Moody s Investors Service 2012, Residential MBS, Special Comment, Key drivers in Irish RMBS pools will persist in 2013 (RMBS/Ireland), 19 September.

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1 Reading 30 Moody s Investors Service 2012, Residential MBS, Special Comment, Key drivers in Irish RMBS pools will persist in 2013 (RMBS/Ireland), 19 September. Copyright 2012 Moody's Investors Service, Inc., Moody s Analytics, Inc. and/or their affiliates and licensors. All rights reserved. Reproduced with permission. Note: This report is provided purely for educational purposes and must not be relied upon, reproduced, disseminated or otherwise used in any manner whatsoever. The information in this document may not be current and must not be used for the purpose of making a decision in relation to a particular financial product or class of financial products.

2 SEPTEMBER 19, 2012 RESIDENTIAL MBS SPECIAL COMMENT Key Drivers of Default in Irish RMBS Pools Will Persist in 2013 RMBS / Ireland Table of Contents SUMMARY 1 1. PERFORMANCE OUTLOOK 2 2. RESULTS OF THE DEFAULT FREQUENCY ANALYSIS 4 3. VIEWS OF IRISH MORTGAGE LOAN SERVICERS 9 APPENDIX A: LOW IMPACT CHARACTERISTICS IN THE DEFAULT FREQUENCY ANALYSIS 10 APPENDIX B: DEFAULT FREQUENCY ANALYSIS EXPLAINED 11 APPENDIX C: SUMMARY DATA 12 APPENDIX D: ANALYSED PORTFOLIOS 13 MOODY S RELATED RESEARCH 14 Analyst Contacts Anthony Parry Vice President Senior Analyst anthony.parry@moodys.com Steven Becker Associate Analyst steven.becker@moodys.com Neal Shah Managing Director neal.shah@moodys.com Annabel Schaafsma Senior Vice President annabel.schaafsma@moodys.com MOODY'S CLIENT SERVICES: Client Services Desks: London: clientservices.emea@moodys.com ADDITIONAL CONTACTS: Website: monitor.rmbs@moodys.com Summary We expect a substantial loss of 9. across Irish residential mortgage-backed securities (RMBS), based on defaults peaking around 2 in early 2013, with negative equity acting as the key default driver. However, uncertainty over the full extent of losses remains as a result of the growing effect of moral hazard. Unlike most of the servicers we spoke to, we expect defaults on unsustainable mortgage debt to typically result in debt forgiveness rather than repossession. Negative equity key default driver into The key driver of future defaults will be loans originated with high loan-to-value ratios (LTVs) in the run-up to the crisis, which are now in the deepest negative equity. In our previous report in 2010, LTV was not yet a driver for mortgage loan defaults although we did predict it would ultimately become one of the key default drivers, a pattern which is now starting to emerge. Higher LTV loans which we estimate are now in negative equity, have a default rate of 21.7%, 1.7 times the rate observed for loans not in negative equity. Moral hazard is having a growing effect. Without the strictest of controls in place, moral hazard will drive default rates even higher and increase losses on Irish mortgage loans. The current dearth of repossessions and the recently proposed personal insolvency legislation is starting to result in higher defaults due to moral hazard. Obligors with loans in negative equity are more likely to default even when they have the financial capacity to pay ( moral hazard ) because they stand to benefit most from the legislation. Unemployment has been broadly flat since 2010 and is therefore less of a key driver of recent defaults. We spoke to a number of servicers to get their views on current market trends. They had mixed opinions on the impact of moral hazard on default levels to date. We received estimates from only negligible levels (<) up to as much as 4 of current arrears are attributable to borrowers who are not truly unable to pay. We expect to see more debt forgiveness. We expect debt forgiveness to become lenders preferred option for dealing with unsustainable mortgage debt. The majority of servicers we spoke to expect repossessions to outweigh the number of cases being dealt with through debt forgiveness. However in our view, without a significant shift in the legal and regulatory environment, repossessions are unlikely to emerge in substantial numbers. We therefore see debt forgiveness as the most efficient, and in some cases the only realistic, option to deal with unsustainable mortgage debt. Frankfurt: Madrid: Milan: Paris:

3 1. Performance Outlook We expect defaults to peak near 2 in early 2013, ultimately leading to net losses of 9. on Irish RMBS transactions. However, uncertainty over the full extent of losses remains as a result of the growing effect of moral hazard. We believe most of these losses will emerge through debt forgiveness rather than repossessions. Loss severities will peak. The scale of the negative equity issue combined with the ongoing macro-economic adjustment means there are substantial losses to be realised on Irish residential mortgage loans. We expect future losses of 9. will emerge on the current balance of 52 billion for the pools included in this report, although so far only negligible losses have been realised. Typical loss severities will reach 5 and could be as high as 7 on average for some pools. 1 Although only based on the limited volumes of repossessions and voluntary surrenders to date, these forecasts are in line with recent experience. Data provided by servicers show loss severities generally ranged from 5-8 during Defaults will peak. We expect defaults to peak near 2 in early Our current loss expectations are based upon the current 90+ day arrears levels of 16% 2 continuing to increase and peaking around 2 in early EXHIBIT Day Delinquencies Index Delinquency 90+ [% of CB] AIB (Clogher) BoSI (Wolfhound) First Active (Celtic) KBC (Phoenix) Index BOI/ICS (Liberator, Kildare) EBS (Emerald) IL&P (Fastnet) Ulster Bank (Celtic) Source: Moody's Investors Service, Moody's Performance Data Service, periodic investor/servicer reports Unemployment has been broadly flat since 2010 and is therefore less of a key driver of default. The current dearth of repossessions and the recently proposed personal insolvency legislation is starting to result in higher defaults due to moral hazard. Five years into the housing downturn repossessions remain negligible relative to the level of arrears; the consequences of default have therefore reduced. Political pressures, the costs involved and a moribund property market have encouraged lenders to seek alternatives. The recently proposed personal insolvency legislation, due to come into force in 2013, may further reduce incentives for struggling borrowers to remain current on their mortgage debt. Without the strictest of controls in place, moral hazard will drive default rates even higher 3 and increase losses on Irish mortgage loans. This will particularly affect loans in negative equity which stand to benefit the most from the legislation. EXHIBIT 2 Smoothed Monthly Change in 30+ and 90+ Delinquencies Delinquencies Monthly Change [% of CB] Source: Moody's Investors Service, Moody's Performance Data Service, periodic investor/servicer reports Lenders will prefer debt forgiveness. The rumours and initial announcement of the new personal insolvency legislation caused a surge in arrears in late 2011 through early This surge is apparent in the right hand peaks in Exhibit 2 showing the monthly increase in arrears. Most servicers we spoke to had also experienced a rise in arrears due to the new legislation but are now seeing or expecting slower rates of increase into Some slowdown is apparent but new arrears are still emerging at higher rates than those seen throughout most of the crisis. It is also evident that servicers attempts to contain early stage arrears are only having limited success. Allowing for a 2-3 month lag, the vast majority of new 30+ day arrears are continuing to flow through to the 90+ day arrears category. The servicers we spoke to had mixed views on the effect of moral hazard on default levels to date. We received estimates of only negligible levels (<) up to as much as 4 of current arrears are to borrowers who are not truly unable to pay. Moral hazard defaults make loss projections less certain. Well implemented controls should see existing, and future, moral hazard defaults ultimately cure, reducing potential losses. Whilst the consequences of default remain reduced and the 2 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

4 implementation of the controls is uncertain it is difficult to determine the number, if any, of moral hazard defaults which will ultimately cure. No credit is currently given to such cures in our loss projections. We expect debt forgiveness to become lenders preferred option for dealing with unsustainable mortgage debt once other alternative restructurings have been considered and viewed as ineffective. The servicers we spoke to had mixed views, with the majority expecting repossessions, including voluntary surrenders, to outweigh the number of cases being dealt with through debt forgiveness. However in our view, without a significant shift in the legal and regulatory environment, repossessions are unlikely to emerge in substantial numbers. We therefore see debt forgiveness as the most efficient, and in some cases the only realistic, option to deal with unsustainable mortgage debt. 3 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

5 2. Results of the Default Frequency Analysis For a summary of the approach and definitions used see Appendix B EXHIBIT 3 Default Predictability of Loan Characteristics High LTV Ratio Employment Type Occupancy Type Region Performance status at Closing Repayment Type Vintage EXHIBIT Arrears by LTV 9% 8% 7% 6% 4% 3% 2% 1% All Loans Benchmark Loans Low Affordability Property Type Loan Purpose Interest Rate Type 2.1 LTV Ratio LTV is emerging as a key driver of default and we expect it will become even more significant in In our previous report in 2010 the impact of LTV on default levels was only just emerging and we predicted it would ultimately become one of the key default drivers. Default rates for high LTV loans (>8) now stand at 14.1%, around 1.4 times the low LTV (<=8) rate. Default rates for all LTVs have increased significantly since the 2010 report but the effect has been more pronounced for high LTV loans and we expect this performance gap to widen further. In our 2010 report, high LTV loans had a default rate of 3.8% which was only slightly above the rate for low LTV loans, see Appendix C for details. EXHIBIT 4 Frequency of Default by LTV Any high LTV loans originated in the run-up to the crisis will now be in deep negative equity. Irish house prices have fallen by 5 from their 2007 peak 4 leaving over half of Irish mortgage loans in negative equity. 5 In order to isolate the effect negative equity is having on default levels to date; Exhibit 2 takes the current balance of only the loans currently outstanding for the default definition and the current indexed property value for the LTV. Instead other exhibits in this report consider the LTV of all loans outstanding at the closing date of each RMBS transaction, to better reflect the predictability of the characteristic as a default driver. EXHIBIT 6 Current Outstanding Defaults by Indexed LTV % 16% 14% 12% 1 8% 6% 4% 2% All Loans All Loans 2010 Benchmark Loans Benchmark Loans Loans which we estimate as being in negative equity today, (indexed LTV > 10), have a default rate of 21.7%, which is 1.7 times the rate observed for lower indexed LTV loans. 90+ day delinquency has been chosen as the default definition in this report but the same general pattern is present in later stage arrears. The following Exhibit shows a similar trend for 360+ day arrears by LTV. As further described in the outlook section, the dearth of repossessions and the recently proposed personal insolvency legislation is already reducing incentives for struggling borrowers to remain current on their mortgage debt. This will particularly effect loans in negative equity that stand to benefit most from the new legislation. 4 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

6 2.2 Employment Type The performance gap between self employed and employed borrowers will remain elevated but continue to slowly contract into To date self employed borrowers have experienced significantly higher defaults rates at just under 2 times the rate for employed borrowers. However the gap has reduced from over 2.3 times in EXHIBIT 7 Frequency of Default: Employment Type are likely to prioritise the servicing of mortgage debt on primary residences over those related to their BTL property. In addition, their ability to do so mainly relies on finding a tenant willing to pay rent sufficient to cover mortgage payments. EXHIBIT 8 Frequency of Default: Occupancy Type 3 2 Buy To Let Buy To Let 2010 Owner Occupied Owner Occupied Self Employed Self Employed 2010 Employed Employed The divergence in default rates for the highest LTVs is less relevant due to the limited data points. Self-employed borrowers tend to suffer from greater income volatility making them more sensitive to an economic downturn. As we stated in the 2010 report, this sensitivity means they are affected earlier in the cycle and we predicted the gap in default rates would reduce over time. At this stage in the cycle, employment type will be less of a driver of future defaults. Unemployment rates have been broadly flat in the 14% range since end-2010, after more than trebling from their 2008 levels. Unemployment is therefore less of a key driver of recent defaults. Furthermore, most servicers we spoke to believe any further deterioration in unemployment will have a less material effect on default rates. 2.4 Region Dublin and Cork continue to show default rates which are half the levels of some other regions. These regional distortions will persist in The lack of alternative employment opportunities outside of the major urban areas is likely to be the main driver of defaults. The low volumes reduce the significance of the highest rates seen in certain regions but the same general pattern remains. The worst performing regions have changed since the 2010 report but the main urban areas of Dublin and Cork continue to show materially lower default rates. 2.3 Occupancy Type BTL loans will continue to see higher default rates into 2013 but more aggressive regulation should help contain moral hazard in this segment. The default rate for BTL mortgage loans is 1.7 times the rate for owner-occupied loans. The performance gap has widened since 2010, when it stood at just under 1.4 times. More aggressive regulation should contain the performance gap. There have been regulatory signals that BTL loans should be dealt with more swiftly. 6 Therefore the emergence of moral hazard should be less material in the BTL segment helping contain default levels relative to owner-occupied loans. Loans backed by BTL properties are riskier than those taken out to buy a primary residence. In a stress scenario, borrowers 5 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

7 EXHIBIT 9 Frequency of Default by Region EXHIBIT 10 Frequency of Default by Region Benchmark Loans Similar patterns remain for the benchmark loans (i.e. loans with standard features). In order to strip out any underlying difference in other loan characteristics, the following Exhibit shows the same regional splits for only the benchmark loans. Although the affected counties are different the same general trend remains. 2.5 Repayment Type The higher default rates seen on original interest-only loans will be maintained into However over the longer term, rising interest rates may reduce the performance difference. Owner-occupied loans that were interest-only at the time the RMBS transaction closed are now experiencing a default rate of 15.6%, 1.8 times the rate of fully amortising loans. Interest-only loans can be an indication of weaker affordability but were a relatively niche product in Ireland. In the run-up to the crisis they were typically taken out by borrowers who would otherwise not have been able to afford the monthly amounts due on a fully amortising loan. During the downturn, with incomes reducing, borrowers with such constrained affordability will now be more susceptible to default. Financially distressed borrowers have fewer options if they are already paying interest-only. From discussions with servicers the two main tools they have found useful in dealing with defaulting borrowers are temporary switches to interest-only and term extensions, thereby reducing borrower s monthly commitments. These reduced terms are not available to borrowers already paying interest only. 6 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

8 Future interest rate rises may reduce the performance difference. Almost all servicers have expressed concerns on the impact future interest rate rises will have on default levels. Struggling borrowers who have previously benefited from a switch to interest only will face a second round of affordability shocks when interest rates rise. Therefore the effect of rate rises may be more evenly felt by borrowers with originally interest only loans and those originally with fully amortising loans. Interest rates however are expected to remain near the current historically low levels until EXHIBIT 11 Frequency of Default: Repayment Type for Owner Occupied Interest Only Interest Only 2010 Amortising Amortising 2010 Technical arrears disguise a substantial underlying credit risk. Typically, securitised pools can include loans that are less than one month in arrears at closing. These loans are typically described as technical arrears, whereby the previous instalment is not necessarily considered as unpaid, but rather delayed from its due date. Some Irish lenders allow the borrower one month flexibility to make their repayment after it is technically due. With a default rate over three times that of loans which are current at close, this characteristic is clearly a material credit risk rather than a purely technical issue. EXHIBIT 12 Frequency of Default: Arrears Status <=1 Months Arrears <=1 Month Arrears 2010 Current Current 2010 Only owner-occupied mortgage loans have been included to ensure the result is not skewed by any increased default tendency for BTL loans which are commonly interest-only. The decline in the default rates for interest-only loans with the very highest LTVs is less relevant due to the limited data points. 2.6 Performance Status at Closing Previous loan performance will continue to become less relevant into A quarter of loans which were in arrears by 1 month or less at the closing date have now defaulted. Although this rate has more than doubled since the 2010 report, the performance gap to loans which were current has shrunk considerably. Benchmark loans tend to default after the most vulnerable segments of the mortgage market. Weaker borrowers who have previously shown poor performance will have largely been reflected in default numbers already. This is apparent from the change in the relative default rates from the 2010 report. The default rate for loans which were in arrears (<=1 month) at closing is now 3.5 times the rate of those which were current, this ratio has dropped from 5.6 times in the 2010 report. Loans that have been in arrears at some point in the past are riskier. Exhibit 13 further analyses the loans that were current at closing. It compares the default rates for loans which had been in arrears in the past versus those which had never been in arrears. The difference in performance is again significant, with a default rate of 18.2% for loans that have been in arrears at some point between loan origination and the closing of the RMBS transaction. This rate is 2.4 times the level seen for loans which have no arrears history. EXHIBIT 13 Frequency of Default: Previous Performance Previous Arrears Previous in Arrears 2010 Never In Arrears Never in Arrears SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

9 2.7 Vintage Poor performance of certain vintages is mainly driven by negative equity and will therefore continue to evolve into Underwriting standards were relaxed in the run-up to the housing recession which is almost certainly driving some of the arrears for these vintages. However loans originated near the peak of the market will also be those which are now likely to be in the deepest negative equity. It is this negative equity issue which we believe is the key driver for the difference in performance. EXHIBIT 14 Frequency of Default: Vintage Volume 2012 Analysis (RHS) 2012 Analysis 2010 Analysis Defaults 16% 14% 12% 1 8% 6% 4% 2% < ,000M 14,000M 12,000M 10,000M 8,000M 6,000M 4,000M 2,000M 0M Volume 2.8 Other Characteristics We analysed a number of other characteristics that show reduced correlation with a loan s default probability. See Appendix A for details. These include characteristics which do not have materially higher default rates and others which can be explained by other underlying factors. 8 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

10 3. Views of Irish Mortgage Loan Servicers We conducted surveys with six Irish residential mortgage loan servicers to get their views on current market trends. 3.1 How have Irish borrowers faired over the past year and what is the outlook into 2013? Most servicers felt the situation for Irish borrowers has been unchanged and will remain difficult into Although interest rates have decreased, the increase in tax rates offset any possible increase in affordability. Most servicers expect arrears to continue increasing over the next 12 months, albeit at the slower rate of increase many are already observing. Two servicers expect 90 day arrears to stabilise by end Which forbearance methods are most effective? There is a wide range of methods used by servicers which are generally tailor-made to individual borrowers needs. Most servicers view short-term arrangements, such as temporarily switching to interest only, are proving most effective although some prefer permanent solutions such as term extensions. 3.3 Will delinquencies be more sensitive to increases in unemployment or interest rates? Typically, changes in unemployment or interest rates are highly correlated with delinquencies. However, given the current position in the economic cycle, with unemployment already trebled since 2008, any additional increase in unemployment rates is seen by most servicers as less correlated with delinquencies. Almost all servicers are concerned with the impact future interest rate increases will have on delinquency rates. Any rise in interest rates will feed through directly to a rise in delinquencies. They are therefore seen as highly correlated by all but one of the servicers. 3.5 What impact do you expect the new personal insolvency legislation to have on mortgage arrears? The new personal insolvency legislation, published in June 2012 and expected to come into force in 2013, may lead to debt forgiveness for those borrowers deemed to have unsustainable mortgage debt. All servicers felt that at present it is difficult to estimate any potential impact on arrears. However, most servicers felt that the speculation and subsequent announcement of this draft bill last year had some impact on arrears as borrowers wanted to wait to see what would happen. Servicers anticipate that the impact on arrears will be low as borrowers become aware of the strict requirements that need to be satisfied to successfully see their debt written-off under the new legislation. 3.5 Will the majority of defaulted loans result in repossession or debt forgiveness? Due to the strict requirements most servicers expect that defaults on unsustainable mortgage debt will ultimately result in repossession, including voluntary surrender. Only a small portion will see debt forgiveness under the new legislation. Two servicers had the opposite view that debt forgiveness would be the ultimate conclusion for the majority of such cases. 3.4 Is moral hazard currently material? While the servicers thought it was very difficult to estimate, they all agreed a portion of their delinquent borrowers are presenting a worse financial situation than they are facing in reality. The estimates ranged from < of delinquent borrowers up to as much as 4. They expect the announcement of the new personal insolvency legislation will have limited impact due to the strict conditions. One servicer in particular stressed that the announcement has actually improved customer engagement which allows them to seek alternative solutions with borrowers. 9 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

11 Appendix A: Low Impact Characteristics in the Default Frequency Analysis A.1 Loan Purpose EXHIBIT A1 Frequency of Default: Loan Purpose A.3 Interest Rate Type EXHIBIT A3 Frequency of Default: Interest Rate Type Purchase Purchase 2010 Remortgage Remortgage 2010 Fixed Fixed 2010 Floating Floating A.2 Affordability EXHIBIT A2 Frequency of Default: Affordability A.4 Property Type EXHIBIT A4 Frequency of Default: Property Type 16% Flat Flat 2010 House House % 2 12% 1 1 8% 1 6% 4% 2% <=1 > 1, <=2 > 2, <=3 > 3, <=4 > 4, <=5 >5 Income Multiple 10 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

12 Appendix B: Default Frequency Analysis Explained Approach and Terminology Dataset: We selected a sample of mortgage loans totalling 66 billion contained in the closing pools of 21 Irish RMBS transactions. We identified 11.2% of these loans had defaulted from the chosen dataset as at the date of the latest pool cut available prior to end Q The outstanding balance of loans remaining in sample pools represents around 46% 8 of Ireland s total residential mortgage debt. Default: Due to a lack of repossession data we treat loans that have an outstanding arrears amount greater than or equal to three times their current instalment as defaulted for the purpose of this analysis. In addition, any loans whose monthly payment is currently zero yet the loan has an arrears amount outstanding have been treated as defaulted in this report. Default rate: This level is defined as the proportion of defaulted loans with a particular characteristic divided by the proportion of loans with the same characteristic included in the closing pool. A loan that has left the pool since closing, i.e. been prepaid, is treated as a non-defaulted loan. Loan-to-value (LTV): Unless specified otherwise for certain characteristics this ratio is defined as of the closing date of each RMBS transaction. It is equal to the then-outstanding loan balance divided by the amount reflected in the then most recent property valuation. Benchmark loan: For some characteristics, such as LTV ratios, further analysis is included to focus only on those loans with otherwise standard features. The creation of this subset isolates the default tendency of the characteristic from other features that may otherwise skew the results. These benchmark loans have been characterised as» Fully amortising» Not in arrears at close» Employed borrowers (excludes self-employed)» Owner-occupied 2010 Report: In December 2010 we produced a similar default driver report for the Irish market. 9 Where relevant we have included the 2010 results in the exhibits to show how performance has developed. The 2010 analysis was based upon a different sample of RMBS pools and a slightly different default definition. However these differences should not have a material impact on the comparability of the relative default levels. Limitations of the Study The accuracy of the study is limited by data availability and assumptions made in creating the results. Changing the assumptions used can have a material impact on the results of this study. In particular, a number of assumptions have been made to determine the primary drivers of default, and attempts have been made to isolate those variables, such as LTV, to enable secondary drivers of default to be analysed. The validity of the results depends on the primary drivers of default being correctly selected. This analysis focuses on loan characteristics. As such, we have not directly taken into account the underlying economic variables in the default study. Default Timing May Depend on Mortgage and Borrower Characteristics We performed this study during the downturn, but it is likely that the same exercise performed with information at the end of this cycle may show smoother multiplier ratios. This is because benchmark loans tend to default after the most vulnerable segments of the mortgage market, which would already have fallen during the initial part of the economic crisis. This conclusion is supported by data from the downturn in the early 1990s in the UK and, more recently, in the US, which indicates that (1) vulnerable borrowers may default appreciably sooner and (2) defaults at a later stage of a downturn could affect other borrowers, who are of better credit quality or have better supporting elements. Period Selected for the Study The default rates used are based upon the closing balance of loans included in RMBS portfolios which closed between Loans which left the pools have been assumed to be good loans which have not defaulted. Although some of these loans will have left the pools due to repossession and will therefore understate the results the relative volumes of repossessions are negligible and the effect is therefore considered negligible. Pre-crisis the Constant Pre-payment Rates (CPR) stood at around 1 10 meaning a large number of loans will have left the pool from older pools and will therefore understate the default rate. The CPR rates post crisis have dropped considerably to less than 1% so the effect on more recent pools is less material. Delinquencies and, subsequently, defaults have not stabilised and will not fully emerge until the cycle has run its course. This clearly affects the default probabilities shown in this study, which may continue to increase throughout the life of each deal, creating some distortion in the results. 11 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

13 Appendix C: Summary Data Summary data 2012 Analysis 2010 Analysis Exhibit Variable Sample Default Rate Ratio* Default Rate Ratio* A1 High LTV (>8) - All Loans 19,412M 14.1% 3.8% Low LTV (<=8) - All Loans 46,668M High LTV (>8) - Benchmark Loans 12,660M 7.4% 2.6% Low LTV (<=8) - Benchmark Loans 27,068M 5.1% High LTV (>8) All Loans 19,412M 5.6% - Low LTV (<=8) All Loans 46,668M High LTV (>8) Benchmark 12,660M 2.1% - Low LTV (<=8) Benchmark ,068M 1.3% - High Indexed LTV (>10) 30,048M 21.7% - Low Indexed LTV (<=10) 16,173M Self Employed 9,860M % Employed 44,934M 9.4% % 2.3 BTL 10,595M 17.3% 5.6% Owner Occupied 55,445M % 1.4 Dublin - All Loans 26,052M 9.7% 2.8% Cork - All Loans 6,022M 9.2% - 2.9% - Other - All Loans 33,353M 12.4% 4.4% Dublin - Benchmark Loans 14,136M % Cork - Benchmark Loans 3,814M % - Other - Benchmark Loans 19,855M 7.2% 2.8% Interest Only - Owner Occupied 5,318M 15.6% 6. Repayment - Owner Occupied 45,931M 8.9% <=1 Month in Arrears 2,631M 27.8% 15.2% Current 60,788M 8.1% % 5.3 Previous Arrears 3,807M 18.2% 13.6% Never in Arrears 39,223M 7.7% ,956M 13.6% 4.3% < ,692M 7.8% % 1.4 Remortgage 13,038M 14.7% 4.9% Purchase 48,486M 10.2% % 1.5 A2 A3 A4 Low Income Multiple (<=3) 14,526M 10.4% 3.6% High Income Multiple (>3) 39,177M % Floating 48,314M 10.7% 3.4% Fixed 16,471M 11.6% % Flat 7,441M 12.4% 3.3% House 58,035M % * The ratios are simple comparisons of the overall default rates for particular characteristics. They do not adjust for other underlying factors which may skew the result, e.g. a particular characteristic may also be associated with loans having higher LTVs 12 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

14 Appendix D: Analysed Portfolios Analysed Portfolios Balance at Current Expected Loss Expected Loss Deal Name Closing Date Originator closing (OB) Balance (CB) 90+ (%CB) (%OB) (%CB) Celtic 9 Nov-05 First Active plc 1,750M 848M Celtic 10 Aug-06 First Active plc 1,788M 1,027M Celtic 11 Dec-06 Ulster Bank Ireland Ltd 3,850M 2,440M Celtic 12 Jun-07 First Active plc 1,950M 1,275M Celtic 14 Feb-09 First Active plc & Ulster Bank Ireland Ltd 4,763M 4,471M Celtic 15 Aug-09 First Active plc & Ulster Bank Ireland Ltd 3,347M 3,052M Celtic 16 Apr-10 First Active plc & Ulster Bank Ireland Ltd 777M 685M Emerald 4 Jul-06 EBS Building Society 1,500M 887M Emerald 5 Mar-08 EBS Building Society 2,500M 1,855M Fastnet 3 Dec-07 Irish Life & Permanent plc 8,000M 6,245M Fastnet 4 Jun-08 Irish Life & Permanent plc 6,500M 4,590M Fastnet 5 Oct-08 Irish Life & Permanent plc 1,779M 1,423M Fastnet 6 Nov-08 Irish Life & Permanent plc 2,400M 1,950M Fastnet 7 Mar-09 Irish Life & Permanent plc 1,500M 1,304M Fastnet 8 Jul-10 Irish Life & Permanent plc 2,100M 1,835M Kildare Mar-07 ICS Building Society 2,950M 1,595M Phoenix 2 Jun-08 KBC Mortgage Bank 7,500M 6,432M Phoenix 3 Nov-08 KBC Mortgage Bank 3,200M 2,722M Phoenix 4 Aug-09 KBC Mortgage Bank 850M 722M Wolfhound 2 Nov-09 Bank of Scotland (Ireland) Ltd 4,300M 3,720M Wolfhound Dec-09 Bank of Scotland (Ireland) Ltd 3,100M 2,732M Total 66,404M 51,810M Source: Moody's Investors Service 13 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

15 Moody s Related Research For a more detailed explanation of our approach to this type of transaction as well as similar transactions please refer to the following reports: Announcement:» Moody's says new Irish personal insolvency legislation has mixed credit implications, July 2012» Moody s downgrades to A3(sf) ratings of 24 Irish RMBS securities, September 2012 Special Report:» Proposed Irish Legislation Opens Door To Widespread Debt Forgiveness, February 2012 (SF275722)» High negative equity levels in Irish RMBS will drive loan loss severities to 7, May 2012 (SF285527)» Euro Area Debt Crisis Has Negative Credit Impact for Some European RMBS Markets, July 2012 (SF292313)» What Drives Irish Mortgage Borrowers to Default, December 2010 (SF226391)» Drivers of Spanish Mortgage Loan Defaults, January 2012 (SF172126)» Drivers of Italian Mortgage Loan Defaults, February 2012 (SF258616)» What Drives UK Mortgage Loans to Default, August 2009 (SF171259)» Credit Insight: European RMBS & ABS (Newsletter) September 2012 (SF296251) Performance:» Irish Prime RMBS Indices April 2012, Published June 2012 (SF289110) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Moody s publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at 14 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

16 1 See Moody s Special Report High negative equity levels in Irish RMBS will drive loan loss severities to 7, May 2012 (SF285527) 2 See Appendix D. Based upon outstanding arrears divided by the current balance of the RMBS pools. The rate is therefore higher than that in other exhibits in this report which instead consider defaults expressed as a percentage of the loans outstanding at the closing date of each RMBS transaction, this better reflects the predictability of the characteristic as a default driver. 3 See Moody s PR Moody's says new Irish personal insolvency legislation has mixed credit implications, July CSO Ireland, July See Moody s Special Report High negative equity levels in Irish RMBS will drive loan loss severities to 7, May 2012 (SF285527) Moody s Economy.com forecast billion outstanding, see appendix D, versus total residential mortgage debt of 112billion as of Q2 2012, Source: Moodys Economy.com 9 See Moody s special report What Drives Irish Mortgage Borrowers to Default December 2012 (SF226391) 10 Irish Prime RMBS Indices April 2012, Published June 2012 (SF289110) 15 SEPTEMBER 19, 2012 SPECIAL COMMENT: KEY DRIVERS OF DEFAULT IN IRISH RMBS POOLS WILL PERSIST IN 2013

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