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					Publication Date: June 6, 2005
Commentary

Europe's Whole Loan Sales Market Burgeoning As Mortgage Credit Market Comes Of Age
Analysts: Emily Bradley, London (44) 20-7176-3588, emily_bradley@standardandpoors.com and Brian Kane, London (44) 20-7176-3530,
brian_kane@standardandpoors.com

Against a backdrop of low levels of mortgage debt relative to the U.S. and sustained growth in property markets,
European mortgage lenders are seeking diversified capital market funding sources, providing an impetus for significant
growth in the whole loan sales market. This market provides a relatively new alternative to securitization funding used by
European lenders since the 1990s.

Last year, the European RMBS market recorded a total funded issuance of €140 billion. A new breed of balance sheet
and cash fund investors fuelled already heady investor demand for paper and helped propel spreads to historic "tights" of
7 bps-9 bps for 'AAA' rated tranches and 40 bps-80 bps for 'BBB' rated tranches. Although these levels have somewhat
abated in recent weeks, market issuance volumes, credit knowledge, and liquidity point to a growing level of
commoditization and wider investor understanding of the European RMBS market.

This growing market expertise is now lending itself to the development of new markets in the arena of the pricing and
sale of mortgage credit risk. As originators first looked to securitization to diversify away from traditional funding
methods, the growing level of knowledge and corresponding higher levels of credit understanding is fuelling the
development of a whole loan sale market in Europe. A whole loan transaction involves the sale of a pool of loans from a
mortgage lender to another institution, providing benefits to both parties.

Whereas whole loan trading is the primary driver of RMBS originations in the U.S., the European market has only
recently reached a level of structuring sophistication and an understanding of fundamentals of the credit risk, liquidity,
and relative value pricing to embrace the whole loan sales market. A vigorous whole loan sales market is likely to
generate even higher levels of residential mortgage loan securitizations in Europe.

This article discusses the opportunities the whole loan sales market presents to mortgage lenders as well as some of the
challenges given the current state of the market in Europe and some of the differences across countries.

Background And Market Development
In the early 1990s, European mortgage originators largely relied upon retail deposits and the issuance of senior unsecured
debt for funding. Securitization subsequently provided a further option, giving the mortgage market a substantial boost in
recent years. The newest alternative to originators has come in the form of whole loan, or portfolio, sales.

This option is firmly entrenched in the U.S., thanks in part to some of the inherent characteristics of the U.S. mortgage
market. Despite the recent increases in securitization in European mortgage markets, 60% of mortgage debt outstanding
here is still financed through retail deposits (see chart 1). This is in sharp contrast to the mortgage market in the U.S.,
where the majority of outstanding mortgage debt is financed through securitization and agency debt.




                                                                                                                                  Page 1 of 7
                    The U.S. mortgage market is more developed than Europe's, with mortgage debt
                    outstanding just over $8 trillion at the end of 2004, and a mortgage debt-to-GDP ratio of
                    approximately 70%, compared with a figure of only about 34% in the EU. Home
                    ownership is also a bit higher in the U.S., at about 69% versus almost 62% in Europe. The
                    size and sophistication of the U.S. market, in addition to other factors discussed below,
                    facilitated the development of a secondary mortgage market, which consists of mortgage
                    securitizations as well as whole loan sales. This segment of the market has benefited from
                    originators' development of advanced risk-based pricing models to sell pools of loans to
                    the market.

                    Whole loan sales markets first emerged in the U.S. shortly after World War II. More
                    recently, accounting rules have played a role in the U.S. market, though this is not
                    considered the main driver. From a buyer's perspective, whole loan products can help
                    banks maintain asset/liability management flexibility because these products do not have
                    to be marked-to-market. The new IAS 39 rule could spark a similar boost to the whole
                    loan sales market in Europe, as originators will be required to recognize securitized assets
                    on their balance sheets in certain circumstances, although it should be noted that the new
                    rule is by no means considered to seriously curtail securitization in Europe.

                    The whole loan sales market is in a stage of nascent growth in Europe. Mortgage
                    originators are the key players looking to sell loans in this burgeoning market, while
                    investment banks are among the buyers of these pools of loans. In a whole loan sale, an
                    originator will sell a pool of loans directly to another institution, rather than securitizing
                    the mortgages by issuing RMBS. On the other side of the sale, an investment bank might
                    pay an originator face value plus a premium for this pool, which it then either holds itself,
                    or securitizes.

                    Originators benefit by monetizing the loan and hence realizing the value of the loan
                    immediately, as well as removing the loans from their balance sheets. In fact, the
                    originator benefits from an immediate profit by selling the pool of loans for a price
                    greater than the face value.

                    The buyer of the pool is willing to pay this premium in order to gain the opportunity to
                    securitize the pool to earn a return in the capital markets. Investment banks have
                    established origination teams and built up a franchise and an expertise in this area by
                    structuring the mortgage banks' own securitizations, and it is now possible for investment
                    banks to own these loans, where they can further benefit from sophisticated restructuring
                    and repackaging. In addition to investment banks, some small and midsize building
                    societies in the U.K. have sought to purchase portfolios of loans in an attempt to increase


Standard & Poor’s                                                                                           Page 2 of 7
                    their assets under management and build their market share or create cross-selling
                    opportunities. For the whole loan sales market to fully develop, a loan level analysis is
                    required to accurately estimate the risk characteristics of a pool of loans.

                    Table 1 presents a comparison of two funding options available to mortgage lenders, a
                    whole loan sale or a securitization.
                                                         Table 1: Comparison of Funding Sources
                    Whole Loan Sale                                                                                           Securitization
                    Profit up-front                                                                                          Profit over time
                    Cross-selling opportunities                             Potential to create instruments by selling this profit over time
                    Assets clearly removed from balance sheet for         New accounting rules will require most securitized assets to be
                    accounting purposes                                                                      recognized on-balance-sheet
                    Additional diversifier of funding                                        Widely-used and understood funding source
                    Additional form of liquidity/different profit model         Continues to be a very strong form of liquidity/benchmark
                    Economic option for smaller-sized pools               Offers economies-of-scale/ability to issue large quantity of debt
                    Ability to buy exact volume of specific loans          Flexible environment/ability to structure risk through tranching



                    Will Europe's Experience Mirror That Of The U.S.?
                    The whole loan sales market is firmly established in the U.S., and signs of growth have
                    recently emerged in Europe, though there are some challenges to be addressed before this
                    market can take hold here as it has on the other side of the Atlantic. In Europe, data
                    availability is more variable and credit scoring systems are far from the standard,
                    established scoring system that exists in the U.S.

                    Europe Lacks Standardized Credit Scoring
                    Growth in the whole loan sales market in the U.S. was partly facilitated by the
                    homogeneity of the market, as well as the excellent availability of data and the existence
                    of a widely accepted credit scoring mechanism. This score measures consumer credit risk
                    and is provided by FICO using software developed by Fair, Isaac and Co. Inc. FICO
                    scores are developed from data from five categories: payment history, amounts owed,
                    length of credit history, new credit, and types of credit used. Fair Isaac started working on
                    credit scoring in the 1950s, and lenders view its scores as a reliable measure of credit
                    evaluation. The availability of data and credit scores has enabled market participants to
                    confidently engage in such a secondary market, contributing to its growth.

                    In contrast, certain features of the European market present difficulties for the
                    development of a fully-fledged whole loan sales market, though significant progress has
                    been made in several areas to pave the way for growth in this market in the coming years.
                    In particular, data availability and standardization vary significantly across European
                    countries, and even across originators within the same country. From both a regulatory
                    and cultural standpoint, major factors vary widely from one country to another, as
                    discussed below. Moreover, credit scoring is far from standard in Europe. There has been
                    recent movement in this area, and further advances will aid the development of a whole
                    loan sales market.

                    Property Valuation Difficult With Nonstandard Data
                    Despite the more limited data availability relative to the U.S., European originators are
                    increasingly becoming more sophisticated. Some originators have developed risk-based
                    pricing platforms using automated valuation models (AVMs). AVMs are designed to
                    allow a property to be assessed very quickly by inputting various property characteristics
                    into a model, which then produces a value for the property. In general, AVMs are used in
                    conjunction with traditional valuation methods to provide additional information and to
                    speed up the process. In addition, credit scoring models have emerged in several
                    countries. Across Europe, there is increasingly a higher understanding of arbitrage and
                    mortgage risk as the market continues to grow.

                    The further development and refinement of AVMs and credit scoring models will provide
                    the market with the quantitative tools necessary to quickly determine the value of a
                    portfolio of loans, which will further boost the whole loan trading market in Europe.




Standard & Poor’s                                                                                                                       Page 3 of 7
                    Growth Prospects Vary By Country
                    The growth prospects for the whole loan sales market vary across Europe, but the markets
                    that look most likely to see the greatest development are the U.K. and The Netherlands.
                    Germany and Italy are also in a potential position to experience growth in a whole loan
                    sales market. Countries with relatively developed credit scoring capabilities are most
                    likely to capitalize on the advantages of the whole loan sales market.

                    U.K.
                    In the U.K., the RMBS market is firmly established as the largest in Europe. As noted in
                    table 1, the volume of securitization offers economies of scale and the opportunity to
                    issue large amounts of debt. Indeed, RMBS issuance in the U.K. at the end of 2004 was
                    €82.2 billion (see table 2). Furthermore, the growth in the market — which has
                    quadrupled over the past five years — points to the growing appetite for non-traditional
                    funding by mortgage lenders and, equally, the demand for RMBS from investors.
                                                    Table 2: U.K. RMBS Issuance
                                                    Volume and number of transactions
                                             2000      2001           2002              2003   2004       2005*
                    U.K. prime
                    € Bil.                   16.4      19.6             21.7            42.7   62.5        20.8
                    Transaction
                    number                     12         9                7              13     19             9
                    U.K. non-conforming
                    € Bil.                    4.4       5.5              7.2            12.9   19.7         6.2
                    Transaction
                    number                     11        10              11               17     20             7
                    Total
                    € Bil.                   20.8      25.1             28.9            55.6   82.2        27.0
                    Transaction
                    number                     23        19              18               30     39            16
                    *Through May 12, 2005.


                    The whole loan sales market in the U.K. is also showing signs of growth as mortgage
                    lenders are evaluating the economic merits of refinancing mortgage originations though
                    securitization or whole loan sales. As shown in a sample of transactions in table 3, the
                    size of sales can vary significantly, with some sales ranging from £30 million to £40
                    million and others in the region of £400 million to £600 million. In addition to total
                    volumes, the average issuance size is far larger in a securitization than in a whole loan
                    sale. However, it is still possible to buy or sell substantial volumes of mortgage loans in
                    the whole loan sales market by completing several transactions. GMAC-RFC, the 12th
                    largest mortgage lender in the U.K., has taken advantage of the benefits offered via the
                    whole loan sales market and has become the U.K.'s largest trader of whole loan portfolios.
                    In 2004, GMAC sold £2.6 billion of mortgage loans to other lenders via the whole loan
                    sales market. The development of this market highlights the importance of and the
                    demand for transparent credit pricing tools.

                    The sample of transactions in table 3 was obtained from publicly available sources. For
                    various reasons, market participants may not disclose some transactions, and in speaking
                    with market participants, including investment banks, we recognize that the table
                    represents merely the tip of the iceberg with respect to the size of the whole loan sales
                    market. While estimates of total market size vary considerably, it is our understanding
                    that sales per year reach £10 billion-£20 billion in the U.K.




Standard & Poor’s                                                                                       Page 4 of 7
                                        Table 3: Whole Loan Sales — Sample Transactions From 2000 To Present
U.K.
Seller                                                            Buyer    Size (Mil. £)                                                        Asset type              Sale date
GMAC                                                 Amber Homeloans               150       Blended pool of prime, buy-to-let, and self-certified products         April 29, 2005
GMAC                                          Brittania Building Society           250                                                                 N.A.         April 29, 2005
Freedom Lending                                         Mortgages PLC              100                                                                 N.A.          April 5, 2005
                           Mortgage Express, a subsidiary of Bradford &                       By value, approximately 21% buy-to-let, 44% self-certified,
GMAC                                                             Bingley           251                           with the remainder standard mortgages              Feb. 25, 2005
                                                                                                                                                                  January 2000 to
GMAC                                                Amber Homeloans                570                                                                 N.A.        February 2005
                      E-Mex Home Funding Ltd., a subsidiary of Cheshire                     Blended pool of mainstream prime, self-certified, and buy-to-
GMAC                                                   Building Society            100                                                         let products          Dec. 3, 2004
                           Mortgage Express, a subsidiary of Bradford &                        Approximately 15% buy-to-let, 51% self-certified, with the
GMAC                                                            Bingley            407                                   remainder standard mortgages               Nov. 26, 2004
Amber Homeloans                        Reliance Property Loans (RPL)                 23                                           Prime mortgage assets              Oct. 21, 2004
Amber Homeloans                                Future Home Mortgages                 65                           Self-certified and light adverse assets            Oct. 19, 2004
Amber Homeloans                                               Redstone               90                                    Sub-prime mortgage portfolio               Oct. 8, 2004
Skipton                                 Kent Reliance Building Society               22                                             Buy-to-let mortgages             Sept. 1, 2004
                           Mortgage Express, a subsidiary of Bradford &                        Approximately 22% buy-to-let, 45% self-certified, with the
GMAC                                                                               123                                                                              Aug. 27, 2004
                                                                Bingley                                                  remainder standard mortgages
GMAC                                                Amber Homeloans                120                       Mix of buy-to-let and self-certified products            July 5, 2004
                      West Bromwich Mortgage Co., a subsidiary of West
GMAC                                        Bromwich Building Society              230                         Mix of buy-to-let and self-certified products          July 5, 2004
Amber Homeloans                                               Redstone             150                                       Sub-prime mortgage portfolio           June 28, 2004
Amber Homeloans                                Ipswich Building Society             22                                                              N.A.            June 11, 2004
Kensington Mortgage
Co.                                           Brittania Building Society             97                                                               N.A.           June 1, 2004
                           Mortgage Express, a subsidiary of Bradford &                       By value, approximately 30% buy-to-let, 46% self-certified,
GMAC                                                                               114                                                                              May 28, 2004
                                                                 Bingley                                          with the remainder standard mortgages
Kensington Mortgage        Mortgage Express, a subsidiary of Bradford &                    Light adverse credit profile and includes customers with lower
Co.                                                             Bingley            108          credit characteristics than the Group's standard selective          March 1, 2004
                                                                                                                                                  lending
                           Mortgage Express, a subsidiary of Bradford &                             By value, 56% buy-to-let, 38% self-certified, with the
GMAC                                                                               480                                                                              Feb. 27, 2004
                                                                Bingley                                                    remainder standard mortgages
GMAC                                                      Dumfermline                70                                                         Buy-to-let          Feb. 19, 2004
                           E-Mex Home Funding Limited, a subsidiary of
GMAC                                         Cheshire Building Society             145                                    Fixed and discounted mortgages            Dec. 11, 2003
                           Mortgage Express, a subsidiary of Bradford &                       By value, approximately 52% buy-to-let, 33% self-certified,
GMAC                                                            Bingley            440                             and the rest are standard mortgages              Nov. 28, 2003
                           Mortgage Express, a subsidiary of Bradford &
GMAC                                                                               100                                                                  N.A.        Nov. 18, 2003
                                                                Bingley
Kensington Mortgage   West Bromwich Mortgage Co., a subsidiary of West
Co.                                         Bromwich Building Society                60                                                                 N.A.         Nov. 1, 2003

                           Mortgage Express, a subsidiary of Bradford &                    The portfolio intentionally includes customers with lower credit
GMAC                                                            Bingley            106      characteristics than previous portfolios acquired from GMAC-             Oct. 31, 2003
                                                                                                                                                        RFC
                      West Bromwich Mortgage Co., a subsidiary of West                       One portfolio comprising £155 million prime mortgage loans
GMAC                                       Bromwich Building Society               248              and the other comprising £93 million non-conforming              Oct. 22, 2003
                                                                                                                                             mortgage loans
                           Mortgage Express, a subsidiary of Bradford &                       By value, approximately 43% self-certified, 33% buy-to-let,
GMAC                                                                               151                                                                               July 30, 2003
                                                                Bingley                                                 and the rest are standard mortgages
                           Mortgage Express, a subsidiary of Bradford &                         Buy-to-let, self-certification, and standard U.K. residential
GMAC                                                            Bingley            250                                                       mortgage loans           July 3, 2003
SPML                                           Ipswich Building Society              30                                                                 N.A.        June 17, 2003
                                                                                             Prime residential lending and the average LTV ratio is about
AMP Banking UK                              Newcastle Building Society             363                                                                  50%          June 1, 2003
                           Mortgage Express, a subsidiary of Bradford &                       By value, approximately 48% self-certified, 31% buy-to-let,
GMAC                                                                               260                                                                              May 30, 2003
                                                                 Bingley                                                and the rest are standard mortgages
Preferred Mortgages                                  Amber Homeloans                 70                                         Sub-prime mortgage portfolio        May 21, 2003
GMAC                                        North Yorkshire Mortgages                75     Mainstream mortgages, buy-to-let, and self-certification loans           May 1, 2003
                           Mortgage Express, a subsidiary of Bradford &
GMAC                                                             Bingley           470                                                                  N.A.         April 1, 2003
GMAC                                      Derbyshire Home Loans Ltd.                60                                                                  N.A.         Dec. 3, 2002
Amber Homeloans                                Ipswich Building Society             25                                                                  N.A.         Nov. 1, 2002
                           Mortgage Express, a subsidiary of Bradford &                    Approximately one-third by value is buy-to-let, one-fifth is self-
GMAC                                                             Bingley           650       certified, and the remainder consists of standard mortgages           Sept. 30, 2002
Amber Homeloans                     Saffron Walden Mortgage Services                 30                                           Mixed mortgage assets              Aug. 8, 2002
Amber Homeloans                              Universal Building Society              10                                                                 N.A.          July 1, 2002
GMAC                                      Derbyshire Home Loans Ltd.                 54                                                                 N.A.         June 1, 2002
Amber Homeloans                           Derbyshire Home Loans Ltd.                 40                                                                 N.A.        May 15, 2002
GMAC                                          Brittania Building Society           154                                                                  N.A.       March 28, 2002
GMAC                                                             Skipton             30                                                                 N.A.          Oct. 1, 2000
                                                                   Total          7363                                                                  N.A.
Europe                                                                     Size (Mil. €)
Credibe                                                     ABN AMRO             2,235                                                                  N.A.            July 2003
N.A.-Not available.




Standard & Poor’s                                                                                                                                               Page 5 of 7
                    As mentioned, there is a very wide variety of credit scoring models in the U.K. Experian
                    and Equifax are the two major independent generic providers of credit scores, which they
                    release as either scores that can be accessed as parts or in one comprehensive generic
                    score. Originators can either access various components of a credit score, such as past
                    borrower performance on various accounts, postcodes, or past defaults/arrears, or the
                    originator can access a score that combines such components into an overall score.

                    The uses of the scores are just as varied as the scores themselves. Some of the more
                    sophisticated originators make use of each component, some use only the generic score,
                    and others disregard the various credit scoring models and use only their own
                    information. A more standardized credit scoring system could enable market participants
                    to better understand the risk inherent in certain loans.

                    The Netherlands
                    The Dutch market is one of the most advanced European markets in terms of whole loan
                    sales and portfolio trading. The key sellers here are insurance companies with strong
                    origination platforms, while investment banks are the primary buyers, and are in turn
                    securitizing these loans. Insurance companies often find mortgage loans attractive, and
                    the long-term nature of these loans is useful for matching long-term liabilities.

                    There is a credit scoring system in place in The Netherlands, where the Bureau Krediet
                    Registratie produces the BKR score, a generic score using past borrower performance on
                    a variety of credit lines to predict default.

                    Italy
                    CRIF Decision Solutions (CDS) produces credit scores in the Italian market using past
                    borrower performance. As the most commonly used consumer credit bureau in Italy, CDS
                    represents the majority of banks and other financial institutions operating in the Italian
                    retail credit market. While CDS's credit scores are helpful instruments in predicting
                    default, the scores use only past borrower performance.

                    While whole loan sales in Italy are not yet a major part of the secondary mortgage market,
                    there are some initiatives underway to create trading platforms in Italian mortgages. In the
                    Italian RMBS market, originators often combine pools of assets to gain critical mass for
                    an RMBS transaction, which results in a single transaction having as many as eight
                    different sellers. The development of a whole loan sales market would provide an
                    alternative financing means for these sellers.

                    Germany
                    In recent years, NPL transactions have dominated portfolio sales in Germany, though
                    once the true sale issue has been resolved, an increase in whole loan sales activity is
                    likely. Expectations are that U.S. market players will seek arbitrage opportunities and
                    higher market share in Germany. In addition to resolving the true sale matter, the German
                    market will benefit from the existence of the SCHUFA, Germany's national credit
                    information agency, which records consumers' financial transactions and information
                    regarding the performance of these financial agreements. SCHUFA provides reports
                    listing this information, as well as a credit scoring service, which uses the information to
                    compile a single credit score for a consumer.




Standard & Poor’s                                                                                         Page 6 of 7
                                          Importance Of Servicing
                                          Servicing the loans is a key issue in the whole loan sales market. In some whole loan
                                          sales, the buyer of the loan portfolio will take on the servicing of these loans, while in
                                          other cases, the buyer will outsource the servicing to a third party. For example, Oakwood
                                          Homeloans Ltd., part of The Oakwood Group, a financial services operating company
                                          with an expertise in sub-prime mortgages, has purchased loans in the secondary market
                                          and has contracted Homeloan Management Ltd. to provide mortgage administration
                                          services. Marlborough Stirling Mortgage Services Ltd., which was recently acquired by
                                          Vertex, is another residential mortgage servicer.

                                          Servicers are key facilitators for the growth of the whole loan sales market, as they enable
                                          firms lacking expertise in servicing to acquire a pool of mortgages without necessarily
                                          taking on the burden of servicing the loans.

                                          We provide Servicer Evaluation reports on mortgage servicers, which potential buyers in
                                          the whole loan sales market may find useful in helping them select a servicer for a pool of
                                          loans.

                                          Concluding Remarks
                                          Europe is poised for significant growth in the whole loan sales market, following in the
                                          footsteps of the U.S. growth experience. An integrated system of credit scoring and
                                          continued improvement in the collection and availability of data will increase
                                          transparency in the market and facilitate this growth, as will the continued sophistication
                                          of market participants. The increase in knowledge and improved understanding of credit
                                          risk and pricing, combined with the opportunity to reduce operational risk through the use
                                          of a third-party servicer, present an excellent environment for mortgage lenders to take
                                          advantage of the funding source the whole loan sales market offers. To this end, we are
                                          well-positioned to provide assistance in this type of transaction through our Servicer
                                          Evaluation reports.

                                          Related Articles
                                                •     "Italian Mortgage Default Estimation: Incorporating the CRIF Decision
                                                      Solutions Mortgage Risk Scale" (published Sept. 16, 2004).
                                                •     "Guidelines for the Use of Automated Valuation Models for U.K. RMBS
                                                      Transactions" (published Feb. 20, 2004).

                                          All criteria and related articles are available on RatingsDirect, our Web-based credit
                                          analysis system, at www.ratingsdirect.com. The criteria can also be found on our Web site
                                          at www.standardandpoors.com.

                                          Group E-Mail Address
                                          StructuredFinanceEurope@standardandpoors.com




Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55
Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2005 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited
except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of
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and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or
recommendations to buy, hold, or sell any securities.




Standard & Poor’s                                                                                                                                           Page 7 of 7

				
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