/> Equity Release Funding (No.5) plc

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Equity Release Funding (No.5) plc
Data and documents available for this issue:
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Market Commentary
04 August 2005
04AUG2005              --- EQUITY RELEASE FUNDING NO.5 PLC ---
CLASS B: STG43M,  FRN, AA/Aa2/AA,    EAL 6.9YRS, 3ML+35BPS
                               --- DEAL INFO ---
   Norwich Union's Equity Release Funding series has notched up its fifth deal
in as many years. NUERL, the originating entity, is the largest player in the
sector with around 40pc market share and Stg2bn of loans advanced to date. Most
smaller originators either lack the critical mass for securitisation or, like
Northern Rock, have a retail deposit base and greater funding flexibility.
Meanwhile there are challenges in finding a structure to efficiently securitise
a product that accrues interest but typically produces minimal cashflows for
years, with the result that NUERL has so far had the field to itself.
   The underlying mortgages are now familiar; they are loans to elderly obligors
with a minimum age of 55 (and an average age of around 70yrs in this
transaction), with low starting LTVs but interest rolled up into principal owed,
which is only due when the obligor dies or goes into care and the property is
   Arrears and defaults are effectively impossible, and the potential for loss
only exists if the loan amount exceeds that value of the property, since Norwich
Union guarantees to its borrowers that it will never claim more than the value
or sale price of the mortgaged property from a borrower or his estate.
   This factor focuses attention on underwriting issues, and NU as the market
leader and a household name in consumer finance can answer these concerns. Its
equity release product is underwritten on a maximum LTV of 50pc, and this deal
has an initial average LTV of only 24.4pc, which has risen to 25.8pc after 8
months of seasoning. All NU borrowers are given detailed advice, and the loan is
not granted until an independent solicitor has endorsed the customer's choice of
the product. While this process doesn't directly protect the ERF collateral, it
should ensure that borrowers are relatively sophisticated and are taking up the
product in the context of broader retirement planning which ought to avoid a
situation where debt eats up the entire value of a major asset such as a house.
   In practice most redemptions on outstanding ERF pools have not come from
borrowers dying or moving into care, but from early redemption and refinancing.
Apart from this source, mortality would not be expected to kick in with an ERF
pool for a number of years, so large liquidity provisions are needed on the
structures to pay early-years interest and principal.
   NUERL has honed its structure over the years to make them more efficient. The
first two deals carried insurance, provided by a unit of Norwich Union,
indemnifying the structure against loans rolling up so much interest that they
exceeded 100pc LTV. In ERF3 this feature applied to only part of the pool, while
ERF-4 and the new deal do without it altogether. A novelty in ERF-5 is that
early repayment penalties are not available to the SPV, but flow back to the
   Essentially however the deals are the same from a credit perspective, relying
on the underwriting skills of NU and the long term outlook for property prices.
In these respects a positive move is a lower LTV here of 24.4pc than the 27pc
norm for the past 3 ERF deals, contributing to triple-A subordination falling
from 18.7pc to 16.9pc.
   ERF-5 falls into the broad category of non-conforming RMBS but is really sui
generis, and its reception has set it apart from the recent slew of sterling
sub-prime paper which have mostly needed wider guidance or wide prints to
attract interest. The ERF programme has a good following now - despite the
summer slow down all tranches were comfortably oversubscribed and guidance of
mid-20s/mid-hi30s/95a was met or beaten.

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