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Rating Action:

Moody's takes action on UK NC RMBS notes issued by Preferred Residential Securities Plc

30 Mar 2010

Approximately GBP 118.3 million of debt securities affected.

London, 30 March 2010 -- Moody's Investors Service has today upgraded 3 classes of notes, confirmed the ratings of 4 classes of notes and downgraded 8 classes of notes issued by Preferred Residential Securities 7 Plc and Preferred Residential Securities 8 Plc. All notes in the two transaction were on review due to their exposure to entities ultimately owned by Lehman Brothers Holding Inc performing servicing and cash management functions..

Today's rating actions conclude the review and take into account the revised loss expectations for the two mortgage portfolios backing these transactions

TRANSACTION OVERVIEW

All the performance data mentioned below refer to the investor reports published in December 2009. Updated data will be shortly available in the investor reports which will be published in April 2010.

Preferred Residential Securities 7 closed in December 2003 and the current pool factor is approximately 8.5%. The assets supporting the notes are first lien non-conforming mortgage loans secured by residential properties located in England, Wales, Scotland and Northern Ireland, with approximately 43.6% of the outstanding portfolio represented by interest-only loans. The original weighted average LTV at closing was approximately 72.4% while the current weighted average indexed LTV has decreased to approximately 65.9% partially due to the house price appreciation after closing of the transaction.

The cumulative losses realised since closing in Preferred Residential Securities 7 amount to 0.78% of the original portfolio balance, with an average loss severity since inception of 8.9%. The reserve fund is currently fully funded and represents 16.4% of the current pool balance.

Preferred Residential Securities 8 closed in August 2004 and the current pool factor is approximately 14.6%. The assets supporting the notes are first lien non-conforming mortgage loans secured by residential properties located in England, Wales, Scotland and Northern Ireland, with approximately 53.2% of the outstanding portfolio represented by interest-only loans. The original weighted average LTV at closing was approximately 73.7% while the current weighted average indexed LTV has decreased to approximately 69.2% partially due to the house price appreciation after closing of the transaction.

The cumulative losses realised since closing in Preferred Residential Securities 8 amount to 1.3% of the original portfolio balance, with an average loss severity since inception of 12.7%. The reserve fund is currently fully funded and represents 9.66% of the current pool balance.

REVISED PERFORMANCE EXPECTATIONS

According to the latest investor reports, 90+ days delinquencies have recently stabilised while the amount of outstanding repossessions has decreased. As per the latest reporting date in December 2009, 90+ days delinquencies plus repossessions represented 18.9% of the outstanding balance of the portfolio in Preferred Residential Securities 7 and 24.4% in Preferred Residential Securities 8.

Moody's has assessed updated loan-by-loan information of the outstanding portfolio to determine the volatility of future losses. As a consequence, Moody's has revised its Milan Aaa CE to 23% for Preferred Residential Securities 7 and 29% for Preferred Residential Securities 8. As of closing, these numbers were 18.5% for Preferred Residential Securities 7 and 18.00% for Preferred Residential Securities 8.

The current credit enhancement of the Class A notes (excluding excess spread) equals approximately 47.9% in Preferred Residential Securities 7 and 40.8% in Preferred Residential Securities 8.

Considering the current amount of realised losses, and completing a roll-rate and severity analysis for the non-defaulted portion of the portfolio, Moody's has reduced its total loss expectations to 1.50% from 1.75% of the original portfolio balance for Preferred Residential Securities 7 and increased its total loss expectation to 2.70% from 2.10% of original balance for Preferred Residential Securities 8.

The reduction in loss expectation and build-up of credit enhancement were the primary drivers to the rating upgrades of the mezzanine and junior notes issued by Preferred Residential Securities 7. On the other hand, for Preferred Residential Securities 8, the higher loss expectation and weaker relative performance resulted in the lower ratings for the class D1a, D1c and E notes, this despite the increase in credit enhancement under the notes.

The loss expectation and the Milan Aaa CE are the two key parameters used by Moody's to calibrate the loss distribution curve, which is one of the inputs into our RMBS cash-flow model. Moody's has also factored into its analysis the negative sector outlook for UK non-conforming RMBS. The sector outlook reflects the following expectations of key macro-economic indicators: GDP to grow by 1.3% in 2010 and by 2.1% in 2011, unemployment to increase to 8.2% by 2010 from 7.6% in 2009, house prices to decrease by around 20% from their peak in 2007 to a trough in 2011 and personal insolvencies likely to remain elevated. For more detailed information please refer to Moody's Economy.Com.

SWAPS, SERVICING, LIQUIDITY FACILITIES AND CASH MANAGEMENT

Some of the notes issued by Preferred Residential Securities 8 are denominated in EUR or in US dollars. The Issuer have entered into currency swap agreements with Barclays Bank PLC to hedge the foreign exchange risk. Preferred Residential Securities 7 notes are all denominated in pounds sterling.

Both transactions are exposed to unhedged basis risk between the interest received on the mortgage loans and the interest due on the notes. While both payments are based on 3-Month-LIBOR, basis risk is introduced into the transactions as the loans in the pools reset 14 days earlier than the notes. These unhedged basis risks had been previously sized by Moody's and have not been the driver of today's rating actions.

In addition, the breach of a rating trigger by the liquidity facility provider has resulted in stand-by drawings of the liquidity facilities in the two transactions. These stand-by drawings have caused increased costs for the structures. The performance triggers are currently breached and the amounts of the liquidity facilities can no longer amortise so that their relative balances are increasing compared to the outstanding note amounts causing an increase in costs for the structure over time. Moody's has considered these increased costs and the resulting decrease in available excess spread over time in the cash flow analysis. Currently the drawn amounts of the liquidity facilities represent 82.1% of the current balance in Preferred Residential Securities 7 and 46.2% of the current balance in Preferred Residential Securities 8.

Finally, today's rating actions incorporate the potential operational risks associated with the timely performance of the servicing and cash management functions. In these transactions, Capstone Mortgage Services Ltd ("Capstone") is the appointed servicer and cash bond administrator. Following a review of Capstone servicing operations, Moody's is satisfied with the ability of the servicer to perform its duties considering current resources, systems and procedures.

However, Moody's considers the back-up servicing and cash management arrangements in place with HML to be not sufficiently hot to ensure in all circumstances, including a Aaa-scenario, the timely payment of principal and interest on the notes and payments to the cross-currency swap provider, due to the limited time available in the structure between the determination date and the payment date and taking into account the grace periods under the notes and the swaps.

In Moody's view, the lack of a highly-rated entity performing the servicing and cash management functions make the most senior classes particularly vulnerable to the absence of sufficiently hot back-up agreements. In Preferred Residential Securities 7, the consideration of this residual operational risk has affected the ratings of the Classes A2 notes by one notch. For Preferred Residential Securities 8 the A1a1, A1a2, A1b and A1c notes are affected by two notches as in this transaction there is also cross-currency swaps linked to the class A note.

LIST OF AFFECTED NOTES

The classes of notes affected by today's rating actions are:

Preferred Residential Securities 7 PLC:

- Class A2, downgraded to Aa1; previously on 17 September 2008 Aaa and placed under review for possible downgrade;

- Class B upgraded to Aa2; previously on 17 September 2008 Aa3 and placed under review for possible downgrade;

- Class C upgraded to A2; previously on 17 September 2008 Baa2 and placed under review for possible downgrade;

- Class D upgraded to Baa1; previously on 17 September 2008 Ba2 and placed under review for possible downgrade;

Preferred Residential Securities 8 PLC:

- Class A1a1, downgraded to Aa2; previously on 17 September 2008 Aaa and placed under review for possible downgrade;

- Class A1a2, downgraded to Aa2; previously on 17 September 2008 Aaa and placed under review for possible downgrade;

- Class A1b, downgraded to Aa2; previously on 17 September 2008 Aaa and placed under review for possible downgrade;

- Class A1c, downgraded to Aa2; previously on 17 September 2008 Aaa and placed under review for possible downgrade;

- Class B1a, confirmed at Aa3; previously on 17 September 2008 Aa3 and placed under review for possible downgrade;

- Class B1c, confirmed at Aa3; previously on 17 September 2008 Aa3 and placed under review for possible downgrade;

- Class C1a confirmed at A2; previously on 17 September 2008 A2 and placed under review for possible downgrade;

- Class C1c confirmed at A2; previously on 17 September 2008 A2 and placed under review for possible downgrade;

- Class D1a downgraded to Baa3; previously on 17 September 2008 Baa2 and placed under review for possible downgrade;

- Class D1c downgraded to Baa3; previously on 17 September 2008 Baa2 and placed under review for possible downgrade;

- Class E downgraded to B1; previously on 17 September 2008 Ba2 and placed under review for possible downgrade;

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

Moody's initially analysed and monitors these transactions using the rating methodology for EMEA RMBS as described in the Rating Methodology reports "Moody's Approach to Rating UK RMBS" published in April 2005, "Moody's Updated Methodology for Rating UK RMBS" published in November 2007 and "Revising Default/Loss Assumptions Over the Life of an ABS/RMBS Transaction" published in December 2008, as well as the Special Report "Interest Rate Risks in UK RMBS -- Moody's approach" published in October 2007. These reports can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings and Credit Index tabs. 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.

For further information, please visit our website www.moodys.com or contact Moody's Client Service Desk (+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

Johannesburg
Dion Bate
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes action on UK NC RMBS notes issued by Preferred Residential Securities Plc
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