EBRD Mortgage Loan Minimum Standards Manual

EBRD Mortgage Loan Minimum

Standards Manual

Updated

June

011

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

..II

INTRODUCTION

.. .3

..........

ENDING CRITERIA (MS

01)

..4

...........

MORTGAGE DOCUMENTATI

ON (MS 02)

..........

MORTGAGE PROCESS AND

BUSINESS OPERATIO

NS (MS 03)

...17

..........

PROPERTY VALUATION (

MS 04)

.........

PROPERTY OWNERSHIP A

ND LEGAL ENVIRONMENT

(MS 05)

.........

INSURANCE (MS 06)

.........

CREDIT AND RISK MANA

GEMENT STANDARDS (MS

07)

.........

DISCLOSURES (MS 08)

.............

BASEL II A

ND III REQUIREMENTS

(MS09) .43

10.

SECURITY REQUIREMEN

. ...

....................

.........................

..................50

11.

.......

MANAGEMENT INFORMATI

ON, IT & AC

COUNT MANAGEMENT (MS

11)

...

APPENDICES

A1.

LOAN APPLICATION FORM

A2.

LOAN APPROVAL OFFER LETTER

A3.

UNDERSTANDING SECURITISATION

A4.

INVESTOR / RATING AG

ENCY SAMPLE REPORT

RESIDENTIAL

RTGAGE

BACKED SECURITY

A5.

INVESTOR / RATING AG

ENCY SAMPLE REPORT

COVERED MORTGAGE

BOND

A6.

BIBLIOGRAPHY

A7.

GLOSSARY

A8.

LIST OF MINIMUM STANDARDS

Mortgage Loan Minimum Standards Manual

June 2011

ACKNOWLEDGEMENTS

This

EBRD

Mortgage Loan Minimum Standards Manual (the Mortgage Manual ) was

originally

written on

behalf of the European Bank for Reconstruction and Development (EBRD) in 2004 by advisors working for

Bank of Ireland

International Advisory Services. It was updated in 2007.

June

2011, ShoreBank International

Ltd. (SBI) updated

further

the Manual, which was funded by the

EBRD

Financial Institutions Business Group

The 2011

List of Minimum Standards

(

LMS

)

provide

guidance for those lending institutions that will receive

mortgage financing from EBRD. This was produced based on the EBRD Minimum Standards and Best Practice

July 2007

outlined in the Mortgage Loan Minimum Standards Manual

In addition to supporting the primary market, the application of these guidelines

should

also ensure that the

mortgage loans will meet requirements for the possible future issuance of Mortgage Bond (

) or Mortgage-

Backed Securities (

MBS

). For a mortgage portfolio to be considered suitable for inclusion in an MB or MBS,

the lending institution must be aware of the prospective requirements of both credit rating agencies and

investors.

wish to thank the following for their insights and contributions:

Alexander Tanase (who was the Operation Leader), Andreea Moraru and Sibel Beadle, all from the

EBRD Financial Institutions Group

. Frederique Dahan from OGC also provided very useful comments

;

Olga Gekht, Daniel Kolter and Maria Serrano of Moody s Investors Service, Inc.;

and

SBI Team

Pamela Hedstrom, Mitch

Medigovich, Ira Peppercorn, Lauren Moser Counts, Alan

Martinez, Anna Fogel and Georgiana Balanescu.

We also appreciate comments and suggestions from mortgage professionals at Banca Comerciala Rom

(

BCR,

part of Erste Group) and Banca Transilvania, which have been clients of previous EBRD mortgage

lending programs.

Mortgage Loan Minimum Standards Manual

June 2011

INTRODUCTION

This

EBRD Mortgage Manual has been written based on the EBRD List of the Minimum Standards and Best

Practices

- June 2011. This is the third edition outlined in the List of Mortgage Lending Standards to provide

guidance for those lending institutions that will receive mortgage financing from EBRD. All partner banks and

non

bank

financial institutions receiving mortgage credit lines from EBRD

should

comply with the List of

Minimum Standards and Best Practices to ensure that, as much as possible, the mortgages underwritten using

EBRD funds are originated and managed in a prudent manner. In addition to supporting the primary market, the

application of these guidelines

sho

uld

also ensure that the mortgage loans will meet requirements for the

possible future issuance of Mortgage Bond (MB) or Mortgage-Backed Securities (MBS). For a mortgage

portfolio to be considered suitable for inclusion in an MB or MBS, the lending institution must be aware of the

prospective requirements of both credit rating agencies and investors. The application of these minimum

standards and best practices is appropriate for the ongoing management of both the primary and secondary

mortgage business.

anual

should

provide further explanation for each standard or best practice, as required, in the LMS. The

LMS and M

anual

were

updated in

June

2011 and contain recommendations and information based on research

undertaken by

the

EBRD and its consultants. It is not intended to be

definitive

. Further improvements to

mortgage lending practices will be identified as the partner banks and

non

bank

financial institutions further

develop this business and this document may be updated from time to time.

Funds used for mortgages not only create a benefit for the financial institutions and the borrowers, they impact

many other industries from construction to insurance and to

appliance

s, just to name a few

Historically

, prior

to enlargement and the 2008 global

finan

cial crisis, the mortgage

market

in Europe expanded at a rate of 8

percent per annum and accounted for 40 percent of GDP. However

in 2009 the mortgage market in the 27-

country EU grew at only 0.6% reaching EUR 6.1 trillion.

The financial crisis demonstrated how important it is to stay with the basic principles of mortgage lending and

not to assume that the trend is always upward. The trends to originate mortgages with lower and lower down

payments, with foreign denominated mortgages and with interest rates that adjusted beyond a borrower s means

show what can happen when these basic principles are not followed.

The M

anual consists of the following chapters:

Product and Lending Criteria (MS

O1)

Mortgage Documentation (MS

O2)

The Structure of a Mortgage

Busi

ness Operation

(

03)

Property Valuation (MS

04)

Property Ownership (MS

05)

Insurance (MS

06)

Credit and Risk Management Standards (MS

07)

Disclosures (MS

08)

Basel II and III Requirements (MS

09)

10.

Security Requirements (MS

10)

11.

Management Information, IT a

nd Account Management (MS

11)

Within most of these chapters, the document outlines the List of the Minimum Standards, Best Practices,

and

Reasons

for Minimum Standards/Best Practices, possible Investor/Rating Agency Issues and further Points to

Note are in

cluded

(see Appendix A8). Further operational information and details are included in the

other

Appendices

European Mortgage Federation

www.hypo.org

Mortgage Loan Minimum Standards Manual

June 2011

LENDING CRITERIA

(MS 01)

1.1

Minimum Standards

EBRD has adopted specific lending criteria for local currency and foreign currency mortgage loans to provide

guidance for those lending institutions that have received mortgage financing from EBRD. All partner banks

and financial institutions should comply with the Minimum Standards and Best Practices to ensure that the

mortgages underwritten using EBRD funds are originated and

managed in a prudent manner.

All mortgage products should have certain characteristics. Differentiated standards apply to local currency and

foreign currency mortgages.

This approach is designed to tighten standards on FX loans relative to local currency

oans, to create a buffer against devaluation risk. There may be country cases in which macroeconomic volatility

is such that a bias towards local currency mortgages would not be appropriate. In those cases, the standards will

be adjusted as necessary.

MINI

MUM STANDARDS

COMMON FEATURES

01:

The following features should be observed for all types of mortgage products:

Purpose:

Residential properties - purchase, remortgage, build or

improve, including the relevant land, if any principal private

dwelling or "buy

let" houses or apartments.

Product Type:

Constant annuity mortgage only, with full amortisation to

liquidate the debt by the end of the mortgage term.

Property location:

Within the country of the lender.

Borrower:

Nation

als and non-nationals resident in the country. Nationals

and non-nationals resident outside the country purchasing

within the country.

Amount:

Minimum/maximum amount stated - 250,000 Euro equivalent

in local currency.

Loan Term:

Minimum 5 years/maximum

30 years (subject to funding).

Borrower Age:

Minimum

age of legal contract. Maximum (at completion of

the mortgage loan term): legal retirement age, as regulated in

the respective country, unless demonstrable evidence of

sufficient pension and/or other income to support mortgage

payments up to the end of contracted mortgage.

Minimum Standards

Interest Rate:

Interest Rate: Variable or Fixed. Fixed interest rates are

preferable. If they are not available in the country or if the

borrowers opt for variables rates, the lender should

appropriately inform the borrowers about the risks involved.

Teaser rates are not allowed. Interest rate switching from fixed

to variable (or vice-versa) are allowed, but in such cases the

borrower must be notified in writing (at least 3 months in

advance) and should the borrower choose to pre-pay, the

prepayment fee should be waived.

Variable Rate Mortgages (VRM). Where the interest rate

charged to the customer is variable, it should be linked

(indexed) to the relevant reference rate for the loan currency

(e.g. Libor, Euribor, etc.) and contain a margin for profit. The

index should ideally be equitable and independent:

Reasonable efforts should be undertaken by lenders to

link to external indexes, such as those published by

Central Banks;

When this is not possible, lenders can use internal

indexes, but these should be published regularly.

Mortgage Loan Minimum Standards Manual

June 2011

Property

Valuation

Should be carried according to Section 4. The LTV limit is to

apply to the lower of either the actual purchase price or the

valuer s estimation. In the event that the purchase price is

higher than the valuer's estimation the lender should lend on

the lesser of these two figures.

Tenure of Property:

Full ownership. Freehold recommended. Leasehold with

minimum of 50 years after the maturity of the loan or legal

maximum, if lower (see MS

Security Required:

First rank mortgage over the property. Assigned life insurance

for the amount and term of the mortgage. Property insurance

in the joint names of the lender and customer to cover the

instatement cost of the property. This policy to be index

linked, if available.

Verification:

Suppo

rting documents as listed in MS

02.

MINIMUM STANDARDS

LOCAL CURRENCY MORT

GAGE LOANS

01:

The lender must adopt the following criter

ia for local currency mortgage l

oans

Currency:

Local currencies only

Loan to Value:

Maximum 80% LTV for owner-occupied properties.

Maximum 70% for buy-

-let .

PTI:

Up to 50% of borrower s net income for owner-

occupied

properties. Maximum 35% of bor

rower s net income for buy-

-let (For mortgage with higher incomes, lenders may use

the maximum rate, but within the limits of the procedures and

prudential requirements of the Central Bank).

Minimum Standards

Affordability Test

: Use of Net Disposable Income (NDI), Debt Service Ratio

(DSR) model or Payment-

-Income (PTI). This model should

stress test the customer s ability to repay by adjusting the

interest rate upwards, usually by 3% (300 basis points). The

model should have a floor limit of funds available for livin

expenses.

BEST PRACTICES

LOCAL CURRENCY LOAN

Best Practices

BP 01

Local Currency Mortgage Loans

Lenders should also consider introducing geographic and employer

diversification parameters to avoid concentration risk by setting limits on the

percent

age of the portfolio that can be in a particular location or loaned to

staff of a particular employer. The level of geographic diversification will

depend on city size and population.

ii.

For local currency loans maximum 80% LTV unless supported by a mortgage

indemnity guarantee to be exercised in a prudent manner (taking into account

the repayment capacity of the mortgagees) and with creditworthy insurers.

iii.

PTI or DSR: Prudential regulations should be applied.

Mortgage Loan Minimum Standards Manual

June 2011

MINIMUM STANDARDS

FOREIGN CURRENCY LO

ANS

01:

The lender must adopt the following criteria for foreign currency mortgage loans:

Currency:

Euro and USD currencies only.

Loan to Value:

Dependent on lender Credit Policy

maximum 70% LTV for

owner

occupied properties. Maximum 60%

for buy-

-let .

PTI:

Up to 35% of net income for owner-occupied properties.

Maximum 30% of net income for buy-

-let (for mortgage

with higher incomes, lenders may use the maximum rate

within the limits of their procedures and prudential

requirement

s of the Central Bank).

Minim

um Standards

Affordability Test

: Same as for mortgage loans denominated in Local Currencies.

In addition, this model should test the customer s ability to

repay in case of depreciation of the local currency (it is

recommended that various degr

ees of depreciation are tested).

BEST PRACTICES

FOREIGN CURRENCY LO

ANS

Best Practices

BP 01

Foreign Currency Mortgage Loans

For hard currency or forex loans maximum 70% LTV unless supported by a

mortgage indemnity guarantee to be exercised in a prudent manner (taking

into account the repayment capacity of the mortgagees) and with creditworthy

insurers.

ii.

Forex loans should be given to individuals whose revenue is in Forex or

Forex

linked.

Underwriting Criteria is the practical application of the lender s Credit Policy and the key aspect is to establish

the applicants ability to repay the loan.

In addition to supporting the primary market, the application of these lending criteria will also ensure that the

mortgage loans will meet requirements for the possible future issuance of Mortgage Bond (MB) or Mortgage-

Backed Securities (MBS).

For a mortgage portfolio to be considered suitable for inclusion in an MB or MBS, the

lending institution must be aware of the prospective requirements of both credit rating

agencies and investors.

FURTHER READING

Refer to Appendices A4 and A5 for examples of Residential Mortgage

Backed Securities and Covered Mortgage

Bond issues.

1.2 E

stablishing Interest Rates

The credit committee and treasury must have a working relations

hip to establish interest rates for various loan products.

The

interest rate charged to customers should be adequate to cover the bank's cost of funds plus a suitable margin for

profit and operating expenses. Where the interest rate charged to the customer is variable, it should be linked to the

relevant reference rate for the loan currency (e.g. Libor, Euribor, etc.). The index should be equitable and, if possible,

independent.

An organi

ation establishes interest rates on several factors; the most importa

nt of which is the Cost of Funds.

Mortgage Loan Minimum Standards Manual

June 2011

When establishing an interest rate for a fixed rate loan, the lender must also consider the matter of a matching

maturity. For example, if the lender is a bank and the bank is funding loans from deposits, the average term

of a

loan should be matched to similar time periods for long term deposits. In circumstances where long term

deposits are not customary or available, the bank should consider a hybrid product that has a fixed rate for a

specified period of time, and later

converts to a variable rate.

Variable interest rates have two components which, when added together result in the interest rate the borrower

will pay for a specific period of time.

The components are the cost of funds index, such as an inter-bank offered rate (IBOR) and the margin for profit

and overhead.

For example:

Index IBOR

4.5%

Margin

2.5%

Interest rate

7.0%

The period during which the interest rate is set at 7% is 3 years, then adjusting each one to three years thereafter

for 20 years.

The

borrow

ers

rate changes in line with changes in the market benchmark. The precise mechanics can vary by

lender or country. For example a 'tracker mortgage' usually defines the precise time response for upward and

downward movements to the IBOR rate and may guara ntee a maximum

deviation from this rate.

With regard to Residential Mortgage-Backed Securities (RMBS), these transactions are usually structured so that

the interest to bond holders is struck at IBOR plus a premium expressed in basis points. This might be 1 month or

3 month IBOR plus 50 basis points. Clearly if the underlying mortgages that are securitised are all variable

interest rates it makes sense to have these rates adjustable in similar fashion. Some of the structures might have

a fixed

interest rate

at the outset.

Often with Mortgage Bonds, the interest rate on the underlying bonds may be fixed for a specified duration or

they might be variable. Some countries have preferences for fixed rates - such as Germany - whereas the UK and

Ireland see

many cu

stomers with variable rate mortgages.

Both RMBS and Mortgage Bonds therefore require considerable care and attention as to how

underlying

mortgages are priced and then how the underlying interest rates can be changed. This potentially can affect the

abilit

y for product flexibility

and profitability.

The mechanics of dealing with duration risk and interest rate risk are beyond the scope of this Mortgage

Manual.

1.3 M

ortgage Sales Channels

Loan Origination may be carried out through several channels including direct contact, mail, e-mail, SMS text,

telephone

and other acceptable banking

channels

Loan officers can execute marketing campaigns through several methods the first and most effective of which is

direct contact with a prospective borrower. A loan k

iosk

desk

located in an existing branch of a bank is most

convenient. Often, banks will develop loan centres with physical locations outside of the bank. Loan centres can

be easier to access and less intimidating to prospective borrowers and can accommodate amenities such as a

play room for young children while the parents participate in the loan process.

Other but less effective methods of soliciting prospective borrowers is through mail, SMS text and telephone.

Typically direct mail has the lowest response rate of 1-

percent

; therefore the campaign must be well designed

and targeted to areas where home buyers are most likely to be found, such as apartment houses or flats.

Mortgage Loan Minimum Standards Manual

June 2011

Another successful method of loan origination is through wholesale operations. The lender may engage in

purchase agreements with loan originations from third party companies such as affiliates or brokers. In this

method the third party takes the application, coordinates the appraisal and title search and often obtains

verification of i

ncome, employment, assets and liabilities. Wholesale lending operations require the allocation of

greater resources to verify and validate the information provided from third party originators.

Wholesale loan operations require a well

designed fraud preven

tion program that addresses methods of fraud,

identification of schemes and which parties to the transaction might present the greatest risk of fraud.

1.4 M

ortgage Market Segments

Once the organisational structure is determined, the Credit Committee and senior management of the

organisation must then consider the market segment it wishes to pursue. Each segment has unique requirements

and borrower characteristics that should be reviewed for compatibility to the culture as well as the investment

objectiv

es of the organisation.

After the organisation determines its target market, the selection of mortgage products that will be sold must be

considered. The following chart identifies the transaction type, its unique characteristic and suggested actions to

ke for managing the type of clients.

Table

Target market characteristics and actions

Transaction Type

Unique Characteristic

Suggested Actions

Purchase

First time home buyer

The borrower will have no

experience with the process or

knowledge of the responsibilities of

home ownership.

Use loan officers, underwriters and

closers who are current

homeowners. A mature loan

closer/attorney is best suited to

take the time necessary to help the

first time buyer become

comfortable. Most first time home

buyers will need to have each step

and each term explained. Take care

to define terminology used and try

to avoid jargon when describing

terms and covenants in the loan

agreements.

Purchase

Move up

Second home

relocation buyer

This borrower has been through

the

process and generally does not

require the same amount of

attention as the first time home

buyer.

Be sensitive to the amount of time

you are requiring of the move up

buyer. Most will not need detailed

explanation of every detail of the

transaction.

finance

Existing home owner

The objectives of this buyer should

be clearly identified. In most cases,

they are refinancing to lower debt

and/or lower payments.

Quickly identify the benefits that

the borrower will realised when the

transaction is complete. If the

benefit is not obvious, investigate

further the borrower s objectives.

Home Equity

The borrower s objective is to

utilise equity that has been

The lender should inquire as to the

borrower s intended use of the

Mortgage Loan Minimum Standards Manual

June 2011

accumulated over a period of years.

Typically the borrower will have a

predetermined use of the funds.

funds

and look for opportunities to

sell the borrower other bank

products; this is known as cross

selling.

Self

Build

Owner

Builder Projects

Self

- build projects are the highest

risk

loan for a mortgage lending

organisation. Often the loan is based

on the projected cost of materials

and some labour. Typically the

borrower intends to provide most of

the labour themselves. Risks

include poor workmanship, failure

to complete the project or delays in

construction. See more on Self-

Build projects in Chapter 6.

The lender should require the

borrower to provide a construction

budget with the type and grade of

material to be used. The lender

should verify the costs and advance

the loan funds incrementally only

after verification of the work

complete.

1.5

Product Types

The chart below illustrates the type of mortgage loans that are typically offered to home buyers and those who

currently own a home. Loan products should be carefully matched to the objectives of the borrower and the

availability of funds. See more about matching funds in the discussion on interest rates.

Table

Mortgage

roducts

Product Type

Features

Optimum Borrower

Lien Rank

Fixed Rate

Predictable Principal and Interest payment which

can be amortised for periods of 5, 10, 15, 20 and

25 years.

First time home buyers,

families and borrowers on

fixed income.

First Rank

Variable Rate

(VRM)

The interest rate is tied to a well-known index

and includes a margin in addition to the index

rate. Payments may change each 1, 3 or 5 years

based upon the agreement of the lender and

borrower. Most VRM loans have a lower initial

rate of interest than fixed rate loans. The loan

may be amortised or interest only for an initial

period (say 3 years) and then amortised over the

remaining term of the loan.

Typically, high income

borrowers or young

professionals who expect

their income to increase in

the coming years.

First Rank,

on an

exceptional

basis

if the

loan is a

home

equity

loan,

second

rank.

Interest Only

Loans

Monthly payments are calculated on the basis of

the unpaid principal balance at the note rate. This

type of loan requires the borrower to make a

single payment, also known as a balloon

payment at a predetermined date.

This product is best suited

for self-build loans, or loans

for short term purposes.

Borrowers should be

carefully analysed to

determine their ability repay

the balloon payment.

First Rank

Home

Renovation

and Energy

Efficiency

Loans

Monthly payments should be structured as

principal and interest payments over a period of

5, 10 or 15 years. Before issuing the loan the

lender should evaluate the cost of the

improvements and the potential benefits to the

borrower. There are cases where improvements

to a property will extend the economic life of a

house which may be beneficial to the borrower.

Owners of homes and flats

more than 10 years old.

First Rank

Mortgage Loan Minimum Standards Manual

June 2011

Self

Build and

Owner Builder

Projects

The principal of the loan is disbursed in draws on

a predetermined loan amount based on work that

has been complete. Owner-builder loans are

short term, 1

3 years which requires the borrower

to pay off the loan or seek long term financing.

The loan should require interest only payments

on the amount of the unpaid principal balance.

An experienced craftsman

is optimum; however, a

borrower who has trade

skills generally makes a

reasonable risk.

First Rank

1.6 S

elf Build Projects

When a customer owns the land and wishes to construct a home, the construction may be carried out by

eith

er a

'registered

builder' or by 'direct labour , also known as Owner-Builder. In many countries, the construction

industry, with Government approval and support has set up a scheme which provides guarantees on the quality

construction of houses. We have examined this scheme in more detail under Insurance in Chapter 6. Once the

scheme is set up, builders are anxious to join because buyers naturally try to purchase properties where the

standard of construction is guaranteed.

Construction lending presents the greatest risks to a lender. The risk of development should be reflected in the

interest rate charged. Critical to the security of the loan is the manner in which the lender releases funds for

construction of the project. There are two methods of constru

ction management:

Phased drawdowns based on a percentage of the work, such as 20%, 20%,

20%

10%,

10%

, for

example

ii.

Drawdowns on the actual work or stages which have been completed

Regardless of the method that a lender prefers to follow, all construction loans begin with the analysis of the

construction budget. It is recommended that the lender retain an architect or engineer to carefully analyse the

cost of labour, materials and land.

In most cases the land should be paid in full by the borrower as their equity contribution, see the chart below.

Thereafter, the loan should be analysed to identify the cost per square meter of the project and compare the

costs with similar projects in similar areas. Project costs may vary depending upon the type of construct

ion,

(wood vs. concrete), and the finish of the interior. In addition to hard costs such as bricks and labour,

construction financing includes soft costs such as architectural and engineering fees, permits, insurance and loan

costs. The lender must require course of construction' insurance to protect the lender and borrower in the event

of a catastrophic event while the project is being built.

Analysis of risk of construction loans employs both the Loan to Value Ratio and the Loan to Cost Ratio. The

Loan

to Value ratio is applied on the basis of the finished value of the property, while the Loan to Cost Ratio

considers the total cost of the project, valued by components of land, material and labour and the loan amount.

For example if the project being built is a stand-alone single family home on a residential plot of land the

components should be valued independently. The lender should then make the loan on the lower of the Loan to

Cost or Loan to Value.

Components

Actual Cost of

Construction

Maximum Loa

n to

Cost @ 80%

Appraised Value

Maximum Loan to

Value @75%

Land

25,000

12,500*

Materials

45,000

36,000

Labour

35,000

28,000

Soft Costs

10,500

8,400

Total

115,500

84,900

145,000

108,750

Table 3.Risk analysis of construction loans

Mortgage Loan Minimum Standards Manual

June 2011

*Some lenders will permit the borrower to contribute the value of the land as a portion of their equity in the

project. However, it is highly recommended that the value of the land contribution

typically

not exceed 50% of

the cost of the land

, depending on the country and actual location of the respective land.

Registered Builder/Fixed Price contract

In all instances where a builder is employed the customer should ensure (and the lender should insist)

that only a

fixed price contract is used. Such a contract will assure both the lender and borrower that price increases cannot be

made. It is important to note that in an expanding or emerging economy, fixed priced contracts may not be feasible

as materials and labour increase. In this case, the lender must approve any changes in the contract and/or the

borrower must be prepared to pay for increased costs from their own resources unless the borrower s equity is

substantial enough to keep the Loan to Value at or below the requisite level.

Direct Labour (Owner

Builder)

Direct labour means that the borrower is either bu

ilding the house himself/herself or is employing all

the various

skills

bricklayers, plumber, electrician or other trades.

Extra diligence is required to ensure that the budget is closely followed. An experience construction loan

manager should be retain

ed to verify all costs incurred by the borrower.

However suitable situations and opportunities will arise - e.g. customer is a building professional and has

previous experience. Undoubtedly a well-managed 'self-build' project will cost the owner less than employing a

builder.

Phased Payments

Borrowers who chose to build a home require a mortgage in the same way as people purchasing a finished

homes do. The

difference is that the need the money in phases or stages.

In many cases the borrower will have begun construction with their own funds first. From a lenders perspective

this ensures commitment and equity contribution. The more of their own funds they use the less likely they are

to default or to abandon the project. For example, if the total cost is 100k and the mortgage is 70k then the

customer s

contribution is

30k -

these funds will be used before the lender will release the phased payments.

The facility offers gradual drawdown of funds typically in tranches as the construction progresses. These ar

clearly defined completion points in the project and are:

Stage 1: Site preparation and foundation

Stage 2: Framing

exterior walls and roof erected, windows framed and roughed in

Stage 3: Mechanical

electrical, water, heating or cooling systems and i

nsulation

Stage 4: Interior finishes such as plaster and paint applied

Stage 5: Interior trim such as doors, faucets, toilets flooring

Stage 6: Exterior finishes, landscaping, onsite parking

At each stage the lender requires inspection and certification by an architect or other suitably qualified

professional (engineer or quantity surveyor) that the work has been completed satisfactorily prior to

drawdown

of the funds.

When advising a customer on financing a self- build project, it's critical to stress the importance of

thorough

preparation especially in relation to costs and cash flows.

Construction Loan Risks

Self Build

Construction lending presents risks unlike that of a traditional mortgage loan. The highest risk is the failure of

Mortgage Loan Minimum Standards Manual

June 2011

the contractor

owner

-builder to finish the project and to ensure the property meets all applicable

building

codes.

To a lending institution an owner-builder project is more risky since most, if not all of the work will be

performed by the borrower. This person may also be emp

loyed in another trade or profession, which means that

the construction of the subject property may experience delays.

The lender needs to be confident that the customer will see the project through and that cost overruns will be

kept to a minimum. The wor

-case scenario for a lender is that the project is abandoned half way through which

leaves the lender with a partially constructed property or a poorly constructed property that is difficult to sell.

Before agreeing to lend on a self

build project the l

ender must be satisfied that:

The borrower owns the land unencumbered with appropriate access

The plans meet local authority planning

/permission and by

law conditions

In course of construction property valuations will be carried out

During

construction

per

iod,

insurance will be in place

The site will be fully serviced with all utilities

The customer has funds available (i.e. their equity)

These funds will be used before the phased drawdowns commence

The builder is a properly licensed professional and regist

ered with the proper authority

A qualified architect will supervise the

construction

The property will be readily marketable in the event of a forced sale

The completed house will be adequate security to cover the mortgage

Construction Loan Risks

Contrac

tor Build

Buyer s prepayment in

tranches

In some regions, developers will have an apartment building under construction and at the same time will be

promoting the project to the public. Developers will agree to sell a specific unit to a buyer if the buyer agrees to

make a down payment ranging from 20%-30% with future deposits required at specific intervals of 20-

30%

until the agreed upon purchase price is paid in full

by completion of the unit

This type of purchase arrangement requires additional

attenti

on since the specific unit may not be finished when

the borrower makes a loan request from the financial institution for a portion of the purchase price. First, a

ender

must carefully evaluate whether the developer/contractor has sufficient financial resources to complete

the project. There have been many cases

where buyers have made substantial payments to developers and where

the developers failed to complete the project. Lenders should not advance any funds to a buyer or developer for

an unfinished unit or home, unless the developer or the lender on his behalf (in escrow) is holding funds

sufficient to complete the unit or home.

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June 2011

MORTGAGE DOCUMENTATI

(MS 02)

Documentation plays a critical role in the mortgage lending process. Financial institutions use mortgage

processing forms to capture, store and analyse the substantial amount of information that is necessary to

prudently originate mortgages and to effectively manage them during the years that they are outstanding. Legal

documents embody the contractual relationship between the lender and borrower, and they secure the lending

institution s interest in the properties that serve as collateral for its mortgages.

This Chapter describes the types of documents that lenders typically employ to document and manage their

mortgage programs. Sample forms including a mortgage loan application and mortgage offer letter are included

in Appendices A1 and A2.

EBRD s Minimum Standards require:

Development of all documentation supplied in the mortgage process must involve suitable

qualified

legal

advisers.

ii.

The

Mortgage Application Form

and supplementary materials should include the following details:

Personal details, including postal codes

Occupation and income

Financial assets

Current debt/repayments

Bank account details

Details of legal body

according to local legal norms (e.g. lawyer, etc.)

Current living accommodation

Details of property to be purchased/built, including postal codes

Amount of loan required

Full costs of transaction

Source of funds to cover the cost

Type of mortgage required

Ter

m/repayment schedule

Illustration of interest rate/payment changes

The Application Form(s) should meet consumer protection legislation and must include explicit

consent for inquiries to a credit bureau (if relevant to country) or credit information reporti

system.

(See sample application

form in Appendix A1.)

iii.

Lenders must ensure

verification

of the information in the Mortgage Application by requesting the

following documents:

Completion of standard conditions in application form (including authority for lender to sell the

mortgage)

Valuation and/or structural survey report

National identity cards (according to local legislation)

Marriage certificate or proof of marriage, if applicable

Divorce/separation agreements, if applicable

Architect certificates

r self

build products

Proof of appropriate registration of the property, such as cadastre excerpts or the equivalent

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June 2011

It may be that in the case of real estate to be built or under construction, not all the documents mentioned

above will be available upfront, such as valuation report, cadastre excerpts, etc. These should be made

available in due course as agreed with the client.

For Income Verification,

at least one

of the following:

Certificate of income from employer

- State certificate of earnings and /or tax paid (or similar documents according to local

legislation)

- For self-employed people: certified audited accounts or local income confirmation, as the

practice may be in the respective country

Independent confirmation real estate taxes are up to date, if

applicable

Savings or loan statements or other justification of source of advanced payments

Rent accounts, if relevant

iv.

The

Mortgage Offer should be documented in an offer letter and/or mortgage loan agreement that is

legally binding, complies with consumer legislation, safeguards the customer and the lender and will

stand in a court of law. The contents of the letter/agreement should include:

Name & address of customer, including its postal code

Address of property being mortgaged, including its postal cod

Amount of credit advanced

Period of the agreement

Number of repayments

Total amount repayable

Cost of the credit

Interest rate (APR ("Annual Percentage Rate"), if the practice of the respective country has such a

banking instrument)

Annual Effective Rate (AER). This is the rate used to computer the equivalent, on an annual basis,

of the present value of all loan repayments and charges, future or existing, agreed between the

creditor and the consumer.

Security (mortgage right) required on the financed prop

erty

General conditions

Consents required to enable the sale of mortgage loan and mortgage rights to third parties, transfer

of data to third parties and the appointment of a third party administrator/servicer, including

consent for access to credit bureau

data, if existing in the respective country.

Post sale documentation.

The following, at a minimum, should be provided post sale:

Written confirmation of the key terms of the loan once the contract is signed and subsequent

notification, at least on an annual basis, in cases where the structure of fees change (e.g.,

redemption penalties, statement fee, re

mortgage, early repayment charges, etc.).

Annual statements to the borrower detailing the principal outstanding, interest payments made

during the year and

any penalty interest.

Written notification if the mortgage is sold if required under local legislation.

Written notification of early repayment charge and arrears charges applied by the lender in cases of

arrears and repossession policy or equivalent inte

rnal regulations.

vi.

Documentation

will be required throughout the entire mortgage process. A mortgage lender will

develop a wide range of other documents to cover specific activities and situations. The following is a

list of documents the lender should have

Consumer guides to process and

products

Loan disclosure forms (see Chapter

for more discussion on the content of disclosures)

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June 2011

Relevant marketing material

Application form(s) meeting consumer legislation and/or secondary market requirements

Credit asses

sment template, data analysis forms and system input forms

Letter(s) of offer (loan agreement) - meeting legislative and/or secondary market requirements

(including sale to third parties)

Mortgage deed

Certificate of title report

Assignment of insurance po

licies forms

Valuation or

property appraisal form

BEST

PRACTICES

Compliance with consumer protection legislation is mandatory, but best practice would also include a range of

risk warnings

and advice

in the offer letter or loan agreement such as:

Advice

that the home is at risk if payments are missed.

Advice that the variable interest rates may be adjusted (up and down) from time to time and that the

mortgage payments would also be adjusted to reflect the future change, as the case may be.

Advice that movements of exchange rates could increase which effectively reduce the repayments in

the local currency (numerical illustration is recommended)

Advice to obtain independent legal advice before signing the contract.

For foreign currency loans, advice on the risk undertaken by the borrower should it experience an

erratic change in value

REASONS FOR BEST PRA

CTICES AND MINIMUM S

TANDARDS

Application and Supporting Documents

The mortgage application form and accompanying authorisation of borrower enables the lender to collect all the

relevant information verifying documentation to adequately assess the application. The interview is a key

activity in the assessment process. Traditionally lenders have gathered information by using a mortgage

application form and this is reinforced by additional facts collected at a face-

-face interview. Many businesses

now use an online data collection process in addition to or instead of a mortgage application form but the

required

information does not change.

The data collection

enables the lender to:

Assemble information about the applicants financial circumstance (status) in order to assess if

the

customer will be able to service the repayments on the loan; and

Assemble information relating to the property on which the loan wil

l be secured.

Assessment of ability to repay

and valuation of security go hand in hand but it is the first of these which is most

important. Even with excellent security there is no point in lending to a person who will find it difficult or

impossible to m

aintain regular repayments. Such a situation causes stress and

hardship for the customer and can

lead to unnecessary administrative work, legal expense and loss for the lender.

The ability to repay is discussed in much greater detail in the chapter on Cred

it and Risk

Management.

Most people agree that it is wise for a prospective borrower to have an initial discussion with their lender about

how much of a loan they can afford before selecting a property and completing a formal application. Many

lenders provide a prequalification worksheet which will indicate the level of borrowing available to the customer

subject to documentary

evidence and final approval.

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June 2011

Offer Letter or Mortgage Loan Agreement:

The offer letter (when accepted) is the formal commitment between the lender and the customer. Once the

Underwriting Department approves a mortgage the next step is to issue a Letter of Offer or a Mortgage Loan

Agreement. An Offer Letter is a very important legal document and once it is

accepted

the customer it b

ecomes

a binding legal contract under which the lender agrees to lend and the customer agrees to borrow a specified

sum of money, for a specified term, at a specified interest rate (defined variable or fixed) with specified security

and on specified terms and conditions. An accepted Letter of Offer is therefore the legal basis of the lenders

relationship with the borrowing customer. In the event of a dispute regarding the loan it is this document that will

be referred to. Accepted Letters of Offer must be treated as one would treat items of security. They should be

retained in the security file. They should not be written on or defaced as this may affect the validity of the Loan.

The terms and conditions in a Letter of Offer will be comprehensive for informa

tion purposes. The key areas are

set

out under the Minimum Standards at the beginning of the Chapter. A range of consents are required of

the

customer including specific consent for the sale of the mortgage for securitisation /mortgage b

ond purposes.

WHAT

INVESTORS AND RATING

AGENCY MAY REQUIRE

Investors and rating agencies require evidence that loan decisions are made on the basis of interview supported

by collection and/or retention of comprehensive data. The application and supporting documents should be

carefully retained for possible review at a later stage by auditors acting on behalf of investors/rating agencies in

the event of a mortgage bond or mortgage

backed securities issue.

FURTHER READING

Refer to Appendix A1

for a sample mortgage

application f

orm.

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June 2011

MORTGAGE PROCESS AND

BUSINESS OPERATIONS

(MS 03)

The mortgage lending process is the foundation for the largest financial transaction that most consumers will

undertake in their lives. It is imperative that each member of the staff of the lender or mortgage providers

(commercial banks, non-bank f

inanci

al institutions and others), whether they are employed in sales, marketing,

underwriting, processing, legal or in other functions, understands and be committed to a process that is clear,

fair, transparent and consistent. For the protection of both the borrower and the bank, the lender needs to ensure

that the mortgage is within the customers means over the long term and consumers need to be fully aware of

the commitments and risks they are taking.

3.1

Minimum Standards

(MS 03

)

There are several ke

y points in managing the Mortgage Process:

The lender must have a written description of

its

minimum

standards, of the

required

documentation

and of the steps involved in originating a mortgage. This includes the initial contact with the customer,

the mortgage application and any documents that become a part of the mortgage file. This description

should include a flow chart showing the steps involved a written description of each of these steps and

the responsibilities of each party at every stage of the process. The lender should have processes in

place to ensure that staff from all areas of the bank or the lending division that have a material role in

the process receive

sufficient

training to ensure that they understand and are committed to the process.

ii.

here should be a clearly defined organisational structure that includes responsibilities, accountabilities

and roles in all aspects of the mortgage process. Additionally, it is recommended that the employees of

the mortgage lend staff understand that their individual performance records are influenced by the long

term performance of the loans they have made.

The

mortgage loan division should be

led

by a highly

experienced Senior Credit Officer who is empowered to oversee all aspects of loan operations. The

mortgage providers should have an audit or quality control unit that reports directly to the CEO or

designated board committee.

chart below illustrates the various steps both the consumer and lender will take to complete a loan

transaction

Customer

identifies a home they wish to purchase

Customer makes application for loan

Bank performs a pre-qualification and advises customer of the probable terms while issuing a offer

letter

Customer accepts or rejects terms

Customer provides documentation to su

pport their application

Bank verifies all information from the borrower and third parties

Approve/defer/decline application

The

Lender obtains a history of property ownership (also known as chain of title ) and evidence that

there are no claims or attachments to the property that would inhibit

the L

ender

from having a first lien

on the property or

uyer being subject to obligations of another person

roper

ty appraised

Loan Committee approval

Legal requirements completed

The property transfer deed is pre

pared for Seller and Buyers signature

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June 2011

The Loan Agreement is signed and ready for registration

The Mortgage and/or Collateral agreement are properly

executed

and ready for registratio

Mortgage drawdown

Mortgage Account Management

A graphic summary of this process is presented below:

Prior to the launch of a new product or the improvement of an existing product, staff representing marketing,

sales, origination, underwriting, processing and legal should agree that the mortgage structure, the underwriti

process, the standards, the documentation and verification, and the disclosure to consumers serves the long term

interests of the lender and of the potential borrower. This should be done up-front and updated from time to

time, depending on the mortgage market development, with existing products as well.

Markets are built and sustained on both investors and consumers confidence. If the business is well organised

and managed, portfolio performance may be measured and observed for the investor and rating agency to assess

governance risk.

Figure 1.

The M

ortgage Process

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June 2011

3.2 O

rganisational Structure

MINIMUM STAND

ARDS

Organisational structure begins at the Board of Directors level with the development of Credit Policy and

creation of an Audit Committee who reports to the

Supervisory

Boa

or to an Executive management

and/or an

experienced Chief or Senior Credit Officer.

Mortgage origination lenders should be done according to an approved strategy. As mortgage lending is a long

term business, the lenders should originate their mortgage

loans

with the view that the respective loans will be

retained in their balance sheet for at least

4 years.

Regardless

organisational structure the

may

lender adopt, it should be supported by necessary checks and

controls to ensure

mortgage lending a

nd risk mitigation

policies are adhered to.

There are two basic structures for a creating a mortgage operation, each with their unique benefits and risks:

Centrali

sed and Decentralis

Centrali

sed loan divisions operate through several Units, including Or

iginations,

Underwriting, Appraisal, Closing and Funding and Loan Servicing. All of the units are located in the same

facility and should participate in loan committee meetings to review loan origination objectives, loan closing to

loan application ratios,

and loan performance.

Figure 2: Mortgage Loan Division organisational chart

Executive Management

In each case, as is discussed here each unit or division requires adequate support systems and controls to assure

accuracy of information for decision making purposes, quality service to customers and safeguards against

harmful activities including negligence and fraud.

Overall the Mortgage Loan Division should be managed by a Senior Credit Officer and supporting staff of

managers, department and unit heads. The graph above illustrates a recommended organisational structure for

the Mortgage Loans Division.

As is illustrated, the audit or quality control unit must report directly to the Chief Executive Officer or Audit

Committee of the Board of Directors so as to assure that there is no undue influence from other units.

Within each unit will be staff that performs specific functions. For example the Originations unit will consist of

loan originators or loan officers, and loan processors who build the loan file and verify information

such

as the

borrower s employment, bank balances, and credit. The loan processor function may include requesting the

appraisal and an examination report of the title to the collateral. Sometimes this person is also an analyst who

applies the standards of risk established by the Board of Directors or the Executive Management or

Credit

Committee

of the organisation. The analyst will summarise findings in a report to the Underwriter along with

the loan file.

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June 2011

The Closing Unit will be comprised of a person, (perhaps an attorney)

who

prepares the loan documents and

security agreements, coordinates signing the documents and filing the loan documents with the appropriate

ministry and interacts with Treasury to fund the loan request.

Once the transaction is closed and funded, the loan file is transferred to the Loan Servicing Department for

administration. The functions of loan servicing will be discussed later.

Policy Making

Loan policy and credit standards are usually created by the

oard of

irectors

Executive Management

or senior

credit committee. As it relates to the decision of decentralisation the board will require a more robust system of

quality control and delegation of authority for operations.

System procedures such as loan product development, loan pricing, back office support, IT systems and loan

servicing are best left as centralised activities, Loan originations and controlled underwriting may be delegated

to branch or remote operations.

Centralised Loan Originations

Cen

tralised origination is most effective for organisations with a specified number of branches or where actual

working space in a branch is limited. Further, quality control of loan transactions and administration is better

managed since there is no need for

duplicate staff or extensive travel between branches.

Decentralised Loan Originations

When the organisation covers a vast territory or wishes to expand into multiple cities, it may be efficient and

economically viable to create Mortgage Loan Centres where the loan originations activities are closer to the

target population. In a decentralised mortgage loan centre, a loan officer and/or loan underwriter may be

delegated authority up to a predetermined level, to write and approve loans. Loan activity should be closely

monitored for quality and performance by tracking default rates by originator and/or underwriter. Even with a

decentralised system, loan authority can be limited to a predetermined amount. After which all loan requests

over a specific amount to be referred to the central loan committee at the home office, or at a minimum, require

the signature of the Senior Credit Officer. Where a Decentralised model of operation is in place, branch

managers implement bank policy in relation to application standards and documentation, loan assessment, issue

of offer documents, taking and perfecting security, issuing the loan cheque and account and arrears

management. The decentralised model would be supported by regular audit checks and balances by Head Office

ensure compliance with policy.

ote: Minimum recommended experience

ould be adjusted to local markets conditions.

Branch Loan Originations

Recommended

Minimum

Experience Required

Recommended

Approval

Authority Euro

Loan Officer

>10 years

5,000

25,000

Loan Underwriter

>7 years

25,000 -

250,000

Home Office Review

7 years

>250,000

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June 2011

PROPERTY VALUATION (

MS 04)

Property valuations are one of several tools that the lender uses to assess and mitigate risk in a loan request. The

measure of risk, as it relates to value of a collat

eral property is known as the Loan to Value ratio, expressed as

follows:

Loan amount /property value = LTV

75,000/100,000 = 75% LTV

The lower the L

oan

Value

ratio, theoretically, the lower the risk of loss in the event that the borrower does

not repay the loan; this is due to the fact that the borrower has made a significant financial investment that they

will not want to lose. Said another way, if a borrower is required to have a greater investment, the lender has a

lower risk and the greater motivation for the borrower to repay the debt Therefore, the purpose of the valuation

is to provide the lender with an independent opinion of value of a collateral property on the date on which the

valuation is made.

The Appraiser

Real property valuations are part science and part art both of which require the appraiser to have a high degree

of training and experience. The lender should consider whether it desires to develop and maintain an in-

house

appraisal unit or outsource the process to an independent appraiser

If the lender desires to have appraisers as

direct employees, it will be important that the appraiser will not be unduly influenced by the loan o

fficer

produce an opinion of value with a predetermined value. The lender must develop a screening process whereby

the appraisal request and the final opinion are reviewed by a manager. Similarly, if the appraiser is an

independent contractor, the appraisal should be requested by the loan processor or risk analyst. In either event

the Senior Credit Officer and/or Loan Committee should carefully assess the qualifications of the appraiser and

whether the appraiser has maintained

going

educational activities. If the appraiser is in house, the lender

must ensure that there is a separation between the appraisers

and the originators.

MINIMUM STANDARDS

The Lender must ensure that a proper property valuation is done by a reputable and bank approved valuer or

appraiser, and the valuation is based upon closed sales. In assessing the profile of the appraiser, the lender must

ensure that: a) the appraiser is a competent professional and a member of a recognised professional body (if

such bodies exist); b) the appraiser has adequate Professional Indemnity Insurance (if self-employed).At a

minimum, an appraiser should have 1-3 years working as an apprentice for a master appraiser before the lender

considers hiring or contracting with the appraiser. Prior to engaging an independent senior or master appraiser,

the Senior Credit Officer and a member of the quality control unit should review 3-5 appraisals that the

appraiser conducted within the last 12 months. The appraisals should be reviewed for accuracy, clarity and

substance. National standards should apply for authorisation of the evaluators (both of the lenders or

indepe

ndent evaluators, as the case may be).

The Appraisal Process

Real property valuations are made on the basis on three criteria; the market approach; the cost approach and the

income approach.

The Market Approach

An appraiser develops an opinion of value u

sing the market approach by comparing recent sales of similar (like

kind) properties, in a reasonable proximity of the property being appraised, also known as the subject .

What to look for: when evaluating the appraiser consider whether the comparables a

re similar.

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June 2011

Are the comparables like kind to the subject? If the subject is a 3 bedroom flat of 90 square meters, a 1

bedroom flat of 45 square meters should not be used as a comparable. If no other 3 bedroom flats of

similar room count and size are available, the appraiser should expand the search area. Likewise, a 3

bedroom flat on the second floor may have a higher value than a 3 bedroom flat on the 9

floor of a

building that does not have a lift.

Are the comparables within the subjects neighbourhood? Comparables should be from an area within

in 1.6 to 2 kilometres of the subject. If the appraiser cannot find a comparable in that distance the

reasons should be fully explained. The underwriter should ascertain whether the lack of comparables

may be detr

imental to the marketability of the property. For example, if no sales of 3 bedroom flats can

be found in a 2 kilometre radius, the underwriter must ask what is surrounding the property. In the

appraisal report the appraiser should have noted that the subject property was surrounded by

manufacturing plants and industrial sites. The conclusion for the underwriter would then be that the

marketability of the subject will be very limited and the loan should be denied or the LTV significantly

reduced.

Was the sale of the comparables recent? Economies and real estate markets are subject to fluctuation.

The market value of a property may have a wide swing in value in a short as six months time.

Therefore, the appraiser must select sales that are within six months

old and certainly no older than one

year. If there are no sales within either period of time, the appraiser should further discuss this matter in

the report. There are both positive and negative factors for the lack of sales in a neighbourhood such as;

the

neighbourhood is mature and homeowners enjoy their location so much they do not sell. The

positive factor is that the demand out paces supply and prices will be stable or increasing. Alternately,

if there are no sales, the appraiser should note in the rep

ort the number of homes that are for sale. If the

number of homes is significant, it is an indication that citizens are not moving into the area, and instead

are leaving which attributes to an excess supply and little demand, thereby resulting in falling p

rices.

The Cost Approach

The Cost Approached to valuation should be weighed carefully when used as a tool for determining value.

When applying the method of the cost approach of valuation, the appraiser develops an opinion of value based

on the replacement cost of the components of the subject property; those components are land costs, material

costs and labour costs.

Such costs may vary as a result of material shortages or when materials are dumped on

a market. Consequently, the appraiser should reconcile or balance each of the three methods of valuation when

making a final conclusion.

For example: if the subject is a row house consisting of 100 square meters and if the row house is situated on a

50 square meter parcel of land, it can be assumed that the house is a minimum of two stories and may or may

not have a garage. First the appraiser will value the parcel of land with other similar parcels of land. (In a fully

developed city, this may not be possible as all of the residential parcels may have been

sold).

Then the appraiser will consider the components of the subject house:

Is the house made of brick, concrete, steel or wood?

Is the roof wood shingle, asphalt shingle, clay tile or other material?

Are the heating and cooling systems passive (such as

solar) or active such as steam heat or forced air?

Are the interior finishes, such as floors, cabinets, doors and installed plumbing fixtures

of high,

medium or low quality?

The appraiser will consult cost reference manuals to determine the cost per square meter of each of the

components and will reconcile the findings with the current cost of labour for each trade to conclude a value.

The cost approach should not be relied on as a sole indicator of value as the cost of labour and materials is

In most EU countries, kitchens are not supplied with the house as they are considered personal property and therefore may

not be included in the value of the subject.

Mortgage Loan Minimum Standards Manual

June 2011

subject to c

hange. The cost approach is best used for financing construction or rehabilitation loans.

The Income Approach

Using the income approach is best suited for valuing rental or tenanted properties. The appraiser should

evaluate the rental or lease agreement to determine the gross monthly lease amount plus any obligations the

tenant may have to reimburse the owner for certain costs, such as property tax or rental tax if any, insurance or

public utilities such as water, electricity, natural gas, steam or coal.

e appraiser will then use a method known as the Capitalisation Approach to develop and opinion of value

based upon the rate of return that an owner would realise from the Net Operating Income, (NOI), of the subject.

For example: If a property generated 700 per month x 12 months = 8,400 per year. Then if the expenses that

the owner paid were equal to

2,500 per year for taxes and insurance, the NOI would be 5,900.

To take the next step in the valuation process requires the appraiser to evaluate a reasonable rate of return on

capital. For example, a reasonable person might invest money in a low risk savings account with an annual

yield of 2% or that same person might invest in a more aggressive bond fund with a yield of 4%, while still a

more aggressive (and slightly higher risk) will be an investment in a flat with the intent to generate income at,

say 8% per annum. Therefore the formula for determining the purchase price (and therefore value) of a flat that

has a rate of return of

5,900 per year with an 8 CAP, would be 73,750. The formula is below:

5,900/.08= 73,750

In the valuation of a single family flat that is not intended for rental, the appraiser will place lesser weight on

the income approach and more on the market approac

h when reconciling the value using the three methods.

MINIMUM STANDARDS

The Appraisal Report

Appraisal reports should have detailed information about the property including:

Applicant s name

Lenders name

Address of the property, including the postal code

egal description as registered in the cadastral or on a survey

A discussion of the location of the property

A discussion of the surrounding neighbourhood and the elements influencing desirability by

prospective buyers

Type of construction material

wood,

brick, concrete or steel

The appraiser should observe and comment on the quality of workmanship, evidence of defects or

hazards that might jeopardise the health and safety of the occupants

The nature of the property, whether residential or mixed use (resid

ential and commercial)

Whether the current use is legal or conforms to use codes established by local authorities.

Physical description of property

Whether the property has:

Functional obsolescence

Physical obsolescence

An economic life at least 20 yea

rs e

xceeding the loan term

Estimated age

Estimated remaining physical life of the property

Dimensions/floor area

Number/type of rooms

Vacant or tenanted: If vacant, the appraiser should ascertain, if possible, the length of time the property

has been vacant; if for an extended period of time, the appraiser and or credit officer should further

investigate whether the lengthy vacancy has negatively impacted the physical condition of the property

and/or systems, such as heating, cooling, water and waste water syst

ems.

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June 2011

If tenanted or occupied by anyone other than the borrower the appraiser should ascertain the length of

the lease or rental agreement and the amount of rent the tenant pays.

If the property is under construction, the appraiser should ask for and carefully evaluate the budget to

complete the project. Most construction projects exceed their budget, exposing the lender to risks of an

unfinished building.

Evidence (as available) of any soil conditions such as subsidence/landslide, excessive moisture,

excess

ive rocky conditions which could impact the stability of the structure.

Ingress to and egress from the property including:

Rights of way across or through the property

Availability and security of parking

Repairs identified. A repair list should take into consideration health and safety of the structure,

cosmetic improvements and cures for functional and physical obsolescence. The repair list should

provide an opinion of the cost to cure, but should be subject to further evaluation by the Underwriter or

cre

dit analyst.

Environmental Factors. See EBRD s Environmental Procedures for Mortgage Loans (

www.ebrd.com

Any extensions or modifications to the original structure that would negatively affect the conclusion of

value, such as a room extension that was not constructed with quality craftsmanship thereby requiring

it to be rebuilt.

Building permits or planning permission (obtained or required as the case may be)

Services

the appraisal should state whether water, natural gas, electricity and/or other utilities, are

available. (Special note should be given to the existence of passive energy systems since such systems

may reduce the monthly expense of the borrower)

If under construction the appraiser should be provided a copy of the approved building plans and the

cost of construction budget. The appraiser should evaluate the stage of construction reached, any

deficiencies noted in the work and an estimate of time to complete the construction. Special attention

should be given to any project that has been delayed or exposed to the elements for more than a few

months as deterioration of unprotected construction materials may shorten the life and undermine the

strength of the material.

When the appraisal is complete, the appraiser should be signed and should include their qualifications and the

name of the firm.

Appraisal reports should be carefully studied by the underwriter and loan analyst. Irregular matters or anomalies

should be addressed and if satisfactory mitigants cannot be employed, the matter should be directed to the

Senior Credit Officer. Mitigants include having the appraiser address irregularities in the conclusion of value;

lowering the loan to value of the loan request or requiring the appraiser to determine a quick sale or distressed

sale value in the event the lender was required to dispose of the property in less than a normal market time.

Other Property Reports

Occasionally it will be necessary for a lender to obtain opinions of the condition of a property fro

m other experts

such as a structural or environmental engineer.

Engineering and Structural

When a lender is evaluating a loan on a property that is beyond 100 years old, or when there is evidence that the

property has had one or more vertical or horizontal additions, it is well advised to obtain an opinion of

suitability and safety from a structural engineer

Further, in cases where a region has been devastated by a

catastrophic event, such as in Thailand in 2010 and Japan in 2011, the soundness of the structures may have

been undermined.

An engineer s report will detail the physical condition of the property with stress tests to determine the

remaining physical life of the property as well as potential costs to remediate conditions found.

In Cairo, a building collapses each week from poor structural support and from vertical additions to a

n existing building

where the foundation and lower supporting structures have not been reinforced.

Mortgage Loan Minimum Standards Manual

June 2011

Environmental

Not

withstanding the health and safety of the borrowers, a lender must be concerned about contaminants and

risks found in building materials and subsurface of the land. For example, prior to 1978, lead based paint was

widely used to pain the interior and exterior of homes. While it may seem unthinkable, small children who

ingested paint chips latter suffered debilitating maladies. In many countries, asbestos was used to insulate pipes

and heating systems. If airborne, asbestos causes lung cancer.

Consequently,

a lender must take these matters into consideration or at the least investigate the potential for

contaminant risk in the event that the lender must repossess the property. Appraisals should be detailed reports

and should include photographs of the interio

r, exterior, neighbourhood and of each comparable.

Lenders should refrain from using desk top valuation models or drive by evaluations for loans exceeding 50%

LTV. It is well advised that the Loan Officer make a cursory inspection of the property when meeting the

prospective borrower on site for the application and note his or her findings in the loan file.

For further information on environmental factors see EBRD.s Environmental Procedures for Mortgage Loans

(

www.ebrd.com

Mortgage Loan Minimum Standards Manual

June 2011

PROPERTY OWNERSHIP A

ND LEGAL ENVIRONMENT

(MS 05)

Many aspects of property ownership have been decided by courts and national laws and therefore are very

country

specific

. The following chapter has been written to guide through what could be a typical legal

environment, but should be reviewed and a

dapted to the specifics in place.

A general definition 'ownership' is the right to have exclusive use of a parcel of land, home or an apartment

without worry that another person will claim an ownership or right to use the same property Ownership may be

subject to limitations made by decree. For example, a seller of a parcel of land may transfer to a buyer the right

to use and build a home on the parcel, but

may

reserve the right to any minerals found under the surface of the

land.

Ownership is also subjec

t to civil laws, such as zoning and use, height restrictions and safety matters.

In most countries, if the state needs to acquire land for social or infrastructure purposes then it may exercise its

power a (sometimes known as eminent domain) by issuing a compulsory purchase order' (sometimes known as

a condemnation order) and the owner may be compensated with the fair market value of the property.

Lenders are cautioned to have their legal staff include provisions in the loan agreement and security

agreemen

t which address the lender s superior rights to payment or settlement awards from condemnation

awards. Payment should be made to the lender and property owner jointly, which the lender may pay off the

obligation of the borrower and/or reduce the obligation

in proportion to the taking of the building or land. For

example if the collateral for a loan is a detached single family home on .5

hect

are of land and the state had

issued an order for the taking of 20% of the land for the expansion of a highway, the loan amount should be

reduced by 20%, thereby keeping the

loan

value

ratio within the original agreed upon amount.

Ownership can be:

Sole and separate: one person owns the property and

if married, the spouse

agrees to give up any claim

to ownership.

Joi

nt Tenancy: two or more people own the property with equal or unequal shares as determined

between them. In some countries all parties must agree to sell and/or pledge for collateral.

Tenants in

Common: Ownership consists of two or more owners, and need not be married or related, with each

having a right to sell their portion independently.

Types of Title

There are two basic types of title or ownership

Freehold and Leasehold.

Freehold estate is ownership and rights to use a property without limit in time, except for the rights of

the State

A freehold estate may be subject to the obligations pre-existing on the title of the property

(such as the obligation of future taxes), which were passed on to the buyer by the seller.

Leasehold estate is where the owner with freehold rights has granted a lease on the land (or building)

for a

specific

period of years and thereby gives to the leaseholder a right to use the property

exclusively. The leaseholder has complete possession of the land/property for

the specific

term

as long

Ownership has a legal basis in the laws of the land and may have an impact upon heirs of the owners. Lenders should seek

competent legal advice before crea

ting conveyance deeds that may impact the spouse or heirs of a borrower upon death.

Ibid

Best practice: Consult a competent attorney on family, marital and contract law and do not allow loan officers

or other staff to give legal advice on the matter of ow

nership

Mortgage Loan Minimum Standards Manual

June 2011

as the user makes payment to the owner.. Leases can be for anything from 5 years to 999 years. It is a

best practice for a lender to avoid making a loan on a property where the lease term is less than 50

years from the maturity of the loan.

Tenancy is the right in a leasehold estate to occupy for shorter terms such as letting a house or apartment for 6

months to 3 years. Tenancy is not a title and it gives no right to remain in the property beyond the contractual

term.

MINIMUM STANDARDS

Lenders should consider mortgages only for people who have Freehold or Leasehold estates with a substantial

unexpired term on the lease.

The borrower should either have:

Freehold (Full ownership) legal title which gives them all rights to use the property without limit in time,

except for the right of the State to take over the property in certain circumstances

after

paying compensation

based on at least full market value.

The property may be subject to certain

rules

placed on the property by a prior owner or developer. The

lender should seek legal advice on the impact to the proposed loan as a result of the restrictions.

ii.

Leasehold

title with the term of the lease equal to or not less than 50 years

after

the

maturity

of the

loan.

Minimum residual should not be less than 20 years so that it will take term of mortgage into account. It

recognised that this type of legal distinction may not exist in all jurisdictions.

In some countries, land ownership may be held by an extended family or tenants in common if owned by a

community

Lenders must carefully evaluate the legal complexities and risks of lending to borrowers of

common land ownership, specifically where a lender may be restricted from foreclosure.

Registration of Title

Many countries have updated and improved their property registration systems by implementing a Land

Registry,

where titles, conveyance deeds, mortgages, encumbrances and other matters affecting real property are

registered. During the loan origination process, and before loan approval, the title to a property must be

examined, usually by a notary or other professional competent in such matters. This examination is known as

examining the chain (or abstract) of title to determine if the title has any previous claims (also known as colour

or clouds).

Claims or clouds

, such as an existing mortgage,

may inhibit the rig

hts of the lender,

and

must be removed before

the new mortgage is placed on the property. This process usually requires negotiation between the attorneys for

the parties and the preparation of

payoff statement. At settlement, checks may be exchanged and a release is

obtained which will be recorded in the Land Registry before the new mortgage or security agreement is

recorded.

The chain of title should identify the following:

Current owner of record

Type of ownership (freehold or leasehold)

Encumbrances on

the land such as easements for utilities

Public roadways or access to the land or building

Denominated obligations such as past due or current taxes or existing mortgages

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June 2011

Another common problem encountered by lenders is a title that is clouded by the mor

tgage loan from a previous

borrower. This is a result of the previous lender failing to record the termination of the mortgage in the Land

title reveals this condition, the previous lender should be contacted immediately. If the previous lender states

that there is still money owed to it, the previous owner must be contacted to resolve the matter. This could result

in a delay and the new len

der should not use the property as collateral until the previous mortgage is satisfied.

For this purpose, it is advised to use an independent and neutral third party such as an escrow agent and/or

attorney who will collect the satisfaction of the previous

mortgage with a promise to record the satisfaction only

when the escrow agent or attorney is in a position to 1) pay the previous lender in full and; 2) record the new

mortgage as a superior lien on the collateral property. To facilitate this activity, a title search must be conducted

on the previous owner and the collateral property. Further, if time should elapse between the time the purchase

agreement is written and accepted by both parties, the title should be searched again before settlement to be

cer

tain no other claims of title have appeared.

Mortgage Loan Minimum Standards Manual

June 2011

INSURANCE (MS 06)

MINIMUM STANDARDS

Insurance is a secondary source of security if there should be a catastrophic event such as death of the borrower

or severe damage to the property from fire, flood or other acts of nature. The proper insurance policy will

reimburse the lender for potential approved losses.

There are several types of insurance that a lender should require (life and property) and another

(mortgage)

that

should be considered when making a mortgage loan:

Life

insurance

which insures the life of the borrower and which benefits the lender and possibly the

surviving members of the family

Hazard

or property insurance, including fire, flood, earthquake

which insures the collateral property

and provides protect

ion to the borrower and lender in the event of a catastrophic event

, and

Mortgage insurance

which insures the lender in the event that the borrower defaults on the loan

and/or cannot repay the debt in full.

Ultimately, the purpose of insurance is to shift the risk of loss to another entity and to provide for a cash

settlement for a catastrophic event such as a fire that destroys the collateral property.

When considering insurance, the lender and borrower must look to the capitalisation and stability of th

insurance company. Insurance providers should be of the highest quality

in order for the insured to rely upon

for payment when needed.

Life Insurance

MINIMUM STANDARDS

A Life Insurance policy on the life/lives of the borrower(s) to cover the outstanding principal for the term of the

loan. The policy is to be assigned to the lender and its value will decrease in line with outstanding balance of the

loan.

Alternately, the customer should be provided the opportunity to consider a whole life insurance policy that has

value beyond the mortgage. Such a policy is beneficial for the surviving family members. A whole life policy

can have an assignment of benefits to the lender as the first priority, which would pay off the loan and leave the

survivors with a free

and clear home as well as a potential cash benefit.

A Life Insurance policy on the lives of the borrower(s) must be sufficient to cover the outstanding principal for

the term of the loan. The policy should identify the lender as an additional loss payee in the event of death. The

policy proceeds will be used to pay off the debt and if there are additional proceeds, the survivors should receive

the balance.

Basic types of insurance are Term and Whole (Universal) Life Insurance.

In the US

the Key Best Rating Service is considered a reliable rating service which evaluates the capitali

ation and

stability of insurance and re

insurance compa

nies.

Mortgage Loan Minimum Standards Manual

June 2011

At the time of the loan, the customer should be provided the opportunity to consider a whole life insurance

policy that has value beyond the mortgage. Such a policy is beneficial for the surviving family members. A

whole life policy can have an assignment of benefits to the lender as the first priority, which would pay off the

loan and leave the survivors with a free and clear home as well as a potential cash benefit. The following

describes each type of policy.

Term Insurance

Term insurance is a very basic risk policy and

could be

he least expensive

if issued

on a euro by euro basis. The

policy typically will have a fixed annual premium during the course of the loan with a declining benefit. Term

insurance however, is the a low quality insurance that is quite profitable for the insu

rance company and provides

limited benefits to the borrower and the borrowers family as the benefit declines as the principal balance of the

loan decreases.

Whereas a universal life policy will bring more benefit to the family upon the death of the principal borrower as

the policy has a growing value, which upon death, would pay the mortgage in full and any value thereafter

would be paid to the survivors. For example:

Hazard Insurance

MINIMUM STANDARDS

Property Insurance should only be accepted

from

high

rated insurance companies with adequate reserves to

facilitate claims for catastrophic events, such as an earth quake, flood or other natural disaster.

The policy should be indexed

contain

defined

escalators to provide for increased coverage against loss if the

property value increases.

The initial coverage should be sufficient to replace or reconstruct the property* in a covered event.

The policy

should

issued in the joint names of the

borrower

and the lender

and

the interest of the lender (

ss payee

) should be noted in the insurance policy.

*This is the amount the property should be insured for each year and it should cover the replacement cost of the

building should it be damaged or fully destroyed. This cost is linked to either a construction industry index of

costs or to the Consumer Price Index. In addition to the main building, the following should be included in the

insured amount

out buildings, site clearance, temporary re

housing costs and professional fees.

As it relates to hazard insurance, the lender must have adequate provisions in the loan security agreement to

require the insurance; to provide for verification that the insurance premium is paid when due, to provide for

Mortgage Loan Minimum Standards Manual

June 2011

sufficient insurance coverage to repair the property to its original condition (to the extent possible), and to

provide for a clear procedure for disbursement of the proceeds of a claim; for example:

The security agreement should provide a clear statement that:

Claims must be filed promptly (say within 10 days)

of the date of a catastrophic event

Claims must be payable to the lender and the borrower or the lender exclusively

If in the event there is damage to the collateral property, the damage must be repaired within a

reasonable time, (say 20 days),

The repairs

must be completed by a licensed contractor

The repairs must be in good workmanship

The repairs are subject to the approval of the lender

Mortgage Insurance

MINIMUM STANDARDS

Mortgage insurance is a credit enhancement which the lender may consider when making loans that exceed the

recommended loan to value ratio, although the maximum LTV as defined in the LMS will still have to prevail

The lender must assure itself that the mortgage insurance company is adequately capitalised.

he lender

must be

identified

as first beneficiary under the policy.

Mortgage insurance is a credit enhancement for the benefit of the lender and a buyer of the mortgage note or

securiti

sation agreement, wherein the premiums are paid by the borrower. Mortgage insurance is generally

required when a borrower request a loan with a down payment of less than 20%. For example, if a borrower has

only 15% down payment, the loan to value is 85%, the lender must displace risk. With mortgage insurance, risk

for the small down payment is shifted to the mortgage insurance company. Effectively, if the borrower defaults

on the loan, the mortgage insurance company will cover a certain percentage of any loss (in this case, the first

5% of the loan) if the borrower defaults and the property must be foreclosed and liquidated. After which, the

lender assumes the balance of any losses.

Mortgage insurance products vary by amount of coverage, method of premium payment and quality of

borrower. A lender must fully investigate the mortgage insurance company to determine whether the company

has sufficient capital and assets to absorb a systemic loss.

How it works:

Let's assume the lenders credit policy is to carry risk of 80% LTV.

The property being purchased costs 85,000 and the loan application is for 90% LTV which is 76,500.

Normally, the lender will lend 80% of

85,000, which is .68,000.

For e

xample:

Purchase price

85,000

Valuation

85,000

Amount of Loan (90%)

76,500

80% of purchase price

Amount to be bonded

8,500

Cost

225

The cost of the bond in this instance is calculated at 3% of the bond amount. In general the higher the LTV the

higher the cost i.e. the insurer is taking a greater risk.

Mortgage Loan Minimum Standards Manual

June 2011

Build

ers and Contractors Guarantee

In order to improve the quality of construction, some Governments, working with representatives of the

construction industry, have introduced a regulatory framework for the private house building sector.

The scheme specifies a high standard of construction and requires inspections of houses being built to ensure

compliance with the standards of construction specified. The guarantee covers homes and apartments and is

available to builders who join the scheme and meet its

require

ments.

One scheme provides the following guarantees to the purchasers of all newly constructed houses.

Guarantees house against major structural effects for 10 years

Guarantees house against smoke and water penetration for 2 years

Guarantees against loss

of phased payments before the house is completed

The 10 year and 2 year guarantees are self-evident. Let s look at the phased payment guarantee. This works on

two

levels:

Level 1

This is to protect the purchaser (and lender) in a situation where the builder declares bankruptcy or goes

into liquidation during the building period. The scheme will

protect the purchaser's deposit or contract payments up

to a specified maximum.

Level 2:

This comes into effect usually after the final inspection when the house is ready to be handed over to the

buyer. The financial indemnity for the remainder of the contract period now increases to a higher specified

maximum.

Mortgage Loan Minimum Standards Manual

June 2011

CREDIT AND RISK MANA

GEMENT STANDARDS (MS

07)

MINIMUM STANDARDS

Every

lender must have a well-

defined

Credit Policy which must clearly identify the parameters by which the

lender carries out its mortgage lending activities with emphasis on practices that identify and mitigate risks. This

chapter will include subjects in sub-headings which will refer to other chapters in the manual. The elements of the

olicy to be discussed in this chapter include:

Introduction

to Credit and Market Risk Management

Contents of a Credit Policy

Credit Risk Management

Underwriting and Operational Standards

Loan Administration and Default Management

Introduction to Credit and

Market Risk Management

Key risks that financial institutions must guard against include:

Liquidity Risk

Interest Rate Risk

Currency Risk

Market Risk

Credit Risk

Operational Risk

This chapter will focus only on Market and Credit Risk in relation to Mortgages and will address specific elements

necessary in the Credit Policy.

Credit and Market Risks arise in areas such as:

Competitive

pressures

- competitors may introduce lower credit standards or accept vulnerable customers

from other lenders to gain busines

Aggressive pricing in the way of lower interest rates and fees

Economic downturn - leading to a contraction in employment or in property values Substantial increase

property values

as in the case of a potential market bubble

Portfolio

oncentrations

ver exposure to a geographical area or employer

Fraudulent

ctivity

- fraud by applicant, intermediary, lawyer, and valuer results in approval which in the

ordinary course would be declined.

Changing

ttitudes

- v

olatility

in markets/changes in social/political attitudes which make it difficult to

repossess and sell a family home.

The following approaches are adopted to manage these risks:

Maintain consistent credit standards through all phases of the economic cycle. Specifically avoid lowering

credit stand

ards in response to competitive pressure.

Investigate the integrity of the applicant at the outset and maintain a focus on 'repayment capacity'.

Stress test 'repayment capacity' by increasing the interest rate in the repayment capacity model.

Maintain and

develop comprehensive and effective systems for managing credit exposure.

Monitor and manage portfolio concentrations to avoid over exposure.

Ensure a team of experienced well trained and professional lenders are in place.

Immediately cease to deal with fraudulent parties and implement corrective actions to guard against similar

occurrences.

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June 2011

Credit grading the customers - Credit Grading is an automated system that measures risk based on payment

performance and automatically downgrades on default.

Develop an

automated collections system to follow up on arrears.

Application of loan loss provisions when making mortgage loans.

Pricing lending at margins which provides a satisfactory return on equity (ROE) and reflects the level of credit

risk and related managem

ent costs involved.

Managing the 'credit' elements of new products to ensure balanced risk reward ratio.

Regular reviews with Group Credit (if Mortgage Centre is stand

alone).

Full compliance with all relevant legislation and internal codes of conduct.

Con

tents of a Credit Policy

Primarily the Credit Policy

must address:

Target borrower

First time home buyers

Move up buyers

Refinancers

or equity release borrowers

Second or vacation home buyers

Foreign nationals

o Types of customers to whom loans will not be granted (e.g. minors, active bankruptcy or

previously foreclosed borrowers

)

Acceptable income sources

and, on a case by case, a constant and predictable stream of inflows from

remit

ances from abroad (based on a proper analysis by the mortgage provide

Wage earners only

Self employed

Income from investments such as homes for rent

Acceptable properties such as

Single family homes, flats and units for rent

Unacceptable properties such as unimproved land

General lending parameters, such as

Term or tenor

of the loans made

10, 15, 20 or

25 years

Type of loans

Fixed rates

Variable rates

Underwriting rules

Housing debt to income ratios

Total debt to income ratios

Adequate reserves

Standards in relation to property valuations, such as

Maximum loan to value

Minimum experience level of appraiser

Minimum number of comparables used

Age of comparables used

Credit authority

Centralised operations

Decentralised operations

Commitment to operate to highest ethical standard and within all legislation.

Mortgage Loan Minimum Standards Manual

June 2011

II.

Credit Risk Man

agement

Risk management is intended to strike a balance between the minimisation of loss and business growth. The lender s

first priority is to protect the depositors money. This balance requires management to review the Credit Policy

regularly to reflect

changing business objectives and

market conditions.

The policy must address the type of credit that is acceptable to the organisation, for example, long term loans

versus short term loans, and loans for flats versus vacant land. The policy must include provisions for

identifying fraud and borrowers known to be dishonest or those that engage in risky ventures. The policy must

address lending criteria in accordance with Minimum Standards as outlined in Chapter

Credit and loan standards are an integral element of Credit Risk Management which includes:

Collateral

Type of acceptable real property

Residential properties should be

the highest consideration

Undeveloped land, industrial and special use

properties should not be considered

Location of real propert

Properties in developed and urban areas should be

the highest consideration

Rural or remote properties should be considered on a case by case basis only

Condition of real property

Properties should be well maintained with minor repairs considered

Propert

ies requiring extensive retro- fitting or rehabilitation should only be considered with the

guidance and advice of engineers and licensed contractors

Occupancy of the real property

Owner occupied properties should be the highest priority and be offered mar

ket interest rates

Loans for non-owner occupied or tenanted properties should be adjusted for risk. The LTV should

be lower and the interest rate should be higher to

compensat

the lender for risk.

Value of the real property

Each lender should establish the minimum value of a property it will consider for collateral. This

value may vary based upon location and local conditions.

Capacity

The amount of the borrower s net income as it relates to the monthly payment: The maximum

Housing Debt to Income Ratio is recommended

is 35% of the borrower s net income.

The amount of the borrower s income as it relates to all revolving debt including the proposed

housing payment should be quantified: The maximum Total Debt to Income Ratio is

recommended is 50% of the borrow

er s net income.

Reserves or excess cash that the borrower has after all debts have been paid should be quantified

The minimum cash reserves for a borrower after all payments should take into consideration

the

number of family members living in the household, their ages and if elderly are in the house, their

need for medical treatment.

Capital

The amount of readily available cash for a down payment on the purchase of a home. The

minimum down payment requirement is recommended to be 10% for a loan insured w

ith Mortgage

Mortgage Loan Minimum Standards Manual

June 2011

Guaranty and 20% without a guaranty.

Capital can come from a borrower s savings, a gift from family members or the liquidation of

another asset.

Credit

A history of a borrower s payment of other credit obligations is a critical tool in evaluating future

performance.

o It is recommended that the borrower have demonstrated a consistent payment history on

revolving credit or other housing expense. Monthly payments made within 5 days of the

due date should be rated higher than borrowers who have made

payments 10 or more days

after the due date. Borrowers who have made payments more than 30 days past the due

date consistently over a period of 12 months may have underlying problems that should

be further investigated. Borrowers that demonstrate an irregular payment pattern may be

demonstrating signs of poor financial management.

Credit reports should be obtained from reliable reporting companies.

Lenders should refrain from making loans to borrowers with payment histories known to be slow.

Lenders should

refrain from making loans to any persons with a criminal background.

Foreign Currency Loans

The Credit Policy should clearly identify those circumstances where foreign currency loans will pose

unnecessary risk to the organisation and borrower.

The policy should require lenders to explain in writing to borrowers the risk undertaken by the borrower in the

case of mortgage loans denominated in a foreign currency should experience an erratic change in value.

Underwriting and Operational Standards

The operational section of the policy should set forth a standard set of procedures that the loan department will follow

when

taking an application, building the loan file with acceptable documentation and

appl

ying

underwriting rules. The

policy must ensure that underwriters and account managers apply the policy initially at credit assessment stage and

subsequently throughout the life of the mortgage. The process of quality control must be applied all during the loan

process.

For each risk factor, the lender should set

a ceiling above which it will not lend

for example if a borrower has a very

good credit rating but lower down payment the ceiling would be 8

% LTV if mortgage insurance is available.

The policy must also address compensating factors for reconsidering a l

oan including exceptions as well as decline and

appeals procedures. The policy should require specific factors, such as increasing property values or increasing wages.

Specifically a loan may be approved where a borrower has a very high income and lower do

wn payments. Thus a loan

with a higher LTV ratio may be made with a compensating increase in interest rate to offset risk. The same would be

true when considering a higher DTI when making smaller loans. When interest rates are increased a corresponding

inc

rease in loan loss provisions is also necessary.

Staff and Credit Training

The policy must include expected lending skills standards, lending authorities, tiered discretions, training requirements

and succession planning. Regular training for staff is a mu

st. Even seasoned loan professionals must be current on new

lending trends and regulations. The Credit Policy should be implemented by setting out clear factors to be

considered in reaching a credit decision, how each is to be taken into account and how they are to be combined

to reach an overall conclusion. Objective credit assessment and prudent credit decisions are made by

ensuring

that all loan requests are managed by experienced staff with a minimum of 12 months training. Competence is

to be judged by Chief Credit Officer or delegated experienced lender before a lending authority is authorised. A

significant commitment should be made to the training and

development of skilled lenders.

Mortgage Loan Minimum Standards Manual

June 2011

Loan Assessment and Quality Control

In conjunction with the application of the Credit Policies and the Underwriting Criteria the following

Six

Loan

ssessment

teps

should be undertaken before arriving at a decision.

Step 1: Documentation

Loan applications taken by loan officers should be fully complete, signed by the borrower and

represent an accurate position of the borrower s financial condition as of the date of the application.

Documentation collected from the borrower should be from sources that can be independently verified

and validated such as:

Wage or salary state

ments

Bank account statements

Credit accounts with other creditors such as auto loans or student loans

Verification of rental payment

Personal Identification

Disclosures

at the time of the loan application, the loan officer should provide a written estimate of

the costs of the loan. The disclosure should allow the borrower a clear picture of the amount of down

payment required, loan costs, third party reports and settlement charges that will be needed at the close

of the transaction.

Step 2: Analysis and

Verification of Ability to Pay

Using the metrics established in the policy manual, the analyst will confirm and validate:

Down payment

Lenders must

confirm that the borrower has a minimum of 20% cash to invest

o The funds are in a verifiable account and have been in the account for a minimum period of

time, such as three months

Recent or large deposits to bank accounts should be further investigated to determine that the

funds were not borrowed or from an unacceptable arrangement

Income

o The borrower is currently and gainfully employed in a trade or profession for a minimum of

one year

Income is expected to continue for the foreseeable future

Income has been independently validate

through the employer or accountant

Is greater than 35% of their housing debt

greater than 50% of all revolving debts

Step 3: Credit History

The borrower must have demonstrated a satisfactory history of repayment of obligations such as auto loans, student

loans, credit cards or other credit arrangements. Where there is a lack of fo

rmal credit, alternate forms of credit should

be considered, such as timely payment of rent, regular deposits to a bank account and payment of utilities.

Where formal credit history is available the

analys

t and underwriter should carefully review a borrower s history

where payments have been made after 10 days of its due date. Further if a borrower has made payments after 30 days

of its due date, but less than 45 days, the risk of a slow account is much greater and should be approached with

caution.

Step 4:

Property Suitability

The collateral is a key element of mortgage lending and when using real property a lender must be assured that the

collateral is suitable for a secondary source of repayment of the loan in the event that the borrower defaults. Using t

appraisal or other technical reports the lender should consider the following:

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June 2011

Location

The location should be desirable to prospective buyers

It should be near employment, transportation

and

shopping

The location should not pose a health hazard to the

buyer

Condition

The structure must be safe

o The structure should be habitable, functional and have an economic life beyond the term of

the loan

Marketability

o There should be sufficient demand such that if the lender were forced to repossess the

collateral,

it could be sold in a reasonable time, (less than six months), at a price equal to or

greater than the debt

Step 5: Legal Status of the Borrower

It is necessary to verify:

The identity of the borrower

The borrower s marital status

The borrower s nationality

Step 6: Transparency and Closing Costs

In Step 1 we identify the necessity to provide the borrower with a clear and concise disclosure of the costs of the

transaction. There should be few changes to the costs, unless there has a change in circumstances which require a

change in the loan. For example; the appraised value was lower which caused the loan amount to be reduced.

A closing cost estimate should include the following:

Loan origination charges

Appraisals and structural reports

Credit reports

Title

examination reports

Attorney or settlement provider costs

Reserves for taxes, insurance or mortgage insurance

Registration fees

Local transfer taxes

The borrower should be counselled to avoid large expenditures prior to the closing, so as to be prepared fo

r the closing.

III.

Loan Administration and Default Management

Loan administration, sometimes known as Loan Servicing is the overall management of a loan portfolio after loans

close. However, sound management of a loan portfolio begins with diversification of the portfolio which is

achieved by maintaining an acceptable risk spread of geographical locations, product concentrations, employer

concentrations,

LTVs, adequacy of mortgage insurance and business sources. Limits or guidelines may be set for

certain conc

entrations. Loan Servicing is comprised of several units within the department:

Cashiering

Loan collections

Tax and insurance payment

Remittance and accounting

Recordkeeping

Customer service

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June 2011

Special servicing, foreclosure and asset management

Loan Admini

stration Policies

Loan Administration Policies and Procedures begin with the development of a comprehensive suite of

management information reports to monitor business progress (see

Chapter

11 for detail). In relation to Credit a

range of reports needs to be in place to analyse items such as new applications, loan approvals, loan declines,

aging and arrears, credit grade profile, loan payoffs and maturities and shock testing. The data should be reviewed

on a quarterly basis to identify trends that maybe use

ful or harmful to the lender.

edit Loss/ Loan Loss Provisions

While loan losses are never desired, prudent management requires planning for such an event. The lender

should confer with the Central Bank to establish range of loan loss p

rovisions which inc

lude:

General provision

Specific provision

Write offs

A General Provision

Agreed with the Central Bank is a percentage of total mortgage lending and is instituted as a hedge against

possible future losses.

Specific Provisions

Are set against individual mortgages, which are in arrears and where potential loss is identified. Potential loss

arises where analysis indicates an inability to service the debt and where the net realisable value of security

held is less than the debt. It is the responsibility of the Servicing Manager with input from the

Collections

Manager

to downgrade the account and recommend an appropriate level of specific provision.

Write offs

Will only be approved by duly authorised officers

, only after all of the facts of the

loan have been reviewed and all

collection efforts have failed.

7.2

ortgage Loan Servicing

When Financial Institutions held the mortgages they originated, they often also collected the mortgage payments

from the borrower. With the growth of the mortgage industry, and, in particular, the growth of securitisation,

those who originated the loan or mortgage were often different than those that owned the mortgage. This

necessitated the growth of another industry: mortgage servicing, or the collection and administration of the

mortgage after the loan has closed.

In general, the mortgage servicing process can be broken down into six key functions, each of which should

have its own policies and procedures:

Cashiering or Collecting Payments and posting them to a

borrowers account or ledger

Reporting of cash flows and delinquencies to management

Delinquency collections and foreclosure prevention

Loss Mitigation including verification that taxes and insurance are paid current

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Foreclosure and special servicing

inc

luding loan losses and write offs Calculation of payoff statements

upon request

In the course of mortgage servicing, the primary contact between the servicer and borrower will be through loan

administration including collections of payments. In the vast majority of cases, this is the only relationship that

will exist between the homeowner and the financial institution.

The primary contact between the servicer and the mortgage holder will be in the reporting function. Important

data will need to be communicated. In particular, the owner will want to know the percentage of loans that are

current. For those loans that are not current, investors will need to know the data on the period of delinquency,

generally expressed in 30, 60, 90 and 120 days delinquent tranches. The servicer should be given data regarding

mortgages that have gone into foreclosure and any recovery payments that stem from that. Servicers should also

provide data on loan modifications and on prepayments sometimes known as runoff

When a borrower falls behind in mortgage payments, the servicer has a critical role to play. How it handles this

function can often determine whether the loan can be made current or whether the borrower will fall further and

further behind in delinquency. Servicers ca

n choose to contract this function out to counselling agencies.

Some organisations combine two or more of these functions. For instance, it is common to see delinquency

collections and prevention, loss mitigation and foreclosure in the same unit. We recommend that these be

handled as distinct functions in order to ensure that all reasonable steps are taken to bring the borrower current

rather than beginning foreclosure proceedings with little communication between servicer and borrower.

If the loan cannot be brought current, then the Financial Institution s policies on Arrears Management should

come into play. These policies should be fair, transparent, well documented, and in accordance with the relevant

laws.

There are still situations, particularly with smaller lending institutions, where the financial institution still holds

the mortgage note and/or still performs the servicing functions. In these cases, the general principles outlined

here still apply.

It should be noted that the current proposal under Basel III caps the amount of Mortgage Servicing Rights that

are considered a part of the financial institution s capital at ten

percent

. There is, however, a multi-year phase in

on this rule. For further reading, see the chapter on Basel.

7.2

Arrears Mana

gement and Repossession

As noted earlier in this chapter, lenders must have a Default and Arrears Management Policy within its overall

Credit Policy which should include specific provisions for:

Well trained team familiar with laws

Clearly documented proc

ess

Overall approach to arrears management including face to face contact and analysis of the five reasons

for delinquency with policies which provide clear solutions to reinstate a loan.

Follow up procedures with

specific action which are measurable and a

chievable.

Enforcement:

Lenders should have clearly defined policies for enforcement cases. Executory titles

should be a basic aim for any lender in the case of non-repayments and after all other alternatives were

exhausted.

Unfortunately, there are accounts that go into arrears as the customer has become delinquent on the mortgage

payments.

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June 2011

The lender s IT department should develop and provide a report to the Collections Unit that lists accounts aged by 10,

20, 30, 60 and 90 days in arrears. The C

ollec

tions

Unit must then follow procedures to contact the borrower for

payment.

The first objective should be to make every effort to bring the account current. The quicker an actual or potential

delinquency can be resolved, the more likely that both the customer and the credit institution will have of

success. Conversely, the longer the account is delinquent, the greater the likelihood of foreclosure and

repossession.

Different lenders have different process on when and how to intervene. Some lenders use system generated

letters to follow up initial arrears situations. Other lenders reach out to a borrower immediately at the end of the

payments grace period, often ten days after the payment is due.

This can serve a reminder in the event that the borrower has forgotten. It can also serve as the beginning of a

cooperative dialogue between the lender and borrower in the event the borrower has encountered unforeseen

obstacles to payment, such as the loss of a job or significant health care expenses.

When contact is made, the collector will analyse the reasons for default and outline solutions for repayment. The

collections policy must be progressive for borrowers that are further behind in payments and/or when it appears that

foreclosure is imminent.

Remedies for re

instatement of a loan include:

Partial payments or full plus partial payment

Restruct

ure or modification of the debt

Deferment of payment

This initial contact has another purpose it provides valuable data to the lending institution. Did the borrower

respon

d to the lender s inquiry? If the borrower responded and there was an agreed upon plan of action, was it

measurable and achievable? If the borrower needed a period of abatement from mortgage payments, did he or

she resume payments at the agreed to time and

amount?

If the borrower either did not respond or failed to comply with an agreement, it is essential that the customer be

advised, in writing, of the consequences of non-payment. If the financial institution has exhausted all options,

and if the borrower still does not comply with the terms of the mortgage, then it is necessary for the institution

to begin the process of repossessing the property. Legal processes vary considerably between countries and

oftentimes between different municipalities or states

within a country.

It is also important that the financial institution review all the documentation made at the time of mortgage

origination, as well as any and all follow up correspondence, to ensure that it has acted properly and in good

faith.

The Loan Servicing division should have a separate policy and procedures manual for Arrears management,

Repossessions, Loan Loss Provisions and Write- offs. From a systems point of view, arrears profiles should be

split into different categories based on the period

of delinquencies

such as 30, 60, 90 and 120+ days.

If and when it is necessary to repossess the home, it is imperative that all municipal, state and country laws are

followed. It is also important that the financial institution have written procedures and that it has the

documentation that these procedures are followed.

It is important that the lending institution take reasonable actions to prevent this from occurring. Lenders have

numerous options including a) temporary abatement;

mortgage restructuring; c) accepting less than the full

amount of the mortgage ( short sale ) or; d) accepting a deed in lieu of foreclosure. However, in those cases

when repossession is necessary, the process should be clear, fair and well documented.

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June 2011

DISCLOSURES (MS 08)

Advance disclosures t

o borrowers are critical to helping the borrower understand their obligations and the covenants they

have given to the lender.

Further, clear disclosures are instrumental in helping t

o reduce the loan default rate.

The following are recommended disclosures

with the ideal objective and information they should contain.

Types of Disclosures

Interest Rates and adjustments

With a fixed rate loan the disclosure should simply describe the payment

pected with the term and amortisation of the loan. A VRM should describe the index that the loan is tied to

and how the borrower can independently verify changes in the index. Further, the disclosure should discuss the

margin and why the margin is necessary, (to cover profit and operating expenses of the lender). Next

the

disclosure should discuss when adjustments to the monthly payment will be made and the disclosure should

provide an example of how the

payment changes with the index.

Loan costs and the Annual Effective Rate

Nearly all loans have costs associated in

addition to interest. These

costs may be third party

charges such as appraisal or engineering reports, attorney s fees and abstract fees. The

borrower should be provided a copy of a Loan Cost Estimate at the time of the application which will allow the

bor

rower time to consider the financial impact of the transaction prior to paying any costs or fees. Where

possible, an Annual Effective Yield or Annual Percentage rate should be calculated and disclosed to the

borrower where they can make a comparison with o

ther loan offers.

Foreign currency loans and the impact of value

flu

uat

ion

This disclosure should illustrate the impact of the

loan payment and/or impact on the reduction in princip

al due to currency devaluation.

Privacy and protection of personal data

Lenders should take every step necessary to protect a borrower s

personal information from being lost or stolen. A privacy and protection disclosure should clearly state who the

lender will share information with

and the borrower s agreement should be f

ormally obtained

Fair lending and equal opportunity

In many countries legislation has been passed to encourage access to credit

to all citizens who are qualified. Inclusive credit requires lenders to treat every applicant with dignity and

respect and to follow basic cannons of ethics. Each lender should develop a policy statement regarding its

commitment to fair and equal access to credit and to provide that statement to each prospective borrower with a

direct phone number to an officer of the lending ins

titution who will acc

ept and investigate complaints.

Borrowers

rights to receive copies of documents

Lending must be transparent to encourage trust and faith in

the process and system. Borrowers should be provided a disclosure that states that all documents used in the

loan process are available upon request.

Borrowers

rights not to sign documents with blank spaces

In general, as a recommended

best

practice, a

borrower should not be required to sign any document with a blank space. However, there are those times

when specific information is not available and the borrower could give limited approval, via a specific

disclosure,

for a representative of the lender to complete a document with a blank space.

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June 2011

BASEL II

AND III REQUIREMENT

S (

MS 09)

Introduction

The Basel Committee on Banking Sup

ervision is an international body of financial regulators.

The Basel II or the Capital Requirements Directive (CRD) as it is known in the EU did not fundamentally

change minimum standards in relation to the mortgage business. However, it strengthened gover

nance

arrangements and, where Credit Institutions (defined as commercial banks, non-bank financial institutions

granting mortgage loans and any other mortgage providers) are authorised to use internal risk models to manage

their mortgage portfolios; it out

lined minimum standards regarding the use and operation of these models.

As and when countries adopt CRD standards, subject to individual sovereign state discretions or regulations by

the respective Central Banks, as the case may be, Credit Institutions ar

e strongly encouraged to adopt these CRD

standards also.

In 2010, these standards were updated in what is now known as Basel III. The core of this new agreement is a

measure that will require banks to increase the amount of their common equity from two (2) percent of assets to

seven (7) percent. Common equity is considered the least risky form of capital.

Depending on the level of risk management sophistication in a Credit Institution, the CRD offers two

approaches regarding residential mortgages

a standardised approach and an internal ratings-based (IRB)

approach.

Under the standardised approach lending fully secured by mortgages will be risk weighted at 35%,

subject to certain conditions.

Under the IRB approach Credit Institutions are required to meet certain minimum qualitative and

quantitative standards and, provided these are met, Credit Institutions will be able to use internal data

to calculate the capital required to underpin their mortgage business. Thus the CRD strongly supports

the residential mo

rtgage business provided strict criteria are met.

Given the fact that Basel III is new, it has yet not delved into the specific technical issues in regard to mortgage

lending that are in the LMS. The specific details on mortgage underwriting are being discussed by an

international working group under the auspices of the Financial Stability Board (FSB) Standing Committee on

Standards Implementation (SCSI). However, while the SCSI has completed a peer review, no report has been

agreed to and issued. While the Section on Basel II included in the LMS is still applicable, it is likely to be

changed and also likely to be amended from time to time.

The draft standards under the SCSI note that:

Financial institutions should regularly review their standards on residential underwriting and adjust

them if there appears to be a build-up of risks in the housing market, or if there is a lending boom that

could pose risks to financial stability.

The regulatory framework should be broad enough to ensure that all residential mortgage lending is

supervised to protect both investors and consumers.

Mortgage data should be collected, analysed and reported at least annually.

While SCSI notes that while it will set high level principles rather than detailed international standards, it does

note that individual jurisdictions can set much more detailed standards including areas such as:

Ban on steering incentives, such as yield spread premiums, that vary based on the terms of the loan

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June 2011

Prepayment penalties

Mortgage data should be coll

ected, analysed

and reported at least annually

Borrower s ability to repay

Interest rate reset notices that require six

months notice

before an adjustable rate or hybrid mortgage is

to adjust

Appraisal reform

Corporate Governance

The credit institution s Board of Directors or an equivalent committee should review and approve all

material aspects of the grading and estimation processes. Senior management should possess a working

understanding of the credit institution s grading systems and detailed comprehension of its associated

management reports.

Senior Management should be regularly informed by these credit risk control units, which should be

independent from product underwriters. The information should include performance of the grading

processes, areas deficient and/or in need of improvement, as well as the results of previous attempts to

improve deficiencies. The reports should be detailed enough to give management specific information

by different grades and by migration across these grades, when applicable.

There should be a clear chain of authority from the very top of the organisation, which receives

information to identify and mitigate risk for the organisation, its investors and its consumers.

The credit institution should declare which approach it has adopted i.e. standardised or internal ratings

based approach (IRB), as well as information relating to management s methods for identifying and

mitigating risk.

Credit Risk Control

The credit risk control unit should be independent from the personnel and management functions

responsible for originating or renewing the bank s mortgage loan and related products. This unit should

report directly to senior management.

The primary areas of responsibility for the credit risk control unit(s) should include, but are not limited

to the following:

Testing and monitoring grades and pools

o Production and analysis of summary reports from the credit institution s grading sy

stems;

o Implementing procedures to verify that grade and pool definitions are consistently ap

plied

across de

partments and geographic areas;

o Reviewing and documenting any changes to the grading process, including the reason for the

changes;

o Reviewing the grading criteria to evaluate if they remain predictive of risk. Changes to the

grading process,

criteria or individual grading parameters sho

uld be documented and retained;

o Active participation in the design or selection, implementation and validation of models used

in the grading process;

Oversight and supervision of mode

ls used in the grading proc

ess;

Ongoing review and alterations to models used in the grading process.

The reports it produces should summarise the status of these mortgages, giving senior management the

ability to take action in the event of any negative trends.

The existence of an independent credit risk control unit is consistent with and does not

supplant

the

need for internal audit

function.

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June 2011

Internal Audit

At least once a year, an internal audit unit should evaluate the credit institution s grading systems and its

operations, including the

operations

of the credit function and the estimation of the risk components. This

should be done more frequently for those areas that are deemed higher risk.

Modelling Credit Risk in Mortgages (IRB approach only)

A number of Credit Institutions have invested resources in modelling the credit risk arising from their

mortgage business. Such models are intended to assist Credit Institutions in quantifying, aggregating and

managing credit risk. The models are not intended to supplement, but rather complement human judgment

and oversight which is necessary to ensure that all relevant and material information, including that which

is outside the scope of the model, is also taken into consideration, and that the model is used appropriately.

If models are used for the mortgage business they must be capable of producing robust and verifiable risk

components that are used as inputs to a formula

. One of the key items the model should produce is the

required amount of capital. The underlying data must be representative of the population of the Credit

Institution s actual borrowers or facilities. Credit Institutions must have written guidance.

The primary areas of responsibility for the credit risk control unit(s) should include, but are not limited to

testing

and monitoring grades and pools of mortgages. The reports it produces should summarise the status

of these mortgages, giving senior management the ability to take action in the event of any negative trends.

The formulas used as inputs into the model and the operational details of the system must be well

documented.

Loan Loss Provisions

Under the standardised approach to credit risk, general provisions can be included in Tier 2 capital subject

to the limit of

1.25% of risk

weighted assets.

Under the IRB approach, the treatment of the 1988 Accord to include general provisions (or general loan-

loss reserves)

in Tier 2 capital is withdrawn.

Credit Institutions using the IRB appr

oach for mortgages must compare

The amount of total eli

gible provisions (5 below) wi

The total expected losses amount as calculated within the IRB approach.

Where the total expected loss amount exceeds total eligible provisions, Credit Institutions must deduct the

difference. Deduction must be on the basis of 50% from Tier 1 and 50% from Tier 2. Where the total

expected loss amount is less than total eligible provisions, Credit Institutions may recognise the difference

in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. At national discretion, a limit

lower than 0.6

% may be applied.

General provisions or general loan-loss reserves are created against the possibility of losses not yet

identified. Where they do not reflect a known deterioration in the valuation of particular assets, these

reserves qualify for inclusion in Tier 2 capital. Where, however, provisions or reserves have been created

against identified losses or in respect of an identified deterioration in the value of any asset or group of

subsets of assets, they are not freely available to meet unidentified losses which may subsequently arise

elsewhere in the portfolio and do not possess an essential characteristic of capital. Such provisions or

reserves should therefore not be included in the capital base.

When such loans are past due for more than 90 days they will be risk weighted at 100%, net of specific provisions. If such

loans are past due but specific provisions are no less than 20% of their outstanding amount, the risk weight applicable to the

remainder of the loan can be reduced to 50% at national discretion. Risk components are defined in the CRD and are (a)

Probability of Default

PD (b) Loss Given Default

LGD, (c) Exposure at Default

EAD and (d) Maturity

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June 2011

Use of Mortgage Property as Collateral

Residential

real estate which is or will be occupied should normally be recognised as eligible collateral,

provided that certain standards are met including an independent appraisal. However, the value of the

property should not depend on the credit quality of the borrower. Financial institutions can and should

establish different standards for property that will be used as rental.

The value of the property should be monitored on a frequent basis and at a minimum once every three

years for residential real estate. More frequent monitoring should be carried out where the market is

subject to significant changes in conditions. In determining the valuation based on comparable

properties, only closed sales must be used. The property valuation should be reviewed by an

indepe

ndent valuer when information indicates that the value of the property may have declined

materially relative to general market prices.

The value of the property should be monitored on a frequent basis and at a minimum once every three

years for residential real estate. More frequent monitoring should be carried out where the market is

subject to significant changes in conditions.

The property valuation should be reviewed by an independent valuer when information indicates that

the value of the property may

have declined materially relative to general market prices.

For loans exceeding EUR 3 million or 5% of the own funds of the credit institution, the property

valuation should be reviewed by an independent valuer at least every three years. Independent value

should mean a person who possesses the necessary qualifications, ability and experience to execute a

valuation and who is independent from the credit decision process.

The competent authorities of a Sovereign State may authorise credit institutions to apply a 50% risk

weighting to the part of the exposure fully collateralised by residential real estate property or

commercial real estate property situated within the territory of the Sovereign State if they have

evidence that the relevant markets are well-developed and long-established with relevant loss-rates that

do not exceed the following limits:

o Relevant losses up to 50 % of the market value (or where applicable and if lower, 60 % of the

mortgage

lending

-value) do not exceed 0.3 % of the outstanding loans collateralised by that

form of real est

ate property in any given year.

o Overall relevant losses do not exceed 0.5 % of the outstanding loans collateralised by that

form of real estate property in any given year.

Accounting Standards

The Basel Committee recognised the need for a Pillar 3 disclosure framework that does not conflict

with requirements under accounting standards, which are broader in s

cope.

Management should use its discretion in determining the appropriate medium and location of the

disclosur

e. In situations where the disclosures are made under accounting requirements or are made to

satisfy listing requirements promulgated by securities regulators, Credit Institutions may rely on them

to fulfil the applicable Pillar 3 expectations. In these situations, Credit Institutions should explain

material differences between the accounting or other disclosure and the supervisory basis of disclosure.

This explanation does not have to take the form of

a line

line reconciliation.

For those disclosures th

at are not mandatory under accounting or other requirements, management may

choose to provide the Pillar 3 information through other means (such as on a publicly accessible

internet website or in public regulatory reports filed with Credit Institution supe

rvisors), consistent with

requirements of na

tional supervisory authorities.

However, institutions are encouraged to provide all related information in one location to the degree

feasible. In addition, if information is not provided with the accounting disclosure, institutions should

indicate where the addit

ional information can be found.

The recognition of accounting or other mandated disclosure in this manner is also expected to help

clarify the requirements for validation of disclosures. For example, information in the annual financial

statements would generally be audited and additional material published with such statements must be

consistent with the audited statements. In addition, supplementary material (such as Management s

Mortgage Loan Minimum Standards Manual

June 2011

Discussion and Analysis) that is published to satisfy other disclosure regimes (e.g. listing requirements

promulgated by securities regulators) is generally subject to sufficient scrutiny (e.g. internal control

assessments, etc.) to satisfy the validation issue. If material is not published under a validation regime,

for instance in a standalone report or as a section on a website, then management should ensure that

appropriate verification of the information takes place, in accordance with the general disclosure

principle set out below. Accordingly, Pillar 3 disclosures will not be required to be audited by an

external auditor, unless otherwise required by accounting standards setters, securities regulators or

other authorities.

Requirements of Rating Agencies and Investors

Declara

tion of which approach the credit institution has adopted i.e. standardised or internal ratings based

approach (IRB) as well as information relating to management s methods for identifying and mitigating

risk.

Rating agencies, investors and others are taking a keen interest in model documentation. They would also

be very interested in understanding the various stress tests that are used to assess the robustness and

accuracy of the modelling and testing systems.

Modelling Credit Risk in Mortgages (IRB approa

ch only)

A number of Credit Institutions have invested resources in modelling the credit risk arising from their

mortgage business. Such models are intended to assist Credit Institutions in quantifying, aggregating and

managing credit risk. The models are not intended to supplement, but rather complement human judgment

and oversight which is necessary to ensure that all relevant and material information, including that which

is outside the scope of the model, is also taken into consideration, and that the m

odel is used appropriately.

If models are used for the mortgage business they must be capable of producing robust and verifiable risk

components that are used as inputs to a formula

. One of the key items the model should produce is the

required amount of

capital.

The underlying data must be representative of the population of the Credit

Institution s actual borrowers or facilities. Credit Institutions must have written guidance.

The primary areas of responsibility for the credit risk control unit(s) should include, but are not limited to

testing and monitoring grades and pools of mortgages. The reports it produces should summarise the status

of these mortgages, giving senior management the ability to take action in the event of any negative trends.

The formulas used as inputs into the model and the operational details of the system must be well

documented.

Integrity of the Grading Process

A Credit Institution must review the loss characteristics and delinquency status of each identified mortgage pool

on at least an annual basis. It must also review the status of individual borrowers within each mortgage pool.

This requirement may be satisfied by review of a representative sample of exposures in the pool.

When such loans are past due for more than 90 days they will be risk weighted at 100%, net of specific provisions. If such

loans are past due but specific provisions are no less than 20% of their outstanding amount, the risk weight applicable to the

remainder of the loan can be reduced to 50% at national discretion. Risk components are defined in the CRD and are (a)

Probability of Default

PD (b) Loss Given Default

LGD, (c) Exposure at Def

ault

EAD and (d) Maturity

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June 2011

Overrides

For grading assignments based on expert judgment, Credit Institutions must clearly articulate the

situations in which Credit Institution s officers may override the outputs of the grading process,

including how and to what extent such overrides can be used and by whom.

For model-based gradings, the Credit Institution must have guidelines and processes for monitoring

cases where human judgment has overridden the model s grading, variables were excluded or inputs

were altered.

Documentation of Grading System Design

Credit Institutions must document in writing their grading systems design and operational details -

documentation must cover:

Grading criteria and rationale for its choice of internal grading criteria;

Responsibilities of parties that rate borrowers and facilities;

Definition of what constitu

tes a grading exception;

Parties that have authority to approve exceptions;

Frequency of grading reviews;

Management oversight of the grading process;

History of major changes in the risk grading process; and

The organisation of grading assignment, includi

ng the internal control structure.

If the Credit Institution employs statistical models in the grading process, the Credit Institution must document

their methodologies. This material must:

Provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the

assignment of estimates to grades, individual borrowers, exposures, or pools

, and the data source(s)

used to estimate the model;

Establish a rigorous statistical process (including out-

-time and out-

-sample performance tests) for

validating the model; and

Indicate any circumstances under which the model does not work effectively.

Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for

exemption from documentation or any other of the requirements for internal grading systems. The burden is on

the model s vendor and the Credit Institution to satisfy supervisors.

Validation and Documentation

Credit institutions should have a robust system in place to validate the accuracy and consistency of

their internal models and modelling processes. All material elements of the internal models and the

modelling process and validation should be documented.

Credit institutions should use the internal validation process to assess the performance of its internal

models and processes in a consistent and meaningful way.

The methods and data used for quantitative validation should be consistent through time. Changes in

estimation and validation methods and data (both data sources and periods covered) should be

documented.

The internal model and the modelling process should be documented, including the responsibilities of

parties involved in the modelling, and the model approval and model review processes.

Credit institutions must have well-articulated internal standards for situations where deviations in

realised PDs, LGDs and EADs from expectations become significant enough to call the validity of the

estimates into question. These standards must take account of business cycles and similar systematic

variability in default experiences. Where realised values continue to be higher than expected values,

Credit Institutions must revise estimates upward to reflect their default and loss experience.

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June 2011

Data Maintenance

Key borrower and facility characteristics to provide effective support to its internal credit risk

measurement. Data should be sufficiently detailed to allow retrospective reallocation of borrowers and

facilities to grades.

Borrower and transaction risk characteristics used either directly or through use of a model, as well as

data on delinquency.

Estimated PDs, LGDs and EADs, associated with pools of exposures.

For defaulted exposures, Credit Institutions must retain the data on the pools to which the exposure was

assigned over the yea

r prior to default and the realised outcomes on LGD and EAD.

Risk Management Process and Controls

With regard to the development and use of internal models credit institutions should establish policies,

procedures, and controls to ensure the integrity of the model and modelling process. These policies, procedures,

and controls should include the following:

Full integration of the internal model into the overall management information systems of the credit

institution.

Established management systems, procedures, and control functions for ensuring the periodic and

independent review of all elements of the internal modelling process, including approval of model

revisions, vetting of model inputs, and review of model results, such as direct verification of risk

computations. These reviews should assess the accuracy, completeness, and appropriateness of model

inputs and results and focus on both finding and limiting potential errors associated with known

weaknesses and identifying unknown model weaknesses.

Such reviews may be conducted by an internal independent unit, or by an independent external third

party.

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June 2011

10.

SECURITY REQUIREMENT

S (MS 10)

MUM STANDARDS

Prior to making any loan, the lender must take measures to assure the validity and safety of the information they

gather and that of the

collateral property.

Sound banking practices require lenders to implement policies to protect depositors and investors money. To that

end implementation of security procedures is imperative at each step of the transaction.

Protection of the personal inf

ormation of the borrower

Upon taking the loan application the loan officer should preserve the borrower s information in

secured files and/or on secured computers.

When files are in public areas of an office, loan files should be kept from sight or reach of all

persons not affiliated with the lender.

Employees should have a

need to know

when accessing a borrower s loan file.

When utilising third party service providers, the lender should require the service provider to

restrict access to the borrower s p

ersonal information.

The lender must develop and implement an alert system when unauthorised persons are

accessing borrower information.

First

Mortgage Right

must be

registered over the property for the amount

of the mortgage. The mortgage

(also known as a security instrument) should include all interest and fees as well as advances the lender

might make to protect its interest in the agreement. This

mortgage right

may be assignable to a

third party

based

, if required,

on the consent obtained at the signin

g of the mortgage loan agreement.

Assuring that the

loan is secured by a first ranking mortgage over the property is prudent banking practice.

Life Insurance:

A Lif

e Insurance policy on the life/lives of the

borrower(s), if available, must be sufficient

to cover the outstanding principal for the term of the loan. The insurance policy should be assigned to the

lender (or investor). See the discussion of term and whole

life polic

es in the chapter on Insurance.

Building

or Property Insurance*: An escalating value policy to cover the replacement/reinstatement

value of the property must be obtained at the time the loan funds are advanced and the security agreement

is registered. The initial cover to be in line with the replacement/reinstatement cost in the appraisers

report. This coverage should be adjusted in line with a suitable index of construction costs. The policy is

to be in the joint names of the

borrower

and the lender, or where appropriate with the lender as a loss

payee. The lender should include in the security agreement (mortgage) detailed steps for the borrower to

follow to replace or rebuild the property.

Borrower s ability to pay

: The loan must not be approve

d at the

outset unless the lender is satisfied that the

customer has the 'ability to repay'. The real property is a secondary measure to recover the loan that was

made.

As stated previously the main activity in deciding if the loan is to be approved is measuring the

customer's

'ability to repay'.

If the customer cannot meet the repayments or if there is reasonable doubt in

the mind of the underwriter the application should be declined.

An abstract of title (also known as a chain of title) should be obtained from a competent source. The lender

must

take care in reading and evaluating the risks associated with any claims or potential claims of title. One

such risk is a loss of lien charge to a subordinate position if another party is successful in proving a superior

lien right.

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June 2011

Irrespective of how strong the security is the bank should never lend on

the basis that the security can

foreclosed to repay the debt. Foreclosures rarely, if ever, result in a full recovery of all money and

costs to the lender.

That said, the bank

should

always take security

via a

mortgage

for

two reasons

It is the

bank

secondary source of repayment if the loan is not repaid by the borrower

and;

The

customer

knows that if payments are not made the property will be foreclosed, therefore it

is psychological collateral.

The taking of security is a critical task in the mortgage process. Lenders must ensure that

quality security is taken and there are no loopholes that might be challenged at a later stage.

Mortgage Indemnity Guarantee (MIG)*:

This should become a minimum standard if the lender decides

to lend outside of

publi

shed LTV policy.

The lender should rely on the ability of the borrower to repay the loan first and then the

security provided

by the property. Only in exceptional circumstances might the lender require further support such as liens or

guarantees.

(See also

01)

WHAT INVESTORS AND R

ATING AGENCY MAY REQ

UIRE

In the event of a Mortgage Bond or Securitisation issue, a full review will be undertaken of the security and

documentation supporting the proposed pool of mortgages.

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June 2011

11.

MANAGEMENT INFORMATI

ON, IT & ACCOUNT MAN

AGEMENT

(MS 11)

MINIMUM STANDARDS

Information technology can play a vital role in helping a financial institution efficiently manage its mortgage

lending activities. A well thought out IT architecture can lead to substantial added benefits to an organisation.

the same time, choosing an appropriate m

ortgage

-related IT system and customising and integrating the system

into its operations can be among the most challenging tasks that a lender faces.

The use of appropriate IT tools can reduce a lender s costs in carrying out routine functions, can help en

sure that

loans are processed applying a consistent set of decision rules, and can contribute to internal controls by tying an

institution s mortgage program to other activities, such as accounting and treasury functions. IT systems can

also assist a lender in identifying how specific characteristics of its mortgages affect loan performance. This can

allow an institution to adjust its underwriting standards and pricing guidelines on an ongoing basis, to ensure

that its mortgage program continues to be profi

table.

i. Mortgage Accounting System: Comprehensive mortgage accounting system which would include the

following functions within guidelines of Credit Policy:

Ability to tag or identify mortgages as belonging to a particular funding source, cover pool or as

having been transferred to a particular SPV (special purpose vehicle)

Facility to use internal own bank standing orders and/or direct debits, if available

Facility to amend payments and to notify customers when rates change

Facility to switch from var

iable to fixed rate and vice a versa

Facility to accept lump sum reductions and/or early repayments

Facility to remove and/or add names to accounts

Management of account on death of a borrower

Facility to monitor and follow up arrears

Facility to carry out

regular or periodic annual reviews

Facility to provide statements to the customer

Systems must also have an adequate disaster recovery plan

ii. Reporting: Good reporting information which is accurate, timely and relevant. Monthly/quarterly/annual

report

s to be available by branch/area/total bank for:

Mortgage portfolio size/split by products (total value, total volume, average term, average interest rate,

average LTV, average PTI)

Share of national mortgages (where available)

Market segments

Portfolio sh

are by sales channel

Growth profile

Performance versus targets

Applications versus approvals versus declines versus drawdowns

Application pipeline

Delinquency

profile (split into 30, 60, 90 and 120 days)

Maturity profile

Geographic profile/employer profile

Profitability

Historic data retention

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June 2011

Ability to produce reports as required by rating agencies and investors* (

see Appendices A4 and A5

)

iii. Monitoring Mortgage Account: The following should be adhered to in order to ensure efficient monitoring

of ac

counts:

Approvals are converted into drawdowns

Security is in order before drawdown(s)

Repayments are up to date

Premiums on life insurance policies are up to date

Premiums on property insurance policies are up to date

Property insurance policies are index

linked, if available

Insurers report incidents of cancelled life and/ or property insurance policies

REASONS FOR BEST PRA

CTICES AND MINIMUM S

TANDARDS

Reporting and Monitoring:

The mortgage business cannot be successful unless there is regular analysis of the current portfolio

versus targets.

Remedial action may be required and it is important to know the baseline or starting point.

Rating agencies and investors require detailed reports on the lenders mortgage portfolio to rate and

buy mortgage bonds

or mortgage

backed securities.

POINT TO NOTE

Mortgage Account Management:

The requirements for mortgage account management are fundamentally similar to all other lending products.

The objective is to manage and monitor the operation of the account and the relationship from drawdown to

redemption.

The accounting system should have the capability to accept debits/credits/permissions/judge accounts to be

arrears/issue arrears letters/calculate interest/ calculate penalty interest/provide a review

facili

ty/issue review

letters, and similar functions.

Repayments can be by cash, standing order or direct debit. Repayments should be made by the

monthly/weekly/fortnightly due date. This date should be agreed upon with the customer ideally to fit with

salary and wages payments. For efficiency the customer should have his current account with the lender.

Standing orders and direct debits should be encouraged with interbank arrangements in place for those borrowers

who hold their bank accounts elsewhere.

The system should accommodate changes in interest rates with the facility to switch between variable and fixed

rates, to amend repayments and to notify customers.

The system should be able to handle lump sum repayments and early repayments. Depending on policy and

legislation the facility should be able to calculate and charge early payment charges. Penalty charges such as

prepayment penalties would be the norm for breaking a mortgage contract but legislation in many markets may

prohibit this

The system and procedures should be able to add and remove names, rule off account at death or bankruptcy and

provide regular statements of account to customers. The accounting system will also have the capability to

identify or "tag" accounts, which are in a particular mortgag

e pool or have been

transferred to a specific SPV.

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June 2011

IT Requirements:

There is a need for extensive IT functionality to

support

securitisation and mortgage bond issues. Requirements

for

performance metrics and analysis can be onerous if IT systems have not been developed to take into account

these requirements and can be

difficult and expensive to amend later on.

Segregation of mortgage assets between those either securitised, in a mortgage bond structure, used as

collateral

for Central Bank liquidity or in the lender portfolio means at a very minimum being

able to identify which assets

are in each structure.

Securitisation requires the cash flows of the underlying assets to be moved to a specific account and this has a

material effect on the underlying accounting arrangements and is problematic if not understood and built into

the systems.

The ability to generate meaningful historical analysis may mean tracking the performance of the

mortgages

over time and being able to explain redemption patterns; arrears; write offs and the like. In addition, integrated

customer records are now more of a requirement than before. Some jurisdictions allow for an implied set off of

deposit accounts against borrowings and these matters may

require analysis.

Backup and busin

ess continuity planning are high on the agenda for rating agencies. In addition how

technology

is employed in an organisation can be the difference between effective and efficient

processing.

One view of a modern bank is that information processing is now

a required competency. It is clear that

modern IT

investment facilitates the gathering of large volumes of data that can allow it to be analysed in a structured

manner. The more integrated the IT systems are the lower costs an organisation can have in its dealings with

customers to make them effective and profitable.

When assets are being placed in bond

structures

, investors will require information on the underlying mortgages

when they decide to buy bonds. The rating agencies perform

static pool analysis"

and need to review the history

of the underlying

mortgages.

Reporting and Monitoring

Good, accurate, timely and relevant information is a critical enabler to success in any business.

Reports should be available at summary level for the Board, CEO and

Senior Management with the

facility to 'drill

down' into more detailed levels. The reporting schedule (depending on the specific need) will be issued

monthly, quarterly, semi-annually and annually. Depending on organisation structure the reports will be

ailable by branch, region, area and total bank.

It is important that historical information is retained at all levels including individual account performance as

rating agencies will wish to examine the lender s 'track record'.

Business performance reports

will cover:

Share of new business

volume and

percent

of growth

Share of national mortgage portfolio

volume

percent

of growth

Growth versus national mortgage portfolio

% split by market segments

volumes %

Split by sales channels

volumes %

Perfor

mance versus budget + forecasts

Volume of drawdowns versus applications and approvals

Number + % declines versus applications

Leakage to competitors

Pipeline analysis

Profitability

total/by product/by segment.

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June 2011

Maturity/employer and geographic profiles

Monitoring reports will cover:

Performance and review of individual accounts (discussed earlier)

Arrears/bad debt reports and profile

Premiums on life and

property insurance policies

whether they are up to date

Property policies indexed

Incidents of canc

elled policies reported by insurers

Rating agency and reporting requirements would include the following information:

Payment under notes transaction balances

Details of arrears

Pool indicator

and a summary by product of loan to value ratios

Mortgage pri

ncipal analysis and run off

Mortgage size

Geographic diversification

Arrears multiple

Seasoning

Interest rates including WAY and WAM (weighted average yield and maturity)

(

Please see Appendices A4 and A5 for a sample new issue reports for RMBS and Covered

Bond issues)

Accounting Methods

There is a basic principle that a fair presentation is achieved if financial statements are prepared in compliance

with International Financial Reporting Standards (IFRS). An entity whose financial statements comply wit

IFRS should disclose that fact. This manual has not considered the detailed implications of either adopting IFRS

or the likely changes that are currently being debated particularly surrounding derivatives and financial

instruments.

WHAT INVESTORS AND R

ING AGENCY MAY REQUI

The rating agencies review the following IT systems and processes when assessing mortgage originators and

servicers:

Core systems functionality

Systems integration and interfaces

Electronic document storage with scanning and workflow

management

System security including backup and

record retention

Disaster recovery and business resumption plans/testing

Data integrity

Use of automated loan application, processing and underwriting systems

Web

based applications

Credit scoring

Risk manag

ement modelling

Automated valuation models

Integration of these systems as well as other business lines

Key information requirements include:

Accurate geographic location

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June 2011

Customer history on mortgage, and for example, additional equity withdrawal

Accurate

recording of the borrower s financial position

Details on property usage such as owner occupied or rented out

Type of mortgage product

Loan to value ratio (LTV) and PTI

Original valuation and most up to date valuation

FURTHER READING

Refer to

Appendices

A3, A4, and A5 on Understanding Securitisation and examples of recent Residential

Mortgage

Backed Securities and Covered Mortgage Bond issues.

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June 2011

APPENDICES

Mortgage Loan Minimum Standards Manual

June 2011

A1.

LOAN APPLICATION FORM

I. TYPE OF MORTGAGE AND TERMS OF LOAN

Amount

Interest Rate

No. of Months

Amorti

ation

Type:

Fixed Rate

GPM

Other (explain):

ARM (type):

II. PROPERTY INFORMATION AND PURPO

SE OF LOAN

Subject Property Address (street, city, province)

No. of Units

Legal Description of Subject Property (attach description if necessary)

Year Built

Purpose of Loan

Purchase

Refinance

Construction

Other (explain):

Property will be:

Primary Residence

Secondary Residence

Investmen

Complete this line if construction loan.

Year Lot

Acquired

Original Cost

Amount

Existing Liens

(a) Present

Value of Lot

(b) Cost of

Improvements

Total (

a + b)

Complete this line if this is a refinance loan.

Year Acquired

Original Cost

Amount

Existing Liens

Purpose of

Refinance

Describe

made

to be made

Improvements

If to

be made,

make comments

on supplemental

pages

Title will be held in what Name(s)

Manner in which Title will be held

Estate will be

held in:

Fee Simple

Leasehold

(show

expiration date)

Source of Down Payment, Settlement Charges, and/or Subordinate Financing (explain)

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June 2011

III. BORROWER INFORMATION

Borrower

Borrower s Name

-Borrower s Name

ID number

Phone

number

Dat

e of

Birth

Yrs.

School

ID number

Phone

number

Date of

Birth

Yrs.

School

Married

Separated

Dependents

(not listed by Co

Borrower)

Married

Separated

Dependents

ot listed by

Borrower)

Unmarried

(include single, divorced,

widowed)

no.

ages

Unmarried

(include single, divorced, widowed)

no.

ages

Present Address

Own

Rent

__No.

Yrs.

(street, city, province)

Present Address

Own

Rent

No.

Yrs.

(street, city, province)

Mailing Address, if different from Present Address

Mailing Address, if different

from Present Address

If residing at present address for less than two years, complete the following:

Former Address

Own

Rent

__No.

Yrs.

(street, city, province)

Former Address

Own

Rent

No.

Yrs.

(street, city, province)

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June 2011

IV. EMPLOYMENT INFORMATION

Borrower

Name & Address

of Employer

Self

Employed

Yrs. on this

job

Name &

Address of

Employer

Self

Employed

Yrs. on this job

Yrs. employed

in this line of

work /

profession

Yrs. employed

in this line of

work /

profession

Position/Title/Type

of Business

Business

Phone

Position/Title/

Type of

Business

Business Phone

If employed in

current position for less than two years or if currently employed in more than one position,

complete the following:

Name & Address

of Employer

Self

Employed

Dates

(from

to)

Name &

Address of

Employer

Self

Employ

Dates

(from

to)

Monthly

Income

Monthly

Income

Position/Title/Type

of Business

Business

Phone

Position/Title/

Type of

Business

Business Phone

Name & Address

of Employer

Self

Employ

Dates

(from

to)

Name &

Address

Employer

Self

Employed

Dates

(from

to)

Monthly

Income

Monthly

Income

Position/Title/Type

of Business

Business

Phone

Position/Title/

Type of

Business

Business Phone

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June 2011

V. MONTHLY INCOME AND COMBINED HOUSING EXPENSE I

NFORMATION

Gross

Monthly

Income

Borrower

Total

Combined

Monthly

Housing Expense

Present

Proposed

Base Empl.

Income*

Rent

Overtime

First Mortgage

(P&I)

Bonuses

Other Financing

(P&I)

Commissions

Hazard Insurance

Div

idends/

Interest

Real Estate Taxes

Net Rental

Income

Mortgage Insurance

Other

(before

completing, see

the notice in

describe other

income, below)

Homeowner Assn.

Dues

Other:

Total

Expected Monthly Income

Jan

Feb

Mar

Apr

Mar

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Self

Employed Borrower(s) may be required to provide additional documentation such as tax returns and

financial statements.

Other Income

Monthly Amount

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June 2011

VI. ASSETS AND LIABILITIES

This Statement and any applicable supporting schedules may be completed jointly by both married and

unmarried Co-Borrowers if their assets and liabilities are sufficiently joined so that the Statement can be

meaningfully and fairly presented on a combined basis; otherwise, separate Statements and Schedules are

required. If the Co-Borrower section was completed about a non-applicant spouse or other person, this

Statement and supporting schedules must be completed about that spouse or other person also.

Comp

leted

Jointly

Not Jointly

ASSETS

Description

Cash or

Market

Value

Liabilities and Pledged Assets. List the creditor s name,

address, and account number for all outstanding debts,

including automobile loans, revolving charge accounts, real

estate loans, alimony, child support, stock pledges, etc. Use

continuation sheet, if necessary. Indicate by (*) those

liabilities, which will be satisfied upon sale of real estate

owned or upon refinancing of the subject property.

Cas

h deposit toward

purchase held by:

LIABILITIES

Monthly Payment

& Months Left to

Pay

Unpaid

Balance

List checking and savings accounts below

Name and address of

Company

Payment/Months

Name and address of Bank, S&L, or Credit

Union

Acct. no.

cct. no.

Name and address of

Company

Payment/Months

VI. ASSETS AND LIABILITIES (cont d)

Name and address of Bank, S&L, or Credit

Union

Acct. no.

Name and address of

Company

Payment/Months

Name and address of Bank, S&L, or Cre

dit

Union

Acct. no.

Name and address of

Company

Payment/Months

Name and address of Bank, S&L, or Credit

Union

Acct. no.

Name and address of

Company

Payment/Months

Stocks & Bonds (Company

name/number & description)

Acct. no.

Life insurance net cash value

Name and address of

Company

Payment/Months

Face amount:

Subtotal Liquid Assets

Acct. no.

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June 2011

Real estate owned

(enter market value from

schedule of real estate

owned)

Alimony/Child

Support/Separ

ate

Maintenance Payments

Owned to:

Vested interest in retirement

fund

Net worth of business(es)

owned

(attach financial statement)

Job

Related Expense

(child care, union dues,

etc.)

Automobiles owned

(make and year)

Other Assets (itemi

se)

Total Monthly Payments

Total Assets

Net Worth

(a minus b)

Total Liabilities

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June 2011

Schedule of Real Estate Owned

(If additional properties are owned, use continuation sheet.)

Property Address

(enter S if sold, PS if

pend

ing sale or R if

rental being held for

income)

Type of

Property

Present

Market

Value

Amount

Mortgages

& Liens

Gross

Rental

Income

Mortgage

Payments

Insurance,

Maintenance,

Taxes &

Misc.

Net

Rental

Income

Totals

Lis

t any additional names under which credit has previously been received and indicate appropriate

creditor name(s) and account number(s):

Alternate Name

Creditor Name

Account Number

VII. DETAILS OF TRANSACTION

VIII. DECLARATIONS

Purchase price

you answer Yes to any

questions a through i, please

use continuation sheet for

explanation.

Borrower

Alterations,

improvements, repairs

Yes

Land

(if acquired separately)

Are there any outstanding

judgments against you?

Refinance

(incl. debts to be paid

off)

Have you been declared

bankrupt within the past 7 years?

Estima

ted prepaid items

Have you had property

foreclosed upon or given title or

deed in lieu thereof in the last 7

years?

Estimated closing costs

Are you a party to a

lawsuit?

PMI, MIP, Funding Fee

Have you directly or

indirectly been

obligated on

any loan of which resulted in

foreclosure, transfer of title in

lieu of foreclosure, or judgment?

(This includes

such loans as

mortgage loans, small business

loans, home improvement loans,

educational loans, any mortgage,

financial obligation, bond, or

loan guarantee. If Yes, provide

details, including date, name,

and address of lender and

reasons for the action.)

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June 2011

Discount

(if Borrower will pay)

Are you presently

delinquent or in default on any

debt or any other loan, mortgage,

financial obligation, bond, or

loan guarantee?

If Yes, give

details as

described in the preceding

question.

Total costs

(add items a through h)

Are you obligated to pay

alimony, child support, or

separate maintenance?

Subordinate financing

Is any part of the down

payment borrowed?

Borrower s closing costs

paid by Seller

Are you a co

maker

endorser on a note?

Other credits (explain)

---------------------------------------

----------------

Are you a citizen of this

country?

Are you a permanent

resident alien?

Loan amount (exclude

PMI, MIP, Funding Fee

financed)

Do you intend to occupy

the property as your p

rimary

residence?

If Yes, complete question

m below.

PMI, MIP, Funding Fee

financed

Have you had an ownership

interest in a property in the last

three years?

Loan amount

(add m & n)

(1) What type of property

did you

own

principal

residence (PR), second

home

(SH), or investment property

(IP)?

Cash from/to Borrower

(subtract j, k, l & o from

(2) How did you hold title to

the home

by yourself (S),

jointly with your spouse or

jointly with another person (O)?

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June 2011

ACKNOWLEDGMENT AND AGREEMENT

Each of the undersigned specifically represents to Lender and to Lender's actual or potential agents, brokers,

processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the

information provided in this application is true and correct as of the date set forth opposite my signature and that

any intentional or negligent misrepresentation of this information contained in this application may result in

civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any

misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to,

fine or imprisonment or both; (2) the loan requested pursuant to this application (the "Loan") will be secured by

a mortgage or deed of trust on the property described in this application; (3) the property will not be used for

any illegal or prohibited purpose or use; (4) all statements made in this application are made for the purpose of

obtaining a residential mortgage loan; (5) the property will be occupied as indicated in this application; (6) the

Lender, its servicers, successors or assigns may retain the original and/or an electronic record of this application,

whether or not the Loan is approved; (7) the Lender and its agents, brokers, insurers, servicers, successors, and

assigns may continuously rely on the information contained in the application, and I am obligated to amend

and/or supplement the information provided in this application if any of the material facts that I have

represented should change prior to closing of the Loan; (8) in the event that my payments on the Loan become

delinquent, the Lender, its servicers, successors or assigns may, in addition to any other rights and remedies that

it may have relating to such delinquency, report my name and account information to one or more consumer

reporting agencies; (9) ownership of the Loan and/or administration of the Loan account may be transferred

with such notice as may be required by law; (10) neither Lender nor its agents, brokers, insurers, servicers,

successors or assigns has made any representation or warranty, express or implied, to me regarding the property

or the condition or value of the property; and (11) my transmission of this application as an "electronic record"

containing my "electronic signature," as those terms are defined in applicable federal and/or state laws

(excluding audio and video recordings), or my facsimile transmission of this application containing a facsimile

of my signature, shall be as effective, enforceable and valid as if a paper version of this application were

delivered containing my original written signature.

Acknowledgement

. Each of the undersigned hereby acknowledges that any owner of the Loan, its servicers,

successors and assigns, may verify or re-verify any information contained in this application or obtain any

information or data relating to the Loan, for any legitimate business purpose through any source, including a

source named in this application or a consumer reporting agency.

Borrower s Signature

Date

-Borrower s Signature

Mortgage Loan Minimum Standards Manual

June 2011

CONTINUATION SHEET/RESIDENTIAL LOAN APPLICATION

Use this continuation sheet if you

need more space to complete the

Residential Loan Application.

Mark

for Borrower or

C for

Borrower.

Borrower:

Case Number:

Borrower:

Case Number:

Borrower s Signature

Date

-Borrower s Signature

Date

Mortgage Loan Minimum Standards Manual

June 2011

A2.

LOAN APPROVAL OFFER LETTER

[FINANCIAL INSTITUTION]

[

January 15, 2011

]

[

Mr.

Client Name

1234

Road

District, City

]

Dear Mr.

Name

We have received your

mortgage

loan application dated January 2, 2011. We are pleased to inform you that

your application has been approved subject to verification of specific information provided by you and by your

acceptance of the terms of this letter. The loan will be secured by a single family home located at 5678 Street in

District, City. Please read this letter carefully.

Loan Amount: 200,000

Interest Rate: 11.25%

Annual Effective Yield: 12.25%

Type of Interest Rate: (Fixed or Variable)

Term of Loan: 240 months

Amortisation: 20 years (or 20 ye

ars with a 10 year call)

Payment Due Date: 1

of each month

Conditions Prior to Final Approval: Borrower shall provide for Lenders review and Approval:

Points

4.0% upon funding

Other Fees:

375.00 document preparation

375.00 processing

50.00 inspec

tion fee

Conditions Prior to Approval

Borrower shall provide for Lenders review and approval an appraisal of the subject property not more than

sixty (60) days old and shall be addressed to Lender herein.

Lender will inspect the property within 5 busi

ness days after acceptance of this letter.

Borrower will provide a current financial statement and statement of income and expenses for the past 12

months.

Conditions Prior to Preparation of Loan Documents:

The lien created herein shall be a valid first lien position. Any subordinate financing shall require the written

consent of Lender.

The loan will be serviced by ABC Bank. Any set up fee and other service fee(s) shall be paid by Borrower

upon the terms and conditions set forth by Servicing Agent.

Mortgage Loan Minimum Standards Manual

June 2011

orrower shall provide for general public liability insurance with Lender as an additional insured in the

cumulative principal amount of the loan(s), which shall be kept in force for the term of the loan.

The loan(s) shall have a prepayment penalty equal to three months interest, if the loan or loans are paid in

full prior to three months from the first payment date. A penalty shall not b

e due for a partial prepayment.

Conditions Prior to Loan Closing:

Acceptance of Terms

The terms and conditions herein are subject to change after Lender has reviewed any and all information

supplied by Borrower or obtained by independent sources.

This letter must be accepted on or before

XXXXXX

, after which Lender may withdraw this offer without

notice.

In order to process the loan offer, you will need to schedule an appointment with one of our lending specialists

at any of our convenient ABC Bank branch offices.

Sincerely,

[

John Doe

Senior Lending Specialist

]

Mortgage Loan Minimum Standards Manual

June 2011

A3.

NDERSTANDING SECURITISATION

INTRODUCTION

This appendix is included to provide information and background on the secondary markets for those who may

not be familiar with those markets.

RESIDENTIAL MORTGAGE

BACKED SECURITIES (R

MBS)

Securitisation is a process whereby assets with a series of cash flows can be sold either by a true sale or a

synthetic structure by the owner of the assets to a special purpose vehicle whereby a bond can be issued backed

specifically by those assets. Securitisation transactions are "off-balance sheet" which means that the originat

ing

bank has essentially no further responsibility for the performance of the mortgages once they are sold into the

SPV.

RMBS are often rated by rating agencies and are priced relative to their risk. In effect they differ from corporate

bonds as they are backed by specific assets that are bankruptcy remote from the originator. Once the bond

interest and the capital get repaid, the excess economic benefits get transferred back to the original owner or

'originator' by way of profit extraction techniques. For the purposes of this manual we are interested in only one

asset class, namely residential mortgages. What is meant by residential mortgages is any lending where the

security is a private residence. It includes lending to acquire, develop or repair the residence or other lending

secured on the residence.

In the case of residential mortgages the asset is the outstanding loan. The borrower is contractually committed

to a series of regular payments which include principal and interest. The mortgage is secured on the residence,

and may be acquired by the lender if the borrower defaults. When these loans are 'on balance sheet' then the

lender is carrying all the risks and (rewards) of ownership. Some of the risks would be credit risk, interest rate

risk and liquid

ity risk.

Residential mortgage-backed securitisation is a funding tool where the bank sells the mortgage with the

underlying security to a "special purpose vehicle" (SPV), which is not owned by the bank. The mortgages are

usually

- but not always - sold at par. The SPV contains only mortgage assets. A bond is created, backed

specifically by these mortgages called "residential mortgage

backed securities" (RMBS) and is sold to investors.

The sale of these mortgages allows the bank to transfer a series of risks such as credit and interest rate risk to

third party investors. These assets are attractive to investors because defaults on residential mortgages are very

low and the longer maturity matches their liabilities.

In essence RMBS are generally regarded as b

onds that can command a high rating. Most RMBS in Europe have

a significant amount of the deal rated "AAA" which from an investor s standpoint is a top grade security. The

RMBS assets are less risky than the general risk of the originator itself. Securitis

ation allows the bonds to hold a

rating that is often many levels above the rating of the originator itself. With the lower risk of RMBS, the

required return is lower and it is advantageous for a lender to securitise its mortgages rather than issue a

corpo

rate bond.

Most RMBS are rated by a combination of Moody s, Standard & Poor s or Fitch Ratings. Based on the basis of

the rating and subsequent demand by investors the bonds are "priced" in the market. As there are many of these

transactions RMBS are now w

ell understood by investors, but individual securitisations are priced depending on

a number of factors.

Let us assume an example where the RMBS are priced at 3Month Euribor + 50 basis points. When the

prospective investors buy the bonds the net proceeds are paid back to the bank that originated the mortgages.

The cash flows of the mortgages are then paid into the SPV including both interest and principal. The

bondholders are paid interest on the basis of 3 M Euribor +50 basis points as well as any principa

l that has been

paid on the underlying mortgages.

Mortgage Loan Minimum Standards Manual

June 2011

In our example, the interest rate charged to borrowers on the mortgages is 3Month Euribor + 120 basis points.

The difference between the bond rate and the mortgage rate is 70 basis points and this excess spread is used to

pay for servicing (generally by the originating bank), credit enhancement and other expenses of the structure.

Any additional funds remaining at the conclusion of the deal is usually extracted for the issuer. The bondholders

are only entitl

ed to the principal and interest payments described above.

Until recently, RMBS have been the most common form of secondary market refinancing tool used in the U.S.

In 2010 the volume of mortgage related securities was $2.36 trillion, which was 22% of the $10.55 trillion

residential mortgage market (1-4 family homes). This is down from a historical level of approximately 60% due

to the restructuring of the GSEs after the financial crisis (Board of Governors of the Federal Reserve System

Mortgage Debt Outstanding). The U.S. market is dominated by three agencies: Fannie Mae (formerly the

Federal National Mortgage Association), Freddie Mac (formerly the Federal Home Loan Association) and the

Government National Mortgage Association (more commonly known as Gin

nie Mae). Each of the agencies was

established as government-sponsored enterprise (GSE) by United States Federal Law to help combat shortfalls

in the US housing market. Ginnie Mae has the full faith and credit guarantee of the U.S. government; Fannie

Mae a

nd Freddie Mac do not.

Extensive legislation may not be needed to facilitate securitisation structures. The most important framework

needed by an originator would be:

the ability to create a 'special purpose vehicle' which is bankruptcy remote from the originator and is

not a subsidiary; and

the ability to transfer assets usually in a tax neutral way to the originator.

The main benefits of RMBS as a funding tool are:

Diversifying the sources of financing. RMBS is an effective method of financing mortgage growth as

against a single traditional source such as core deposits.

Reducing risk. RMBS transfers credit, interest and maturity risk from the originator to the investor.

To help capital adequacy ratios. Certain financing tools such as securitisation can remove assets from a

bank s balance sheet and thus free up capital if it was inadequate.

Exhibit 1

below maps the processes involved in mortgage

backed securities

Source: European Mortgage Federation: "Mortgage Banks & Mortgage Bond in Europe" Figure 3

MOR

TGAGE BONDS

Mortgage bonds are generally an 'on balance sheet' method of financing mortgages. The security for the

bondholders is the collective pool of qualifying mortgage assets. For example if there were two bond issues,

specific mortgages would not be identified with a specific bond issue. In effect the bond issues share the pool.

To make the mortgage bonds distinct from corporates, specific legislation is needed in a jurisdiction permitting

them to be issued. The reason is that the security for the bon

ds is that part of the entities assets will not be made

available to general creditors in a 'bankruptcy' or wind up situation. Mortgage bonds are also known as 'covered

bonds' for this reason. In Germany, mortgage bonds or 'Pfandbriefe' have a long track record without defaults.

Mortgage Loan Minimum Standards Manual

June 2011

Often jurisdictions that have introduced 'mortgage bonds' have used similar structures to those applied in the

German or Danish markets.

Often the legal issuer of the mortgage bond may be a 'mortgage bank' which could be a subsidiary of the main

bank. This structure is used to place the interests of the bondholders above those of depositors in case of

bankruptcy or distress. The qualifying assets of a mortgage bond are typically residential mortgages but may

also include commercial mortgages, government or agency debt or other high quality assets. Many of these

structural issues are addressed in enabling legislation or Central Bank/Securities Commission regulations.

Mortgage bonds are the most important funding instruments for mortga

ge lenders in Europe after retail deposits.

Against a backdrop of ongoing turbulence in capital markets, the covered bond market continued to expand: in

2009, total outstanding covered bonds grew 5% to 2.4 trillion, of which 1.6 trillion are mortgage cov

ered

bonds. The covered bond is also expanding outside Europe. South Korea entered the covered bond market in

2009. Ukraine exited the market in 2010, after the last outstanding covered bond was repaid in March. Markets

inside and outside Europe are currently conducting a feasibility study into the merits of the product as a funding

instrument for lenders. In jurisdictions, such as Australia, Belgium, Canada, Cyprus, Japan, Mexico, New

Zealand, Romania, South Korea, and the US, working groups are lobbying for dedicated covered bond

legislation. The legislative procedures are at different stages in each country.

Mortgage bonds are issued on the strength of the mortgages issued by the originator. The bonds are supported

by a collective pool of mortgages. Mortgage bonds are "on-balance sheet and the originating bank continues to

have responsibility for the performance of the mortgage even though it is now assigned to the mortgage pool.

The bondholder receives interest usually on a fixed rate basis (a small percentage of are floating rate) and the

bonds are redeemed on the basis of the bond agreement rather than in line with the pool of mortgages. For

example 'bullet redemptions' on these structures is prevalent. This contrasts with RMBS where the redemption

of t

he bonds parallels the principal payments on the mortgages.

The protected structure of a mortgage bond results in the bonds being priced lower than corporate bonds issued

by the organisation. Mortgage bonds also are generally priced at a lower spread than RMBS. A significant

reason for this is the level of over collateralisation that typically exists in a mortgage bond structure. Usually

loan to value ratios are lower and are substantially less than the mortgage s 'market value'.

The main benefits of mortgage bonds as a funding tool are:

Diversifying the sources of financing. Mortgage bonds are an effective method of financing mortgage

growth compared to a single traditional source such as core deposits;

Closer matching of maturity profiles of the underlying

assets with the liabilities financing them; and

Improving capital adequacy ratios. Certain financing tools such as mortgage bonds can have attractive

regulatory treatment.

Exhibit 2 below charts the process of mortgage bonds.

Mortgage Loan Minimum Standards Manual

June 2011

Exhibit 2

Mortgage Bond P

rocess

Source: European Mortgage Federation: "Mortgage Banks & Mortgage Bond in Europe" Figure 1

To further understand the two processes a comparative chart is shown in Table I in below.

Table I Main characteristics of covered bonds and asset

backed se

curities1)

Covered bonds

Asset

backed securities

Motivation of issuer

Refinancing

Risk reduction, regulatory

arbitrage, refinancing*

Issuer

Generally originator of loans

Special entity

Recourse to originator

Yes

Generally no

Structure

Assets generally remain on balance

sheet but are identified as

belonging to cover pool

Assets are transferred to special

entity

Impact on issuer s capital

requirements

None

Reduction

Legal restrictions on issuer or

eligible collateral

Yes (if issued under covered bon

legislation)

Generally none

Management of asset pool

Generally dynamic

Predominantly static

Transparency of asset pool to

investors

Limited (but quality regularly

controlled by trustees or rating

agencies)

Limited

Prepayment of assets

No pass

through

as assets are

replaced

Generally full pass

through

Tranching

None

Common

Coupon

Predominantly fixed

Predominantly floating

Source: Packer, F., R. Stever and C. Upper, (2007), The covered bond market , BIS Quarterly Review,

September.

* Under cert

ain conditions, entities might have incentives to issue ABSs with the

sole

purpose of obtaining

liquidity, as has happened in Spain during the last few years. A special regulatory framework combined with the

low cost of securitisation compared with other s

ources of financing has made Spanish banks a major issuer of

ABSs in Europe (second to the United Kingdom). Where this is the case, the frontier between ABSs and

covered bonds blurs, as both instruments are used solely to raise funds.

WHY DO EITHER?

Second

ary market activities allow the mortgage lender to access the capital markets and diversify its funding

Mortgage Loan Minimum Standards Manual

June 2011

sources. If the lender s existing cost of funds is expensive or does not match the long term profile of its

mortgage loans then the organisation could consider either securitisation or mortgage bonds for raising capital.

Using either of these two mechanisms will require considerable time and effort to put in place. The costs

associated with a first deal are considerable and senior management should consider a program of ongoing

issuance to amortise these expenses.

FURTHER READING

Refer to:

Appendices

A4 and A5

for examples of recent Residential Mortgage

Backed Securities and Covered Mortgage

Bond issues.

Mortgage Loan Minimum Standards Manual

June 2011

A4.

INVESTOR / RATING AGENCY SAMPLE REPORT

RESIDENTI

MORTGAGE

BACKED SECURITY

This appendix cont

ains

extracts from the following Moody s new issue report. For the entire report see

www.moodys.com.

NEW ISSUE REPORT

Closed Joint Stock Company Mortgage

Agent of AHML 2010-1

RMBS/Prime/Russia

Closing Date

June 15, 2010

Analyst Contacts

Olga Gekht

Vice President Senior Analyst

44.20.7772.8675

[email protected]

Stanislav Nastassine

Analyst

49.69.70730.767

[email protected]

Definitive Ratings

SERIES

RATING

AMOUNT

(BILLION)

% OF

ASSETS

EGAL FINAL

MATURITY

COUPON

SUBORDI

NATION

RESERVE

FUND**

TOTAL

CREDIT

ENHANCE

MENT***

Baa1

RUB 6.096

45.00

Nov 2042

10%

0.7%

10.7%

Baa3

RUB 6.096

45.00

Nov 2042

6.5%

10%

0.7%

10.7%

RUB 1.355

10.00

Nov 2042

N/A

0.7%

Total

RUB 1

3.5

100.00

* At close

** As a % of total/ notes at close

*** No benefit attributed to excess spread

The subject transaction is a static cash securitisation of mortgage loans extended to obligors located in

Russia. The portfolio consists of m

ortgage loans secured by residential properties in the Russian

Federation.

Mortgage Loan Minimum Standards Manual

June 2011

Asset Summary (Cut off date as of 01/12/2009)

Seller(s)/originator(s):

Agency for Housing Mortgage Lending (AHML) (Baa1/P

Servicer(s):

AHML

Receivables:

First

lien prime mor

tgage loans to individuals secured by

property located in Russia.

Methodology Used:

Moody's MILAN Methodology for Rating Russian RMBS,

July 2008 (SF131752)

Moody's MILAN Methodology for Rating Russian RMBS

(Russian Translation), February 2009 (SF15748

Moody's Approach to Rating RMBS in Emerging

Securitisation Markets

EMEA, June 2007 (SF97186)

Moody's Approach to Rating RMBS in Emerging

Securitisation Markets EMEA (Russian Translation),

October 2008 (SF144620)

Cash Flow Analysis in EMEA RMBS

: Testing Features

with the MARCO Model (Moody s Analyser of Residential

Cash Flows), January 2006 (SF58290)

A Framework for Stressing House Prices in RMBS

Transactions in EMEA, July 2008 (SF131751)

V Scores and Parameter Sensitivities in the Major EME

RMBS Subsectors, April 2009 (SF158654)

V Scores and Parameter Sensitivities in the Major EMEA

RMBS Sectors (Russian translation), June 2009

(SF172528)

Moody s Enhanced Approach to Originator Assessments

in EMEA RMBS Transactions, October 2009 (SF1537

18)

Models Used:

MILAN (Russian settings) MARCO & ABSROM

Total Amount:

RUB 17,774,192,354

Length of Revolving Period:

Static

Number of Borrowers:

21,435

Borrower concentration:

Top 20 borrowers make up 0.81% of the pool

WA Remaining Term:

13.44 yea

WA Seasoning:

1.7 years

Interest Basis:

100% fixed rate for life

WA Current LTV:

48.7%

WA Original LTV:

53.29%

Moody s calculated WA indexed LTV:

51.54%

Borrower credit profile:

100% prime borrowers

Delinquency Status:

None of the loans are in

arrears at the time of securitisation

Liabilities, Credit Enhancement and Liquidity

Excess Spread At Closing:

3.5% annualised excess spread at closing

Credit Enhancement/Reserves:

3.5% Excess spread at closing

2% amortising reserve fund (building up f

rom 0.70%)

subordination of the notes

10% financial assistance from AHML (see section

Structure, Legal Aspects and Associated Risks)

Form of Liquidity:

Excess spread, reserve fund, financial assistance from

AHML, principal to pay interest mechanism

Numbe

r of Interest Payments Covered

by Liquidity:

Approximately one interest payment (including senior

costs) is covered by the reserve fund; and four more

interest payments (including senior costs) are covered by

the financial assistance provided by AHML

Mortgage Loan Minimum Standards Manual

June 2011

Inte

rest Payments:

Quarterly in arrears on each payment date

Principal Payments:

Pass

through on each payment date

Payment Dates:

20 February, 20 May, 20 August, 20 November

First payment date: 20 August 2010

Hedging Arrangements:

None

Counterparties

suer:

Mortgage Agent AHML 2010

-1

Sellers/Originators:

AHML (Baa1/P

Contractual Servicer(s):

AHML

Sub

Servicer(s):

Regional Operators

Back

up Servicer(s):

None

Back

up Servicer Facilitator:

None

Cash Manager:

None

Back

-up Cash Manager:

None

Cal

culation Agent/Computational

Agent:

Citibank N.A.

Back

-up Calculation/Computational

Agent:

AHML

Swap Counterparty:

N/A

Issuer Account Bank:

ZAO Citibank (Not Rated by Moody s, rated BBB+ by Fitch)

Collection Account Bank:

Large Russian Banks

Paying A

gent:

ZAO Citibank

Management Company:

TMF

RUS (Not Rated)

Issuer Administrator/Corporate Service

Provider:

TMF

RUS, PMA

Service (Not Rated) (for accounting and

tax services)

Arranger:

AHML

Lead Manager(s):

ZAO Citibank

Special Depositary:

Gazpromba

nk (Baa3/P

Moody s View

Outlook for the Sector:

Negative

Unique Feature:

Two senior tranches (Classes A1 and A2) with pro

rata

interest payments and time

subordinated principal

repayments predefault of the Mortgage Agent.

Degree of Linkage

to Originator:

AHML acts as servicer and back up cash manager. The

collection accounts are also in the name of AHML. In

addition, AHML is committed to provide financial

assistance to the transaction in the amount of 10% of the

notes outstanding. This expo

ses the Notes to the credit of

AHML: all things being equal, a downgrade of AHML s

current rating would lead to a downgrade of the Notes.

Originator s Securitisation History:

# of Precedent Transactions in Sector:

% of Book Securitised: Approxima

tely

30%

Behaviour of Precedent Transactions:

Through the crises delinquencies and defaults observed on

the mortgage portfolios backing prior transactions of this

issuer have been worse than the average

delinquencies/defaults reported in the Russian inde

Mortgage Loan Minimum Standards Manual

June 2011

However, there have not been any losses in any of the

prior transactions.

Key Differences between Subject and

Precedent Transactions:

Two senior tranches (Classes A1 and A2) with pro

rata

interest payments and time

subordinated principal

repayments pr

edefault of the Mortgage Agent. The

difference in ratings assigned to these notes is primarily

due to the time subordination of principal repayment, which

results in Class A1 being repaid very quickly before losses

arise in the transaction.

Step up of the

class A2 depends on whether or not reserve

fund has been drawn below 50% of its target balance

Legal reserve and contingency reserves have been

removed from the structure

Portfolio Relative Performance:

Expected Loss/Ranking:

6%/ higher than peer g

roup due to worse performance of

the mortgage portfolios backing prior transactions.

When Moody s rated AHML 2008-

1, the expected loss

assumption was 4%. The increase of the expected loss

assumption to 6% is mainly driven by the performance of

the mortgage

portfolios backing the previous transactions

as well as the changes in the economic environment.

AHML has provided static historical information regarding

the default rates experienced by the seller on the whole

mortgage book (see section "Credit Analysis

").

MILAN CE/Ranking: 18%/in line with peer group

When Moody s initially rated AHML 2008-

1, the MILAN CE

assumption was 14.9%, which is lower than the current

MILAN CE of 18%. The increase in the MILAN CE was

driven by the general weakening in Russian eco

nomy,

which resulted in the decrease in house prices.

Weighted

Average Stress Rate For

House Prices:

54.4%

Potential Rating Sensitivity:

Chart Interpretation:

At the time the rating was assigned, the model output

indicated that Class A1 would have achi

eved a Baa1 rating

even if the expected loss was as high as 13.5% and MILAN

CE was as high as 28.8% and all other factors were

constant.

Factors Which Could Lead to a

Downgrade:

1. The ratings downgrade of the Russian Federation

2. The ratings downgrade o

f AHML

3. The growth of the pool delinquencies and loss rates

above expectations

4. Unforeseen regulatory changes

Strengths and Concerns

Strengths:

Concerns and Mitigants:

Weighted

average LTV

: Weighted

average

current LTV (based on valuation at

origination)

of 48.7% is lower than similar Russian deals.

Also, as per the Russian MBS law, there are no

mortgages in the portfolio with LTV exceeding

70%.

No arrears

: No loans in the pool were in

arrears at the time of their sale to the Mortgage

Agent

Other support:

In the circumstances described

Moody s committees particularly focused on the

followi

ng factors, listed in order of those most

likely to affect the ratings:

Unrated Account Bank: ZAO Citibank,

which is the Account Bank in this transaction,

is unrated. All collections and the reserve fund

are held in this account. This is partially

mitiga

ted by the replacement trigger as well as

incorporated into the modelling as described in

the Assets section below.

Mortgage Loan Minimum Standards Manual

June 2011

below, AHML (Baa1/P-

2) is obligated to

provide financial assistance to the transaction

in the amount of up to 10% of the outstanding

notes (amortising after 2 years subject to

certain conditions).

Other s

tructural features:

A record on the

Principal Deficiency Ledger (PDL) will be

triggered by loans in arrears for more than 90

days, which allows early trapping of excess

spread.

Mortgage certificates

: All mortgages are

evidenced by mortgage certificates

(

zakladnaya), which allows for an efficient

transfer of mortgages to the Mortgage Agent.

Mortgage certificates are kept in custody of the

special depository, Gazprombank (Baa3/P

3),

which also provides a third

party oversight to

the transaction.

Borrowers

notification:

All the borrowers

have been notified of the sale of the mortgage

certificates to the Mortgage Agent, and each

mortgage certificate has been endorsed in the

name of the Mortgage Agent.

Mortgage market conditions

: (i) Very limited

availability of historical performance data and

the available historical data shows significa

deterioration of performance through the crisis.

Moody s has used estimates for certain

parameters based on other similar markets and

applied additional stress to account for the

uncertainty. (ii) House prices started to

decrease in Russian regions in Q

3 2008

and

may decrease even further during 2010 in some

regions.

Economic conditions:

i) The pool has

experienced loss of equity in the underlying

properties as indicated by the weighted

average

current loan

indexed valuation of 51.5%

(compared to current loan

original valuation

of 48.7%). ii) The economic situation in Russia

is starting to stabilise; however, the lagging

effects of previous economic weakness and

increased unemployment are likely to drive

delinquencies up in the short to medium ter

This is mitigated by an increased expected loss

to account for this risk, which also led to a

MILAN CE in excess of that which would be

driven by the model outcome.

Legal and regulatory conditions: (i) The

timeliness of enforcement of the mortgage

col

lateral in the Russian regions may differ

from the largest cities such as Moscow and St.

Petersburg. These delays have been reflected in

modeling

assumptions. (ii) Legal uncertainties

still exist as the transaction relies on some legal

concepts which have

not been extensively

tested under Russian law, particularly

associated with the MBS Law as well as with

the risk of set off as described in the Assets

section below.

Linkage to the creditworthiness of

originator:

The ratings of the notes are likely

to be

affected if the creditworthiness of AHML

deteriorates.

Mortgage Loan Minimum Standards Manual

June 2011

Structure, Legal Aspects and Associated Risks

Transaction structure

: The Mortgage Agent,

registered in the Russian Federation, has issued three

classes of Rouble denominated bonds to refinan

ce the

purchase of receivables arising from Russian

mortgage loans originated by a range of local

regional banks and non

banking corporate entities in

accordance with standards set by AHML. This is the

first transaction with time

subordinated structure

iss

ued under the Russian domestic MBS law. In the

absence of the default of the Mortgage Agent, Class

A1 will be repaid first followed by the repayment of

Class A2. Interest due for these two classes will be

paid pro

rata.

Allocation of payments/pre accelerat

ed revenue

waterfall

: On each quarterly payment date, the

issuer s available funds (i.e. interest amounts

received from the portfolio, the reserve fund, and

interest earned on the issuer s account) will be

applied in the following simplified order of prior

ity:

1. Senior expenses;

2. Interest on Classes A1 and A2 (pro rata);

3. Minimum Coupon for Class B (de minimis

payment of RUB0.01 per Bond);

4. Principal Deficiency Ledger ( PDL ) (to be used

to repay the notes sequentially);

5. Reserve Fund;

6. Interest

on Class B (subject to the available funds).

Allocation of payments/pre

accelerated principal

waterfall

On each quarterly payment date, the principal

amounts received from the portfolio and amounts

applied to clear PDL will be applied in the following

mplified order of priority:

1. Principal to pay the shortfall of payments of the

senior expenses and interest on classes A1 and A2

2. Principal payments in sequential order until repaid

in full to Class A1; Class A2 and Class B.

Allocation of payments post

default of the

Mortgage Agent (but before the Mortgage Agent

is declared insolvent)

: If the mortgage agent has

defaulted due to the reasons described below and the

notes have been accelerated, the principal amounts

received from the portfolio will be allo

cated as

follows:

1. Principal payments on Class A2 until the notional

amounts of Classes A1 and A2 are equal.

2. Pro-

rata principal payments on classes A1 and A2.

3. Principal payments on Class B (after classes A1

and A2 have been fully repaid). Interest

on classes

A1 and A2 will continue being paid prorate at that

time.

Allocation of payments/PDL

like mechanism

The PDL will be debited once the loan has been

declared defaulted. The loan is declared defaulted if it

has been 89+ days in arrears; the mortgag

ed property

is completely or partially destroyed; the relevant

mortgage loan agreement or mortgage certificate is

held void by court; or the mortgaged property has

been seized or foreclosed.

Mortgage Loan Minimum Standards Manual

June 2011

Originator Profile, Servicer Profile and Operating Risks

Date

of Operations Review: April 2010

Originator Background: Agency for Housing Mortgage Lending OJSC (AHML)

Rating:

Baa1

Financial Institution Group Outlook for Sector:

Stable

Ownership Structure:

100% owned by the Russian Federal Government

Asset Size:

RUB 168.8 billion

% of Total Book Securitised:

30%

Transaction as % of Total Book:

15%

% of Transaction Retained:

10%

Servicer Background: AHML

Rating:

Baa1/P

-2

Total Number of Mortgages Serviced:

Approximately 128,500

Number of Staff:

107 FTEs d

edicated to servicing (including contract

workers)

Cash Manager/Calculation Agent Background: Citibank N.A.

Rating:

Citibank N.A.: A1/P

-1

Main Responsibilities:

Preparation of investor report

Obligation to perform calculations and make

payments accord

ing to waterfall

Draw on reserve fund and/or on the AHML s

financial support

Calculation Timeline:

Calculation period, which ends on the last date of

the month corresponds to the quarterly payment

date on the 20th of the following month (for

example, calc

ulation date from October 1 to

December 31 corresponds to the payment date on

February 20). The servicer is obligated to deliver

the servicing report to the cash manager by the 6th

of the month. There is a 7 day grace period for

interest and 30 day grace p

eriod for principal

payments not made on the payment date before

this non

payment is classified as default of the

Mortgage Agent.

Mortgage Loan Minimum Standards Manual

June 2011

Back

up Cash Manager/Calculation Agent Background: AHML

Back

up Cash Manager and Its Rating:

Baa1/P

-2

Main Responsibilit

ies of Back

up Cash

Manager:

Same as the responsibilities of the primary cash

manager once the primary cash manager has

defaulted. As part of its role as servicer, AHML is

well equipped to perform cash management duties.

Special Depository: Gazprombank

Rating:

Baa3/P

-3

Main Responsibilities of Special Depository:

Approximately 128,500

Number of Staff:

Safekeeping and tracking of the mortgage

collateral (i.e. mortgage certificates)

Calculation and tracking of the mortgage coverage

Control over the mortg

age agent s compliance with

the regulation and obligation to notify appropriate

authorities in case of non

compliance of the

mortgage agent with any laws or regulations

Control over mortgage collateral and other aspects

of mortgage coverage (such as collec

tions and

reserve funds)

Mortgage Loan Minimum Standards Manual

June 2011

Collateral Description (pool as of December 2009)

Mortgage Loan Minimum Standards Manual

June 2011

Russian & CIS Performance Indices

February 2011

Appendix 2a: RMBS Transactions Overview

Current Performance Data

Transaction Name

Originators

Original

Balance

Closing

Date

Reporting

Date

Reporting

Frequency

Pool

Factor

Original

LTV

Current

LTV

JSC

Agent of AHML 2010

-1

Agency for Housing

Mortgage Lending OJSC

13,547M

Jul

Feb

Q 0.85

52.90

39.40

Appendix

Transaction Name

Tranche

Name

Asset

Domicile

Tranche

Currency

Original

Tranche

Balance

Current

Tranche

Balance

Original

Rating

Date

Original

Rating

Current

Rating

Date

Current

Rating

Indicator

CJSC

Mortgage Agent of AHML

2010

-1

RUSSIA

Ru.Ruble

6,096M 4,407M

7/16/2010

Baa1

7/16/2010

Baa

(sf)

CJSC

Mortgage Agent of AHML

2010

-1

RUSSIA

Ru.Ruble

6,096M 6,096M

7/16/2010

Baa3

7/16/2010

Baa3

(sf)

CJSC

Mortgage Agent of AHML

2010

-1 B

RUSSIA

Ru.Ruble

1,355M 1,355M

7/16/2010

(sf)

Mortgage Loan Minimum Standards Manual

June 2011

A5.

INVESTOR / RATING AGENCY SAMPLE REPORT

COVERED MORTGAGE

BOND

This appendix con

tains

extracts from the following Moody s new issue report. For the entire report see

www.moodys.com.

NEW ISSUE REPORT

Alpha Bank A.E.

8 billion Direct Issuance

Global Covered Bond Programme

Covered Bonds / Greece

First rating assignment

20 May 2010

Analyst Contacts

Martin Rast

Vice President

Senior Analyst

44.20.7772.8676

[email protected]

Monica Bianchi

Statist

ical Analyst

44.20.7772.8745

[email protected]

Definitive Ratings

Cover Pool

(EUR Million)

Assets

Covered Bonds

(EUR Million)

Covered Bonds Rating

4,169

Residential Mortgage Loans

3,500

Baa3

The ra

tings address the expected loss posed to investors. Moody s ratings address only the credit risks associated with the transaction.

Other non

credit risks have not been addressed, but may have a significant effect on yield to investors.

Moody s has assigne

d long

term definitive ratings of Baa3 to the Greek mortgage covered bonds issued

directly by Alpha Bank A.E. (the issuer or Alpha) under the terms of its 8 billion Direct Issuance Global

Covered Bond Programme (the programme). The programme has been esta

blished in accordance with the

Greek covered bond legal framework1

(CB legislation).

The rating takes into account the following factors:

» The credit strength of the issuer (Ba1/NP/D+). Alpha is the third largest financial institution in Greece

with total

assets of

69.60 billion as of end-

December 2009.

» The credit quality of the assets (the cover pool) securing the payment obligations of the issuer under the

covered bonds. The cover pool mainly comprises prime Greek residential mortgage loans originated

by the

issuer. The collateral score for the initial cover pool is around 11%.

» The strengths of the Greek CB legislation: (i) the holders of the covered bonds will have the benefit of

both unlimited recourse against the issuer and a statutory pledge over the assets forming part of the cover

pool; (ii) the legal segregation of the assets in the cover pool from any bankruptcy proceedings against the

issuer; (iii) the statutory asset percentage test with a maximum of 95% and other matching tests; and (iv)

Mortgage Loan Minimum Standards Manual

June 2011

rtain restrictions to the value of loans in the mandatory tests, resulting in inter alia no value given to (a)

loan parts above 80% LTV and (b) loans in arrears of more than 90 days.

» The contractual asset percentage set at 95%, which translates into a mi

nimum 5.26% amount of

committed over

collateralisation. Given this level of over

collateralisation in conjunction with other deal

factors (e.g. the rating of the issuer, cover pool composition), the expected loss is commensurate with a

Baa3 rating on the c

overed bonds.

» The use of contractual arrangements designed to mitigate the rating linkage between the issuer and the

covered bonds.

Strengths of the Transaction

» The issuer: The covered bonds are direct and full recourse obligations of the issuer (Ba1

NP/D+).

» The cover pool: the covered bonds are supported by a well

seasoned and granular cover pool. Only

prime residential mortgage loans are eligible. Furthermore, the statutory/ mandatory imposes that only loan

parts below 80% of the property s market

value can be used as coverage for issuing covered bonds. The

loans have an average loan

property market value (LTV) ratio of approximately 56.2%.

» The CB legislation: A number of provisions set out in the CB legislation are regarded favourably by

Moody

s. These include, but are not limited to, the following:

Asset eligibility criteria. Only assets that satisfy certain eligibility criteria can be taken into account for

the purpose of the portfolio tests.

Segregation. The assets assigned by virtue of

the statutory pledge or the trust deed (to the extent not

subject to Greek Law) by the issuer will be segregated from its insolvency estate. Any proceeds deriving

from the assets included in the cover pool will be used to satisfy the claims of the holders

of the covered

bonds and of the other secured creditors, in each case subject to the terms of the CB legislation and the

programme documents.

Servicing of the cover pool after issuer bankruptcy. Upon an issuer event, the Bank of Greece may

appoint a serv

icer if the trustee fails to do so.

Recourse to the issuer. If the proceeds from the cover pool

are not sufficient to repay the covered bonds following the bankruptcy of the issuer, the holders of the

covered bonds would have recourse on an unsecured bas

is against the insolvency estate of the issuer.

Supervision by Bank of Greece. The issuance of covered bonds is supervised by the Bank of Greece.

» Refinancing risk: In terms of its assessment of refinancing risk, Moody s views favourably the extended

turity date included in the final terms of the covered bonds. However, this extension maturity only

works if an event of default does not occur, such as the breach of the amortisation test.

» Market risk: Exposure to interest rate risk is mitigated by the

portfolio tests that the issuer has to carry

out under the terms of the CB legislation. At the time of the first issuance, both the covered bonds and the

cover pool are denominated in Euros.

» Commingling risk: Commingling risk is mitigated by the followin

g measures: (i) the commingling

reserve fund to be funded if the issuer s short-

term rating falls below P

1; and (ii) the notification of the

borrowers to pay directly to an account at a credit institution with a rating of at least P

1 upon an issuer

event

» Set

-off risk: Moody s understands that the CB legislation would prevent the borrowers from exercising

any right of set

-off against payments due in respect of loans included in the cover pool.

Weaknesses and Mitigants

Mortgage Loan Minimum Standards Manual

June 2011

» The issuer: As with most covere

d bonds, until an issuer event, the issuer has the ability to materially

change the nature of the programme. For example, additional loans may be added to the cover pool, new

covered bonds issued with varying terms and different hedging arrangements entere

d into. These changes

could impact the credit quality of the cover pool or the degree of exposure to refinancing risk and/or

market risk.

Mitigants

: (i) the contractual and legislative asset eligibility criteria; (ii) the LTV limits

imposed by the CB Legis

lation; and (iii) the contractually binding level of over

collateralisation.

» The cover pool: The credit quality of the cover pool is reflected in the collateral score of approximately

11%.

Mitigant:

Moody s EL modelling takes into account the credit risk

of the cover pool.

» Substitution risk: As in most covered bond frameworks, there are few restrictions on the future

composition of the cover pool and hence substitution risk exists. The following should be noted:

The risk associated with the interventi

on of the issuer and the relevant mitigants should be considered.

The risk associated with the deterioration of the cover pool is mitigated by the following: (i) any asset

that is part of the cover pool before the issuer s insolvency will continue to ser

ve as security for the

covered bond holders; (ii) the CB legislation and the programme documents require the issuer to comply

with the portfolio tests and inject additional assets if such tests are breached; (iii) the pool composition will

be monitored; an

d (iv) the mandatory tests will give no value to loans in arrears of more than 90 days.

» Market risk. While the notes issued under the first series are variable rate referenced to the ECB base

rate, 39% of the assets have a fixed

rate term. No swap mitiga

tes such risks.

Mitigant:

Moody s has

factored in its analysis the interest rate risk and it is reflected in the over

collateralisation level.

» Refinancing risk. Following an issuer bankruptcy, to achieve timely payment, the holders of the covered

bonds m

ay need to rely on proceeds being raised through the sale of assets in the cover pool. The value of

the assets may also be subject to substantial volatility.

Mitigant:

Moody s modelling uses stressed

refinancing margins when modelling this transaction.

» S

overeign risk. Greece s public finance situation has markedly deteriorated and is set to remain highly

challenging. The type of economic and financial stress that would be associated with government debt

problems would somewhat weaken the credit fundamenta

ls of even highly enhanced structured

transactions.

Mitigant

The low TPI of this transaction limits the uplift of the rating assigned to the covered

bonds above the rating of the issuer.

» Time subordination risk: The deal does not contemplate the automat

ic acceleration of the outstanding

covered bonds upon an insolvency of the issuer. This feature may result in the later-

maturing liabilities

being de facto subordinated to the earlier maturing liabilities.

Mitigant

: When timely payments can no

longer be ma

de by the trustee, the claims of secured creditors will be paid on a pari passu basis » Income

underwriting: Generally all the loans have been checked to confirm that the borrowers can, based on their

income as it transpires from the borrower s pay slip or

tax return at the time of origination, afford to repay

the loans over their lives. However, in some cases and only for existing customers, credit is given to other

sources of income when there are indicators of higher than declared income. Those indicator

s may be (a)

qualitative information provided by the Branch, (b) availability of other assets (cash, property), (c) the

applicant is an Alpha Private Banking customer.

Mitigant: We took these characteristics into account when

calculating the collateral sco

re for the cover pool.

Mortgage Loan Minimum Standards Manual

June 2011

Structure Summary

Issuer:

Alpha Bank A.E. (Ba1, Not Prime, D)

Sponsor Bank:

Alpha Bank A.E.

Structure Type:

Direct issuance

Issued under Covered Bonds Law:

Yes

Applicable Covered Bonds Law:

Greece

Sellers/Originators:

Alpha B

ank A.E.

Servicers:

Alpha Bank A.E.

Interest Rate Swap Provider:

n/a

Asset Monitor:

Deloitte Hadjpavlou, Sofianos & Cambanis S.A

Trustee/Representative of the

Bondholders:

Citibank, N.A., London Branch

Timely Payment Indicator:

Very Improbable

Cover

ed Bonds Summary

Total Covered bonds Outstanding:

3.5 billion

Currency of covered bonds:

100% euro

Extended Refinance Period:

10 years

Principal Payment Type:

Soft Bullet

Interest Rate Type:

100% floating

Collateral Summary

Size of Cover Pool:

4.17 billion

Main collateral type in Cover Pool:

Res

idential

Main Asset Location:

Greece

Loans Count:

79,275

Currency:

Euro

WA Current LTV:

56.2% (on an unindexed basis)

WA Seasoning:

49 months

WA Remaining Term:

230 months

Interest Rate Type:

Floating 61%, Fixed 39%

Committed Over-

Collateralisati

on:

5.26%

Collateral Score:

11%

Further details:

See Appendix 1

Pool Cut

Off Date:

27 September 2010

Mortgage Loan Minimum Standards Manual

June 2011

Structural and Legal Aspects

Moody s Rating Methodology

Moody s covered bond rating methodology special report ( Moody s Rating Approach to Covered Bonds

dated 4 March 2010) details the approach used for rating covered bond transactions. The main assumption

is that until an issuer default, the covered bond obligations are sufficiently supported by the issuer. After an

issuer default, the programme

will rely only on the quality of the cover pool (including the swaps, if any

and to the extent that they have survived). The impact of the credit strength of the issuer and that of the

quality of the cover pool are analysed below.

Credit Strength of the S

ponsor Bank

The covered bonds are full recourse to Alpha Bank A.E. (rated Ba1/NP/D+). With total assets of

69.60

billion as of December 2009, Alpha has a strong franchise in Greece as the country's third

largest bank,

commanding a leading position in corp

orate banking and strong retail banking penetration in recent years.

Moreover, the bank has good geographic diversification through its presence in South Eastern Europe

(SEE) and Cyprus. The rating also benefits from its good efficiency indicators, while t

he recent EUR 986

million rights issue has strengthened the bank's capitalisation.

For further information on the issuer see Related Research: Moody s Bank Credit Opinion on Alpha Bank

A.E. was last updated on 18 June 2010.

The Credit Quality of the Cover

Pool

The cover pool

The cover pool consists of loans backed by properties located in Greece. All the loans in the pool have

been originated by the issuer in line with its underwriting guidelines.

All loans pay principal on a monthly basis, and are based o

n annuity amortisation schedules. All loans in

the pool are euro-

denominated.

The current weighted

average loan outstanding to original market value for the entire portfolio (56.2%).

Mortgage Loan Minimum Standards Manual

June 2011

Approximately 6% of the pool are subsidised loans, both from the Greek Go

vernment and OEK (Housing

Agency). The subsidies cover all or part of the interest amount of the monthly instalments of the loans

concerned, but borrowers are still liable for the whole interest amount.

The subsidies vary between 17% and 100% of the inter

est amount and can be granted for a maximum of

nine years. The payments owed are debited by the issuer from the account opened in its books in the name

of the trustee. The underwriting for these loans are the same as for the other loans, subject to more strict

eligibility criteria (see Appendix 2 for details about the underwriting criteria).

The quality of the collateral is evident from the collateral score of approximately 11%. For a description of

the cover pool, please see Appendix 1.

For further informa

tion on selected questions related to Alpha s underwriting policy, please see Appendix

Appendix 1: The Cover Pool

Overview

Collateral Type:

Residential Mortgage

Asset balance:

4,168,881,223

Average loan balance:

52,588

Number of loans:

79,275

Numb

er of borrowers:

57,119

Number of properties:

58,274

WA Remaining Term (in months):

230

WA Seasoning (in months):

Details on LTV

WA current LTV (*):

56.2%

WA Indexed LTV:

53.0%

Valuation type:

Market Value

LTV threshold:

80%

unior ranks:

n/d

Prior ranks:

n/d

Specific Loan and Borrower characteristics

Loan and Borrower characteristics

Loans benefiting from a guarantee:

n/a

Interest Only Loans:

0.0%

Loans for second homes / Vacation:

2.1%

Buy to Let loans / Non owner oc

cupied

properties:

0.0%

Limited income verified:

50.0%

Adverse Credit Characteristics(**):

0.0%

Performance

Loans in arrears (

2months -

< 6months):

0.0%

Loans in arrears (

6months -

< 12months):

0.0%

Loans in arrears ( > 12months):

0.0%

Loa

ns in a foreclosure procedure:

0.0%

Multi

Family Properties

Loans to tenants of tenant

owned Housing

Cooperatives:

n/a

Other type of Multi

-Family loans (****)

n/a

* Based on original property valuation

** Refers to Borrowers with previous missed p

ayments, Borrowers with a previous personal bankruptcy or Borrowers with record of court claims

against them at time of origination

*** n/d : information not disclosed by Issuer

**** This "other" type refers to loans directly to Housing Cooperatives and to

Professional Landlords

Mortgage Loan Minimum Standards Manual

June 2011

Mortgage Loan Minimum Standards Manual

June 2011

A6.

BIBLIOGRAPHY

BIS Quarterly Review: The covered bond market , Packer, F., R. Stever and C. Upper, (2007), September

Board of Governors of the Federal Reserve System: Mortgage Debt Outstanding, Release Date March 2011,

http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm

Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for

consumers and repealing Council Directive 87/102/EEC

Directive of the European Parliament and of the Council on credit agreements relating to residential property

European Bank for Reconstruction and Development - Environmental and Social Risk Management E-

Manual,

available at:

http://www.ebrd.com/pages/about/principles/sustainability/resources/financial.shtml

European Bank for Reconstruction and Deve

lopment

List of the Minimum Standards (LMS) and Mortgage

Manual (editions 2004 and 2007, respectively)

European Central Bank: EU Banks Funding Structures and Policies (May 2009)

European Central Bank: Covered Bonds in the EU Financial System (Decemb

er 2008)

European Covered Bond Council: European Covered Bond Factbook 2010

European Mortgage Federation (2002): "Mortgage Banks & The Mortgage Bond in Europe" 4th Edition

European Mortgage Federation (2002): "2002 Factsheets

European Mortgage Federatio

n website

Moody's Approach to Rating RMBS in Europe, Middle East, and Africa, 2 October 2009

Moody s

Enhanced Approach to Originator Assessments in EMEA RMBS Transacti

ons, 19 October 2009

Mortgage Loan Minimum Standards Manual

June 2011

A7.

GLOSSARY

Accrued Interest

Interest that is earned but not paid, ad

ding to the amount owed.

Adjustable

Rate Mortgage

(ARM)

(Also known as a variable-rate loan) A mortgage with an interest rate and

payments that can change at specified time periods based on changes in an

interest rate index that reflects current finance market conditions, such as the

LIBOR index or the Treasury index. When the interest rate on an ARM

increases, the monthly payments will increase and when the interest rate on an

ARM decreases, the monthly payments will be lower.

Adjustment Interval

The time between changes in the interest rate or monthly payment on an ARM.

The rate adjustment interval and the payment adjustment interval are the same on

a fully amortising ARM, but may not be on a negative amortisation ARM.

Affordability

A consumer's capacity to afford a house. Affordability is usually expressed in

terms of the maximum price the consumer could pay for a house and be

approved for the mortgage required to pay that amount.

Amortisation

The process of paying a loan over a predetermined period of time at a specific

interest rate. The amortisation of a loan includes payment of interest and a

portion of the outstanding principal balance during each payment cycle.

Amortisation Schedule

A table showing the mortgage payment, broken down by interest and principal,

the loan balance, tax and insurance payments if made by the lender and the

balance of the tax/insurance escrow account.

Appraisal

A professional estimate of the value of the property, including references to sales

of comparable properties.

ppraiser

An independent professional who conducts an analysis of the property, often

qualified by education, training and experience to estimate value of property or

personal property. Can work independently or for lender.

Arrears

Amount past due on a mor

tgage.

Balance

The amount of the original loan remaining to be paid. It is equal to the loan

amount less the sum of all prior payments of principal.

Bankruptcy

A provision in the law that allows borrowers to, whether personal or corporate to

declare themselves with greater assets than liabilities and/or greater liabilities

than income. In some cases courts allow bankrupt borrowers relief from debt by

discharging the debt. In other cases, the court will require the borrower to make

payments to creditors.

Building Loan

Also called a construction loan. A mortgage loan made to finance the

construction of a building, administered in tranches during the construction

process.

Certificate Of Title

A legal document that indicates who is responsible for and owns

the property and

describes the property and any liens against it.

Charge

Off

The portion of principal and interest due on a loan that is written off when

Mortgage Loan Minimum Standards Manual

June 2011

deemed to be uncollectible.

Closing

On a home purchase, the process of transferring ownership from the seller to the

buyer, the disbursement of funds from the buyer and the lender to the seller, and

the execution of all the documents associated with the sale and the loan.

Closing Costs

Costs that the borrower must pay at the time of closing, in addition to the down

payment.

borrowers

One or more persons who have signed the note, and are equally responsible for

repaying the loan.

Collateral

Property that is pledged as security for a debt. In the case of a mortgage, the

collateral would be the land, t

he house, and other buildings and improvements.

Convertible Mortgage:

A mortgage that begins as either an adjustable rate or fixed rate mortgage and

can be converted into another type of mortgage at a specified point in the loan

term.

Construction Financ

ing

The method of financing used when a borrower contracts to have a house built,

as opposed to purchasing a completed house.

Coupon

The contractual rate of interest on a credit instrument. For example a bond with

an interest rate of 6% is said to have a

coupon rate of 6%.

Credit Bureau

The company that gathers information on consumers who use credit and sells

that information in the form of a credit report to credit lenders.

Credit Assessment

Analyses the credit

worthiness of the borrower.

Credit Enhan

cement

A method whereby a company or individual attempts to improve its debt or

credit worthiness. The most common forms of credit enhancement are collateral

and over collateralisation, corporate guarantee, letter of credit, insurance, and

senior

subordina

ted structures.

Credit

Loss Ratio

The ratio of current credit-related losses to the current value of a mortgage-

backed security, or the ratio of total credit-related losses to total mortgages

owned by the corporation.

Credit Rating

An assessment of the credit worthiness of individuals and corporations that is

based upon the history of borrowing and repayment, as well as the availability of

assets and extent of liabilities.

Credit Rating Agency

A company that provides credit analysis services and ratings for corporate,

project finance, energy utility companies, sovereigns, public financing and

financial service companies. Standard & Poor s and Moody s are widely

recognised ratings agencies.

Credit Report

A report from a credit bureau containing detailed information bearing on credit-

worthiness, including the individual's credit history.

Credit

Related Losses

The sum of lost or foreclosed property expenses plus charge

offs.

Credit Risk

The risk that an issuer or a borrower may default on its obligations.

Mortgage Loan Minimum Standards Manual

June 2011

Credit Scoring

A statistical measure of credit risk calculated using recorded information

credit report

by a standardised, quantifiable method.

Default

The failure of a borrower to meet the terms of a legal contract, such as the

provisions of a mor

tgage. This can be failing to make any payment for an amount

of time or making payments below the minimum amount agreed.

Delinquency

When all or part of the borrower's monthly installment of principal and interest is

unpaid after the due date.

Delivery

The submission of all loan data and other information and documentation

required, usually used in delivering a loan to the secondary market.

Derivative Mortgage

Product

A security that pays investors with cash flows generated by an underlying

instrument,

such as mortgages or mortgage-backed securities. The most common

derivatives include multiple class securities, stripped mortgage

-backed securities,

and residuals, or tranches.

Depreciation

A decline in the value of a house due to changing market conditions, decline of a

neighborhood or lack of upkeep on a home.

Documentation

Requirements

The set of lender requirements that specify how information about a loan

applicant's income and assets must be provided, and how it will be used by the

lender.

Down Pay

ment

The difference between the value of the property and the loan amount, expressed

in currency, or as a percentage of the price. For example, if the house sells for

20,000,000 USD and the loan is for 12,000,000 USD, the down payment is

8,000,000 USD or 4

0%.

Eviction

To remove or put out an occupant of a property by legal process.

Examination of Title

Research on the title of a property from public records or an abstract of the title.

Employment Verification

The process of checking the borrower s employ

ment information.

Escrow

An agreement that money or other objects of value be placed with a third party

for safe keeping, pending the performance of some promised act by one of the

parties to the agreement. It is common for home mortgage transactions to i

nclude

an escrow agreement where the borrower adds a specified amount for taxes and

hazard insurance to the regular monthly mortgage payment. The money goes into

an escrow account out of which the lender pays the taxes and insurance when

they come due.

uity

In connection with a home, the difference between the value of the home and the

balance of outstanding mortgage loans on the home.

First Mortgage

A mortgage that has a first-priority claim against the property in the event the

borrower defaults on th

e loan.

Fixed

Rate Mortgage

Mortgage in which the interest rate on the

mortgage remains the same throughout

the term of the loan. As a result the monthly payment of interest and principal

remains the same through the life of the mortgage.

Forbearance

Agr

eement between a delinquent borrower and lender in which the lender

Mortgage Loan Minimum Standards Manual

June 2011

postpones legal action or foreclosure and the borrower agrees to a payment plan

to bring the overdue mortgage payments up to date.

Foreclosure

A legal action that terminates all ownership rights to a home when the

homebuyer fails to make the mortgage payments or is otherwise in default under

the terms of the mortgage.

Grace Period

The period after the payment due date during which the borrower can pay a

regularly scheduled payment without

penalty.

Hazard Insurance

Also known as property insurance. Insurance purchased by the borrower, and

required by the lender, to protect the property against loss from fire and other

hazards. Mortgage lenders often require a borrower to maintain an amount of

hazard insurance on the property that is equal at least to the amount of the

mortgage loan.

Home Equity Loan

A type of second mortgage in which the borrower uses the equity in their home

as collateral. This is often used for large expenses, such as home improvements,

medical bills or education tuition.

Housing Debt to Income

(HDTI)

Ratio comparing required monthly mortgage loan payments to available net

income. Recommended maximum is 28

33%.

Income Verification

The process of checking the borrower s

income information.

Initial Interest Rate

The interest rate that is fixed for some specified number of months at the

beginning of the life of an ARM. The initial rate is sometimes referred to as a

"teaser" when it is below the fully indexed interest rate.

Interest

The cost paid to the lender for the borrowed money.

Interest Accrual Period

The period over which the interest due the lender is calculated.

Interest Payment

The amount of interest paid each month.

Interest Rate Adjustment

Period

The frequenc

y of rate adjustments on an ARM after the initial rate period is over.

The rate adjustment period is sometimes but not always the same as the initial

rate period.

Interest Rate Index

The published index of interest rates on a publicly traded debt security used to

calculate the interest rate for ARM. The index is usually an average of the

interest rates on a particular type of security such as LIBOR.

Land Contract

A contract between a buyer and private seller of a property, in which the seller

retains the

title to the property until the buyer repays the loan, usually in monthly

installments, in full.

Late Payment

A payment received after the grace period stipulated in the note.

Lien

A perfected claim on a property for a debt or performance of an agreement

Loan Agreement

Agreement between the borrower and the financial institution according to which

the financial institution grants the mortgage loan to the borrower. Sometimes

known as a Security Agreement.

Mortgage Loan Minimum Standards Manual

June 2011

Loan Amount

The principal amount of a loan which the borrower promises to repay, as set

forth in the mortgage contract.

Loan Servicing

The process by which a lender administers a loan after closing. Activities usually

include collection of principal and interest payments until the loan is paid in full;

collections of past due amounts; verification that taxes and insurance are paid

and disbursement of interest and principal to Treasury.

Loan to Value (LTV) Ratio

The relationship between the principal balance of the mortgage and the appraised

value (or

sales price if it is lower) of the property.

Loss Mitigation

A process by which a lender or third party negotiates mortgage terms that will

reduce the likelihood of foreclosure and the resulting losses for the lender in the

event of borrower default.

Mar

ket Value

The current value of a property based on what a willing purchaser would pay.

The value determined by an appraisal is sometimes used to determine market

value.

Maturity

Date on which the last payment of principal and interest is due. This is usua

lly

but not always the term, which is the period used to calculate the mortgage

payment.

Modification

A change to the original terms of a mortgage, often made in order to make the

payment affordable for the mortgagor.

Mortgage

A security instrument entered into between a lender and borrower or buyer and

seller wherein a promise of payment and other obligations are made by the

borrower also known as the mortgagor.

Mortgage Agreement

Agreement between the borrower and the bank that pledges the property bei

financed to the lender according to which the bank grants the mortgage loan to

the borrower.

Mortgage

Backed

Securities or MBS

An investment instrument (debt security) issued in the secondary market that

represents ownership of an undivided interest in a group of mortgages. Principal

and interest from the individual mortgages are passed-through to pay principal

and interest on the MBS.

Mortgage Bond or MB

A bond secured by mortgage loans, sometimes known as a pool of loans.

Mortgage Insurance (MI)

Ins

urance, paid for by a borrower to insure the lender against financial loss of a

mortgage lender in the event of borrower default.

Mortgage Loan Payoff

Amount

The outstanding balance of the mortgage loan including interest accrued to be

paid in full on a d

ate certain.

Mortgage Loans

Outstanding

The total amount of money that is owed by mortgagors.

Mortgage Loan Term

The period used to calculate the monthly mortgage payment.

Mortgage Payment

The monthly payment of interest and principal made by the borrow

er.

Mortgagee / Mortgagor

The lender / The borrower.

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June 2011

Negative Amortisation

A rise in the loan balance when the mortgage payment is less than the interest

due.

Non

Performing Loan

A loan that is not producing income, including a loan that is not accruing its

stated principal and interest

, after a specif

number of days

Notice of Default

A formal written notice to a borrower that a default has occurred and that legal

action may be taken.

Origination Fee

An upfront fee charged by some lenders, usually expressed as a percent of the

loan amount used to offset the cost of originating the loan.

Origination

The process through which a mortgage lender creates a mortgage secured by

some amount of the mortgagor's real property.

Over collateralisation

The posti

ng of more collateral than is needed to obtain financing.

Partial Prepayment

Making a payment larger than the scheduled payment as a way of paying off the

loan earlier.

Payment Period

The period over which the borrower is obliged to make payments.

Payme

nt Shock

A very large increase in the payment on an adjustable rate loan. Also used to

describe the economic shock to a borrowers budget if they make a substantial

increase in their housing expense.

Perfecting a Title

Establishing lien priority over other claims on title or eliminating claims or any

legal question as to ownership of a lien or a property.

Pre

Foreclosure Sale

The sale of a property wherein the borrower is in default and the lender permits

the sale prior to the foreclosure auction.

Prepa

yment

Repaying all or part of the mortgage ahead of schedule.

Prepayment Penalty

A charge imposed by the lender if the borrower pays off the loan before a

predetermined date.

Prequalification

The process of determining whether a potential borrower has t

he ability, meaning

sufficient assets and income, to repay a loan before taking a complete application

and before the verification process.

Primary Mortgage Market

The market for issuing mortgage loans to the borrower, usually banks and non-

bank financia

l institutions.

Principal

It is the original loan amount minus the total repayments of principal made to

date The portion of the monthly payment that is used to reduce the loan balance.

The principal balance (sometimes called the outstanding or unpaid pri

ncipal

balance) is the amount owed on the loan at any given time

Primary Residence

The house in which the borrower will live most of the time, as distinct from a

second home or an investor property that will be rented.

Prior Lien

Also known as first lie

n. Highest priority debt in case of default.

Private Mortgage Insurance

Insurance which protects the lender in the case of a default by the borrower, by

paying a percentage of the loss of liquidating the property. May be required by

Mortgage Loan Minimum Standards Manual

June 2011

the bank if the down payment by borrowers is less than 20% of the value of the

property.

Processing

Compiling and maintaining the file of information about a mortgage transaction,

including the credit report, appraisal, verification of employment and assets, and

so on. The pro

cessing file is handed off to underwriting for the loan decision.

Pool

A collection of individual mortgages that are grouped together by primary

lenders (banks, thrifts, mortgage bankers) to constitute the collateral for a MBS.

Qualification

The process of determining whether a prospective borrower has the ability,

meaning sufficient assets and income, to repay a loan. Qualification is sometimes

referred to as "pre-qualification" because it is subject to verification of the

information provided by the app

licant.

Qualifying Income (QI)

Applicant s income that is documented and stable.

Refinance

Paying off an old loan while simultaneously taking a new one.

Remittance

The transfer of principal and interest collected from the borrower to the holder of

the m

ortgage.

Also, the transfer of money from outside the county to a citizen in the country.

Repayment Plan

Agreement between the borrower and lender allowing the borrower who is

delinquent on his mortgage to make larger monthly payments for a period of tim

until arrearages are repaid.

Replacement Cost

The cost to replace damaged personal property without a deduction for

depreciation.

Residual Income (RI)

Remaining income after an applicant has made the mortgage payment and all

revolving credit obligation

Risk

Based Capital

The amount of capital necessary for a bank to have with which to absorb losses

throughout a hypothetical ten-year period marked by severely adverse economic

circumstances.

Risk

Based Pricing

Loans priced to take into account higher risk for lower quality borrowers. When

lending to higher risk borrowers with higher interest rates, this is called subprime

lending.

Seasoned Mortgage

A mortgage made in prior years and on which principal and interest payments

have been made on time.

Sec

urity

A negotiable instrument, categorised as debt securities or equity securities.

Scheduled Mortgage

Payment

The amount the borrower is obliged to pay each period, including interest,

principal, and mortgage insurance, under the terms of the mortgage co

ntract.

Second Mortgage

A loan with a second-priority claim against a property in the event that the

borrower defaults. The lender who holds the second mortgage gets paid only

after the lender holding the first mortgage is paid.

Secondary Mortgage

The market where mortgage loans are sold to provide liquidity to mortgage

Mortgage Loan Minimum Standards Manual

June 2011

100

Market

lenders so that they may use the proceeds to fund new mortgages.

Self

Employed Borrower

A borrower who owns and operates his/her own enterprise or a person declared

as self-

entrepr

eneur (in accordance with the national legislation of the respective

country)

and when requesting a loan must document income using financial

statements rather than information provided by an employer.

Serious Delinquency

A single-family mortgage that is 90 days or more past due, or a multifamily

mortgage that is two months or more past due, and the bank considers the

mortgage in danger of default.

Servicer

The party who services or administers a loan and which may or may not be the

lender who originated

it.

Servicing

Administering loans between the time of disbursement and the time the loan is

fully paid off. This includes collecting monthly payments from the borrower,

maintaining records of loan progress, assuring payments of taxes and insurance,

and pu

rsuing delinquent accounts.

Teaser Rate

The initial interest rate on an ARM, when it is below the fully indexed rate,

sometimes known as the introductory interest rate.

Title

Evidence or proof of ownership of land (also known as deed).

Title Insurance

Insurance, purchased by a buyer or borrower to protect themselves or the lender

against loss arising from prior claims which may affect the title to property.

Total Debt to Income

(TDTI)

Ratio comparing sum of all required debt payments to available net in

come.

Recommended maximum is 36

40%.

Underwriting

The process of assessing a loan application to determine the risk involved for the

lender and structuring the proposed loan.

Undocumented Income

Income of the borrower which is not reported to tax authori

ties.

Mortgage Loan Minimum Standards Manual

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101

A8.

LIST OF MINIMUM STANDARDS

EBRD List of the Minimum Standards for Mortgage Activities

Updated

June

2011

List of Minimum Standards & Suggested Best Practices for Financial Institutions

Mortgage Loan Minimum Standards Manual

June 2011

102

NTRODUCTION

This

EBRD

List of Minimum Standards (the LMS ) has been produced based on the existing

List

Minimum Standards and Best Practices. The LMS is outlined in the

EBRD

Mortgage Manual (the Mortgage Manual ) to provide guidance for those lending institutions that will receive mortgage financing from EBRD. A

partner banks and

non

bank

financial institutions receiving mortgage credit lines from EBRD will comply with these Minimum Standards and Best Practices to ensure that, as much as possible,

the mortgages underwritten using EBRD funds are originated and managed in a prudent manner. In addition to supporting the primary market, the application of these guidelines

will also ensure that the mortgage loans meet standardisation requirements for the possible future issuance of

Mortgage Bond

(MB) or Mortg

age

Backed Securities (MBS).

It is

hoped that standardisation in underwriting and documentation will both improve the quality of lending processes and ultimately will facilitate the development of secondary markets.

For a mortgage portfolio to be conside

d suitable for inclusion in a MB or MBS, the lending institution must be aware of the prospective requirements of both credit rating

agencies and investors.

Further explanation for each standard or best practice, as required, is provided in the Mortgage Manual. The

Mortgage

Manual

was

updated in June 2011 and contains

recommendations and information based on research undertaken by the EBRD and its Consultants based on their experience in mortgage lending. It is not intended to be

definitive.

Further improvements to mortgage lending practices will be identified as the partner banks and non-

bank

financial institutions further develop this business and this

document may be updated from time to time.

The Minimum Standards and Best Practices have been divided i

nto the following categories:

MS/01

Product and

Lending Criteria

MS/02

Mortgage Documentation

MS/03

The Mortgage Process and Business Operations

MS/04

Property Valuation

MS/05

Property Ownership

MS/06

nsurance

MS/07

Credit and Risk Management Standards

S/08

Disclosure

MS/09

Basel II

and III

Requirements

MS/10

Security Requirements

MS/11

Management Information/IT and Account Management

Within each of these sections, this list outlines Minimum Standards, Best Practices, Reasons for Minimum Standards/Best Practices and Investor/Rating Agency Issues.

Moreover, the application of such Minimum Standards and Best Practices is appropriate for the ongoing management of both the primary and secondary mortgage business.

Mortgage Loan Minimum Standards Manual

June 2011

103

Minimum Standard

Section 1:

Product and Lend

ing Criteria

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO

NOTE/REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Note: These standards are meant to supplement, not replace, prudential

requirements or the lender s own standards. Where more stringent, such

requirements or standards should apply.

All mortgage products should have certain characteristics. The following

features should be observed for all types of mortgage products:

Common Features

Purpose: Residential properties - purchase, remortgage, build or improve,

including the relevant land, if any, principal private dwelling or

buy

let

houses or apartments

Product Type:

Constant

annuity mortgage only, with full amortisation to

liquidate the

debt

by the

end of the mortgage term.

Property location:

Within the

country of the lender.

Borrower:

Nationals and non-

nationals

resident in the country. Nationals

and non

nationals resident outside the

country

purchasing within the

country.

Amoun

Minimum/maximum amount stated - 250,000 Euro equivalent in

local currency.

Loan Term:

Minimum 5 years/maximum 30 years (subject to funding).

Borrower

Age:

Minimum - age of legal contract. Maximum (at completion

of the mortgage loan term): legal retirement age, as regulated in the respective

country

, unless demonstrable evidence of sufficient pension and/or other

income

(s) to support mortgage payment through the end of

contracted

mortgage.

Interest Rate: Variable or Fixed. Fixed interest rates are preferable. If they

are not available in the country or if the borrowers opt for variables rates, the

lender should appropriately inform the borrowers about the risks involved.

Teaser rates are not allowed. Interest rate switch from fixed to variable (or

vice

-versa) are allowed, but in such cases the borrower must be notified in

Underwriting Criteria is the

practical application of the

lender s Credit Policy and

the

key aspect is to establish the

applicants

ability to repay the

loan.

Mortgage Loan Minimum Standards Manual

June 2011

104

writing (at least 3 months in advance) and should the borrower choose to pre-

pay, the prepayment fee should be waived.

Variable Rate Mortgages (VRM)

Where the interest rate charged to the

customer is variable, it should be linked (indexed) to the relevant reference rate

for the loan currency (e.g. Libor, Euribor,

etc.

) and contain a margin for profit

The index should ideally be equitable, transparent and independent:

Reasonable efforts should be undertaken by lenders to link to external

indexes, such as those published by Central Banks;

When this is not possible, lenders can use internal indexes, but these

should be published regularly.

Property Valuation: Should be c

arried

acc

ording to Section 4

The LTV

limit is to apply to the lower of either the actual purchase price or the

valuer

estimation.

10.

Tenure of Property: Full ownership.

Freehold

recommended. L

easehold

with minimum of 50 years after the maturity of the loan or legal maximum, if

lower (see

Section 5

11.

Security Required: First rank mortgage over the property. Property

insurance in the joint names of the lender and customer to cover the

replacement or reinstatement cost of the property. This policy to be index

inked, if available.

12.

Verification:

Supporting documents as listed in

Section 2

Differentiated standards apply to local currency and foreign currency

mortgages

II.

Local Currency Mortgage

Sub

Loans

Currency:

Local currencies only

Loan to Value (

LTV)

: Maximum 80% LTV for owner-occupied properties

Maximum 70% for buy-

-let .

PTI:

Up to 50% of borrower s net income for owner-occupied properties.

Maximum 35% of borrower s net income for buy-

-let

(For mortgage

borrowers

with higher incomes,

lenders

may use the maximum rate, but

within

the limits of the procedures and prudential requirements of the Central Bank).

Affordability Test: Use of Net Disposable Income (NDI), Debt Service

Ratio (DSR) model or Payment-

-Income (PTI). This model should stress test

Lenders should consider

introducing geogra

phic

and employer

diversification parameters

to avoid concentration

risk by setting limits on

the percentage of the

portfolio that can be in a

particular location or

loaned to staff of a

particular employer. The

Mortgage Loan Minimum Standards Manual

June 2011

105

the customer

s ability to repay by adjusting the interest rate upwards

usually

(300 basis points). The model should have a floor limit of funds available

for living expenses

III.

ard Currency Mortgage

Sub

Loans

Currency:

uro and USD only.

Loan to Value: Dependent lender C

redit

olicy

- maximum 70% LTV for

owner

-occupied properties. Maximum 60% for buy-

-let .

3. PTI:

Up to 35% of net income for owner-occupied properties. Maximum

of net income for buy-

-let

(for mortgage borrowers with higher

incomes,

lenders

may use the maximum rate within the limits of their

procedures and prudential requirements of the Central Bank).

Affordability Test: Same as for mortgage loans denominated in Local

Currencies. In addition

, this model should test the customer s ability to repay in

case of depreciation of the local currency (it is recommended that various

degrees of depreciation are tested).

level of geographic

diversification will

dep

end on city size and

population.

ii.

For local currency loans

maximum 80% LTV

unless supported by a

mortgage indemnity

guarantee

to be exercised

in a prudent manner

(taking into account the

repayment capacity of the

mortgagees) and with

credit worthy insurers

iii.

For hard currency or

forex loans m

aximum

70% LTV unless

supported by a mortgage

indemnity guarantee to be

exercised in a prudent

manner (taking into

account the repayment

capacity of the

mortgagees) and with

creditworthy insurers

iv.

Forex loans should be

ven to individuals

whose revenue is in Forex

or Forex

linked.

Mortgage Loan Minimum Standards Manual

June 2011

106

Minimum Standard

Section

2: Mo

rtgage Documentation

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO

NOTE/REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Development of all documentation supplied in the mortgage process must

involve suitable

qualified legal

advisers.

ii.

The

Mortgage Application Form and supplementary materials should

include the following details:

Personal details, including postal codes

Occupation and income

Financial assets

Current debt/repayments

Bank account details

Details

of legal body

according to local legal norms (e.g. lawyer, etc.)

Current living accommodation

Details of prop

erty to be purchased/built and

postal codes

Amount of loan required

Full costs of transaction

Source of funds to cover the cost

Type of mortgage r

equired

Term/repayment schedule

Illustration of interest rate/payment changes

The Application Form(s) should meet consumer protection legislation

and must include explicit consent for inquiries to a credit bureau (if

relevant

country)

or credit informat

ion reporting system

iii.

Supporting documentation: lenders must ensure

verification

of the

information in the Mortgage Application by requesting the following

documents:

Completion of standard conditions in application form (including

authority for lender to

sell the mortgage

)

Valuation

and

structural survey report

National identity cards (according to local legislation)

Compliance with consumer

protection legislation is

mandatory,

but

best

practice would

also inclu

a range of risk

warnings/advice in the

offer letter/loan agreement

such as:

Advice that the home

is at risk if payments

are missed.

Advice that the

variable

interest rates

may be adjusted (up

and down) from time

to time and that the

mortgage payments

uld also be adjusted

to reflect the future

change

, as the case

may be.

Advice that

movements of

exchange rates could

increase/reduce the

repayments in the local

currency (numerical

illustration is

recommended).

Advice to obtain

Application and

Supporting

Documents

The mortgage application

form

and accompanying authorisation

of borrower enables the lender to

collect all the relevant

information verifying

documentation to adequately

assess the application. The

interview is a key activity in the

assessment process.

The Offer

Letter:

The offer letter (when accepted)

is the formal

commitment

between the lender and the

customer.

General

Investors and

rating

agencies require evidence

that loan decisions are

made on the basis of

interview supported by

collection and/or retention

f comprehensive data.

Application

The

application

and

supporting documents

should be carefully retained

for possible review at a

later stage by auditors

acting for

investors/rating

agencies in the event of a

mortgage bond or

mortgage

backed

securities

iss

ue.

Mortgage Loan Minimum Standards Manual

June 2011

107

Marriage certificate or proof of marriage,

if applicable

Divorce

separation agreements, if

applicable

Architect certificates

for se

build products

Proof of appropriate registration of the property, such as c

adastre

excerpts

or equivalent

It may be that in the case of real estate to be built or under construction, not

all the documents mentioned above will be available upfront, such as

valuation report, cadastre excerpts, etc. These should be made available in

due course as agreed with the client.

For Income Verification

at least one

of the following

Certificate of income from employer

- State certificate of earnings/tax paid (or similar documents

according to local legislation)

For self

employed people: c

ertified audited accounts

or local income

confirmation, as the practice may be in the respective country

Independent confirmation

real estate

taxes are up to date

, if applicable

Sav

ings

or loan statements or other justification of source of advanced

payments

Rent accounts, if relevant

iv.

The

Mortgage Offer should be documented in an offer letter and/or

mortgage loan agreement that is legally binding, complies with consumer

legislation,

safeguards the customer and the

lender

and will stand in a court

of law. The contents of the letter/agreement should include:

Name & add

ress of customer, including

postal code

Address of property being mortgaged

and

postal code

Amount of credit advanced

eriod of the agreement

Number of repayments

Total amount repayable

Cost of the credit

Interest rate (APR ("Annual Percentage Rate"), if available in the

respective country

Annual Effective Rate (AER). This is the rate used to compute the

equivalent, on an annual basis, of the present value of all loan

repayments and charges, future or existing, agreed between the

independent legal

advice before signing

the contract.

For Hard currency

loans, advice on

the

risk undertaken by the

borrower

in the case of

mortgage loans

denominated in a

foreign currency,

should

experience an

erratic change in

value

Mortgage Loan Minimum Standards Manual

June 2011

108

creditor and the consumer

Security

(mortgage right)

required

on the financed property

General conditions

Consents

required to enable the sale of mortgage loan and mortgage

right

third

parties, transfer of data to

third

parties and the

appointment of a

third

party administrator/ servicer, including consent

for

sharing information with the access to credit bureau data, if

existing in the respect

ive country.

Post sale documentation

The following, at a minimum, should be provided

post sale:

Written confirmation of the key terms of the loan once the contract is

signed and subsequent notification, at least on an annual basis, in cases

where the structure of fees change (e.g., redemption penalties,

statement fee, re

mortgage, early repayment charges, etc.).

Annual statements to the borrower detailing the principal outstanding,

interest payments made during the year and any penalty interest.

Written no

tification

, if the mortgage is sold if required under local

legislation.

Written notification of early repayment charge

and

arrears charge

applied by the lender in case of arrears

and

repossession policy or

equivalent internal regulations.

vi.

Documentation

will be required throughout the entire mortgage process. A

mortgage

lender

will develop a wide range of other documents to cover

specific activities and situations. The following is a list of documents the

lender should have:

Consumer guides to process

pro

ducts

Loan disclosure forms

Relevant marketing material

Application form(s) meeting consumer legislation and

secondary

market requirements

Credit assessment template/form/system

Letter(s) of offer (loan agreement) - meeting legislative or

secondary

market

requirements

;

including sale to 3rd parties

Mortgage deed

Certificate of title report

Assignment of insurance policies forms

Valuation/property appraisal form

Mortgage Loan Minimum Standards Manual

June 2011

109

Minimum Standard Section 3:

The Mortgage Process and Business Operations

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO

NOTE/REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

The lender should have a written business strategy for mortgage lending

approved at the Board of Directors level.

ii.

The lender should have a written description of the key standards of the

required documentation and of the steps involved in originating a mortgage.

This should cover the process from the initial contact with the customer

until the final reimbursement of the loan, including potential collection.

This description should include: a flow chart showing the steps involved, a

written description of each step and the responsibilities of each party at

every step.

iii.

The lender should have a clearly defined organisational structure that

includes responsibilities, accountability and roles in all aspects of the

mortgage process. The mortgage business should include a highly

experienced

Senior Credit Officer to oversee loan operations, reporting to

the bank s Chief Credit Officer. The lender should have an Audit

Committee that reports directly to the designated board committee.

iv.

he lender should have processes in place to ensure that st

aff from all areas

of the bank or the lending institution hav

ing

a material role in the process

receive training to ensure that they understand and are committed to the

process.

rocesses

governing

performance incentives provided to all staff, as the

case

may be,

should be consistent with the fact that mortgages are long

term

loans.

Prior to the launch of a new

product or the improvement

of an existing product, staff

representing marketing,

sales, origination,

underwriting, processing

and legal should

agree

hat

the mortgage structure,

underwriting process,

standards,

documentation

and verification, and the

disclosure to consumers

serves the long term

interests of the lender and

the potential borrower.

This should be done

front and updated from time

time, depending on the

mortgage market

development,

with existing

products as well.

The

mortgage lending process is

the foundation for the largest

financial transaction that most

consumers will undertake in

their lives. It is imperative that

each member o

staff, whether

they be in sales, marketing,

underwriting, processing, legal

other

functions,

understands and is committed to

a process that is clear, fair,

transparent and consistent. For

the protection of both the

borrower

and the bank, the

lender

needs to ensure that the

mortgage is within the

customers means over the long-

term and consumers need to be

fully aware of the

commitments

and

risks

they are

taking.

Markets are built and

sustained on both

Investors and Consumers

confidence. If the

siness

is well organised and

managed, portfolio

performance may be

measured and observed for

the investor and rating

agency to assess

Governance Risk.

Mortgage Loan Minimum Standards Manual

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110

vi.

Regardless of whichever organisational structure the lender adopts, it

should be supported by

the

necess

ary checks and control

to ensure policies

in relation to mortgages are adhered to.

The two main types of organisational structures are:

Centralised Approach

vii.

Centrali

sed loan divisions operate through several units, including

Originations, Underwriting, Appraisal, Credit, Closing and Funding and

Loan Servicing. All of the units are located in the same facility and should

participate in loan committee meetings to review loan origination

objectives, loan closing to loan applicatio

n ratios and loan perform

ance.

viii.

In a centralised business model, loan approval may be delegated to an

Underwriter, the Senior Credit Officer and for large credits, the Credit

Committee o

the Board of Directors

, with all respective approval from the

Credit Department or similar u

nits

Decentralised Approach

ix.

A decentralised business model could be more effective for a large

branch operation or an organi

ation that services a wide geographical area.

However, the decentralised model often requires the delegation of

authority for loan approval. The authority may be placed with a branch

manager, for instance. However, all mortgage loans originated by a third

party (other than the lender) should be checked by the Credit Department

(or similar unit) of

lender financing the respective

loans.

Credit authority should be delegated for lower denominated credits and

larger credits should require a review by a regional manager or the Senior

Credit Officer.

xi.

The decentralised model also requires greater scrutiny of loan

performance, including by the Credit Department or other similar unit.

Research shows that

many of the largest and

most successful

mortgage lenders have

centralised their

operations with

ranches

being responsible for

business development,

sales and Customer

Service.

Where a decentralised

model is adopted, it should

be supported by regular

audit checks and balances

by Head Office - Credit

Department

or the Audit

Committee to ensure

compliance with policy.

One method for

determining compliance is

to review loan perform

ance.

A high default rate per loan

originator is a sign of

potential problems with the

structure in place

Where a decentralised model of

operation is in place, branch

managers implement bank

policy in relation to: application

standards

and documentation,

loan assessment, issue of

offer

letter

, taking and perfecting

security, issuing the loan cheque

and account and arrears

management. The decentralised

model would be supported by

regular

Credit and Audit checks

and balances by Head Office to

ensure compliance with policy.

Financial institutions need to

demonstrate that capital and

shareholder funds are being

managed prudently and that

adequate risk management

controls are in place.

Rating Agencies and

Auditors acting on behalf

of Investors will assess the

process procedures and

standards of lenders.

A measurement of quality

is loan performance.

Investors will look

carefully at loan default

rates to determine whether

the organisation is well

managed. When default

rates increase, greater

ersight is necessary to

evaluate the effectiveness

of policy and supervision.

Mortgage Loan Minimum Standards Manual

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111

Minimum Standard

Section

4: Property Valuation

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO

NOTE/REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATI

AGENCY ISSUES

Lenders must ensure that a proper property valuation

takes place

ii.

The

Valuation Report

must contain the following details:

Lenders and Applicants name

Address of the property, including the postal code, and legal

description as register

ed in the cadastral or on a survey

description

of the location of the property.

description

of the surrounding neighbourhood and the elements

influencing desirability of prospective buyers.

Description of property

with

estimation of age.

Type of const

ruction material

wood, brick, concrete or steel

The appraiser should observe and comment on the quality of

workmanship, evidence of defects or hazards that might jeopardi

e the

hea

lth and safety of the occupants.

The nature of the property, whether residential or mixed use

esidential and commercial).

Whether the current use is legal or conforms to use codes established

by local authorities.

Dimensions/floor area.

Whether the property has a remaining economic life at least 20 years

exceeding the loan te

rm.

Number and type of rooms.

acant, the appraiser should ascertain

, if possible,

the length of time

the property has been vacant. If vacant for an extended period of time,

the appraiser and or credit officer should further investigate whether

the lengthy vacancy has negatively impacted the physical condition of

the property and/or systems, such as heating, cooling, water and waste

water.

If tenanted or occupied by anyone other than the borrower, the

appraiser should ascertain the length of the lease or rental agreement

and the amount of rent the tenant pays.

Any

physical

extensions

of the structure including p

lanning

It is critical that the

appraiser

not influenced

by the loan originator, the

seller or agents r

epresenting

the buyer or seller.

Appraisals should be

detailed reports and should

include photographs of the

interior, exterior,

neighbourhood and of each

comparable.

Lenders should refrain from

using desk-top valuation

models or drive by

evaluations for loans

exceeding 50% LTV.

It is well advised that the

Loan Officer make a

cursory inspection of the

property when meeting the

prospective borrower on site

for the application.

An appraisal of collateral

property must provide the lender

with an independent assessment

of the property that is being

offered as security.

One of several purposes of the

appraisal is to determine the

. Th

should be based on

the lower of the market value or

the purchase price. In addition,

the appraisal establishes the

value for insurance and

highlights repairs needed to the

property.

Mortgag

e borrowers should be

warned about negotiating a

purchase price greater than the

appraised value. While it is

possible a borrower may have a

need or desire for a property and

may be willing to pay more than

its appraised value, lenders

should not make a loan on the

basis of the purchase price, but

on the value as determined by

the appraisal.

Further, lenders should be on

guard for a fraudulent scheme

known as cash to borrower

Investors make decision

to purchase loans or whole

portfolios on the basis of

perceived risk. A critical

measurement of risk is the

calculation. Accurate

values are necessary to

make such an assessment.

Mortgage Loan Minimum Standards Manual

June 2011

112

permission (obtained o

r required as the case may be).

Services

water, gas, electricity or other utilities, as available. If

under constr

uction

stage reached/work, estimated budget and time

to complete.

Evidence

(as available) of any soil conditions such as

subsidence/landslide,

excessive moisture, excessive rocky conditions

which could impact

the stability of the structure.

Market value,

using a minimum of 3 recently closed comparable (like

kind) properties in a reasonable proximity

the subject property. The

market analysis should include the estimated marketing time for an

arm s length sale to a reasonably informed buyer.

Purchase

Pri

ce.

The appraiser should carefully examine the sale

history of the property and address sudden and/or substanti

al increases

in price or value.

Reinstatement

replacement cost. The replacement cost should address

current availability and costs of materials and labour while addressing

each component of the property

If occupied by tenants or if intended to be a property for let, an

income analysis to determine the Capitali

ation Rate

Repairs identified. A repair list should take into consideration health

and

safety of the structure, cosmetic improvements and cures for

functional and physical obsolescence. The repair list should provide

an opinion of the cost to cure, but should be subject to further

evaluation by the Underwriter or credit analyst

Environme

nta

l Factors. See EBRD s Environmental Procedures for

Mortgage Loans (

www.ebrd.com

Recommendation(s).

Signat

ure/qualification/name of firm.

iii.

Criteria for selecting the valuation firm: In assessing the profile of the

appra

iser, the lender must ensure that: a) the appraiser is a competent

professional and a member of a recognised professional body (if such

bodies exist); b) the appraiser has adequate Professional Indemnity

Insurance (if self-

employed)

; (c) the appraiser is i

ndependent.

At a

minimum, the appraiser should have one year of experience as an

apprentice or junior appraiser working under the tutelage of a senior or

master appraiser. Prior to engaging an independent senior or master

appraiser, the Senior Credit Officer and a member of the quality control

often accomplished with an

accomplice and an appraiser.

Mortgage Loan Minimum Standards Manual

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113

unit should review 3-5 appraisals that the appraiser

has

conducted within

the last 12 months. The appraisals should be reviewed for accuracy, clarity

and substance. National standards should apply for authorisation of the

evaluators (both of the lenders or independent evaluators, as the case may

be).

Mortgage Loan Minimum Standards Manual

June 2011

114

Minimum Standard Section 5:

Property Ownership

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO

NOTE/REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

he borrower should either have:

iii.

Freehold

(Full ownership)

legal title which gives them all rights to use the

property without limit in time, except for the right of the State to take over

the property in certain circumstances and when the State

pay

compensation based on at least full market value.

The property may be subject to certain covenants, conditions and

restrictions placed on the property by a prior owner or developer. The

lender should seek legal advice on the impact to the proposed loan as a

result of the restrictions.

iv.

Leasehold

title (in countries where this is applicable) with the term of the

lease equal to or not

less than 50

years

after

the

maturity

of the

loan.

Lenders must be able to grasp

tangible security in the event of

loan default.

Lenders should establish, by use

of the appraisal, the estimated

time necessary to market the

property in the event it is

ecessary to foreclose

Investors and Rating

Agencies need comfort

that the mortgage customer

owns the property and it is

good security for the loan.

Mortgage Loan Minimum Standards Manual

June 2011

Minimum Standard Section 6:

Insurance

EBRD MINIMUM STANDARDS

EBRD SUGGESTED BEST

PRACTICE

POINTS TO

NOTE/

REASONS FOR BEST

PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Life Insurance: A Life Insurance policy on the life/lives of the

borrower(s) should be required in an amount to cover the outstanding

principal for the term of the loan. The p

olicy

should

be assigned to the

lender. I

ts value will decrease with o

utstanding balance of the loan.

Alternately, the customer should be provided with the opportunity to

consider a whole life insurance policy that has value beyond the

mortgage. A whole life policy can have an assignment of benefits to the

lender as the first priority, which would pay-off the loan, and leave the

survivors with a free and clear home as well as a potential cash benefit.

As an alternative to Life Insurance (if available), the Lender could also

propose a Payment Protection Insurance.

ii.

The buyer should contract Property Insurance from a high-

rated

insurance company with sufficient reserves to withstand claims for

catastrophic events, such as an earthquake, flood or other natura

disasters.

The policy should be indexed or contain defined escalators to provide for

increased coverage against loss, if the property value increases. The

initial coverage should be sufficient to replace or reconstruct the

property* in a covered event.

The policy is to be issued in the joint names

of the customer and the lender or the interest of the lender (

as loss payee

)

should be noted in the insurance policy, as the case may be.

iii.

Mortgage insurance: As a c

redit

enhancement should be carefully

conside

red in the context of current market conditions

*This is the amount the property should be insured for each year and it

should cover the replacement cost of the building should it be damaged

or fully destroyed. This cost is linked to either a construction industry

Insurance premiums

shoul

d be pro-rated (1/12

of the renewal premium)

and added to the principal

and interest payment along

with 1/12 of the taxes, if

any

ii.

Basic property insurance

typically covers the

structure against hazards

such as fire and flood.

Borrowers should be

counsell

ed on the benefits

of obtaining additional

insurance coverage for

their contents and personal

property

and

this

can be

made an option that the

borrower may elect to

purchase from the lender

at the time of settlement.

iii.

Mortgage Insurance

Guaranty (MIG) e

nab

les

the lender to lend more

with the risk being

underwritten by an insurer,

or effectively pushing the

risk off the balance sheet.

It is recommended that

any loan with an LTV

When housing supply is below

norms and when prices increase,

credit enhancements may lead

to increased speculation and

access to credit for borrowers

that may present a higher risk.

Credit enhancements such as a

Lenders should exercise

great caution to ensure

that the mortgage

insurance company has

sufficient assets and

capital to withstand

multiple claims, such as

those experienced in the

mortgage crisis of

200

8/2009

Mortgage Loan Minimum Standards Manual

June 2011

116

index of costs or to the Consumer Price Index. In addition to the main

building, the following should be included in the insured amount - out

buildings, site clearance, temporary re- housing costs and professional

fees.

greater than 80% have

such insurance as a

requirement of the loan.

-borrower or additional

collate

ral may be compensating

factors used on a case by case

basis.

Mortgage Loan Minimum Standards Manual

June 2011

117

Minimum Standard Section 7:

Credit and Risk Management Standards

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO NOTE/REASONS

FOR BEST PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Credit Policy - The lender must have a defined Credit Policy which must

contain

parameters on the best practices that the lender carries out while

engaging in

ts mortgage lending activities.

Primarily, the Credit Policy must identify acceptable risks as to a borrower,

in terms of Capacity, Capital, Credit, and Collateral. As a general principle,

lenders should not lend only on the basis of Collateral. Collateral should be

treated as a last resort or safeguard for the proposed mortgage loan. The

Credit Policy should address:

pacity

The borrower

s net income as it relates to the monthly payment

o The borrower s income as it relates to all revolving debt

including the proposed housing payment

o Reserves or excess cash that the borrower has after all debts

have been paid.

Capital

o The amount of readily available cash for a down payment on

the purchase of a home.

o Capital can come from

the

borrower

s savings, a gift from

family members or the liquidation of another asset.

Credit

o A history of

the

borrower s payment of other credit oblig

ations

is a critical tool in evaluating future performance.

orrower

s should demonstrate a consistent payment history

on revolving credit or other housing expense. Borrowers

who have made payments more than 30 days past the due

date consistently over a period of 12 months may have

underlying problems that should be further investigated.

Borrowers that demonstrate an irregular payment pattern

may be demonstrating sign

s of poor financial management.

o Credit reports should be obtained from reliable reporting

mpanies.

Turnaround time in the

credit process is customer

responsive, efficient and

consistent with quality

assessment. This depends

on individual banks but

could range from 24

hours to 7 days.

The maximum

Housing Debt to

Income Ratio is

recommended at 35%

of the borrower s net

income

(see also

Section 1).

The maximum Total

Debt to Income Ratio

is recommended at

50% of the borrower s

net income (see also

Section 1)

Financial institutions need to

demonstrate that capital and

shareholder funds are being

managed prudently and that

adequate risk management controls

are in place

Loan Assessment:

Loans are underwritten in

accordance with clearly defined

standards. Risk is taken in line with

ublished policy.

Credit Risk Management:

Implements policies for prudent

business management.

Arrea

rs Management and

Repossession:

Good b

usiness p

ractice.

Credit policies and operations

manuals are useful only to the

extent of the training that loan

personnel receive.

Organi

sations should schedule

regular training on the subject

matter of lending and to review

past mistakes.

A financial organisation

must have a

documented

Credit Policy to establish

the risk parameters under

which it operates.

The

policy mu

give clear

guidance and direction to

staff and demonstrate to

potential Investors and

Rating Agencies the type

and style of risk

management in place.

It should be evident to all

external parties that

prudent, structured risk

management practices are

place.

Mortgage Loan Minimum Standards Manual

June 2011

118

Collateral

Type of acceptable real property

Residential properties, preferably the one being financed

and only if not possible, on other properties of consistent

value.

Location of real property

Properties in developed and urban areas

are preferre

Rural or remote properties

can

be considered on a case by

case basis only, after carefully estimating the market

liquidity

Condition of real property

Properties should be well maintained with

only

minor

repairs

required

For properties requiring extensive retrofitting or

rehabilitation

, the Lender should seek guidance and advice

from

engineers and licensed contractors.

Occupancy of the real property

Owner occupied properties should be the highest priority

and be offered

market

interest rates

Loans for buy-

-let or tenanted properties should be

adjusted for risk. The LTV should be lower and the interest

rate should be higher to compensate the lender for risk (see

also Section 1)

Value of the real property

Each lender should establish the minimum value of a

property it will consider for collateral. This value may vary

based upon location and local

conditions

o Environmental matters in the C

redit

Policy should address

the

EBRD's Environmental Procedures for Mortgage Lending, as

amended from time to time (www.ebrd.com

All lending decisions must be made on the basis of verifiable information and

documentation in addition to the judgment of a seasoned and well trained loan

underwriter.

The lender must set standards which ensure that underwriters and account

managers apply the policy initially at credit assessment stage and

subsequently throu

ghout the life of the mortgage.

Self

Build Projects

Lenders

are cautioned about

engaging in self-build projects.

Many owner-builders underestimate

the true cost of construction and

may not have adequate skills to

complete the project with quality

craftsmanship.

Traditionally, construction and self-

buil

t projects provide the highest

degree of risk. The risk of

development should be reflected.

Investors typically will not

buy construction loans.

Organi

sations should not

look to investors to assume

the risk and ma

nagement of

construction loans.

Mortgage Loan Minimum Standards Manual

June 2011

119

The C

redit

olicy should include the appro

ach to Exception applications

and

applying compensating factors for reconsideration of a loan which appears to

make common sense, but does not meet every aspect of the policy

The policy must include steps for

lenders

declining loans which are not based

on sound banking principles. Lenders should have

procedures

for appealing or

reconsidering a negative loan decision.

Interest

Rates and Loan Products:

The interest rate charged to customers should be adequate to cover the bank's

cost of funds plus a suitable margin for profit. The lenders should have a

clearly written policy to avoid dealing with high risk borrowers and/or with

fraudulent customers.

Fixed Rates should be matched with the cost of funds and have sufficient

margin to allow for minor flu

uations in the cost of money. Further, it is

critical that the fixed rate loan be matched to a similar maturity of deposits;

e.g. l

onger term loans to longer term deposits.

Interest rates may be different for

various

loan products such as purchase,

refinance or home equity and construction or self-build loans to reflect the

level of risk associated with that product.

Foreign Currency Loans: The C

redit

Policy should clearly identify those

circumstances where foreign currency loans will pose unnecessary risk to the

organisation and borrower.

The policy should require lenders to explain in writing to

borrowers

the risk

undertaken by the

borrower

in the case of mortgage loans denominated in a

foreign currency

should

experience an erratic change in value

Mortgage Assets and Liabilities Management:

Lenders should:

Avo

id an Originate and Distribute model in underwriting mortgage

loans.

Match their funding for mortgage lending for a period of at least 3

years; alternately, the loans should include a provision to reset the

interest rate to market rates at specific anniv

ersaries of the loan.

f the

lender is not keen

ready to take the risk of

fixed interest rates, the

lender should consider

variable rates.

Marginally capitalised lenders

should avoid risk based loans.

Lenders are recommended not to

engage in risk based pricing wh

ich

would substantially increase loan

loss reserves and should implement

caps on the number of risk-

based

loan portfolio.

Mortgage Loan Minimum Standards Manual

June 2011

120

Plan to keep their originated mortgage loans in their balance sheets

for at least 3 years.

part of the C

redit

Policy, the Loan Servicing Division should have a

separate policy and procedures manual for Arrears M

anagement,

Reposse

ssions, Loan Loss Provisions and Write

fs.

Lenders must have an Arrears Management Policy for Mortgage Lending

Risk Framework. This should be part of the overall Credit Policy and i

nclude

specific provisions for:

Well t

rained team familiar with collect

ion practices and local laws.

Clearly documented process for contacting borrowers.

Overall approach to arrears

including

face to face contact

;

analysi

s of

reasons why the borrower has not made a payment and outline

solutions for repaying the debt

Follow up procedures with

action

items

specific

measurable

and

achievable.

Collection and Enforcement:

The Credit Policy should include procedures for managing the loan after

closing until full repayment. This is known as

Loan Servicing Policies

ii.

Lenders should have clearly defined policies for loan enforcement.

Foreclosure on the property should be the final aim for any lender in the

case of persistent non-repayments, but only after all other alternatives have

been exhausted.

iii.

Taking possession of the collateral should be the last resort solution and

should be exercised with care and in accordance with the legal requirements

in the respective country.

iv.

Lenders should assess the potential damage to its market image and

position in case of forced executions of the

collateral.

Mortgage Loan Minimum Standards Manual

June 2011

121

Minimum Standard

Section 8: Disclosure

EBRD MINIMUM STANDARDS

EBRD SUGGES

TED

BEST PRACTICE

POINTS TO NOTE/REASONS

FOR BEST PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Mortgage lenders should have appropriate disclosure policy. The following

minimum standards should be applied:

Lenders should have procedures to make all disclosures to the prospective

customers as required by the law and/or consumer protection act in the

respective country.

ii.

All mortgage documentation, starting with the Mortgage Application

Forms

, has to make sure that consumer protection legislation is observed,

as required by the legislation of the respective country. Also, key

information regarding inter alia APR and AER should be disclosed to the

customers (see Section 2).

iii.

Post sale documentation and the mortgage provider s obligations in

relation to servicing the mortgage loans should be fully disclosed.

iv.

For mortgages denominated in foreign currencies (as mentioned in

Section 1), the depreciation risk should be disclosed upfront.

Good disclosure policy will make

mortgage lending a safer activity as

no unjustified claims would be

submitted by the customers.

Investors and Rating

Agencies need comfort

that the mortgage

customer

is fully aware of

all details of the relevant

mortgage transaction they

have entered into.

Mortgage Loan Minimum Standards Manual

June 2011

122

Minimum Standard

Sec

tion

Basel II and III Requirements

The Basel Committee on Banking Supervision is an international body of

financial regulators.

The Basel II, or the Capital Requirements Directive (CRD) as it is known in the EU, does not fundamentally change minimum standards in relation to mortgage business.

However, it strengthens governance arrangements and, where Credit Institutions (defined as commercial banks, non-bank financial institutions granting mortgage loans and any

other mortgage prov

iders) are authorised to use internal risk models to manage their mortgage portfolios

. I

t outlines minimum standards regarding the use and operation of these

models. As and when countries adopt CRD standards, subject to individual sovereign state discretio

ns or regulations by the respective Central Banks, as the case may be, Credit

Institutions are strongly encouraged to adopt these CRD standards also.

In 2010, these standards were updated in what is now known as Basel III. The core of this new agreement is a measure that will require banks to increase the amount of their

common equity from two

(2)

percent of assets to seven

(7)

percent.

Common equity is considered the least risky form of capital.

Depending on the level of risk management sophistication in a Credit Institution, the CRD offers two approaches regarding residential mortgages

a standardised approach and

an internal ratings

based (IRB) approach.

Under the standardised approach

lending fully secured by mortgages will be risk weighted at 35%, su

bject to certain conditions.

Under the IRB approach Credit Institutions are required to meet certain minimum qualitative and quantitative standards and, provided these are met, Credit

Institutions will be

able to use internal data to calculate the capital

required to underpin their mortgage business.

Thus the CRD

strongly supports

residential mortgage business provided strict criteria

are met.

Given the fact that Basel III is

relatively

new, it has not yet delved into the specific technical issues with regard to mortgage lending that are in the LMS. The specific details on

mortgage underwriting are being discussed by an international working group under the auspices of the Financial Stability Board (FSB) Standing Committee on Standards

Implementation (SCSI). However, while the SCSI has completed a peer review, no report has been agreed to and issued. While the Section on Basel II included in the LMS is

still applicable, it is likely to

change

and also likely t

o be amended from time to time.

The draft sta

ndards under the SCSI note that:

Financial institutions should regularly review their standards on residential underwriting and adjust them if there appears to be a

build

-up of risks in the

housing market or if there is a lending boom that could pose risks

to financial stability.

The regulatory framework should be broad enough to ensure that all residential mortgage lending is supervised to protect both investors and consumers

Mortgage data should be collected, analy

ed and reported at least annually.

While SCSI notes that while it will set high level principles rather than detailed international standards, it does note that individual

countri

es can set much more detailed

standards in areas such as:

Borrower

s ability to repay

Qualifications of mortgage len

ders

Ban on

steering incentives, such as yield spread premiums, that vary based on the terms of the loan

Prepayment penalties

Interest rate reset notices

that require six

months notice

before an adjustable rate or hybrid mortgage is to adjust

Appraisal

reform

INTRODUCTORY REMARKS

Mortgage Loan Minimum Standards Manual

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123

Corporate Governance

The credit institution s Board of Directors or an equivalent

committee should review and approve all material aspects of the

grading and estimation processes

Senior management should possess a working understanding of

the credit institution s grading systems and detailed

comprehension of its associated management

reports.

ii.

Credit

Risk Control

The credit risk control unit should be independent from the

personnel and management functions responsible for originating or

renewing the bank s mortgage loan and related produc

ts.

This unit

should report directly to senior management

iii.

Inte

rnal Audit

At least once a year, an internal audit unit should evaluate the

credit institution s grading systems and its operations, including the

operation

of the credit function and the estimation of

risk

components. This should be done more frequently for those are

that are deemed higher risk.

iv.

Modelling

Credit Risk in Mortgages

(IRB approach only)

If models are used for the mortgage business, they must be capable

of producing robust and verifiable risk components that are used as

inputs to a formula.

One of the key items the model should produce

the required amount of capital.

Use

of Mortgage Property as Collateral

Residential real estate which is or will be occupied

should

normally be recognised as eligible collateral, provided that certain

standa

rds are met including an independent appraisal.

However,

the value of the property should not depend on the credit quality of

Senior

Management should be

regularly informed by these credit

risk control units, which should

be independent from product

underwriters.

The information

should include performance of

the grading processes and areas

deficient and/or in need of

improvement,

as well as the

results

of previous attempts to

improve deficiencies. The reports

should be detailed enough to give

management specific information

different grades and

migration across

these

grades

when applicable.

The primary areas of

responsibility for the credit risk

control unit(s) should include, but

are not limited to, testing and

monitoring

grades and pools of

mortgages.

The reports it

produces should summarise the

status of these mortgages, giving

senior management the ability to

take action in the event of any

negative trends.

The formulas used as inputs into

the model and the operational

details of the system must be well

documented.

To demonstrate a clear chain of

authority from the very top of the

organi

sation which receives

information to identify and mitigate

risk for the organisation, its

investors and its consumers

To provide information from a unit

that is

independent

from the rest of

the organisation and whose function

is to continually test for risk.

The existence of an independent

credit risk control unit is consistent

with and does not

supplant

the need

for internal audit

function.

The models are best used as a

management tool, used in

conjunction with human

judgment.

Declaration of which

approach the credit

institution has adopted i.e.

standardised or

internal

ratings

based approach

(IRB) as well as

information relating to

management s methods for

identifying and mitigating

risk.

Rating agencies, investors

and others are taking a

keen interest in model

documentation.

They

would also be very

interested in understanding

the various stress tests that

are used to

assess

the

robustness and accuracy of

the

modelling and testing

systems.

EBRD MINIMUM STANDARDS

EBRD SUGGESTED BEST

PRACTICE

POINTS TO NOTE/REASONS

FOR BEST PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Mortgage Loan Minimum Standards Manual

June 2011

124

the borrower. Financial

institutions

can and should establish

different standards for propert

y that will be used as rental.

Mortgage Loan Minimum Standards Manual

June 2011

125

Minimum Standard

Section 10: Security Requirements

EBRD MINIMUM STANDARDS

EBRD SUGGESTED BEST

PRACT

ICE

POINTS TO NOTE/REASONS

FOR BEST PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

First Mortgage Right is to be registered over the property for the

amount

of the mortgage plus interest. This mortgage right is to be

assignable to a third

party

(together with the mortgage loan) based,

if required by the law, upon the consent obtained at the signing of

the

offer

letter

or the mortgage loan agreement.

ii.

Life Insurance

: A Life Insurance policy on the life/lives of the

borrower(s) should cover the outstanding principal for the term of

the loan, as

and

when

available in the local market. The insurance

policy is to be assigned to the lender and its value should decrease

in line with outstanding balance of the loan.

iii.

Buildings Insurance

: An index linked property policy to cover

the replacement/reinstatement value of the property should be

required. The initial cover should be in line with the replacement or

reinstatement cost in the Valuer s or Appraiser s Report.

This

cover should be adjusted over t

ime to be in line with an appropriate

index of construction costs. The policy is to be in the joint names

of the customer and the lender.

A Mortgage Indemnity

Guarantee (MIG*). This would

become a Minimum Requirement

if the lender decides to lend

outsi

de of published LTV policy.

Lending outside of the published

LTV policy should only be done

under exceptional circumstances

and should require the approval

of senior management, if

permitted at all (see also Section

4).

ii. Lenders should rely

first

on th

ability of the borrower to repay

and then security provided by the

property. Only in exceptional

circumstances should the loan

require further support such as

additional liens or guarantees.

The need for these additional

guarantees should indicate that

this loan should be reviewed by

senior management.

* as outlined in

Section 7.

Assuring that the loan is secured by

a first ranking mortgage over the

property is prudent banking

practice.

Further, the lender must be assured

that the borrower will have the

ability

to repay the loan and to do

so on

timely basis.

Documentation

should be in the loan file to verify

the ability to repay.

The value of the

property as a security interest is

only relevant as a fall back position

in the

event of non

payment.

In the event of a Mortgage

Bond or Securitisation

issue, a full review will be

undertaken of the security

and documentation

supporting the proposed

pool of mortgages.

Therefore, the lender

should ensure that the

underwriting standards are

in place, that

documen

tation to verify the

borrower

s ability to repay

is in the loan file and that

there is a system in place to

spot check and monitor the

loan files.

Mortgage Loan Minimum Standards Manual

June 2011

126

Minimum Standard

Section 11: Management Information, IT and Accounting Information

EBRD MINIMUM STANDARDS

EBRD SUGGESTED

BEST PRACTICE

POINTS TO NOTE/REASONS

FOR BEST PRACTICES AND

MINIMUM STANDARDS

INVESTORS/RATING

AGENCY ISSUES

Mortgage Accounting System: Comprehensive mortgage accounting

system that would include the following functions within the guidelines of

the

Credit Policy

Ability to "tag" or identify mortgages as belonging to a particular

funding source, cover pool or as having been transferred to a particular

SPV

Facility to use internal bank standing orders/direct debits, if available

Facility to

amend payments

and

notify customers when rates change

Facility switch from variable to fixed rate and vice

-a-

versa

Facility to accept lump sum reductions

and

early repayments

Facility to remove/add names to accounts

Management of account on death of a

borrower

Facility to monitor

and

follow up on arrears

Facility to carry out regular/annual reviews

Facility to provide regular

statements to the customer

Systems must also have an adequate disaster recovery plan

ii.

Reporting:

Good reporting information which is accurate, timely and

relevant. Monthly/quarterly/annual reports should be available by

branch/area/total bank for:

Mortgage portfolio size and/split by products (total value, total

volume, average term, average interest rate, average LTV, average

PTI)

Share of national mortgages (where available)

Market segments

Origination

channel

Growth profile

Performance v

ersus

targets

Applications versus approvals versus declines versus drawdowns

Application pipeline

Arrears profile (split into:

30, 60, 90 and 120

days)

Reporting and Monitoring:

The mortgage business cannot be

successful unless there is regular

analysis of the current portfolio v

argets.

Remedial action may be required

and it is important to know the

baseline or starting point.

Rating agencies and

investors

require

detailed reports on the

lenders mortgage portfolio to

rate/buy mortgage bonds or

The rating agencies review

the following IT systems

and processes when

assessing

mortgage

originators and servicers:

Core systems

functionality

Systems integration

and interfaces

Electronic document

storage/scanning and

workflow

management

System security

/backup/retention

Disaster recovery and

business resumption

plans/testing

Data integrity

Use of automated

underwriting systems

Web

based

applications

Credit scoring

Risk management

modelling

Automated valuation

models

Integratio

n of these

systems as well as

other business lines

Key

information

Mortgage Loan Minimum Standards Manual

June 2011

127

Maturity profile

Geographic profile/employer profile

Profitability

Historic

data retention

Ability to produce reports as required by rating agencies and investors

iii.

Monitoring Mortgage Account: The following should be adhered to in

order to ensure

efficient monitoring of accounts:

Approvals are converted into

draw

downs

Security is in order before drawdown

(s)

Repayments are up to date

Premiums on life insurance policies are up to date

Premiums on property insurance policies are up to date

Property in

surance policies are index linked

Insurers report incidents of cancelled life/property insurance policies

mortgage

-backed securities. (see

ection on rating agencies)

requirements:

Accurate geographic

location

Customer history on

mortgage

and, for

example, additional

equity withdrawal

Accurate recording of

the

borrower s

financial position

Details on pr

operty

usage such as owner

occupied

rented out

Type of mortgage

product

Loan to value ratio

(LTV) and PTI

Original valuation and

most up to date

valuation