Egg Banking reported last week that a system error has led to an understatement in the level of charge-offs in the Pillar trust. According to the press release issued by the bank, the error relates to the treatment of overpayments made by terminated accounts, which are those in arrears for more than six months but not charged off.

"We understand that any overpayments made by terminated accounts were used to offset any future arrears related to the account," Deutsche Bank analysts said. "For certain terminated accounts that remained delinquent, Egg's system effectively treated any overpayments made as minimum principal payments in the subsequent months, even though the account remained in arrears. As such, these accounts did not roll through into charge-offs."

Egg allows overpayments on terminated accounts so it can reduce future arrears for a maximum period of six months, after which delinquency rolls are triggered again if further payments are not received.

According to Egg's press release, the policy was not correctly enforced because of a system error, and further arrears were not properly monitored after the end of the overpayment period, generating errors in charge-offs. The accounting errors amounted to an average 38 basis points during the period between June 2005 and November 2006. However, Egg said that the error would be rectified and that all affected accounts would be removed from the Pillar trust this month.

Egg also highlighted that the "overpayments" correction was not related to the accounting concerns raised by the rating agencies on the way the bank managed certain other delinquent accounts that resulted in understated losses late last year. As a result, Fitch Ratings downgraded the junior tranches in October while Moody's Investors Service kept the bonds on negative watch (ASR, 11/13/06). The rating agencies have not taken any action on the back of these newer accounting errors.

"Egg's Pillar Funding announced reporting errors compounded Moody's ongoing rating watch negative action, taken last summer," Societe Generale analysts said in a report. "We believe the further negative newsflow may create a buying opportunity should sellers come to market. However, few bonds have changed hands recently, when a proportion of accounts did not get charged off due to a system error.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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