Ratings

MELBOURNE (Standard & Poor's) Oct. 13, 2009--The Australian government has 
announced its intention to allocate a further A$8 billion to support new 
issuance of Australian residential mortgage-backed securities (RMBS) through 
the Australian Office of Financial Management (AOFM). This is on top of the 
A$8 billion investment announced last year, which has been nearly exhausted. 
The AOFM support aims to assist the revival of the securitization sector and 
to help smaller lenders in competing against the major banks in the housing 
loan sector.
     In particular, the extension has a focus on alleviating constraints in 
the small-and-medium enterprise (SME) sector. Until the onset of the global 
financial crisis, smaller home lenders, and non-bank originators in 
particular, had become significant providers of capital for self-employed 
borrowers in the SME sector through the provision of low documentation (LoDoc) 
residential loans. Following the crisis, these lenders experienced funding 
difficulties due to the virtual closure of the RMBS market. As a consequence, 
LoDoc borrowers faced significant credit rationing and reduced financing 
options, and have not benefited as much from the first round of AOFM 
investment in RMBS, as LoDoc loans were capped at 10% for these transactions.  
     Of the A$109 billion of Australian prime full documentation (FullDoc) and 
LoDoc loans currently backing RMBS transactions rated by Standard & Poor's, 
about A$12 billion or 11% of the total comprises LoDoc loans. Further, about 
A$8 billion, or just under 70% of the current LoDoc loan balance in Australian 
prime RMBS rated by Standard & Poor's, has been provided by non-bank 
originators. While LoDoc loans comprise about 16% of the total loans 
originated and securitized by the non-bank originator sector, they comprise 
only 6% of the remaining total securitized portfolio, when non-bank 
originators are excluded.  
     All other things being equal, we generally consider LoDoc loans to be 
riskier than FullDoc loans for two reasons. First, we consider that 
self-employed borrowers tend to have a riskier credit profile than their 
salaried counterparts as their incomes are less certain and more variable than 
for pay-as-you-go (PAYG) employees. Second, there is often less information 
known or proof in these loans about certain credit characteristics of the 
borrower on which to base the lending decision or credit assessment. For these 
reasons, many lenders may require a higher equity contribution on LoDoc loans 
relative to their FullDoc loans to compensate for and offset this additional 
risk. When a portfolio of loans is subsequently securitized, and bearing in 
mind individual loans are not assigned a rating, a smaller proportion of the 
total debt issued backed by a LoDoc loan portfolio will be able to be rated 
'AAA', than would be the case for a transaction backed by an otherwise 
identical FullDoc portfolio.
     However, in our experience, we believe that providers of LoDoc loans in 
Australia have, to date, managed to strike an appropriate balance between the 
additional risk posed by LoDoc loans and the provision of finance to an 
important segment of the community and broader economy. Apart from a higher 
equity contribution for LoDoc loans, Australian lenders have typically not 
combined LoDoc loans with riskier features, such as negative amortization. 
Another key strength of the sector in Australia is the role the two major 
lenders' mortgage insurers--QBE Lenders' Mortgage Insurance Ltd. and Genworth 
Financial Mortgage Insurance Pty Ltd.--have played. Besides providing 
insurance, they have also influenced the underwriting criteria applied by 
lenders in the first instance. The vast majority of loans originated by 
non-bank lenders in Australia are wholly covered by lenders' mortgage 
insurance (LMI). To benefit from LMI, the loan must meet the lender's 
underwriting criteria as well as the underwriting criteria set by the LMI. 
Further, for the most part, the LMIs have not granted pool or open policy 
arrangements to the smaller, non-bank lenders, which means each LMI provider 
undertakes its own approval process before each loan is insured and 
consequently funded through a securitization program. It should be noted that 
we have observed more variability and, in our opinion, more risky 
characteristics being offered in combination with LoDoc loans extended by 
certain lenders in the smaller, uninsured sub-prime Australian RMBS sector.
     Although LoDoc residential loans are riskier than FullDoc loans, Standard 
& Poor's considers that to date, this risk has been managed effectively. In 
fact, no prime, fully insured Australian residential mortgage-backed 
securities (RMBS) transaction has been downgraded by Standard & Poor's as a 
result of underlying performance deterioration. LoDoc loans form a significant 
portion of some of the portfolios backing transactions rated by Standard & 
Poor's, with some consisting exclusively of this type of loans. We maintain 
active surveillance on ratings of Australian RMBS, including those containing 
LoDoc loans, and are currently comfortable with the performance of these 
portfolios and the current ratings assigned to these notes. As highlighted in 
our latest Australian RMBS Arrears Statistics report, LoDoc loan arrears fell 
to 3.55% at July 31, 2009, from 3.76% in June 2009. This is also down from a 
peak of 4.45% as at Jan. 31, 2009. The real value of LoDoc loans that are more 
than 90 days in arrears is below A$230 million, which is the lowest level 
since July 2008.
     For more information about Standard & Poor's opinions on the Australian 
RMBS sector, please refer to the following related publications:

RMBS Arrears Statistics, Australia, published July 31, 2009
Scenario Analysis: 2009 Update To Lenders' Mortgage Insurance Sensitivity 
Analysis Of Australian Prime RMBS, published on June 30, 2009
Lenders’ Mortgage Insurance Is Only One Of Several Strengths Supporting 
Australian RMBS Deals, published May 1, 2009
Twice As High: Understanding the LoDoc SPIN, published April 20, 2006

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     Ratings are statements of opinion, not statements of fact or 
recommendations to buy, hold, or sell any securities. Standard & Poor's 
(Australia) Pty. Ltd. does not hold an Australian financial services license 
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