26th WORLD CONGRESS - IUHF 2006

NEWS FROM THE EUROPEAN

RESIDENTIAL MBS MARKETS
Alexander Batchvarov, PhD, CFA - Managing Director
International Structured Product Research, + 44 207 995 8649

September 2006
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the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.

Refer to important disclosures on page 11.

European Funded RMBS Issuance

200 UK

180 Sw itzerland
Sw eden
160
Russia
140
Portugal
120 Netherlands
EURbn

100 Italy

80 Ireland
Greece
60
Germany
40
France
20 Spain
0 Denmark
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Belgium

Source: Merrill Lynch

*2006 is to August 31 2006

Refer to important disclosures at the end of the presentation 2

1
 Funded UK issuance

100
90 Prime
80 Sub prime

70 Buy to let

60
EURbn

50
40

30
20
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Merrill Lynch

*2006 is to August 31 2006

Refer to important disclosures at the end of the presentation 3

Main European RMBS Markets

80000
Netherlands
70000
Italy
60000
Germany
50000 Spain
EURmn

40000

30000

20000

10000

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Merrill Lynch

*2006 is to August 31 2006

Refer to important disclosures at the end of the presentation 4

2
 Synthetic European RMBS

Funded Issuance Unfunded Issuance

5 25

4 20

3 15

EU R Bn
EUR Bn

2 10

1 5

0 0
2000 2001 2002 2003 2004 2005 2006 YTD* 2000 2001 2002 2003 2004 2005 2006 YTD*

Denmark France Germany Netherlands Sweden UK Denmark France Germany Netherlands Sweden UK

Source: Merrill Lynch

* 31 August 2006

Refer to important disclosures at the end of the presentation 5

Synthetic RMBS

Refer to important disclosures at the end of the presentation 6

3
 RMBS Weight in GDP

Euro Issuance in 2005 as % of 2005 GDP per country

Unfunded Synthetic Funded Cash

2005 % of GDP 2005 % of GDP

France 8,187 0.53 Spain 27,203 3.00

Germany 8,915 0.42 France 3,298 0.21

Netherlands 20,884 4.49 Germany 302 0.01

Greece 1,500 1.28
Funded Synthetic Ireland 1,750 1.12
Italy 9,974 0.81
2005 % of GDP
Netherlands 19,453 4.18
France 398 0.03
Portugal 7,034 5.57
Germany 755 0.04
UK 74,345 4.34
Netherlands 4,205 0.90

Source: Merrill Lynch, Datastream

Refer to important disclosures at the end of the presentation 7

Trends in European RMBS Issuance

z UK Master Trust Programs

z Multi-currency issuance, primarily from the UK
z Money-market tranche in USD
z Seeking global distribution
z SEC registered, 144A, Reg. AB
z Homogeneous or mixed pools
z Fixed coupon RMBS
z RMBS: funding tool for finance companies
z Funding vs. capital
z Potential for AAA issuance only
z Covered bonds and RMBS convergence

Refer to important disclosures at the end of the presentation 8

4
 Covered Bonds vs. RMBS
z Multiple regulatory regimes: countries
with and without specific regulation re.
covered bonds
z Structural complexity: wide variety of
structures and forms of execution;
development of structured covered
bonds using securitisation techniques
z Collateral pool: homogeneity for
mortgage covered bonds, but possibly
other assets financed by covered bonds
z Cover pool: size set by law
z Transparency of pool: no specific public
reporting on pool composition/
evolution; replenishment/ substitution
z Prepayment: range of prepayment risks
from large to none, country dependent,
may or may not be assumed by investor
Refer to important disclosures at the end of the presentation
Covered Bonds vs. RMBS (cont.)
z Supervision: mainly of covered bond
issuers
z Servicing: by issuers
z Rating: linked to issuers rating;
increasingly de-linked through structure
z Structure: single bond
z Regulatory capital: no change for issuer;
for investor: AAA 10(20)% / appr. 4.5%
z Coupon: fixed, bullet
Refer to important disclosures at the end of the presentation
z Multiple regulatory regimes: countries
with specific securitisation laws or
without specific laws (but established
securitisation practices)
z Structural complexity: driven by the
respective existing securitisation
legislation or established practices
z Collateral pool: mortgage products
consistent with originations niche;
clearly defined sectors in the UK
z Cover pool: size depends on quality
z Transparency of pool: specific deal pool
reporting on a regular basis; substitution
supervised by rating agencies
z Prepayment: low due to predominantly
floating rate nature of RMBS, but always
assumed by investor
9
z Supervision: rating agencies, regulatory
approval for issuance
z Servicing: by issuer/ third party servicer
z Rating: linked to pool quality and deal
structure, independent of issuer
z Structure: multiple tranches
z Regulatory capital: capital relief for
issuer; for investor: 20%/ 7% AAA
z Coupon: floating, bullet or pass-through
10
5
 Recent Legal Developments

z Spain
- Ley 23/2005 exempts non-resident investors from withholding tax liability
z Netherlands
- July 2005, law granting an additional loan for NHG borrowers unable to make their
loan payments due to divorce, unemployment or death of their spouse
- October 2004, new law enabling the SPV to transfer legal title of the loans by means
of a registered deed of assignment via a notary
z Italy
- May 2005, Law 80 - improve the efficiency of civil court proceedings relating to
foreclosures, improve insolvency legislation, restrict claw-back in bankruptcy and
facilitate covered bond issuance
z Germany
- July 2005, all banks allowed to issue Pfandbriefe; removal of federal guarantees to
Landesbanken
- Change in tax treatment
z UK
Covered bond law?
Refer to important disclosures at the end of the presentation 11

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Refer to important disclosures at the end of the presentation 12