How To Sell The Lily Funding Pty.Linconsistency Mortgage Backed Notes

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1 INTERNATIONAL STRUCTURED FINANCE PRE SALE REPORT Liberty Funding Pty Limited Series Floating Rate Mortgage-Backed Notes CLOSING DATE: September 12, 2001 AUTHOR: Australia-RMBS This pre-sale report is based on information provided to Moody's as at September 10. The amount of issue and final ratings on the transaction may differ from the provisional ratings. Any subsequent changes may be disseminated by Moody's through its rating desk. Sydney Patrick Eng Senior Vice President (61-2) CONTACTS: Sydney Jennifer Elliott Managing Director (61-2) New York Linda A. Stesney Managing Director (212) New York Vernessa Poole All Asset Backed and Residential Mortgage Backed Securities (212) WEBSITE: TRANSACTION IN BRIEF Issue Amount Maturity Rating Series A1 Senior Notes A$100,000, December 2030 (P)Aaa Series A2 Senior Notes A$84,000, December 2030 (P)Aaa Series B and Series C Notes A$16,000, December 2030 NR RATING OPINION Moody's provisional (P)Aaa ratings of Liberty Funding Series A1 and Series A2 senior notes are based on several factors: 1. The credit protection available to the Series A1 and Series A2 senior notes through the A$16 million Series B and Series C notes or 8% of the total notes issued; 2. The reserve fund account, which is funded using the excess spread, made available to meet principal charge-off up to a maximum of 1.75% of total notes issued. In addition the issuer is able to use excess spread to reimburse principal charge-offs of all classes of notes, if needed; 3. The second notes account, which is funded using the excess spread, made available to repay loans advanced to the Manager, which represents the amount of deferred establishment fees due under the loan contracts. 3. The experience and expertise of Liberty Financial in underwriting and servicing non-conforming mortgage loans; 4. The threshold rate mechanism, which obligates the servicer to set an agreed-upon interest rate more than sufficient to cover the coupon payments, fees, and expenses payable by the issuer; 5. The liquidity made available to the Series through a liquidity reserve account and the ability of the issuer to use principal collections to meet the interest shortfall; 6. The credit quality of residential mortgage loans ; 7. The protection provided for noteholders by a fixed and floating charge over the assets of Series granted to the Security Trustee on behalf of the noteholders; and 8. The structural protections built into the program, including the limited recourse provisions set forth in the legal documents. Moody's has not rated the Series B and Series C notes. September 10,

2 Moody's rating addresses only the credit risks associated with the transaction. Other non-credit risks, such as those associated with the timing of principal prepayments and the early redemption of the notes, have not been addressed and may have a significant effect on yield to investors. STRUCTURE OVERVIEW Liberty Funding is a special purpose company, incorporated in Victoria, Australia, and is established to arrange various funding facilities for Liberty Financial. Liberty Financial will use the proceeds to fund non-conforming mortgage loans originated by its distribution network. Liberty Funding is capable of issuing an unlimited number of series. However, each series is secured exclusively against the assets of that series. The liabilities incurred by Liberty Funding in respect to one particular series may only be satisfied from the assets of that particular series. If the net proceeds of the enforcement of the security for the series are insufficient, none of the other assets of Liberty Funding will be available to meet the insufficiency. Failure by Liberty Funding to meet any such shortfall will not constitute an event of default for the other series of notes. Series has three classes of notes-series A, Series B and Series C. The Series A notes will consist of two tranches-series A1 and Series A2 notes. The Series A notes will take priority over the Series B and Series C notes in order of coupon and principal payments. The proceeds from the notes issued will be used to purchase a pool of nonconforming mortgage loans originated by Liberty Financial and to make a loan advance to the Manager. On each monthly interest payment date, Series A noteholders will receive a floating rate of interest at a margin over the monthly Bank Bill Rate. If there is an interest shortfall, the manager must draw on the liquidity reserve account and use principal collections (if needed) to meet the interest shortfall. Available principal collections from the mortgage pool will be allocated in the following priority: 1. To pay Series A1 noteholders in full, followed by Series A2 noteholders; and 2. To pay Series B noteholders and Series C noteholders, subject to certain step-down criteria being satisfied. The pool of housing loans allocated to the series will consist of non-conforming housing loans originated by Liberty Financial according to its underwriting policies. The loan applicants generally could not meet traditional mortgage lenders' underwriting guidelines (for example, limited documentation standards) or were less creditworthy than those of traditional mortgage lenders. Thus, the loans bear higher interest rates than those originated in accordance with conforming housing loans. These loans could experience delinquency, foreclosure, and loss rates that are higher than those of mortgage lenders who underwrite in a more traditional manner. Having reviewed the loan portfolio on a loan-by-loan basis, Moody's has found a number of positive and negative characteristics. The favourable characteristics include the following: The weighted average current loan-to-value ratio is 75 % (vs 73% in previous Series ); Approximately 65% of the loans at the time of origination had not previously experienced adverse credit records, such as bankruptcy and poor judgement; The average loan size of this pool is A$116,452, with 84% of the loans having a current loan balance of less than A$300,000; Approximately 91% of the loans were secured by detached houses; More than 77% (vs 73% in previous Series ) of the properties were located in 2

3 major metropolitan areas; Stringent valuation guidelines and the ability of Liberty to service and foreclose loans promptly and effectively; Loss performances have been strong with negligible amount of losses for the previous two securitised mortgage pools by Liberty Financial. Less favourable characteristics include the following: Weighted average seasoning of approximately five months; Approximately 60% of the loans were originated as debt consolidation; and Non-conforming mortgage lending is still a relatively new sector in Australia with limited historical performance data. The delinquency and loss performances of nonconforming mortgage loans may exhibit a higher degree of volatility than conforming mortgage loans, especially in a severe economic downturn environment. However, Liberty Financial is the leading non-conforming mortgage lender in this market. When assessing the adequacy of the credit enhancement available to the senior notes, Moody's evaluates the differences in the credit quality of the borrowers, loan characteristics, availability of excess spread to meet credit losses, and the experience and expertise of Liberty Financial in underwriting and servicing non-conforming loans. Moody's believes that the credit support available is sufficient to support the Aaa ratings assigned to the senior notes. CREDIT SUPPORTS Credit enhancements are available as follows: (1) Reserve Account and Excess Spread Liberty Funding has established a reserve fund account and a second notes account for this series to provide first-loss protection for all classes of notes up to a maximum of 1.75% of total notes issued and to repay loans advanced to the Manager. In assessing the credit protection to noteholders, Moody's analysis assumes the first loss protection and the repayment of the Manager s advance will be covered from the excess spread accumulated in the second notes account and the reserve fund account. The reserve fund account will be progressively funded (3.0% for the first year and 2.0% for each year thereafter on the outstanding principal of all Notes) using excess spread up to an amount equal to 1.75% of total notes issued or A$3.5 million, provided that the subordinated level is less than twice the initial subordination level, or before the sixth anniversary of the issue date. Liberty Financial will advance funds in the form of subordinated loan to the Issuer on each financial year end, the amount standing to the credit of the reserve account in a principal reserve fund account that can be drawn to meet principal charge-off and to repay the Manager s advance. After taking into consideration the available excess spread using conservative prepayment rate and loss curve assumptions, Moody's expects the reserve fund account will be fully funded within the 12 month period. The reserve fund account can be reinstated using future excess spread once it is drawn to meet principal charge-offs. The reserve fund account is allowed to step-down (decrease) after certain stepdown conditions are met. In addition to the reserve fund account, Series A noteholders will have the credit protection from ongoing excess spread in the series that will cover all losses incurred, and also carry over principal charge-offs related to the series on a monthly basis. All excess spread remaining after interest payments are made on the notes, reserve fund is topped up, and principal charge-off is reimbursed, will be released to Liberty Financial. Moody's evaluates the value of excess spread using a variety of scenarios that are consistent with the ratings assigned to the notes, including high prepayment rates, late 3

4 losses incurred in the life of the transaction, and minimum interest yield on the pool. Moody's believes the credit protection available to the Series A noteholders, through a combination of the subordinated Series B and Series C notes, reserve fund account, and the benefits of ongoing excess spread, is consistent with the Aaa ratings assigned to the senior notes. (2) Subordination The rights of Series B and Series C noteholders to receive interest payments are subordinated to the rights of senior Series A noteholders to receive all interest payments owed. The Series B and Series C notes and the reserve fund account can be proportionately stepped down (decreased) if certain conditions relating to lockout period, loss, and delinquency levels are satisfied. THRESHOLD RATE Variable mortgage loan interest rates are set at the discretion of the servicer, who will maintain the weighted average interest rate on the mortgage loans at a level specified under the servicing agreement. The minimum threshold interest rate incorporates the amount of fees and expenses of the program, the issuer's interest obligations to noteholders, and the amount of excess spread that may be used to meet the credit loss protection to Series A noteholders. LIQUIDITY FACILITY At closing, an amount of A$500,000 will be allocated to the Liquidity Reserve Account from the proceeds of the issuance amount of the Series notes. The Liquidity Reserve Account will be built up to the greater of 1.5% of the outstanding principal of the notes and A$600,000 on each payment date from principal collections. Drawings may be made only under the facility to fund income shortfalls and only when certain limited conditions are met. To the extent that there is a Liquidity Reserve Draw, Interest Collections on subsequent Payment Date can be used to reimburse the Liquidity Reserve Draw amount previously made. PROGRAM SERVICING AND MANAGEMENT The manager, namely, Liberty Financial Pty Limited, is responsible for the administrative support and automated systems required to carry on the administration, supervision, and management of Liberty Financial's business. The responsibilities involved are the co-ordination of funding requirements for the program and the establishment of guidelines governing mortgages approved for the program. The servicer - also Liberty Financial Pty Limited - provides day-to-day servicing of Series mortgage loans, such as ensuring compliance with all laws, resetting interest rates, administering collections, managing delinquent loans, enforcing rights under the mortgages, and settling claims on any mortgage or property insurance policies. Liberty Financial does not out-source any of its servicing functions to any third parties. Liberty Financial has developed a proprietary underwriting system, for which it was granted an Australian patent in June 2000, that assists in maintaining Liberty's consistency in credit assessment decision and quality control. The servicer may also cover any losses associated with prepayment penalty fees, and other related interest charges resulting from the sale of properties. To the extent that the servicer covers the interest costs associated with defaulted mortgage loans, noteholders will benefit from a lower loss severity and, hence, a lower loss rate associated with this particular series. The experience and expertise of Liberty Financial in underwriting and servicing nonconforming mortgage loans are an important part of Moody's credit analysis. Moody's reviewed the operations of the servicer, as well as the capabilities of the manager, and is satisfied that both are capable of satisfactorily carrying out their obligations in a 4

5 professional and appropriate manner. Liberty Financial may be terminated under certain circumstances under a servicer termination event, including an insolvency of the servicer, and an unremedied failure to remit monies it owes to the issuer within three business days. STANDBY SERVICER Citibank N.A. Sydney branch will act as standby manager and servicer in the event that either the servicer or the manager is no longer able to carry out its obligations. If a servicer or manager termination occurs, the standby manager or servicer agrees to immediately act as the manager or the servicer, if requested by the company or by the security trustee. The backup servicing arrangements reduce the probability of servicing interruptions in the event of a servicer termination. SECURITY TRUSTEE Under the security trust deed, the security trustee will have custody of the title documents, and will open and maintain the operating bank account. Moody's believes the functions performed by the independent security trustee further enhance the protection of the bondholders' security interest. The issuer has granted the security trustee - for the benefit of noteholders and other secured creditors - a fixed and floating charge over all the trust assets. Following a default, the security trustee must act in accordance with the directions of bondholders. A default includes failure to pay coupon interest on the notes within ten days of the due date. 5

6 ISSUE SUMMARY Issuer: Originator, Manager & Servicer: Security Trustee: Standby Manager & Servicer: Custodian: Lead Manager: Issue Type: Underlying Assets: Mortgage Insurer: Credit support: Liberty Funding Pty Limited (Liberty Funding) Liberty Financial Pty Limited (Liberty Financial) Perpetual Trustee Company Limited Citibank N.A.,Sydney Branch Perpetual Trustee Company Limited Salomon Smith Barney Australia Capital Markets Pty Limited. Senior/subordinated floating rate mortgage backed notes Conforming and non-conforming residential mortgage loans Royal and Sun Alliance Lenders Mortgage Insurance Limited (RSALMI) (rated A2) (1) Excess spread; (2) Reserve Account; (3) Mezzanine and Subordinated Series B and Series C notes, equal to 8% of total notes issued; and (4) mortgage insurance policy from RSALMI on selected mortgage loans, approx. 0.7% of the pool. Doc ID# SFxxxxisf Copyright 2001 by Moody s Investors Service, Inc., 99 Church Street, New York, New York All rights reserved. ALL INFORMATION CONTAINED HEREIN IS COPYRIGHTED IN THE NAME OF MOODY S INVESTORS SERVICE, INC. ( MOODY S ), AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided as is without warranty of any kind and MOODY S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17(b) of the Securities Act of 1933, MOODY S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY S have, prior to assignment of any rating, agreed to pay to MOODY S for appraisal and rating services rendered by it fees ranging from $1,000 to $1,500,000. 6