%). A1 and A2 notes pay interest pro rata and share the same PDL but they amortise sequentially unless unpaid PDL exceeds 1% of the initial portfolio balance.

Finally, operational and servicing risks are mitigated by the financial strength of performing-loan servicer UniCredit S.pA. (Aa3/P-1), delinquent-loan servicer CURE/UniCredit (Aa3/P-1) and defaulted-loan servicer UCMB (not rated) as well as back-up servicer appointment triggers at loss of Baa3. The main source of liquidity remaining in the structure is the availability of principal funds to pay note interest.

Capital Mortgage Series 2007-1 was the first RMBS transaction launched by Banca di Roma S.p.A, now UniCredit Family Financing Bank S.p.A. (A1/P-1). The portfolio consisted of 22,633 residential mortgage loans granted to 22,633 debtors for an overall amount of EUR2.5 billion. At closing, the underlying collateral had a relatively low current Loan-to-Value (LTV) (64.55%) and good seasoning (13 months). The portfolio was quite concentrated in Rome (30.41%) and Milan (18.65%) but the rest of the pool was relatively well spread across the country. All loans are secured by first economic lien on residential properties and all debtors are individuals ("persona fisica"). All the portfolio pays monthly.

Moody's rated and monitors this transaction using the rating methodology for EMEA RMBS as described in the Rating Methodology report "Moody's Approach to Rating Italian RMBS" published in December 2004 which 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

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 non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Moody's will continue to monitor the performance of this RMBS transaction closely. For more information, please see Moody's research on www.moodys.com or contact Moody's Client Service Desk on (+44-20) 7772 5454.

London
Barbara Rismondo
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Milan
Nikoletta Knapcsek
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
Telephone:+39-02-9148-1100

Moody's takes action on Italian RMBS issued by Capital Mortgage S.r.l. (Capital Mortgages Series 2007-1)
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