First Permanent Financial Services has originated its first mortgage securitization which securitizes mortgages with loan-to-value ratios (LTVs) of up to 100%. First Permanent Securities Mortgage Trust 2001-1 issued A$45 million (U.S.$22.8 million), Australia's fourth securitization of mortgages with a high LTV.

It is also the third transaction backed by loans to borrowers buying new homes constructed by Devine Ltd, a property developer that owns 51% of the originator. Basis Capital arranged and structured the deal and ANZ Bank acted as lead manager on the Class A and B tranches.

The transaction is secured on 245 loans worth A$50 million (U.S.$25.3 million), with an average LTV of 97.9%. The borrowers were mainly first-time homebuyers and not able to place the deposit normally required by mortgage lenders. But no self-employed borrowers are included in the pool.

None of the loans in this portfolio have lenders' mortgage insurance, as is usual in securitized Australian mortgages. Insurers are reluctant to insure mortgages with a LTV of more than 95%. This transaction gets its credit support from: subordinated loans and certificates; a cash reserve of A$750,000; and a liquidity reserve of A$150,000 - which will be built up to A$250,000 (U.S.$126,684) through accumulation of excess spread.

The deal is tranched and rated by Standard & Poor's as follows: Class A, A$36 million (U.S.$18.2 million), priced at one- month BBSW + 42 basis points, average life 1.9 years, rated AAA; Class B, A$9 million, priced at one-month BBSW +148 basis points, average life 2.7 years, rated BBB+; Class C, A$4 million, not rated; and Class E, A$1 million, not rated.

The Class A notes have 29.5% credit support and the Class B notes have 11.5% credit support. "We witnessed strong interest in both the A and B tranches, which were ultimately placed with a number of domestic institutional investors," said Leanne Gordon at ANZ. "Investors were satisfied that the loan underwriting criteria, together with structural enhancements such as the mutual discretionary fund, that is, self insurance, provide adequate protection against potential losses in the portfolio."

There should be more such transactions in the future. Vera Ha at S&P in Melbourne comments: "There will be more such deals; however they will continue to be a small portion of the total RMBS market for a while. I don't think that this sort of transaction will become a trend as such."

Gordon added, "We anticipate that First Permanent may issue a further A$200 million (U.S.$101.4 million) into the Australian market during 2002." Past high-LTV transactions include the AV Jennings HLC Trust and the WB Trust.

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