AU2008100980A4 - A Data Processing System and Method with Investment Construction and Criteria Setting Evaluation - Google Patents

Description

5097A-AU-D 00 A DATA PROCESSING SYSTEM AND METHOD WITH APPRECIATION CONTINGENCY AND CONFLICT MANAGEMENT O Field of the Invention 00 The present invention relates to a data processing system and method which utilize computer generated digitally encoded electric waveforms in the implementation of 0novel financial systems and methods. In the description contained herein, the 00 invention is primarily concerned with state-or collateral-dependent financing arrangements (typically debt contracts) over real estate assets, and the new data 00 processing systems and methods required to screen, select, process, securitise and Sportfolio manage such financial arrangements. However, the application of the invention is not, as such, restricted to either debt instruments or real estate assets. The invention can be applied to many different types of financial arrangements over a significant number of asset categories commodities or human capital).

Copyright Notice This document contains material which is subject to copyright. The applicant as copyright owner has no objection to the reproduction of this patent document in its entirety as it appears in the Patent Office files or records, but otherwise reserves all copyright rights whatsoever.

Background Art The global mortgage industry has evolved over the last 50 years at great pace. This has been particularly the case with the advent of the process of "securitisation", whereby bundles of mortgages are packaged together and sold on to third-parties, thereby liberating the balance sheets of banks to engage in a new round of costeffective lending. This has in turn led to the development of liquid secondary markets in mortgage-backed securities that are actively traded by investors all around the world.

Innovation in the primary mortgage market has, however, been relatively stilted.

Since the turn of the 2 0 th century, global housing finance has been dominated by either fixed-rate or variable-rate mortgage instruments. While there has been some -1- 5097A-AU-D 00 innovation on the periphery of these products interest-only contracts, home- 0 equity loans, etc), this has not resulted in fundamental changes to the way in which consumers finance their home ownership choices.

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00 Perhaps the one exception here is the "reverse mortgage", in which the mortgage's interest rate compounds or "rolls-up" over time, thereby enabling the consumer to defer the cost of the finance until the time that they either die or sell their property.

00 C Under a reverse mortgage, there are not, therefore, any ongoing interest and principal payments to which the consumer is subject. Reverse mortgage are, furthermore, 00 limited to a specific class of consumers: namely, the elderly. Indeed, the providers of Sthese products quite explicitly prevent consumers under the age of, typically, 65 from qualifying for such loans. In addition, reverse mortgages are not used to purchase new properties: on the contrary, they are restricted for use as "equity-release" mechanisms for those asset-rich yet cash-poor owner-occupiers who are currently living in their own residence. Reverse mortgages are not as a consequence relevant to the traditional housing finance industry. As a final point, reverse mortgages are-in their own waysimple interest-bearing securities that appeal to fixed income investors only. Reverse mortgages do not in any manner whatsoever provider the lender (or, in the event of securitisation, a third-party investor) with any exposure to the risks and returns associated with changes in the value of the underlying properties over which the mortgages are held the owner occupied residential real estate asset-class).

In 2003, a landmark government report in Australia (see C. Joye, A. Caplin, E.

Glaeser, P. Butt, M. Kucynski (2003) New Approaches to Reducing the Costs of Homeownership; A Report for the Prime Minister's Homeownership Taskforce, Menzies Research Centre) unlocked the door to a new universe of housing finance possibilities, with particular emphasis placed on allowing consumers to draw on the "equity" side of the home ownership balance sheet while at the same time supplying institutional investors with efficient access to the residential real estate asset-class for the very first time. This was in effect a vastly more advanced suite of proposals to the many (mostly distant) arrangements that exist in both the professional and academic worlds. In these worlds there has for some time existed various cottage-industry style shared-equity programs (almost exclusively in the academic and public sectors in 5097A-AU-DIO0 00 Australia, the UK, the US, and New Zealand) targeting faculty and low-income

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Ohouseholds, in addition to isolated incidences of so-called "shared-appreciation" mortgages in the private sector in the UK and US. There has not, however, ever been O a successful example of an enduring market-based programme in which significant 00 numbers of consumers have shared the long-term economic exposures to their owneroccupied homes with similarly large numbers of external investors. The 2003 OAustralian Prime Minister's Home Ownership Task Force Report outlines merely the 00 07 conceptual architecture through which such a market could be developed.

00 In particular, that report argues that while for centuries businesses in need of funds Shave been able to avail themselves of both debt and equity, households that aspire to expand have been restricted to the use of mortgage finance. And so, despite the evergrowing sophistication of corporate capital markets, consumers around the world have been forced to use only the crudest of financial instruments. The report contends that the implications of this deficiency vary from the merely inconvenient to the extremely tragic. Suffice to say that many of the grave economic complications that are manifest throughout the course of an occupier's life-cycle can be attributed to the "all-ornothing constraint" on home ownership the fact that households must retain 100% of the equity in their homes, and are prevented from sharing their investment in the residential real estate asset with third-parties).

The report describes how this all-or-nothing constraint on home ownership (also referred to as the "indivisibility" of the housing asset) plagues consumers right throughout the life-cycle. For example, young families scramble to scrape together funds for a down payment so that they can graduate from the difficulties of rental accommodation to the (supposed) nirvana of owner-occupation. This period of intense saving often induces a considerable consumption squeeze and severely constrains lifestyle choices. In fact, the bulk of young households in some countries are obliged to commit around 70% of all their wealth to one highly illiquid and very volatile asset residential real estate. Then there are the costs associated with servicing the mortgage and maintaining the home. The weight of such commitments frequently forces families to endure Spartan-like conditions in the early to middle years the socalled "house poor". In later life, most manage to pay off all their debts and live in the 5097A-AU-DIO 00 home clear and free. Unfortunately, by this time retirement beckons and the majority

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Sof dwellers have precious little income (other than an old age pension). They are now "asset rich, but cash poor". Indeed, a significant proportion of all elderly populate the

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O lowest two income quintiles.

00 In an attempt to rectify the asymmetry between corporate and household capital Smarkets, the report proposes that contemporary arrangements could be augmented by 00 1 a more flexible system that would furnish families with the option of using both O"debt" and synthetic "equity" finance when purchasing their properties. Under the 00 report's proposal, housing would be financed by using a traditional mortgage in Ocombination with synthetic equity capital, contributed by the same or a separate lender via a "state- or collateral-dependent" debt contract, whereby the normal interest rate is replaced by an entitlement or claim to the future positive and/or negative price movements associated with changes in the value of the underlying property over which the debt instrument is held (hence the "state-dependence"). The report claims that these "equity finance" arrangements could give rise to, amongst other things: a plus reduction in the upfront costs of home ownership; an increase in the consumer's disposable income once they move into their home (as a result of the diminished debt servicing obligations); a reduction in their risk of default given the smaller size of their traditional mortgage; and a material increase in the household's liquid wealth at retirement since they no longer have to dedicate most of their savings to the otherwise illiquid and inaccessible dwelling asset. And so, whereas this household might once have been priced out of the market, the report maintains that the use of equity finance has made home ownership a much more realistic ambition.

The report also claims that the use of equity finance would constitute a safer equityrelease mechanism for the asset-rich yet cash-poor elderly (who represent an increasingly large proportion of the population) in comparison to reverse mortgages.

The report posits that it is an unfortunate fact that the illiquidity of housing equity obliges many aged individuals to select between two starkly different paths. They either: continue to teeter on the precipice of poverty, while retaining the right to occupy the home that they have cherished for so long; or alleviate these monetary woes by selling their current abode, moving to a smaller one, and possibly -4- 5097A-AU-DIO 00 jeopardising relationships that have been defined by the area in which they live. The

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Sadvantage implied by the latter option is of course an improvement in the homeowner's otherwise dim consumption prospects.

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00 The report notes that the equity-release opportunity has not gone unnoticed by members of the financial community. In fact, there have been several attempts to Sprovide home owners with a vehicle through which they can liberate wealth held in 00 1 the form of housing. These include products such as reverse mortgages, shared- Oappreciation mortgages, and home-equity loans. Notwithstanding the recent growth in 00 reverse mortgages, the success of these offerings has been a slow-paced affair, to say Sthe least. The majority of older dwellers spent their middle years constrained by the creditor's leash, and they are understandably reluctant to burden themselves with any additional debt (at least in its conventional incarnation). At the same time, many choose not to trade down to a smaller home, since this usually requires them to move to an entirely different geography, which then raises the spectre of sacrificing social ties that are predicated on the locational proximity of the two parties. Strong psychological bonds to the current property can create a substantial roadblock to higher levels of consumption so much so that most financial planners tend to ignore the owner-occupied home when assessing the resources available for use in later life.

In light of the above, the report argues that there is little doubt that by eliminating the "indivisibility" of the dwelling asset by way of sharing the equity entitlements with third-parties) one could open up a new realm of possibilities for elderly occupiers. In contrast to many of the alternatives, the report submits that collateraldependent equity finance offers elderly owners three particularly attractive attributes: it prevents them from having to move from their current homes and incur all of the associated emotional stress; they do not have to assume traditional debt; and, most importantly, in comparison to a reverse mortgage, equity finance instruments leave consumers, in the worst possible contingencies, with a significant share of the equity in their home. Reverse mortgages, on the other hand, would expose these same borrowers to the risk that the ever-growing loan amount will eventually balloon out to consume 100% of the value of their homes, thereby subjecting them to the spectre of little, or even negative, equity.

5097A-AU-D 00 0 Another important advantage afforded by equity finance is the valuable insurance service the lender supplies by sharing a proportion of the downside risk the risk O of property price declines). The simple fact is that most homeowners own one house, 00 situated on one street, pointing one direction, with all its manifest peculiarities.

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Indeed, economists estimate that the "idiosyncratic" risk attributable to a single- Sfamily home is more than two to three times that which one would impute to a well- 00 0diversified portfolio of property (and of course, the use of large amounts of leverage Oonly serves to magnify these hazards).

00 SThe report's equity finance instrument was designed such that when the housing market declines, the cost of capital is low, while when it booms, it is comparatively high (which is obviously ideal from the consumer's perspective). That is to say, if there is no price appreciation, households are not obliged to make any economic transfers to the lending institution or individual (or synthetic equity provider) over and above the original loan amount certainly a superior outcome to paying interest on a massive mortgage. In the event that there is price depreciation (as was the case in the early 1990s), households benefit from being able to redistribute some of these risks to the investor. All other forms of debt finance (including reverse mortgages), by way of contrast, offer no such flexibility, and as such are clearly distinguished from equity finance mortgages.

While the case for investors is complex, it would appear to be just as attractive.

Owner occupied residential real estate is, after all, the largest asset class on earth, valued at $70 trillion in developed countries alone. Since 1960, it has outperformed stocks, bonds and real estate investment trusts on a risk-adjusted basis. It is also a highly "uncorrelated" investment category, which could provide prospective participants with significant diversification gains. The experience of the stock market crashes of 1987 and 2001 are a classic case in point: while global equities suffered significant losses, owner-occupied housing in Australia, Europe and North America delivered tremendous price appreciation. And so, if institutions could spread their eggs among a greater number of baskets, they would be able to appreciably increase (decrease) portfolio returns (risk) while holding risk (returns) constant. Of course, it is 5097A-AU-DIO0 00 currently impossible to access real estate's risk-return profile in a well-diversified 0 fashion or to trade home equity on a liquid market.

,1 O While the report provides an impressive articulation of the equity finance opportunity 00 and outlines the skeletal features of how these arrangements might practically develop, it does not specify the precise contractual solutions to more fundamental 0issues associated with the economic pricing of the equity finance contract, including 00 C for example, prepayment by consumers who want to stay in their homes, the Srefinancing of the traditional interest-bearing mortgage with which it is to be bundled, 00 and owner initiated renovations to the property that serves as the contract's underlying Scollateral. Consequently, on the consumer side of the equity finance ledger setting aside the capital markets challenges for the time being), the report did not provide comprehensive proposals as to how one could confidently solve crucial problems associated with "adverse selection" borrowers who prepay their equity finance instruments to the detriment of the lender) and "moral hazard" borrowers who do not seek to maximise the value of their properties, or engage in behaviour that detracts from its future sale proceeds). The report is also silent on the critical technological systems that would enable the lenders of both the traditional interest-bearing mortgage and the equity finance instrument to avoid conflicts of interest and thereby interact advantageously.

On the capital markets front, the report once again sketches out the broad nature of the equity finance opportunity, while shedding no light on the methods, systems, and technologies that the distributors, lenders, underwriters and/or funders of these equity finance contracts must use in order to identify, screen, select, securitise, and service such assets, and manage the overall portfolios into which they are placed on an ongoing basis through time, in order to enable a successful and self-perpetuating interaction between the consumer and investor sides of the equity finance market.

The many otherwise intractable commercial problems highlighted above have motivated the present developments.

5097A-AU-D 0 00 There have been a number of private and public sector programmes that have tried to 0 implement arrangements somewhat similar to the equity finance initiative of the abovementioned report.

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0 00 In 1987, the US Congress created the Home Equity Conversion Mortgage ("HECM") Insurance Demonstration Program under the National Housing Act to: facilitate 0the conversion of home equity into liquid assets to meet the needs of elderly home 00 owners; encourage and increase participation of the mortgage markets in this process; and determine the extent of demand for home equity conversion and the 00 types of mortgages that would best serve the needs of aged individuals. Under the SHECM Program, elderly home owners could assume a reverse mortgage secured by the equity in their residence. As the borrower receives payments, the amount of debt tied to the mortgage rises over time. This debt is non-recourse, with the implication that only the value of the dwelling may serve as collateral, and other personal assets cannot be seized if this value is not sufficient to pay off the loan.

Originally authorised by Congress to insure 2,500 reverse mortgages through to September 1991, the Department of Housing and Urban Development ("HUD") designed the demonstration program in consultation with other federal agencies and implemented it with a Final Rule in July 1989. The next year, Congress extended the demonstration through to 1995 and expanded HUD's authority to insure 25,000 mortgages. It subsequently amended the program again to authorise HUD to insure up to 50,000 mortgages through to September 30, 2000. And in October 1998, Congress increased the number of allowable outstanding loans to 150,000.

Yet for reasons outlined previously, such interest-bearing reverse mortgages-which afford the lender no access to the risks and returns associated with the underlying property-are very different to equity finance instruments.

In the US also, state and time-dependent shared "appreciation" mortgages ("SAMs") were developed in response to the inflationary pressures experienced during the 1970s, and on the surface at least bear the closest resemblance to some of the "upside" and "downside" collateral-dependent equity finance mortgage techniques discussed 5097A-AU-DI 0 00 herein (which, in plain-vanilla form, might be seen as analogous to a shared "appreciation and depreciation" mortgage without any time-dependent interest rate c, attached). When the general price level rises, there is a front-end loading of interest O payments in standard mortgage instruments. That is, inflation causes nominal rates of 00 interest to rise while simultaneously driving down the real value of outstanding debt.

A SAM reduces the extent of this front-end loading by enabling users to pay lower rates of time-dependent interest today in exchange for investors receiving a collateral- 00 dependent share of the inflation-induced increase in the value of housing in the future.

00 The SAMs offered in the US were relatively short term (generally 10 years in Sduration), and combined sizeable cuts in interest payments with a substantial sharing of appreciation. One product in particular presented households with a 6% per annum interest rate concession in return for a contingent claim on 40% of the appraised price growth. Very few such instruments were in fact issued, in part because of their nebulous tax treatment. The primary mandate of the IRS of the USA is to prevent tax avoidance. Regrettably, this seems to have coloured its attitude when called to rule upon the prickly subject of whether a SAM entitles householders to mortgage interest deductions. In the end, in 1983 the IRS decided (somewhat reluctantly, if one reads between the lines) that both the fixed and contingent interest payments on a specific SAM product were indeed tax deductible). The ruling was deliberately narrow, and as a further sign of inertia, the IRS has twice since announced that it would not issue any additional determinations on the subject, most recently in 1996.

The consequences of the IRS's attitude towards the classic SAM continue to ripple throughout the US housing market to this day. There was of late, for instance, a wellfunded and researched attempt to launch just such an instrument, with the National Commerce Bank Services ("NCBS") of Memphis offering to acquire contracts from local issuers in the Southeastern states, and Bear Steams undertaking to sell the securitised bonds. Yet the product was withdrawn almost immediately, in a large part because of ongoing questions about the stance of the IRS. To illustrate the manifest ambiguity, consider the advice NCBS offered to potential clients.

-9- 5097A-AU-DIO 0 "The application of the federal income tax rules to a SAM is both uncertain and

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Ocomplicated, and the rules will affect each borrower differently. Accordingly, you must talk to your tax advisor about the consequences of borrowing under a SAM."

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0 00 The Reverse Mortgage Advisor Volume 3.2 (Spring 2000) edition contained the following statement about another shared-appreciation type product, developed by SFinancial Freedom, with the standard time-dependent interest element, "The new 00 0product, called the home appreciation loan is still under development and Omay be unveiled in the third quarter of this year. The HAL would have many 00 characteristics of a reverse mortgage. For example, a borrower could take the loan Sproceeds as a lump sum, and the loan wouldn't have to be repaid until the borrower dies or sells the home. The repayment obligation would be the loan amount borrowed, plus accrued interest and a predetermined percentage share of the home appreciation during the loan period, which would be negotiated upfront between Financial Freedom and each borrower. The greater the percentage, the larger the loan size. For example, if a borrower's home was valued at $150,000 when the HAL was made, and the home was sold five years later for $180,000, the borrower would have to pay Financial Freedom a percentage of the $30,000 gain from the sale of the home." As of the priority date of the present application, there has been no commercialization of the proposed product by Financial Freedom, or its parent, Lehman Brothers.

More recently, bankers, employers, local governments, and not-for-profit organisations have launched shared appreciation products in many of America's most expensive housing markets, from Howard County, Maryland to San Diego, California.

These contracts generally have one common element: instead of a SAM replacing the conventional first mortgage, as in the experiments of the 1980s, the scheme supplements it, usually in the form of a second mortgage or, in one case, a coownership agreement (with respect to the latter, see also US Patent No. 5,983,206 for example of a mortgage combined with a joint venture equity partner). Typically, an equity source provides 20 to 25% of the purchase price (in one programme this percentage has risen to 50%) in exchange for a similar share of the appreciation at point of sale. The remainder of the acquisition costs are financed by a small down payment and a conventional first mortgage of 70 to 75% of the home value.

5097A-AU-D 0 00 These initiatives have usually been implemented as either public-purpose programmes to help low-to-moderate income families or as employer-sponsored schemes to assist O employees acquire a home (the latter of which is most prevalent among universities in 00 comparatively expensive markets such as Harvard, MIT, Stanford and the University of Colorado). As such, it is not surprising that most have operated on a small scale, 0producing at best only a few thousand financing arrangements nationwide. They do 00 not appear to be shaped in a way that can attract significant private capital for two 0basic reasons: the current design does not give rise to returns that would be high 00 enough to appeal to outside investors--equity partners do not normally receive any Spremium for giving up the decision-making rights, nor do they receive any rental yield that would usually arise in the context of a direct equity investment in residential real estate; and the existing programmes do not share a common contractual structure, with different parameters on everything from duration, to repayment formulas, to the legal structure. As a consequence, these efforts have not spurred the emergence of a tradable financial instrument commodity in housing equity, which would provide the homogeneity that the secondary markets so desperately seek.

In 1996, Northbay Family Homes, a not-for-profit organisation in the San Francisco Bay Area, developed a product known as the Community-Assisted Shared Appreciation ("CASA") contract. Unlike its peers, CASA has attracted considerable investment from banks, development firms, and other private entities that supplement the government funding. The investors obtain an equity stake in the house in the form of a second mortgage, which is then backed up by the local authorities with a third mortgage. The second and third mortgages each equal 10% of the sales price, for a total equity investment of 20%. Both the investor and the government agency get their funds back when the home owner sells the property. If the occupiers have not sold after 14 years, they are required to refinance and buy out the investors if they can afford to do so. Significantly, when the house is disposed of, the family receives of the appreciation, while the equity partners collect 60% (most of which goes to the private institutions). Due to the high prices in the San Francisco area, this initiative has proved to be extremely popular with residents.

-11- 5097A-AU-DIO o00 Indeed, all of these programmes have experienced demand that has been much greater

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0 than the available supply. In Howard County, for instance, a recent financing round

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for nine buyers attracted 347 applicants. Part of the reason demand has exceeded 0 supply is that most schemes have offered financing on exceptionally favourable terms 0 as a result of the flexibility afforded by public funding. But the fact that even the CASA program has galvanised strong demand shows that there exists the potential for 0 a much larger consumer market than is presently the case.

00 oO OIn all of the above cases, the state-dependent nature of the shared-appreciation 00 mortgage instrument is confined exclusively to one area: events in which the value of Sthe house increases. As a consequence, the cost of capital borne by the consumer is not in any way affected by events in which the value of the property declines. Lenders under these arrangements apparently have not conceived of a situation in which they would be willing to share any of the "risks" associated with home ownership. Put differently, they have not thought of offering households an "upside" and "downside" collateral-dependent mortgage (or, simply, an "equity finance mortgage") arrangement where a proportion of the principal amount would actually be forgiven in the event that the price of the property falls, in addition to foregoing or not foregoing all other forms of time-dependent interest. In many respects, this downside risk sharing component of the mortgage contract resembles an insurance service, insofar as it seeks to limit the occupier's exposure to contingencies in which they would suffer a wealth loss. While many people would have one believe that residential real estate is an incredibly safe investment, at the individual home owner level nothing could be further from the truth. The simple fact is that a very large number of households realise both nominal and real losses when they come to sell their homes.

And yet in the current housing finance market, there is nothing that they can do about it that is to say, they are forced to assume 100% of all the economic risks inherent in owning a home.

Summary of the Invention In accordance with a first aspect of the present invention there is disclosed a data processing system to enable an entity to use a range of decision rules to evaluate in real time or on a batch basis applications from consumers to enter into financial 12- 5097A-AU-DIO 00 arrangements with a financing entity for financial accommodation in which an asset is used as collateral, with an ultimate objective of said entity accepting or rejecting those Sapplications, said system comprising: O at least one data input terminal in which is input data comprising at least one 00 of, data relating to the collateral over which the financial accommodation is applied for, data relating to the consumer, and data relating to financial accommodation applied for; 00 (ii) a data processing means connected with the or each of said input terminals; and one of, 00 (iii) a data storage means connected with said data processing means and Scontaining both initial portfolio data relating to said applications accepted to date which collectively characterise a financial portfolio of said financing entity, and desiderata data relating to desired characteristics of said portfolio, wherein said data processing means amalgamates said input data and said portfolio data to produce a modified portfolio data representative of said portfolio if said application were accepted and compares said modified portfolio data with said desiderata data and signals acceptance of said application only if either one or more of the following apply: the difference between said desiderata data and said modified portfolio data is less than the difference between said desiderata data and said initial portfolio; or if said modified portfolio remains within predetermined acceptable error bands of said desiderata data; or (iv) a data storage means connected with said data processing means and containing both initial portfolio data relating to said applications accepted to date which collectively characterise a financial portfolio of said financing entity, and desiderata data relating to desired characteristics of said portfolio, wherein said data processing means periodically sets or modifies said application acceptance criteria such that if a batch of applications meeting said set criteria are accepted and amalgamated with said portfolio data to produce a modified portfolio data and if said modified portfolio will result in either: the difference between said desiderata data and said modified portfolio data being less than the difference between said desiderata data and said initial portfolio; or said modified portfolio remaining within predetermined acceptable error bands of said desiderata -13- 5097A-AU-D 00 data, said data processing means signals denoting the acceptance of said

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Sapplications meeting said periodically set or modified application criteria.

O In accordance with a second aspect of the present invention there is disclosed a 00 method of accepting, rejecting or referring in real time or on a batch basis applications from consumers to a financing entity for financial accommodation in which an asset is Sused as collateral, said method comprising the steps of: 00 S(i) inputting into a data input terminal data relating to the collateral, consumer Oand/or said financial accommodation, said data input terminal being connected to 00 a data processing means to which is connected a data storage means, (ii) storing in said data storage means both initial portfolio data relating to said applications accepted to date which collectively characterise a financial portfolio of said financing entity, and desiderata data relating to desired characteristics of said portfolio, (iii) amalgamating said input data and said initial portfolio data to produce a modified portfolio data representative of said portfolio if said application were accepted, (iv) comparing said modified portfolio data with said desiderata data, and accepting said application only if either one or more of the following apply: (a) the difference between said desiderata data and said modified portfolio data is less than the difference between said desiderata data and said initial portfolio; or if said modified portfolio remains within predetermined acceptable error bands of said desiderata data.

In accordance with an third aspect of the present invention there is disclosed a computer implemented financial system for maintaining a close approximation between an actual pool of investments, each investment comprising a financial arrangement between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation over unique collateral, and a desired pool of investments, said system having an investment mandate specifying target values for a plurality of investment characteristics each of which is stored in a memory bank operated by said system, said system further having a data store in which is maintained the actual values of said plurality of investment characteristics of -14- 5097A-AU-D 00 said actual pool of investments, said system comparing the values in said memory

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Obank and said data store, and permitting as additions to said actual pool of investments only those additional investments having investment characteristics which either (a) O reduce the difference between said target values and said actual values or ensure 00 that said actual values remain within predetermined acceptable error bands of said target values.

00 N In accordance with a fourth aspect of the present invention there is disclosed a 0 Omethod for periodically setting application acceptance, or investment, criteria so as to 00 maintain a close approximation between an actual pool of investments to which Sadditions are being made, or applications accepted, in accordance with predetermined set application criteria and that of a desired pool of investments, said investment pool comprising financial arrangements each between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation, said method comprising the steps of: establishing an investment mandate specifying target values for a plurality of investment characteristics; (ii) storing each of said investment characteristics in a computer operated data store; (iii) storing the actual value of said plurality of investment characteristics of said actual pool of investments in said data store; and one of, (iv) monitoring the investment characteristics of said actual pool and periodically setting or modifying said application acceptance criteria as required such that if a batch of applications meeting said set criteria are accepted and amalgamated with said actual pool characteristics to produce modified pool characteristics, said modified pool will result in either the difference between said specified target values and said modified pool characteristics being less than the difference between said specified target values and said actual pool; or said modified pool characteristics remaining within either said specified target values or predetermined acceptable error bands of said specified target values; or continually or periodically monitoring the investment characteristics of said actual pool and the rate of additions to such pool in accordance with said set application acceptance criteria and based on a target frequency of changes to said 5097A-AU-DIO0 00 set application acceptance criteria and the rate of additions to said actual pool,

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Speriodically setting or modifying said application acceptance criteria such that: (c) _if a batch of applications meeting said set criteria are accepted and amalgamated O with said actual pool characteristics to produce modified pool characteristics, said 00 modified pool will result in either the difference between said specified target values and said modified pool characteristics being less than the difference abetween said specified target values and said actual pool, or said modified pool 00 scharacteristics remaining within either said specified target values or the Oacceptable error bands of said specified target values; and said setting will most 0 likely remain for as long as possible or for a period which meets said target Sfrequency of changes to said setting taking into consideration said rate of additions to said actual pool.

In accordance with a fifth aspect of the present invention there is disclosed a computer implemented financial system for managing and communicating with financial accommodation distribution agents so as to maintain a close approximation between an actual pool of investments and a desired pool of investments, said investment pool comprising financial arrangements each between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation, and maximising distribution agent efficiency and minimising distribution agent hindrance, said system having an investment mandate specifying target values for a plurality of investment characteristics each of which is stored in a memory bank operated by said system, said system further having a data store in which is maintained the actual values of said plurality of investment characteristics of said actual pool of investments, said system comparing the values in said memory bank and said data store, and in real time or on a batch basis transmitting a signal representing advertised application criteria which, if met, will result in acceptance of said application based on said criteria representing investment characteristics which reduce the difference between said target values and said actual values or ensure that said actual values remain within predetermined acceptable error bands of said target values; and/or transmit a signal indicative of acceptance of applications or summary application data to said distribution agents to the extent said application or summary application data either represents investment -16- 5097A-AU-D 00 characteristics which if accepted into said actual pool either reduces the difference 0 between said target values and said actual values or ensures that said actual values remain within said acceptable error bands of said target values.

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0 00 Brief Description of the Drawings A preferred embodiment of the present invention will now be described with reference to the drawings in which: 00 Fig. 1 is a schematic flow chart of a prior art mortgage origination and securitisation system, 00 Fig. 2 is a schematic flow chart of the asset targeting, selection, servicing, Ssecuritisation and portfolio management system of the preferred embodiment, Fig. 3 is a feedback loop extracted from Fig. 2, Fig. 4 is a flow chart which exemplifies the acceptance procedures, Fig. 5 is a block diagram of a computer system upon which the methods and systems of the preferred embodiments can be implemented, and Fig. 6 is a graph of a representative digitally encoded electronic signal or similar electromagnetic waveform.

Detailed Description The origination and securitisation of asset-backed securities such as mortgages is a common procedure in the capital markets today and Fig. 1 schematically illustrates some of the key processes involved. Traditional banks, for example, each have a mortgage origination system 10 which utilizes the bank's balance-sheet capital 9 and deals directly with borrowers 11. In recent years, borrowers 11 have also been able to deal directly with a mortgage broker 8 who in turn deals with the mortgage origination system 10 of a financial institution such as a bank.

Irrespective of with whom the borrower 11 deals, the typical result is a normal mortgage having a term and a "time-dependent" interest rate (which may be fixed or variable) and a security over the borrower's property. However, the value, and financial return or yield, realised on conventional mortgages by lenders and investors is completely independent of changes in the market value of the borrower's property, (assuming no default in a falling market).

-17- 5097A-AU-D 00 SSuch mortgages are able to be bundled together, for example by being assigned to a unit trust which forms part of a mortgage securitization system 7, the units of which O can then be sold to investors 19. This enables the original lender's balance-sheet 00 capital 9 to be returned to the lender and used as the lender wishes, but most typically 0 to be recycled by the lender in the form of additional mortgages.

0 1 Such conventional mortgages are a form of time-dependent interest-bearing finance 0 and earn returns that are determined by lender-stipulated interest rates, which may be 00 fixed or floating. As such, the cash-flows supplied by these contracts are quite Sdifferent from the returns realised on the collateral against which the mortgages have been secured the underlying real estate assets). Accordingly, current mortgage origination systems are more-or-less indifferent to the specific characteristics of the collateral assets against which they lend. That is, contemporary lenders do not distribute their housing finance in order to maximise the returns realised on the properties over which their mortgages are held, given the independence between the interest rate on their mortgage contracts and price changes on the underlying properties. Stated differently, contemporary lenders can in no way be described as "investors" in the underlying assets that serve as collateral for the purposes of the financing contracts that they enter into with borrowers. Consequently, with the exception of rare situations such as events of default and foreclosure, contemporary lenders do not have any ongoing exposures to changes in the capital values of the collateral assets such as residential real estate.

Another important characteristic of the contemporary housing finance market is that the interest rates on any standard pool of securitised mortgages tend to be essentially homogenous. It is certainly true that the specific types of properties underlying any such pool of mortgages, and indeed the performance of those properties, has no bearing on the interest rate levied by lenders when either issuing the finance or throughout the term of that finance. For example, if the Commonwealth Bank of Australia were to distribute, say, $250 million worth of standard variable home loans during any given month, these loans will carry the same interest rate. In this context, the Commonwealth Bank of Australia is more-or-less indifferent to the geographic -18- 5097A-AU-DIO0 0 regions and dwelling types against which the mortgages are issued, subject to

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Sconsiderations associated with default risk and collateral loss. The key issues that concern the lender are those that impact on the borrower's ability to service the C interest and principal repayments on their loan over time: their past earnings 00 history, future earnings prospects, credit worthiness, etc. The Commonwealth Bank of 0 Australia may then choose to securitise these mortgages and sell them to investors Saround the world, who, given the homogenous nature of the instruments, will be 00 1 indifferent to the fact that they have been originated against many different types of Oproperties (indeed, no two properties in the pool will be the same) located in different 00 geographies. This is absolutely the case in countries such as Australia, the UK and the OUS, where all securitised loans must be "mortgage insured". The existence of mortgage insurance protects investors from the risks associated with income default by the underlying borrowers and the resultant prospect of collateral loss the latter risks are in effect "sold" on to the mortgage insurer).

Given the housing affordability crises in many developed countries, which exists in spite of the current low interest rate environment, there is an undeniable need for more sophisticated forms of finance in which the consumers' cost of capital depends not exclusively on the traditional time-dependent interest rate, but rather relies on (possibly non-exclusively) both positive and negative changes to the value of the underlying collateral assets residential real estate) without necessarily invoking laws relating to co-ownership, joint-tenancy, partnership, or joint-venture in which the lending institution would have been judged to have acquired a direct equity interest in the borrower's home. There must therefore be an equally strong need for the development of the fundamental technologies and specific financial methodologies that would enable such financing instruments to be widely distributed and underwritten on a perpetual basis using third-parties.

One complementary goal of the developments described herein is to enable the concurrent emergence of liquid capital markets that supply third-party investors with access to the return profiles of the abovementioned securitised state-dependent financing contracts, the performance of which is tied to movements in the (potentially both capital and income) value of the underlying collateral assets. To highlight one 19- 5097A-AU-D 00 specific example, it is anticipated that the detailed business technologies, methods,

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0 and systems described below will allow households around the world to dramatically

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cut the upfront costs of home ownership, or to release capital that is currently tied up O in their existing dwellings, by drawing on "state-dependent" real estate equity finance 00 claims (and related variations thereof, including interest or rental yield bearing combinations), where the rate of return realised by the lending entity is related to the 0 performance of the household's property. These creditors may then choose to package 00 1 such equity finance instruments into a tradeable form, selling them on to secondary Omarket investors, and, by doing so, potentially permit the development of even more 00 sophisticated financial claims residential real estate derivatives).

For the avoidance of doubt, the term "state- or collateral-dependent" as used herein in relation to debt contracts (albeit equally applicable to other types of financial arrangements, including traditional equity contracts), means that the lender's cost of capital is dependent on the current value of an asset such as a residential property, and future positive or negative changes in the market value of that asset (including both capital and yield income components). The advent of such state-dependent financing arrangements, which do not, presently exist in any universal form in industries such as the mortgage market, relies very much on the development of the asset-selection, processing, servicing, securitization and portfolio management systems, methods and technologies that can bind together the consumer and investor markets sides of the financing equation by supplying both constituencies with tractable value propositions.

In order to exemplify such financing arrangements consider a young, cash-constrained couple that wishes to start a family and move into a $200,000 home. Assume that they have scant savings and must take out a 90% loan, which implies that they enter into a $180,000 standard interest-bearing mortgage. If interest rates are at, say, as is the case in many developed countries recently, this young couple will need to pay approximately $1,500 per month for the 30 year term of their loan, if they aspire to ever fully pay off their debt. With the escalating price of residential real estate in many OECD nations over the last decade, a significant number of low-income aspirants do not have sufficient disposable income to pay for a deposit, or adequate ongoing earnings to service the interest and principal payments on a loan. They are, as 20 5097A-AU-DIO0 OO a result, forced to delay their first home purchase and consign themselves to the

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Ospectre of rental accommodation for the foreseeable future (to say nothing of having to defer the prospect of starting a family as well).

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OO Consider an alternative scenario in which this couple draws on both a standard home loan and a collateral-dependent form of equity finance a loan that carries no 0 interest rate, but rather recompenses the lender via exposures to the underlying 00 Sproperty's gains and losses). In particular, suppose that a financial institution lends Othem, say, 20% $40,000 of $200,000) of the appraised value of their property 00 upfront in return for rights to 40% of any potential price rises and 20% of any price Odeclines in the market value of the property. As a consequence, this couple now only needs to fund $160,000 $200,000 less $40,000). If, once again, a 90% loan-tovalue ratio is assumed, the size of the home loan falls by 20% from $180,000 to $144,000. A 7% interest rate, the ongoing interest and principal payments are cut from around $1,500 a month to $1,200 a month; and hence the required deposit drops from $20,000 to $16,000. Since the loan-to-value ratio on the couple's interestbearing home loan has fallen from 90% to 72%, it is also likely that the need for mortgage insurance had been avoided. In addition, there may be a rise in the couple's disposable income once they move into their abode (as a result of their diminished debt servicing obligations), a reduction in their risk of default, and a material increase in their liquid wealth at retirement since they no longer have to dedicate most of their savings to the otherwise inaccessible dwelling asset. And so, whereas this family might once have been priced out of the home ownership market, buying a property has now become a much more realistic ambition.

As discussed above, it is currently impossible for institutional investors to access owner-occupied housing's risk-return profile in a well-diversified fashion or to trade home equity. This is especially unfortunate considering that residential real estate equity has performed extremely well in comparison to stocks, bonds and cash over the years, to say nothing of its attractive "correlation" characteristics residential real estate moves in a very different direction to the other investment categories, thereby opening the door to valuable diversification gains). Finally, residential property is the largest asset-class on earth-in fact, some multiples the size of both equities and fixed -21 5097A-AU-DIO 00 income-and was recently valued by The Economist magazine at in excess of

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Strillion in developed countries alone.

O The closest substitutes currently available to portfolio investors are Real Estate 00 Investment Trusts ("REITS"). But almost all REITs are based on lumpy commercial real estate, and those with residential exposures are constrained to rental properties in Sidiosyncratic apartment groupings. Both the commercial and rental property markets 00 1 are characterised by unique risk-return dynamics, and represent but a small proportion Oof the biggest, and in many respects, most attractive, investment category of them all: 00 owner occupied residential housing. The financial community should therefore view Ssecuritised pools of the aforementioned equity finance mortgages in a very positive (-i light. Institutions are constantly searching for new categories of investments, particularly those with return profiles that differ from stocks and bonds. In the past, this led to institutions allocating significant capital to private equity vehicles and hedge funds, despite the potentially high risks that these strategies involve. The owner occupied residential real estate market seems a natural place to look for an immense new set of asset returns and some extremely appealing diversification opportunities.

Yet in order to transform owner occupied residential real estate into a genuine investment class, one must first create the underlying financial arrangements that would form the basis of the securitised investment pools. In turn, these arrangements need to be satisfactory from both the consumer and investor perspectives. This is no trivial task, and the absence of any such market today is testament to the difficulties that lie in wait. Once the so-called "optimal contracting" problem is solved (i.e.

whereby a durable long-term contractual arrangement can be forged between, say, the debtor and creditor), one must still design the practical technologies and commercial processes that will successfully govern the identification, selection, administration, processing, and servicing of these arrangements, while at the same time developing the securitization and ongoing portfolio management procedures that will enable the highly idiosyncratic individual assets to be converted into a marketable investment form.

22 5097A-AU-DIO 00 Overview

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SAn integrated set of instruments, technologies and business systems are disclosed that collectively seek to achieve the following two key objectives. Firstly to provide O consumers with a state-dependent financing instrument where the cost of capital 00 is tied to positive and negative movements in the value of the underlying collateral asset, independent of any traditional, time-dependent interest rate that may or may not Salso form part of the arrangement) in which they can share with external third-parties 00 some of the risks and returns associated with their otherwise indivisible investment in Oa typically illiquid and potentially very risky asset the owner-occupied home).

00 Secondly to provide external third-party investors with access to a diversified pool of Sassets that will enable them to obtain cost-effective exposures to the underlying investment class, an outcome that is presently exceedingly difficult for such thirdparties to secure. As previously discussed, the societal benefits borne from engineering these new markets, and bringing together the independent consumer and investor constituencies in order to simultaneously satisfy the wants and needs of both, are many and compelling.

One prospective mechanism for developing such opportunities would be through the advent of a new form of housing finance described herein as the Equity Finance Mortgage and which is different from that proposed in the abovementioned Report of the Prime Minister's Home Ownership Task Force. The EFM instrument is a "hybrid" financial arrangement in the sense that it is legally classified as debt (since it is based on a standard mortgage contract), while also providing economic payoffs akin to an equity investment in residential real estate-i.e. where the return on the mortgage is determined by formulae dependent upon the economic performance (e.g.

capital appreciation and/or depreciation) of the housing asset against which it was lent. The aspects of the invention described hereafter detail previously undisclosed methods, instruments, technologies and business systems that relate both to the EFM contract, and the myriad processes and systems required to enable the practical operationalisation of such contracts. These methods, instruments, technologies and business systems are, however, equally applicable to any other form of financial arrangement that has a "collateral-dependent" payoff, and the detailed description below relating to EFMs is not intended to be limiting.

23 5097A-AU-DIO 00 The business systems, technologies and processes described in Fig. 2 take the form of Sfive modular systems, each controlled by an integrated computerised system O (represented in Fig. 2 as a square), many components of which can function in a "real- 00 time" automated fashion, that together form what is known as the "Asset Targeting, Acquisition, Servicing, Securitisation and Portfolio Management System", hereafter the "Overall System" 600. This in turn is typically overseen by a human operator 00 C known as the System Manager 00 As discussed, the chief objective of the Overall System 600 is to enable the successful Sdistribution of EFMs (used here as an example of a collateral-dependent financing arrangement) to consumers by way of drawing on financing or "underwriting" capital supplied by third-party investors, and the subsequent packaging of those individual EFMs into large pools or portfolios, the characteristics of which are satisfactory to the preferences of third-party investors who may or may not have supplied the original financing capital. In relation to the latter point, the uncertainty as to whether the thirdparty investors are the same entities that provided the original financing capital is attributable to the fact that that the Overall System 600 can accommodate either a one- or two-stage capital provision process. In the one-stage example, capital can be raised from investors upfront and used to underwrite the distribution of the EFMs to consumers. As the capital is exhausted, the EFMs are placed into a portfolio held by the same entities that supplied that capital in the first place. These entities are, therefore, also the end-user investors. In the two-stage alternative, the Overall System 600 incorporates "intermediating" financiers or "warehousers" that provide short-term underwriting capital for the purposes of enabling the distribution of the EFMs.

However, once all this capital has been used up, the Overall System 600 packages the EFMs into a pool that is then sold to a class of new investors. After the interests (e.g.

shares or units) in this packed portfolio of EFMs have been sold to third-parties, the original provider(s) of the financing capital the warehousers) are repaid, and recompensed for supplying their intermediation service.

The five independent yet fully integrated systems of the Overall System 600 are outlined below. To the extent that live electronic interfaces between systems or -24- 5097A-AU-DIO 00 components within the system either temporarily fail or are otherwise inoperative, at each point relevant data can be output via an electronic interface to SM (or other human operator) and subsequently input into the relevant system requiring such data O by SM (or other human operator), again via electronic interface. These systems and 00 their related database interactions, are summarised as follows: C1. The "Target Investment System" 100 00 The initial role of the Overall System 600 is to continuously or periodically collect the many and varied preferences of its end-user investors those that are going to be 00 the ultimate holders of the EFM portfolios or those that are managing investments in SEFM portfolios on behalf of the ultimate end user investors), such as their desired portfolio-level risk (or expected return volatility), return and correlation outcomes, and the types fully detached properties or apartments) and locations Sydney or Melbourne) of the underlying collateral assets that these investors would like to see in the final EFM portfolio, from its Investment Information Providers ("IIPs") 101.

The IIPs 101 is able to also furnish other information of relevance to the future performance of the EFM portfolio, including past, present and forecast data of a macroeconomic, microeconomic, or real estate related nature. This information, which is continuously or periodically updated through time, is inputted into a central electronic database (the "Investment Information Database", or "IID" 102). The IID 102 is maintained not just for the need to record investor preferences, but for the dominant purpose of providing the Target Investment System 100 with the inputs necessary to determine the "idealised" target) portfolio characteristics of the actual originated EFM portfolios the preferred portfolio weights to various geographies, property-types and consumer characteristics). Using a direct electronic connection, the TIS 100 extracts the information it requires from the IID 102 to dynamically or iteratively estimate (via a series of TIS 100 embedded algorithms) the desired portfolio elements and overall attributes of the target EFM pool and/or periodically set EFM application acceptance requirements to achieve the attributes of the target EFM pool. These are in turn continuously or periodically updated as new information is inputted into the IID 102 over time. The TIS' 100 outputs are then transmitted by direct electronic feeds to the Target Investment Database 112, which is connected via a real-time electronic interface to the Asset Origination 5097A-AU-D 00 System 200. As explained hereafter, the AOS 200 utilises its suite of

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automated decision-rules to compare the investment characteristics of EFM applications on an individual or batch basis with either the idealised portfolio O characteristics of the TID 112, or the periodically-set EFM application acceptance 00 requirements of the TID 112, in order to process those EFM applications in real time or on a batch basis and ultimately generate a final EFM pool that either matches the TID 112 attributes to the maximum extent possible or doesn't exceed any thresholds 00 or acceptable error bands stored within the TID 112, thereby satisfying the preferences of its end-user investors or investment managers. Further, utilising its 00 real-time electronic connections with the Asset Origination Database ("AOD" 202), the TIS 100 is able to periodically reset TID's 112 EFM application acceptance criteria (initially set by reference to lIP 101 only) such that AOS 200 additions to the EFM actual portfolio will result in the overall portfolio either more closely approximating TID's 112 idealised portfolio or remaining within acceptable error bands of the TID's 112 idealised portfolio. In resetting the TID 112 EFM application acceptance criteria, TIS 100 is able to also, via electronic links to AOD 202 or the Asset Warehouse Database ("AWD" 210), have consideration for the frequency of such resets by using as a predictive tool to determine the rate at which EFMs have, or are being, originated by AOS 200. The frequency of resets to the TID 112 EFM application acceptance criteria are important to the successful operationalisation of the system as too frequent resets have an adverse impact on, or hinder, the ability of distribution agents to market and communicate EFM acceptance requirements to end consumers and also potentially result in unnecessarily high criteria communication (or advertising) costs.

One final responsibility of the TIS 100 is to respond to the Investment Mandates of the Asset Management System 500, and through data collected from the lID 102 output dynamic updates to the TID 112 that provide the AMS 500 with its target portfolio characteristics (once again, via direct electronic connections between the AMS 500 and TID 112).This enables the AMS 500 to process its own decision-rules and undertake the actions required to ensure that the investment pools' actual performance converges as closely as is possible to the preferences of the various investors in those pools.

-26- 5097A-AU-D 00 2. The "Asset Origination System" 200 Utilizing its real-time electronic connections with the TID 112, AOD 202, and AWD O 210, the AOS 200 automatically manages the issuance of EFMs to end-user 00 consumers via its distribution agents (Mortgage Market Information Providers, or "MMIPs" 201) with reference to various static and dynamic feed-back and feedforward decision-rules. Such rules ensure that the actual characteristics of the EFMs 00 \that it sources from consumers, and, in particular, the attributes of both the underlying Scollateral assets (in this case, residential properties) and the consumers themselves, 00oO match within acceptable error bands of the TID's 112 idealised portfolio and/or Sapplication acceptance preferences, thereby ultimately giving rise to a realised pool of EFMs that will be acceptable to third-party investors or investment managers. This involves establishing complex asset-selection rules, based on a wide range of geographic, consumer and property related portfolio preferences, which determineon a substantially automated basis (real time or batch) -whether EFM applicants (i.e.

consumers) are accepted or rejected by the MMIPs 201.

As an illustration of the systems' ability to interact with SM should live electronic links between system components temporarily fail or not exist, the AOD 202 may output by electronic interface to SM or other human operator the characteristics of the EFMs sourced by AOS 200 in response to periodically set (and potentially advertised) underlying collateral (and potentially consumer) application acceptance criteria contained in the TID 112 which determine whether applications are advanced through AOS 200. To the extent that the characteristics of the EFM portfolio fall outside acceptable error bands stored in TID's 112 idealised portfolio preferences, or are expected to fall outside such acceptable error bands or preferences if AOS 200 continues to accept applications based on a specific set application acceptance criteria, the SM is able to periodically or in real time adjust such application acceptance criteria (and preferably communicate such adjustment to consumers and/or MMIP 201) by reference to information output from TID 112 and AOD 202 such that further additions to the EFM portfolio will result in the overall portfolio more closely approximating TID's 112 idealised portfolio.

-27- 5097A-AU-DIO 00 Over and above such use of static and dynamic feed-back and feed-forward decisionrules, in conjunction with its real-time electronic interfaces with the TID 112, AOD 202, and AWD 210, the AOS 200 also encompasses a dynamic MMIP 201 o remuneration system that operates to further improve the probability of the AOS 200 00 achieving its portfolio construction objectives. In particular, the AOS 200 calibrates dynamic MMIP 201 remuneration strategies that provide the distributors of EFMs 0with the strongest possible motivation to issue the contracts in line with the 00 preferences stored in the TID 112 and, ultimately, end-user investors, while Ssimultaneously refining the MMIPs' 201 financial incentives in response to their 00 observed performance over time. Further, the AOS 200 in conjunction with TID 112 Sand AOD 202 calibrates dynamic or periodic MMIP 201 communication strategies that provide the distributors of EFMs (and/or prospective EFM applicants) with the underlying collateral asset criteria (and potentially consumer criteria) by which applications will be accepted so as to provide the greatest likelihood of consumer demand and/or distributor driven applications being in line the end-user preferences stored in TID 112. As part of MMIP 201 communication, the AOS 200 is capable of receiving summary input data from MMIP 201 describing the collateral underlying an EFM application (such as post code, whether it is a house or home unit (condominium), indicative value, etc.) and in real time outputting whether such application indicatively meets the preferences of TID 112. This is an important feature as it ensures MMIP 201 efficiency when seeking to distribute EFMs to end user consumers by not requiring full application information in order to convey indicative acceptance.

As a final task, the AOS 200 interacts with the Underwriting Capital Providers ("UCPs" 211), and, once an EFM application has progressed through the AOS'200 decision-rules and been formally approved, administers the transfer of capital from the UCPs 211 to each applicant (via the MMIPs 201) that has successfully sought finance. The security that is provided by the applicant in exchange for the finance is the underlying financing arrangement (in this case, an EFM), which is held by the UCPs 211 .The characteristics of each EFM are stored in the AWD 210 for the duration of the warehouse period until such a time as all the required EFMs are sourced, and the final portfolio is closed, or, in the event of a two-stage capital -28- 5097A-AU-D 00 provision process, the portfolio is securitised or otherwise sold to third-party investors that are independent of the UCPs 211).

O The AOD 202 provides the AOS 200 with a wide range of inputted application data 00 from the MMIPs 201, who are responsible for interfacing with applicant. The EFM application information sourced by the MMIPs 201 is inputted into the AOD 202 either by way of a real-time electronic web-based interface, or manually upon receipt 00 of a fax-based application form, and covers data relating to the characteristics of the applicant age, current residential address, occupation, income, marital status, first 00 mortgagee, credit history, prior ownership experience etc), the current or sought-after Sdwelling's attributes location, price, purchase method (auction or private-sale), land size, land-to-dwelling ratio, number of bedrooms, bathrooms, etc), and MMIP 201 specific variables distributor type (mortgage broker or financial planner), corporate membership, geographic location, current remuneration structure, EFM distribution history, etc). The AOS 200 has a real-time electronic connection with the AOD 202, and upon receiving a transmission of EFM application data from the AOD 202, subjects this information to a series of static and dynamic feed-back and feedforward decision-rules. The dynamic decision-rules involve the AOS 200 making real-time or batch comparisons between the application data and the portfolio preferences stored in the TID 112. While acceptance of EFM applications is able to simply require that the pool of EFMs meet acceptable error bands stored in TID 112, at its most granular level, such comparisons can ensure that every individual accepted application improves the quality of the overall pool of EFMs with reference to the preferences of end user investors or investment managers. Alternatively, the AOS 200 is able to make comparisons between the application data and the periodically set or modified (and potentially MMIP 201 communicated) underlying collateral (and potentially consumer) application acceptance criteria contained in the TID 112. In this case batches or tranches of applications meeting a set criteria will be accepted implying a less granular approach, but, nonetheless one that ensures the acceptable error bands stored in TID's 112 idealised portfolio preferences are met. If the application data successfully progresses through all of the AOS' 200 decision-rules, the AOS 200 approves the application and is able to determine, subject to a series of algorithms, the application's pricing and specific terms. This information is then -29- 5097A-AU-DIO 00 relayed back through the AOD 202 to the MMIP 201 that had sourced the application

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in the first place. Once the transaction is settled, the relevant data pertaining to the applicant, property type, MMIP 201 agent, and the contract terms are transmitted from O the AOD 202 though the AOS 200 to the AWD 210, which holds all information 00 relating to formally approved EFM applications. The AWD 210 also captures additional data provided by the UCPs 211, such as the amount of underwriting capital, and proportion of capital that has been drawn-down during the EFM distribution 00 period. If, on the other hand, the EFM application does not successfully pass through the AOS' 200 decision-rules, a rejection signal is sent by the AOS 200 through the 00 AOD 202 to the MMIP 201. For the purposes of continuously refining its decision- Srules, the AOS 200 nevertheless stores all rejected application data in the AOD 202.

3. The "Asset Securitisation System" 400 At a time determined either automatically via pre-specified parameters once a certain value of EFMs have been sourced, or a particular period of time has elapsed), or on a discretionary basis by the SM, the Asset Securitisation System 400 uses its real-time electronic interfaces with the TID 112 and the AWD 20 to compare the characteristics of the EFMs that have been actually sourced with the updated investor preferences contained in the TID 112 (recall that these are being continuously refined over time as new information is inputted into the lID 102). The ASS 400 then processes a suite of static and dynamic feed-back and feed-forward decision rules to determine what actions if any are required in order to optimise the structure of the investment pool comprising the originated EFMs in a manner that most closely matches the preferences of the end-user investors (as stored in the TID 112). This involves the ASS 400 transferring the originated EFM assets from a warehouse vehicle controlled by the UCPs 211 (who in this scenario would have supplied the AOS 200 with underwriting capital on a relatively short-term, intermediation basis) into the final investment portfolio that is to be marketed to third-party investors.

Alternatively, in the case of a more simple one-stage process (whereby the original providers of the underwriting capital are the same investors who intend to hold onto the EFM assets over the long-term), the ASS 400 simply calibrates the characteristics of the existing investment pool in which the EFM assets have been held for the duration of the origination process. Hereafter the procedure by which the ASS 400 5097A-AU-D10 00 evaluates the originated pool of EFMs and determines the final investment pool's

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0characteristics will, for ease of description, be referred as the "securitisation" process.

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O Once the securitisation process has been completed, the ASS 400 transfers all of the 00 relevant EFM contract data from the AWD 210 and the Asset Servicing Database ("AServD") 302 onto the Asset Management Database 502, which Sconcurrently collects information from the Investment Market Information Providers 00 0 501, or "IMIPs" primary and secondary market participants, such as stock Sbrokers, investment analysts, and other capital market information providers). This 00 latter suite of information will include the final pool registry, ongoing registry data, O and secondary-market trading information, such as the pool's price, volume, volatility and yield. Concurrently, the ASS 400 determines the remuneration of the UCPs 211in the event that they are holding the EFMs assets on a short-term intermediation basis-via proceeds realised from the securitisation event.

4. The "Asset Servicing System" 300 There may be a significant period of time between the date on which an EFM is first distributed to a consumer and the date on which it is finally securitised over 12 months). Throughout this period, and for the duration of the EFM contract's life, the Asset Servicing System ("AServS") 300 is responsible for all of the EFM contract's administration requirements, which are outsourced to Asset Servicing Information Providers ("ASIPs") 301. These administrative requirements involve, amongst other things, variations to the contract's terms, events of default, prepayments, renovations to the properties, repayments, refinancings of related contracts a first, interestbearing mortgage) and, subsequent to discharge, the processing of cash flows through to end-user investors. Any data relating to the EFM contract servicing events is electronically inputted by the ASIP's 301 into the Asset Servicing Database ("AServD") 302, which then relays the details onto the AServS 300 via its own electronic interface. In turn, the AServS 300 electronically interacts with both the AWD 210 during the warehouse period, and the AMD 502 once the EFMs have been securitised in order to manage the ongoing EFM servicing requirements of both securitised and non-securitised EFMs. The AServS 300 also interfaces indirectly with -31 5097A-AU-D 00 the AOS 200 via the AServD 302 in order assist with the AOS' 200 management of

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the MMIPs' 201 ongoing remuneration during the life of the EFM loans.

C.)

C 5. The "Asset Management System" 500 00 Post securitisation, the Asset Management System 500 employs a suite of static and dynamic feed-back and feed-forward decision-rules to monitor the risk and return characteristics of the listed and unlisted securitised EFM pools (via its 00 electronic connection with the AMD 502) in order to ensure that their behaviour and performance is consistent with the expectations of investors in those pools, as 00 stipulated by data and information collected electronically from both the IID 102 and the TID 112.

After extracting information from the AMD 502, lID 102 and the TID 112 and processing this through its decision-rules, the AMS 500 determines what changes if any need to be made to the terms and conditions of the EFM contracts underlying the pool in order to stimulate certain consumer actions). Alternatively, in the case of an investment pool that is open-ended with new tranches of EFMs continuously fed into it over time, what modifications are required to any additional tranches of assets in order to optimise the pools' future performance. In the event that the AMS 500 concludes (based on its rules) that the terms of the pools' underlying contracts should be altered, it will electronically signal these changes through the AServD to the AServS 300, which gives effect to the requested changes and informs the AMD 502 of their consequences. If the pool is open-ended and changes to the characteristics of originated EFMs are required, the AMS 500 will electronically signal these changes to the TIS 100 via the lID 102 and thereby influence the actions undertaken by the AOS 200 and, ultimately, the composition of EFMs that are sourced by the MMIPs.

Fig. 2 provides an overview of the end-to-end applicant to investor composite technological system and processes that lies at the heart of the Overall System 600.

Detailed comments regarding the individual systems 100-500 are relegated to the next section of the application. Note that while the systems (and their corresponding processes) are related, each individual system serves a distinct commercial objective and thus can be independently deployed. That is to say, the automated technology can -32- 5097A-AU-D 00 be developed sequentially with the modular components of the Overall System 600 developed to date operating as a single technological architecture.

,1 O The data processing capabilities and technological structure of the Overall System 600 00 can be distinguished from prior art mortgage origination and securitisation systems in several different ways.

00 First, the Overall System 600 electronically integrates on an end-to-end basis the otherwise independent mortgage identification, screening, selection, processing, 00 securitisation, servicing and ongoing portfolio management system requirements, Swhich in the prior art are divided into independent utilities that do not typically interact with one another.

Second, the Overall System 600 has been conceived to enable the identification, screening, selection, securitisation and servicing of a class of financing arrangements (using real-time automated decision-rules) that supply risk and return payoffs that are fundamentally different from that which is associated with prior art mortgage instruments. In particular, prior art forms of interest-bearing finance home loans) earn returns that are determined by time-dependent interest rates, which are fixed or floating. As such, the cash-flows supplied by these contracts are quite different from the returns realised on the collateral against which they have been secured owner occupied residential real estate). By way of contrast, an EFM is a contract that provides recompense to the financier through rights to future changes in the value of the underlying asset that has been used as collateral. The cost of capital to the consumer is not therefore exclusively time-dependent, as in the case of the prior art mortgage market, but rather relies crucially on the future price performance of the property in question. That is to say, the EFM's cost of capital is "state-or collateraldependent". Accordingly, while prior art mortgage origination and securitisation systems are almost entirely indifferent to the specific characteristics of the housing assets against which they lend (especially given the existence of mortgage insurance), this is the primary area of interest for the Overall System 600 (since the attributes of the collateral asset itself have a first-order influence on the performance of the financing arrangements).

-33

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5097A-AU-D 00 Third, the individual rates of return attributable to the state-dependent financing arrangements that comprise a portfolio of EFMs are inherently heterogenous, whereas O the interest rates attributable to the individual mortgages that make up a standard 00 mortgage pool are homogenous. As discussed previously, the Commonwealth Bank of Australia may in any given month distribute, say, $250 million worth of floating-rate 0mortgages, all of which will carry exactly the same interest rate. In this context, the 00 \Commonwealth Bank of Australia will be more-or-less ambivalent as to the geographic regions and dwelling types against which the mortgages are issued. It may 00 then choose to securitise these mortgages and sell them to investors all around the Sworld, who, given the uniform nature of the instruments, will be indifferent to the fact that every property that serves as security will be quite unique in terms of both its geographic location and its physical characteristics. In comparison, $250 million worth of state-dependent EFMs forms a pool of highly idiosyncratic assets, each of which will have very different expected rates of return. Furthermore, the geographic regions and dwelling types against which the EFMs are issued will have a profound influence on the portfolio's expected performance (to say nothing of the fact that they represent claims over Australian residential real estate, which may perform in a very different fashion to other property markets overseas, and hence be of limited interest to offshore investors). Consequently there is a need to identify, screen, select, securitise, service and portfolio manage EFM-like assets in a much more sophisticated fashion to that which takes place in the prior art mortgage market. This need is met utilising technologies which dynamically regulate the asset-selection process through time. By way of example, while the Commonwealth Bank of Australia might regard it as acceptable to issue $250 million worth of mortgages in Western Sydney, it is unlikely that investors in a $250 million EFM pool would regard having all their assets located in such a concentrated geographic area as being acceptable.

Fourth (and as a result of point three), the Overall System 600 employs an extensive suite of static and dynamic feed-back and feed-forward decision-rules to control the distribution of EFMs through time subject to the target portfolio preferences of thirdparty investors. The Overall System's 600 chief objective is to maximise the probability that the attributes of the approved pool of EFMs will be in line with those -34- 5097A-AU-D 0 00 that were requested by the end-user investors (whose wishes are represented by the use of an "idealised" or target investment portfolio). As discussed above, since the returns to the EFMs rely on the performance of a highly heterogenous collection of Q collateral assets owner occupied residential real estate), the process by which 00 these assets are screened and selected is vastly more complicated than the methodologies by which traditional banks issue prior art interest-bearing mortgage contracts.

00 As a final point of differentiation, the Overall System 600 encompasses an integrated 00 asset management system that employs static and dynamic feed-back and feed- Sforward decision-rules and process control systems to, automatically modify the terms and conditions of the underlying financing arrangements, and the characteristics of future tranches of assets that are added to the pools, with the objective of minimising the observed differences between the performance of those pools and the preferences of end-user investors. This relies crucially on integrated electronic interfaces between the asset management system, various memory banks that store information regarding the performance of the pools and the requirements of investors, and other critical control systems that manage the production of the target portfolio, the selection of the underlying assets, and the servicing of those assets through time.

Explanation of Individual Aspects 1. State-Dependent Financing Arrangements The following is a description of one or more embodiments of the EFM In accordance with one embodiment of the EFM, creditors offer to provide consumers with finance equal to a percentage 20%) of the total value of their collateral assets an owner-occupied property) on a zero-interest basis in return for eventual repayment of: the principal amount lent; plus rights to a pre-determined share of any capital appreciation on the collateral asset or less rights to a pre-determined share of any capital depreciation on the collateral asset, 5097A-AU-D 00 as determined on the date of discharge or repayment of the total amount owing 0 under the EFM, which will be specified in the financing documentation, and might typically occur on the sale of the asset in question or upon the election

C.)

O of the borrower.

00 For the purposes of the present explanation, the mathematical relationship between the proportional value of the financing supplied by the creditor the principal 00 amount lent as a fraction of the value of the collateral asset at the time the financing was extended) and the creditor's rights to a share of the collateral asset's future capital 00 appreciation or capital depreciation (whichever eventuality is relevant as at the date of Sthe discharge of the total amount owing under the EFM), can be expressed as the ratio X:Y:Z, where X denotes the proportional value of the financing supplied by the creditor, Y refers to creditor's rights to any future capital appreciation of the collateral asset as a proportion of the value of that collateral asset's total capital appreciation; and Z denotes the creditor's rights to any future capital depreciation of the collateral asset as a proportion of the value of that collateral asset's total capital depreciation.

Accordingly, a 1:2:1 EFM cost of capital would indicate that for every percentage point of finance that the creditor supplied, it would be entitled to two percentage points of all future capital appreciation and one percentage point of all future capital depreciation. Note, however, that more sophisticated representations of this general case are easily envisaged, particularly those incorporating time-varying claims to the capital appreciation or depreciation on the underlying collateral asset, and/or arrangements that encapsulate a time-dependent interest rate or proxy for the estimated income yield on the collateral asset (where the combined capital and income returns would represent the total economic performance of the asset in question). By way of illustration, the following EFM cost of capital alternatives can be practically deployed: a 1-1-1 EFM cost of capital; a 1-1-0 EFM cost of capital; a 1-2-1 EFM cost of capital; a 1-2-2 EFM cost of capital; a 1-2-0 EFM cost of capital; -36- 5097A-AU-DI 0 00 a 1-3-1 EFM cost of capital; 0 a 1-3-2 EFM cost of capital; a 1-3-3 EFM cost of capital; O a 1-3-0 EFM cost of capital; or 0 (10) any one of the above in combination with a standard time-dependent interest rate or rental yield.

00 A variation to the pre-determined sharing of capital appreciation is one where the Screditor's rights to a share of the collateral asset's future capital appreciation is capped 00 by reference to an index or an upper return bound. If such cap is reached or exceeded, claims to the capital appreciation as a proportion of the value of that collateral asset's total capital appreciation, Y, may be retrospectively varied so that it is not. Further, to the extent that the collateral appreciates in line with say an index, Y may have one value associated with a collateral appreciation rate at or below that of a limit or index and another applicable for a collateral appreciation rate that exceeds a limit or index.

Unlike contemporary housing finance, whereby the rate of return is known or levied by lenders when issuing the finance or throughout the term of the finance, collateral dependent (or partly collateral dependent) finance returns are based on the highly idiosyncratic appreciation or depreciation of the collateral underlying the finance and are not known until such point when the appreciation or depreciation is determined for purposes of settling an amount owing under the financial arrangement. As such, the rate of return to the financier or the effective rate paid by the recipient of the finance is not known until such time as the future value of the collateral is determined. In the event that the provider of the finance chooses to cap the cost or effective rate of the finance, which may be as a result of legislative requirements limiting the effective annual percentage rate, there is a strong need for specific financial methodologies and systems to ensure such cap is not exceeded.

A capped return may be implemented by means which preferably include one of the following embodiments: As outlined above, a capped return may be achieved by retrospectively determining or varying a predefined creditor's claim to a share of the capital -37- 5097A-AU-DIO0 00 appreciation on the collateral once the appreciation or future collateral value is

O

Sknown. This preferably involved the steps of calculating and returning the rate _of return associated with the wholly or partially collateral-dependent financial

C.)

O arrangement based on a predetermined share of capital appreciation and then 0 checking if such rate exceeds or is less than the capped rate. In the event that the rate based on an initial predetermined capital appreciation share exceeds the Ocapped rate, then the otherwise predetermined capital appreciation rate is 00 1 adjusted such that when applied to a known collateral value, the capped rate is Oeither achieved or not exceeded; 0 Determining both the quantum or quanta owing for purposes of consummating Sthe financing arrangement assuming the capped rate applies and the quantum or quanta owing for purposes of consummating the finance arrangement assuming a predetermined capital appreciation sharing absent the capped rate. In the event that there are only payments from the borrower to the provider of the finance, determining that the amount owing as the lesser of the two amounts would achieve the capped rate. There are a number of other embodiments which achieve the same net amount owing for the purposes of consummating a collateral dependent (or partly collateral dependent) financing arrangement which ensure that the capped rate is not exceeded. These include the borrower paying the financier the full amount owning based on a predetermined appreciation share and the financier paying, crediting or offsetting to the borrower an amount required to ensure the net amount is such that the capped rate is not exceeded (also refer to below). Such amounts can be determined by iterative processes which narrow in on a solutions, maximum and minimum tests, checking procedures and the setting of toggles which change dependent on stipulated criteria; and For a given appreciation sharing right of the financier, determining the maximum collateral value or collateral appreciation for purposes of concluding the financing arrangement which achieves the capped rate. The capped rate can then be achieved by setting the capital appreciation sharing beyond this point to zero or ignoring any further excess appreciation.

-38 5097A-AU-D10 00 As part of incentivising the recipient of collateral dependent (or partly collateral 0 dependent) finance to maximize the value of the underlying collateral asset, or alternatively set contractual terms which increase the likelihood of the finance O provider's return requirements being met, it may be necessary to vary the finance 00 provider's claims to capital appreciation (or depreciation) by reference to an index or a reference rate.

00 For example, to the extent that the collateral appreciates in line with say a local area index, the recipient of finance may be content sharing 40% (that is, Yj 40%) of the 00 capital appreciation, but, to the extent there is an effort made by the finance recipient Sto best ensure the collateral appreciates more than the local area index, is only happy sharing say 30% (that is Y 2 30%) of excess appreciation over and above that of the reference index. Such an approach also provides added incentive to the recipient of the finance to maximize the value of the collateral and in doing so maximize the return to the provider of the finance. Further, by setting the finance provider's share of collateral appreciation high, Y 1 for low levels of capital appreciation and lower, Y 2 for high levels of appreciation, the likelihood of achieving the finance provider's minimum required return is significantly increased while at the same time ensuring that the finance receipt's cost of finance is not excessive.

Taking the example above where Y has two predetermined values, the collateral has an initial value, Vi, for purposes of commencing the financing arrangement, the collateral has a final value, Vf, for purposes of concluding, or forming part of the basis for concluding the financing arrangement, and the reference index has a value, II, at the time of determining Vi and a value, 12, at the time of determining Vf, the quantum of the capital appreciation share of the finance provider could be mathematically presented as Vi(1 2 /II 1) x Y 1 [Vf- Vi(I 2 xY 2 The preferred application of this conditional appreciation sharing involves first checking whether Vf/Vi is greater than 12/Il, if so then the quantum of the finance provider's rights to capital appreciation is as expressed above, otherwise the second appreciation share, Y2, never comes into play and the quantum could simple be mathematically presented as (Vf- Vi) x Y 1 -39- 5097A-AU-D10 00 Where the finance provider's claims to capital appreciation vary as a function of the rate of such appreciation or by reference to a reference rate, R, and n represents the Snumber of rate periods that the financing arrangement remains outstanding, taking the O example above where Y has two predetermined values, the quantum of the capital 00 appreciation share of the finance provider could be mathematically presented as Vi x [(I+Rl n 1] x Y 1 [Vf- (Vi x (1+R 1 x Y 2 00 The above examples are illustrative of the capital appreciation share, Y, having only 2 predetermined values. Other embodiments incorporate greater numbers of 00 predetermined collateral appreciation shares each of which apply to either reference Srates of collateral appreciation or reference indexes or a combination thereof.

In another variation to the pre-determined sharing of capital depreciation the provider of finance shares in depreciation in some proportion only after the value of the collateral asset declines beyond a certain value. For example such a certain value may be where the value of the collateral falls below the amount of total financial accommodation provided against the collateral. In this case a one for one sharing beyond this point results in the amount owing being simply the value of the collateral (less any prior ranking finance). In the event that prior ranking finance exists, the amount owing could be limited to zero.

One crucial implication of the state-dependent nature of the EFM's cost of capital is that it can give rise to contingencies whereby the cost of this form of finance to the borrower over long periods of time is either negligible, nil, or negative. For example, if the value of the borrower's collateral asset has not increased as at the date of discharge, the borrower will simply repay the original loan amount that was extended to it by the creditor on the date that the borrower entered into the EFM arrangement, with no additional interest costs. The EFM would therefore have been a free form of finance. If, to take another example, the value of the borrower's collateral asset has fallen as at the date of discharge, the creditor may assume some of these capital losses and either reduce the value of the original loan amount, make payment to the borrower or provide other credit or set off as appropriate. This would result in an entirely unique situation whereby the cost of the EFM finance to the borrower would 1 5097A-AU-D 00 be negative: that is, there would be a value transfer from the creditor to the borrower.

C

CThere is not any current form of housing finance that encapsulate such features, and

(N

which could give rise to frequent eventualities whereby the cost of that finance to the 0 borrower is negative.

00 Other embodiments of the method used to determine the finance provider's unique participation in, or assumption of, capital losses (in the absence of a default event) by 00 way of either directly determining an adjusted amount owing or using the capital loss sharing amount to either reduce the value of the original or outstanding finance 00 amount required to settle a financing arrangement, make payment to the borrower or Sprovide other credit or set off, are described in more detail below.

Rights to (or an obligation to assume absent a default event) a share of any capital depreciation on the collateral asset preferably include, and for the purposes of explanation are mathematically represented as follows: A pre-determined share of capital depreciation, Z, multiplied by the capital depreciation as measured by an initial value of the collateral for purposes of commencing the financing arrangement, Vi, less the final value of the collateral for purposes of concluding, or forming part of the basis for concluding the financing arrangement, Vf, in which case the depreciation share could be mathematically presented as Z(Vi Vf). There are a number of other mathematical representations and depreciation sharing mechanics which could be used by those expert in the art. For example, ifZ were equal to LVR (see below) this quantum could also be determined in accordance with the various representations outlined in below. Z could also vary as a function of the collateral depreciation as outlined in below; The initial principal advanced by the financier, P, multiplied by the percentage decline in the value of the collateral. Where the percentage decline in the collateral is expressed as (1 Vf/Vi), this could also be expressed as P (1 Vf/Vi). Further, where P is expressed as a percentage of Vi, LVR, the same quantum could be expressed as LVR (Vi-Vf). As can be seen there are numerous mathematical representations of this amount.

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5097A-AU-D 00 The amount determined in above could be multiplied by a pre-determined multiple of LVR if capital depreciation sharing in the financing contract were expressed as a multiple of the P to Vi ratio; O A pre-determined sharing of capital depreciation which changes as a function 00 of the depreciation incurred by the collateral. One such embodiment of this can be illustrated by the following. If the collateral value at commencement of the financing arrangement is represented as 100% and the capital depreciation 00 share as Z, then the depreciation share could, for example, be Z, between collateral value 100% and 90%, Z 2 between collateral value 90% and 00 and so on.

The pre-determined share of capital depreciation could be such that the finance provider does not participate until such point that the collateral has depreciated below a pre-defined level, value trigger, T. Such trigger could for example be when the depreciation amount is equal to borrower's equity investment, that is, the property value falls to or below the amounts advanced to the borrower. In such a case the pre-determined share of depreciation could be expressed as T Vf, P Vf or where the financier is only sharing in a portion, S, of depreciation beyond T or P, S (T Vf). Again there are a number of means by which such embodiments can be represented. One such embodiment is where the depreciation sharing is one level prior to T being reached and another thereafter; In the event that the state-dependent financing arrangement is second or equal ranking to other finance advanced to the borrower, there exist situations above whereby the finance provider's participation in the depreciation exceeds that of the original principal. In order to protect for this the preferred contact states that the state-dependent finance provider's depreciation exposure is limited the minimum of the depreciation share and P; and The ability for the provider of the finance to not share in capital deprecation until the passage of a pre-determined period of time following the commencement of the financing arrangement. In this case any of the above mentioned depreciation sharing amounts could be utilized subject to confirming that the required time had past. In the event insufficient time had past or a certain data was not reached prior to the date for determining -42- 5097A-AU-DIO0 00 depreciation share, then such share or amount would be either determined as, or set to, zero.

,1 C The amount owing on a wholly or partly state-dependent financing arrangement 00 adjusted to reflect a pre-determined share of any capital depreciation on the collateral asset preferably includes, and for the purposes of explanation is mathematically represented as follows (algebraic expressions have the meaning above): 00 An adjusted principal determined, at least in part, by Vi and Vf. This could be expressed as (Vi.LVR) Z(Vf-Vi) or Vf.Z Vi(LVR There are a number 00 of other mathematical representations which could be used by those expert in the Sart which downwardly adjust the principal depending on depreciation sharing mechanics; An adjusted principal determined, at least in part, by the principal advanced or value trigger, T, and Vf. In this case the adjusted principal could be such that the finance provider does not participate in depreciation until such point as the collateral has depreciated below a pre-defined level. Adjusted principal could be expressed as min(Vf, Vf if Vf is less than P or T, or the greater of zero and Vf- F where F represents the amount of outstanding prior or equal ranking finance; or The adjusted principal determined as the initial principal advanced less any rights to the depreciation as described above.

For explanatory purposes, it is henceforth assumed that all EFMs carry a 1:2:1 cost of capital. Other features of the EFM contract may include, but are not limited to, one or more of the following: The borrower's obligation to discharge the EFM is triggered by any one of transfer or resumption of the property, the death of the owners, the n year anniversary of the loan, the exercise of novel prepayment provisions, or events of default; The EFM can be "prepaid" without the property being sold) at any point during the contract's potential n year life (such circumstances trigger a binary switch or toggle in the EFM whereby its cost of capital reverts to a ratio rule in which the creditor need not share in any capital losses on the underlying -43 5097A-AU-DI0 00 property). As will be discussed later, this binary switch in the EFM cost of 0 capital is an important mechanism for controlling for the negative effects of perverse "gaming" by consumers, and "adverse selection" more generally.

O Additional embodiments incorporate determinants other than a property sale as 00 to whether the creditor will participate in a share of capital loss on, or depreciation in, the underlying collateral and incorporate other mechanisms for determining the amount of such participation which may be by way of an 00 adjusted principal, payment, credit or set off. Such other determinant associated with not participating in capital depreciation or capital loss include default under 00 the financing contract, an early repayment which is earlier than pre-determined Srepayment events in the financing contract and the position of toggle markers or switches which are determined based on pre-determined events including prepayment and default. An example of additional embodiments is provided in Annexure 3, which contains a sample of the full EFM contract of the preferred embodiment; The consumer legally owns 100% of the equity in their collateral asset and retains similar rights and liberties to those that they possess under a standard prior art mortgage product; The EFM is secured by a mortgage over the collateral asset, or a second mortgage where the borrower has taken out a standard interest-bearing mortgage, which can be uniquely packaged together with a "subordinated" EFM; and An improvements provision that enables the borrower to receive credit on the date of discharge of the EFM (or any other date during the financing arrangement) for any increase in the collateral asset's value that arises as a result of capital improvements undertaken by the borrower during the term of the contract. As with the prepayment provision, embodiments of this improvements procedure will be described more fully below; An expense provision that enables the borrower to receive credit or benefit for a portion of transaction expenses such as stamp duty, legal fees and auction or selling commissions. This may be by way of taking into consideration such expenses when calculating the amount payable under the EFM contract; -44- 5097A-AU-D 00 A periodically or accruing interest rate or rent with reference to either the amount of funds advanced or the value of the property. Such interest rate or rent may commence at any time during the contract. This feature could be utilized as

C.)

O a step-up in the cost of capital at a particular point in time in order to encourage 00 repayment of the contract at that time; and The specific terms and conditions of the EFM contract can be calibrated to generate investment returns that satisfy the requirements of external third-party 00 investors in a diversified pool of such contracts.

00 A final key feature of the EFM contract is that the investment interests of the Sborrower the future performance of the underlying collateral assets) are very closely aligned with those of the creditor and, where applicable, investors in diversified pools of these contracts. Further details of the contract contemplated by the EFM are provided below.

1.1 Consumer Value Proposition In the housing market, demand for EFMs is expected from three primary consumer categories with varying value propositions: First-time buyers who are not be able to afford to purchase a property, (b) want to reduce their upfront costs, or want to buy a more expensive home; Existing home owners who want to refinance their current mortgage in order to reduce their ongoing mortgage repayments, or want to upgrade to a more expensive home; and The asset-rich yet income-poor elderly who want to access an equity-release mechanism other than reverse mortgages.

Creditors impose a maximum loan-to-value ratio on the total financing that the borrower draws on (encompassing, for example, both a first interest-bearing mortgage that has been bundled together with a subordinated, or in other cases, an EFM that ranks equally with the interest-bearing mortgage) to ensure that the borrower has a significant financial investment in the collateral asset at the time the finance is extended.

5097A-AU-D10 00 EFMs should prove to be an attractive form of housing finance for consumers. Table

O

S1 provides a comparison of financing a property with a traditional mortgage ("Traditional Scenario and two alternative scenarios in which the consumer uses O an EFM in combination with the standard form of interest-bearing finance 00 ("Traditional EFM Scenario 2" and "Traditional EFM Scenario Table 1 00 Traditional Housing Finance Compared with the use of an EFM Traditional Scenario I Traditional EFM Scenario 2 Traditional EFM Scenario 3 00 >Traditional mortgage only >EFM to reduce costs >EFM to buy more valuable home Property Value $500,000 Property Value: $500,000 Property Value: $625,000 Prime Mortgage $450,000 EFM $100,000 EFM $125,000 Deposit: $50,000 Need to fund: $400,000 Need to fund: $500,000 LMI (about $6,750 Prime Mortgage $360,000 Prime Mortgage $450,000 Annual P&I $3,000/mth Deposit: $40,000 Deposit: $50,000 LMI $0 LMI $0 Annual P&I $2,400/mth Annual P&I $3,000/mth >Standard Cost >Save 20% plus >Buy 25% more valuable home In EFM Scenario 2, the consumer uses an EFM to reduce the size of their prime mortgage from $450,000 to $360,000. In this scenario, the consumer should benefit in a number of ways: The size of the required deposit on the prime mortgage falls by 20% (from $50,000 to $40,000); The size of the ongoing interest and principal repayments over the n year life of their traditional mortgage falls by 20% (from $3,000 per month to $2,400 per month) as a result of the reduction in the size of the prime mortgage; and The need for lenders mortgage insurance is eliminated altogether (dropping from $6,750 to as the value of the prime mortgage falls to 72% of the value of the property, below the level at which LMI is otherwise required -46- 5097A-AU-D10 00 In EFM Scenario 3, the consumer uses an EFM to purchase a more valuable home. In 0 this example, the household is able to purchase a home that is 25% more valuable Sthan the home in Traditional Scenario 1 for the same upfront and ongoing monthly O cash costs.

00

O

1.2 EFM Payoffs The following examples show the simplified payoffs associated with a $100,000 EFM 00oO C that has been used to finance a $500,000 property with varying prices realised at the point of sale. Table 2 highlights the gross cash flow to the creditor.

oO 00 Table 2 Examples showing EFM Payoffs Example 1 Example 2 Example 3 Purchase Price $500,000 $500,000 $500,000 EFM $100,000 $100,000 $100,000 Sale Price $500,000 $450,000 $550,000 Borrower Repayment 0 Repays $100,000 e Repays $90,000 0 Repays $120,000 ($100,000 $100,000 principal ($100,000 principal principal) less 20% of plus 40% of $50,000) $50,000) Comments Borrower saves a Borrower reduces a Borrower makes a on interest loss on property by profit of $30,000 on principal 20% the property repayments repayments Saves 20% on 0 Saves 20% on interest principal interest principal repayments repayments Gross cash-flow to the $200,000 $90,000 $120,000 creditor 1.3 Key EFM Terms and Conditions In the housing market context, the majority of an EFM contract's terms and conditions can be based on a standard mortgage contract. For the EFM the total amount owing under the loan is due only on the date that the mortgagor discharges the loan by selling the property or by repaying without sale). The total amount owing is determined by either a competitive transaction value auction or privatesale treaty) or via an independent fair market valuation undertaken by a valuer (for -47- 5097A-AU-D 00 example, a valuer approved by the creditor). In one embodiment of the EFM, the

C

creditor has the right to accept the transaction value or to require an independent market valuation, and relies on the independent valuer's appraisal estimate if there is a C discrepancy. If the borrower does not accept the appraised value, it can require a 00 further independent market valuation in which case the value of the property will be taken to be (at the creditor's option) either the mid-point of the two valuations, or the transaction price. The creditor can also have the option to seek further valuations. If 00 it does so, the value of the property can be the mid-point of the closest two of all the valuations. Other variations will be apparent to those skilled in the art.

00 SOther important features of the preferred EFM contract include: The improvements provision; The refinancing provision; The prepayment provision; The "as is" or good repair provision; and The sale and prepayment notice provision.

1.3.1 The Renovation Provision The EFM contract preferably incorporates an improvements provision to enable borrowers to be credited for complying renovations to the collateral asset that lead to an improvement in the value of the asset and that are made with the creditor's consent. The borrower can seek credit for improvements to the property subject to conditions which include: There is a minimum certified expenditure on the improvement determined from time to time at the creditor's discretion (this can be a fixed sum, for example, $20,000, and be subject to price indexation from time to time); An approved independent valuer undertakes a fair market valuation of the property both as at the date the renovation commences and as at the date it is completed; The renovation is completed within a certain number of months (or longer if the creditor approves) of the date it is started; -48- 5097A-AU-D 00 The second valuation determines the incremental value attributable to the

O

Orenovation. The incremental value is calculated as the difference between the property's valuations pre and post the improvement; O The incremental value attributable to the renovation is credited to the borrower 0 at time of the discharge of the total amount owing under the EFM; and At the time of discharge of the total amount owing under the EFM, credit for the Srenovation will only reduce the amount owing to the extent that the property's 00 0value at sale (including the value of any credited improvements) is greater than Oits value at the time the EFM loan amount was originally advanced the 00 renovation provision cannot be used to produce a situation where the lender is Ssharing losses under the rule, or similar).

Another embodiment of the renovation provision allows the borrower to seek credit (by way of set off, payment or otherwise), and the provider or servicer of the finance to determine the availability or quantum of such credit, for improvements or renovations to the collateral asset that lead to an improvement in the value of the asset. This arrangement is subject to one or more conditions which may include, but are not to be limited to the following.

A specified or minimum expenditure on the improvement or a specific improvement type requirement determined from time to time at the creditor's discretion (this can be a fixed sum, for example, $20,000, and be subject to price indexation from time to time or can be substantive improvements which exclude, for example, painting, landscaping or replacement of fixtures and fittings). Such specific requirements are preferably implemented by way of inputting the presence or quantum of expenditure or improvement type into data processing apparatus and instructing it to output a signal/(s) representing the availability or otherwise of a credit, credit being set to zero, preventing the calculation of a credit, or reducing the credit (or parameters in its calculation) by the amount of excluded improvements.

A valuation or estimate of valuation of the property is undertaken either as at or within proximity of commencement of the contract, commencement of the renovation, completion of the renovation, completion of the contract, or any other date which may be deemed appropriate at the creditor's discretion. Such a 49 5097A-AU-D 00 valuation or value estimate is preferably undertaken by way of property

C

valuation techniques including, but not limited to, physical appraisal, computerautomated appraisal, an actual sales price, and a property-index based price.

O The resultant data is input into a data processing apparatus and utilised to output 00 a signal representing the availability of, or the calculation of the quantum of, an improvement credit.

The renovation meeting requirements such as being completed within a certain 00 time period (or longer if the creditor approves) of the date it is started or the date of a pre-renovation valuation or valuation estimate or being undertaken by an 00 approved builder. Other requirements taken into account may include whether Sthere exists an improvement notification or approval, or there exists a building or regulatory approval (if required), or the improvement was undertaken by a qualified trades person. Preferably such requirements are taken into account by way of inputting the satisfaction of a corresponding requirement into data processing apparatus and instructing it to output a signal/(s) representing three possible outcomes namely the availability or otherwise of a credit, the credit being set to zero, or the preventing or disablement of the calculation of a credit.

The value attributed to, or associated with, the renovation for purposes of a number, or a predefined proportion of such number, calculating the credit, payment or set off is determined by any one of a number of predetermined methods which may include the following.

i. The difference between the property's deemed value pre and post the improvement.

ii.The difference between the property's deemed value pre and post the improvement where such pre or post value is adjusted to take into consideration the movement in the property's value excluding the improvement over the time the improvement is made. This movement is not associated with the improvement and the adjustment is preferably done by adjusting the deemed pre or post improvement values such that both values are deemed to be based at the same point in time thus isolating the value of the improvement as opposed to value changes over time in the collateral excluding the improvement. This is preferably done by multiplying a deemed pre 5097A-AU-D0 00 improvement value, V 1 (or dividing a deemed post improvement value, V 2 0 by any one of the following factors: a predetermined index as at the date of deemed improvement

C.)

O completion, 12, divided by the index at a deemed date of improvement 00 commencement, Il, in which case the improvement credit could be mathematically presented as V 2

V

1

(I

2 /II) (or V 2

(I

1 /1 2 Vi); an appreciation factor, F, over the deemed period of the improvement, 00 in which case the improvement credit could be mathematically presented as V 2 ViF (or V 2 /F VI) or 00 a growth inflator calculated with reference to an appreciation rate, Ra, and the time period between the deemed pre and post valuations, t, in which case the improvement credit could be mathematically presented as V 2 Vl(l+ Ra) t (or V2/(1+ Ra)-VI).

This provision is one embodiment of a method to allow the provider of the finance to continue to receiving collateral-dependent returns during the period over which the improvement is made and reduce the return sensitivity to the period over which the improvement is made. Consider a situation where an improvement actually adds no incremental value, but, the property gains significant value over say a 6 month period between the deemed pre and post improvement period, purely as a result of the entire property market appreciating strongly. If the improvement credit were to be determined in accordance with above, this would result in a non-intentional zero appreciation sharing by the financier over the 6 month period. Further, without this provision, or other embodiments of it, during periods of collateral appreciation, the borrower has an economic incentive to maximize the time period over which the improvement is made or the period between the deemed pre and post improvement valuation dates.

ii. The cost or value of the improvement itself (preferably evidenced by one or more invoices, quotations or other like documentation); iii. The minimum of the cost or value of the improvement; iv. The appreciated (or depreciated) value of the improvement over time with such appreciated value preferably determined by way of multiplying the -51- 5097A-AU-D10 00 deemed value of the improvement, Vi, as at a particular date by any one of the following factors: the value of the property at or near the conclusion of the contract, VpC, O divided by the value of the property as at the date the improvement value was 00 initially determined or based, Vpi, in which case the improvement credit could be mathematically presented as Vi(Wp/Wpi); the value of an index at or near the conclusion of the contract, Ic, 00 divided by the index as at the date the improvement value was initially determined or based, Ii, in which case the improvement credit could be 00 mathematically presented as Vi(IJ Ii); or an appreciation factor, F, or growth inflator with reference to a rate of appreciation, Ra, and a time period between the date the improvement value was initially determined or based and the date at or near conclusion of the contract, t, in which case the improvement credit could be mathematically presented as Vi(l+ Ra)t or Vi F.

This provision is one embodiment of a method to credit the borrower for improvements or renovations to the collateral asset that lead to an improvement in the value of the asset where such value is measured at the conclusion of the contract, or other predetermined date, as opposed to simply at completion of the improvement or another date prior to conclusion of the contract. The preferred method assumes the value of the improvement is initially measured at or near completion of the improvement and its value then appreciates (or depreciates) at either the same rate as the property as a whole, a predetermined index, or growth inflator. Another embodiment is one where each of the deemed pre and post improvement valuations are separately indexed to or near the completion date with the then difference representing the value attributed to the improvement credit.

v. The depreciated value of the improvement over time. Such a depreciated value is preferably determined by either multiplying the initially determined improvement value (or improvement value calculated at any point in time accordance with any of the methods described herein), Vi, by a depreciation factor, Fd, or dividing it by a deflator with reference to a rate of depreciation, Rd, and a time period between the date the improvement -52- 5097A-AU-D 00 value was initially determined and the date at or near conclusion of the contract, t, in which case the improvement credit could be mathematically presented as Vi Fd or Vi Rd) t 0 This provision is one embodiment of a method which adjusts the value 00 attributed to an improvement at a particular point in time for any subsequent depreciation. Such depreciation may be due to thing such as wear and tear, atrophy, or changes in tastes or fashion over time.

00 vi. The value assigned to the improvement at a point in time indexed to, or from, an alternate time with reference to the collateral asset or a property, 00 inflation or other index. This is preferably done by way of multiplying the Svalue initially attributed to the improvement by the value of the collateral or an index as of the date at, or to, near conclusion of the contract divided by the value of the collateral or an index as of the relevant date (ie. the date being indexed to or from).

The value attributable to the renovation is credited, paid or set off to the benefit of the borrower/financee at time of the discharge of the total amount owing under the EFM or at any other predetermined time.

In the event that a planed improvement has a negative value attributed to it, the finance provider may impose a negative credit or penalty.

At the time of discharge of the total amount owing under the EFM or at any other predetermined time, the credit, payment or set off for the renovation will only reduce the amount owing to the extent that the property's value at sale or at any other EFM repayment or termination date (including the value of any credited improvements) is greater than its value at the time the EFM contract amount was originally advanced. That is, the renovation provision cannot be used to produce a situation where the lender is sharing losses under the "1:2:1" rule, or similar.

The value attributed to the renovation cannot reduce the amount owing under the EFM below the original EFM amount. That is, if the value attributed to the renovation exceeds the actual or assessed capital appreciation of the property, then the credit, payment or off set will only be equal to the amount of the capital appreciation. If there has not been any increase in the value of the property or if the value of the property has decreased when the EFM is repaid, the value -53- 5097A-AU-D10 00 attributed to the renovation will not be used to reduce the amount owing under the EFM. Preferably this is implemented by way of calculating an overall Sdifference equal to the value used for purposes of concluding the financial O arrangement less the value used for commencing the financial arrangement less 00 the value attributed to the improvement and returning one of the following outcomes: a credit of zero if the overall difference is negative, 00 a credit of the full value attributed to the improvement if the overall difference is positive, 00 a quantum equal to the deemed concluding value less the deemed Scommencement value if the overall difference is negative and the result of the (,i deemed concluding value less commencement value is positive, or a quantum equal to the improvement plus the overall difference if the overall difference is negative and the result of the concluding value less the commencing value is positive.

1.3.2. The Refinancing Provision The borrower can refinance any senior or "pari-passu" mortgage that ranks ahead of, or equal with, the EFM subject to conditions which include: One of the creditor's approved independent valuers is required to undertake a fair market valuation of the property; The refinancing must be with one of the relevant creditor's approved panel of senior lenders; and The total refinancing must not exceed the greater of the total senior interestbearing debt outstanding at refinancing or, alternatively, a percentage (for example, 85%) of the refinancing valuation less any amount owing on the EFM calculated at the time of refinancing assuming that the property was sold for that percentage of the refinancing valuation, whichever is the greater.

1.3.3. The Prepayment Provision The borrower is able to prepay all, but not part, of the amount owing under the EFM while it is still owning and occupying the property subject to conditions which include: -54- 5097A-AU-D 00 One of the creditor's approved independent valuers is required to undertake a

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fair market valuation of the property as at the date of prepayment; The borrower may have to repay the entire amount owing under the EFM. It O may not therefore be able to partially prepay the amount owing under the EFM, 00 although this could be allowable under the contract; and, most importantly The creditor will not share in any capital losses in the event that the approved independent valuer determines that the value of the borrower's property at the 00 time of discharge is less than its value on the date that the EFM loan amount was originally advanced.

00 SThe binary switch in the EFM contract's cost of capital from a 1:2:1 relation to a 1:2:0 relation in the event that the collateral asset has experienced capital depreciation as at the date of prepayment by the borrower is important to the successful operationalisation of the product. In particular, it protects the creditor against circumstances in which the borrower tries to prepay the EFM to the explicit economic detriment of the creditor situations where the value of the collateral asset has fallen and hence the EFM cost of capital is negative). In the absence of this binary switch, it is possible that EFM borrowers would systematically time their discharge dates to coincide with down turns in the housing market and thus periods of negative collateral asset performance. This would give rise to suboptimal creditor returns.

In another embodiment the borrower is able to either repay all or part of the amount owing under the state-dependent financing arrangement subject to conditions which include: The provider of the finance will not share in capital losses conditional on events including any one of the following: a switch or toggle marker is set to a value or position indicative of an adjusted principal, payment, credit or set off being determined in the event of election of early pre-payment or default by the financee or mortgagor; a repayment date is earlier than pre-determined repayment dates in the financing contract; a repayment is to occur independent of a sale of the collateral, other than at completion of the term of said finance; 5097A-AU-D0 00 a repayment is to occur as a result of default under the financing 0 contract; or a repayment (which is not a prepayment) prior to a specified date or O passage of time for which depreciation sharing will occur.

00 The amount owing under the financing arrangement in the circumstances where one or more conditions under which the provider of finance will not share in capital losses prevails is determined in accordance with one or more methods 00 which include: If the final value of the collateral for purposes of concluding, or 00 forming part of the basis for concluding the financing arrangement (final Svalue) is less than the initial value of the collateral for purposes of commencing the financing arrangement (initial value), the depreciation share percentage, Z, is set at zero and the value of the adjusted principal is calculated by subtracting from the principal the reset Z percentage multiplied by the result of the difference between the final value and the initial value (see above for mechanics if final value greater than initial value); Calculating the repayment amount dependent on the maximum of the initial value and final value; Calculating the repayment amount dependent on determining whether the final value is less than the initial value and if so determining the repayment amount based on the initial value; Calculating the repayment amount dependent on determining whether the final value is less than the initial value and if so determining the repayment as the principal; or Calculating the repayment amount dependent on setting any previously calculated depreciation sharing amount to zero or any downward adjusted principal amount to the initial principal.

1.3.4. The As Is or Good Repair Provision The borrower's obligations in relation to the mortgaged collateral may be subject to one or more of the following conditions: -56- 5097A-AU-DIO 00 The mortgaged property must be maintained in good repair or no worse

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Ocondition than the property was in when the financial arrangement was entered into; O To the extent that an improvement has been undertaken, the mortgaged property 0 must be maintained in no worse condition than the property was in when the property was inspected and valued at completion of the improvement for the Opurposes of determining a improvement credit under the improvement 00 provision; In the event the creditor determines that the property has not been maintained in 0 a state equal to that when the financial arrangement was entered into, the creditor may at its absolute discretion add to the value of the property determined by a sale or valuation for the purposes of concluding the financial arrangement an amount which when added to such value equates to the value the creditor reasonably believes the property would have achieved if the property had been maintained in a condition no worse than when the financial arrangement was entered into. The value reflecting that which would have been achieved if the property had been maintained in a condition no worse than when the financial arrangement was entered into will be the value used by the creditor for the purposes of calculating the appreciation or depreciation sharing and for concluding the financial arrangement; In the event the creditor determines that the property is not in good repair, the creditor may at its absolute discretion add to the value of the property determined by a sale or valuation for the purposes of concluding the financial arrangement an amount which when added to such value equates to the value the creditor reasonably believes the property would have had achieved if the property had been maintained in good repair. The value reflecting that which would have been achieved if the property had been maintained in good repair will be the value used by the creditor for the purposes of calculating the appreciation or depreciation sharing and for concluding the financial arrangement; or In the event the creditor determines that the property has either not been maintained in a state equal to that when the financial arrangement was entered into or in good repair, the creditor may at its absolute discretion determine the 57 5097A-AU-DIO0 0 value reflecting that which would have had been achieved if the property had

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Obeen maintained in a condition no worse than when the financial arrangement was entered into will be the value used by the creditor for the purposes of O calculating the appreciation or depreciation sharing and for concluding the 00 financial arrangement; 0 The creditor may, at the expense of the borrower, undertake maintenance required to ensure the property is in good repair or maintained in its "as is" 00 1 condition prior to sale or valuation.

OThe "as is" or "good repair" provision is important to the successful operationalisation 00 of the product and the protection of the creditor against borrower gaming. This is particularly so to the extent the EFM is repaid while the borrower remains living in the property as opposed to settling the EFM as part of a sale of the property. Given that the borrower shares in capital appreciation, in the event the property is sold the borrower has an incentive to maximize the value of the property, however, if the EFM is repaid while the borrower is still living the property, the borrower has an incentive to minimize the value of the property as this reduces the amount owing under the EFM contract. Most property agents advising a home owner on how to maximize the value of their property will highlight the importance of how the property is presented and how in many cases the cost of presentation is significantly less than the value increase associated with the good presentation. Examples of maintenance items which can be easily rectified a low cost, but, may negatively impact the mindset of a valuer or purchaser of a property and thus negatively impact value, are whether gardens are manicured, internal order and state of cleanliness, condition of paint on painted surfaces and state of repair of fixtures and fittings. In the event the property underlying the EFM has been poorly maintained or deliberately poorly presented, it is therefore important that the provider of EFM finance has the ability at its discretion to add to the determined value or sales value of the property an amount based on its reasonable opinion that would reflect the value had the property been maintained "as is" or in good repair.

1.3.5. The Sale and Prepayment Notice Provision The EFM contract preferably incorporates provisions to enable the provider of the EFM (eg, a lender) to manage or observe the valuation or sales process of the -58- 5097A-AU-D 00 collateral prior to repayment of the EFM. The borrower or finance recipients

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Sobligations in relation to the mortgaged collateral may be subject to one or more conditions which preferably include: O To prepay, the borrower must give the lender at least 1 months notice of their 00 intention to prepay and the date on which they intend to prepay; 0 The borrower must consult with the lender before they sell (that is, enter into a Sbinding sale contract as opposed simply settle a sale) the property. This allows 00 the lender to discuss with the borrower various procedures, rights, and Oobligations under this mortgage, including how the property's appraised value is 00 calculated. In selling, the borrower must take reasonable steps to achieve the fair Omarket value for the property at the time of the sale; The borrower's notification to, or consultation with, the mortgagee before they sell must allow sufficient time for an inspection of the property, the ordering and conducting of a valuation and a review of the planned sale process; and Following notice or consultation to sell the property or otherwise repay the EFM, in the event the mortgagee determines that the property has not been maintained in good repair (or has not been maintained in a state equal to that when the financial arrangement was entered into) the mortgagee has the right, at the borrower's cost, to order works to rectify such state prior to the property being offered for sale (and in doing so not unreasonably defer the date when such property can be offered for sale) or valued; Failure by the borrower to provide notification of intention to sell the property or otherwise repay the EFM (which may be within a stipulated time of such intention) will constitute default under the financial arrangement and result in associated penalties (if any); and In the event the property has been maintained in good repair or in a state equal to that when the financial arrangement was entered into, the mortgagee may exercise a right to order minor or highly cosmetic works for purposes of sale or valuation presentation.

The "sale and prepayment notice" provision is an important feature distinguishing the EFM from traditional mortgages. Given the EFM finance provider's return is critically linked to the valuation or sale price of the property at the time of conclusion -59- 5097A-AU-DIO 0 00 of the finance arrangement, mechanisms are required to allow the creditor to protect 0 Sor manage its interests in the valuation or sale of the property while at the same time ensuring borrower communication to allow the borrower to best manage their interests O in the property and rights and obligations under the finance contract. An added benefit 00 of the notification process is ensuring that the borrower relationship is well managed 0 so as to mitigate borrower complaints.

0 0In the case of a traditional mortgage, there is no mortgagee requirement that the Oborrower notify or consult with the mortgagee prior to undertaking the process of 00 selling the mortgaged property or prepaying the mortgage. If a borrower needs the Smortgage released over the property as part of a sale settlement, the traditional process is simply one of the borrower requesting or applying for the mortgagee to discharge the mortgage over the title to allow the title to change hands or to become unencumbered. To the extent a traditional mortgagee requires a passage of time as part of the mortgage discharge process (as opposed to the property sale process) this is purely to provide it time to process the discharge request, calculate the discharge payment, arrange a time to attend settlement of a sale, or in some cases allow client retention teams to contact the borrower for future business. While formal notice of a borrower's intent to sell a mortgaged property is not required by the mortgagee, many mortgagees do become aware of the sale process as the details of the mortgage are often requested of the mortgagee for inclusion in a contract of sale.

The importance of the "sale and prepayment notice" provision is highlighted by the following: While the EFM finance provider has the right to rely on a valuation of the property as opposed to the property sale price for purposes of determining the amount to be repaid under the EFM contract, valuers are usually averse to assigning a value to a property which differs from that contained in a recent contract of sale. In fact, in most cases, to the extent that property appears to have been on the market for what the valuer considers a reasonable period of time, the valuer will simply accept the contract of sale as the correct value of the property.

If the valuer has not inspected the property prior to the contract of sale being entered into, the valuer has no ability to understand or question the sale process 5097A-AU-D 00 or the presentation of the property which resulted in a given sale price. It is 0 therefore clear that in order to obtain an unbiased, objective and independent view on value, the valuation needs to be conducted immediately prior to sale, o not after; 00 While the "as is or good repair" provision acts to protect the EFM provider's interests, its implementation after a sale or valuation may raise concerns by the borrower as to the accuracy or subjectiveness of the valuation impact. Through 00 the notification provision the EFM provider has the ability to inspect the property and if unsatisfied with the state of the property, either provide the 00 borrower an opportunity to correct the state of the property or enforce the Scorrection prior to valuation or sale. Therefore, through the combined operation of the notification and "as is or good repair" provisions the uncertainty associated with the valuation impact of the "as is or good repair" provision in isolation is effectively removed; Given that many users of an EFM may not have sold a property in the past, or in any case will not be expert in the ideal sales approach to maximize the sale value of the property, the consultation requirements as part of the notification provision allows the EFM provider to outline the key considerations the borrower should have regard for when selling. The independent valuation of the property prior to sale should also provide valuable expectation setting guidance; and By knowing the property is on the market, the EFM provider has an ability to track the sales process online or through advertising media. This assists in monitoring fraud or non-arms length sales.

More specific details on the mechanics of all of the above provisions are provided in Annexure 3, which contains a sample of the full EFM contract of the preferred embodiment.

1.4 Priority Agreements Wherever there is a mortgage that ranks ahead of the EFM, one feature of the arrangements disclosed herein is an agreement between the EFM creditor and any other independent creditors that have supplied finance to the borrower in conjunction -61 5097A-AU-D 0 00 with the EFM, which agreement regulates the respective rights of the two parties. So

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far as practicable, the EFM creditor will always seek to secure an agreement that will Sprotect its rights, including by placing a cap on the priority of any senior creditor (i.e.

O a supplier of senior ranking interest-bearing mortgage that has been bundled together 00 with the EFM).

C2. The Target Investment System ("TIS" 100) 00 C The Overall System's 600 modular chain of integrated technologies begins with the TIS 100. In its most fundamental embodiment, the TIS 100 is a system that uses 00oO sophisticated investment algorithms to manipulate core data that it extracts Selectronically from the IID 102 (where that data was originally inputted into the lID 102 on the basis of information supplied by the IIPs 101) to continuously generate the "idealised" or target investment pool characteristics that it electronically outputs to the TID 112. This electronic output will typically comprise a matrix of economic preferences in a spreadsheet-like format that describe the target portfolio's attributes to a very high degree of quantitative resolution. For example, the TIS' 100 output can quantify the precise target portfolio weights to the state-dependent financing contracts EFMs) right down to very small geographic units such as municipalities, while at the same time stipulating the maximum and minimum acceptable EFM investment thresholds subject to, say, both the geographic unit and dwelling type, amongst other things. After receiving a transmission from the TIS 100, the TID 112 stores this data in its memory bank, which can then be electronically extracted by the AOS 200 in real-time for the purposes of processing its own decision-rules.

The raw economic and financial data that is continuously inputted into the IID 102 quoted listed and unlisted pool valuations or median property prices for postcodes around Australia) is collected either manually via physical meetings with IIP's 101, or gathered electronically through an integrated Internet- or other computerbased network linking the Overall System 600 with the IIPs a Bloomberg terminal or real-time feeds from property information providers). Amongst other constituents, the IIPs can include: potential investors in the EFM pools; (ii) the SM; (iii) UCPs 211; (iv) investors in existing EFM pools; and direct data dissemination suppliers.

-62- 5097A-AU-D 00 Potential Investors 0 The nature of the information entered by potential investors into the lID 102 can require that they make preliminary choices as to the portfolio characteristics that they

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O would prefer. For example, the IID 102 enables them to select: "passive" EFM 00 portfolio exposures that supply well-diversified holdings of real estate assets that mirror the performance of the wider property market; or more "active" EFM portfolio exposures that will result in the TIS 100 generating aggressive investment 00 targets that yield higher raw returns, albeit with commensurately higher risk.

Prospective investors can also state their preferred dollar value commitment to any 00 given EFM pool, which can have implications for the volume of assets the AOS 200 chooses to accept or reject. In this context, the IID 102 has the ability to store both indicative non-binding) and legally binding orders in relation to the prospective investors' monetary exposure to any given EFM pool.

The provision of passive investment services is a traditionally less expensive undertaking than the cost associated with supplying more sophisticated active investment strategies, and the investors' selection in this regard will have an impact on the indicative fees quoted to them via the IID at the completion of preference inputting process. It should be emphasised that the TIS 100 has the ability to generate target EFM portfolios that are tailored specifically to individual investors such as pension plans (where these investors are able to commit sufficiently large amounts of capital to warrant such tailoring), or to simply aggregate the inputted investor preferences that have been stored in the IID 102 and compute the best possible portfolio outcome that satisfies the largest number of potential investors. The former tailored alternative is often referred to in the investment industry as a "specialised mandate" in which portfolio managers will invest their larger clients' capital on an individual, non-pooled basis such that the strategy they deploy perfectly matches with the client's bespoke requirements.

To illustrate the potential specificity of the EFM pool management options outlined above, the TIS 100 can offer a range of"passive" portfolio construction methodologies to investors via the IID 102: -63 5097A-AU-D 00 EFM investment pools that are either value- or volume-weighted by the 0 geographic location of the underlying residential properties state-by-state, city-by-city, or post-code-by-post-code, depending on the granularity of the O geographic delineations that the TIS 100 wishes to make). In this manner, the 00 target portfolio generated by the TIS 100 has EFM weights that reflect the value- or volume-weighted distribution (where volume can be defined by either the absolute number of properties or the transactional liquidity of those 00 properties) of residential real estate across Australia according to the relevant geographic identifiers. For example, if, say, 40% of all residential properties 00 were located on a value basis the total number of dwellings multiplied by Sthe current price of those dwellings) in Sydney, then the TIS 100 produces a target EFM weight for Sydney of 40%, subject to upper and lower bound tolerance thresholds. These tolerance thresholds are in turn paramaterised via randomised statistical simulations using a Monte Carlo method) undertaken by the TIS 100 to determine what variations from the target portfolio weights the EFM pool could accommodate before there was a material change in its performance; EFM investment pools that are value- or volume-weighted by both dwelling type and geography. For example, where investors want to ensure that they both have the right geographic exposures, and the right mix of properties. In this case, the TIS 100 quantifies the value-weighted distribution of all dwelling types subject to their location, and hence provides two-dimensional target portfolio weights that specify both the required geographic and dwelling type capital allocations.

EFM investment pools that are value- or volume-weighted by dwelling type, geographic location, and, for example, the contemporaneous consumer cohorts.

This represents an even higher level of portfolio construction resolution, whereby the TIS 100 produces three-dimensional value- or volume-weighted portfolio construction targets based on the distribution of all dwelling types subject to their location, and the types of consumers that occupy those properties first time buyers, upgraders and retirees).

-64- 5097A-AU-DIO0 00 The objective of the passive TIS 100 weighting systems identified above is simply to provide investors with a portfolio of EFMs that most closely approximates the characteristics of the broader residential real estate market and hence minimises the

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O so-called "tracking error", which is a metric used in the funds management industry to 00 quantify the divergence of a passive portfolio from its chosen asset-class benchmark.

Detailed information explaining each sub-option is supplied in person, over the telephone, or via the relevant EFM pool order page on the IID 102 computer-based 00 C interface.

00 The indicative portfolio management fees quoted by the TIS 100 through the IID 102 Sfor the provision of such investment services are dependent on the choices made.

(,i Upon completion of each investor's initial "portfolio request", a message is sent via email to the investor providing a preliminary outline of the proposed portfolio construction methodology and management fee structure.

Potential investors who wish to acquire interests in active EFM pools are required to submit more detailed information to the IID 102. These participants can choose one or more of the following services, the implementation of which is carefully managed by the TIS 100 and AOS 200 as detailed hereafter (the following list is not intended to be exhaustive): The investor 191 transmits to the TIS 100 through the IID 102 their geographic portfolio construction preferences with higher and lower weights to certain capital cities); The investor 191 transmits to the TIS 100 through the IID 102 their dwelling type portfolio construction preferences with higher and lower weights to types of properties, such as detached homes); The investor 191 transmits through the IID 102 their portfolio construction preferences based on a variety of other distinguishing consumer- and propertyrelated characteristics including, but not limited to, the properties' size, the properties' land-to-dwelling ratio, the properties' number of bedrooms, the properties' number of bathrooms, the occupier's age, income, credit history or cohort first-time buyer, existing owner, or retiree); 5097A-AU-D10 00 The investor 191 transmits to the TIS 100 through the lID 102 their preference 0 that the Overall System 600 seeks to minimise the EFM pool's portfolio risk expected future volatility) subject to the investors' pre-specified preferred

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O level of return; 00 The investor 191 transmits to the TIS 100 through the IID 102 their preference that the Overall System 600 seeks to maximise the EFM pool's portfolio return subject to the investors' pre-specified preferred level of risk; 00oO The investor 191 transmits to the TIS 100 through the IID 102 information with respect to its existing portfolio allocations to, say, stocks, bonds, cash and other 00 kinds of real estate commercial or industrial), and requests that Overall SSystem 600 optimises its total portfolio holdings on a so-called "mean-variance basis" by adding to their portfolio a mean-variance "efficient" exposure to EFMs (whereby the investor's acceptable EFM pool allocation can be restricted by maximum upper or lower bounds determined by their own internal investment mandate, or, in other circumstances, their allocation is unrestricted), and subject to the investor's preferred total portfolio level of risk or return (i.e.

across all their asset-class holdings) along the lines of the methodologies discussed in points and above; or, The investor 191 transmits to the TIS 100 through the IID 102 their preference that the Overall System 600 constructs the EFM portfolios in accordance with the TIS' 100 proprietary investment methodologies, the precise mechanics of which are confidential and will not be disclosed to the investor; Any combination of one or more of the above.

The objective of the active TIS 100 portfolio construction systems outlined above is to engineer EFM exposures that most closely approximate the investors' communicated preferences. Detailed information explaining each sub-option is supplied in person, over the telephone, or via the relevant EFM pool order page on the IID 102 computerbased interface.

The indicative portfolio management fees quoted by the TIS 100 through the IID 102 for the provision of such investment services are dependent on the choices made.

Upon completion of each investor's initial "portfolio request", a message is sent via -66- 5097A-AU-D10 00 email to the investor providing a preliminary outline of the proposed portfolio

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construction methodology and management fee structure.

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O At this juncture of the process, prospective investors can also be furnished with the 00 ability to indicate a variety of other preferences with respect to further portfolio enhancements and the ongoing management of their committed capital. These additions, the provision of which is identical in method to those outlined above, 00 \include, but are not limited to, the following: Whether the investor has either absolute or relative taxation preferences for 00 income rather than capital gains, or vice versa (in most cases provided by simply Sstating the relevant effective rate of tax for each based on the investor's personal circumstances); Whether the investor, other than for taxation reasons, has a preference for returns in the form of yield cash distributions from the EFM pool) or capital appreciation and the nature of any such preference; Whether based on points and above, and other potential considerations, the investor would like to have the income and capital cash-flow distributions yielded by the EFM pool "reinvested" in the same EFM pool or Overall System 600 managed investment vehicle, or, in the event that this is not the investor's preference, fully distributed to an account of the investor's choosing; and Whether or not the investor would prefer increasingly diversified exposures to EFMs through the regular introduction of new "tranches" of EFMs, thereby increasing the number of assets to which the investor has access via the pool over time.

It should be noted that potential investors 191 who input their preferences into the IID 102 in this manner will have a strong working knowledge of the meaning of the terms used above and the application of these terms to their investment holdings.

The System Manager The SM has the ability to input information into the IID on a discretionary basis.

There are a number of reasons why this should happen in relation to the functions of the Overall System 600 as a whole. For instance, corrective action may need to be -67- 5097A-AU-DIO0 00 taken in the event that the behaviour of the EFM pools is not consistent with the 0 preferences of investors as a consequence of some unintended circumstance that was not previously anticipated by the AMS 500, and hence not catered for by its decision-

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O rules. The electronic communications links between the AMS 500, the IID 102 and 00 the TID 112 in Fig. 2 provide such feedback.

0(ii) The Underwriting Capital Providers (UCPs 211) oO 00 In the event that their services are required, the UCPs 211 supply short-term warehouse funds to enable the distribution of EFMs through the AOS 200 in advance 00 of securitisation by the ASS 300 and ultimate repayment of the UCPs' 211 funds.

SThese agents also have the ability to input their preferences into the IID 102. They can, therefore, exert a strong influence over the TIS' 100 computed targets in order to prevent the origination of EFMs (through the AOS 200) that they are not prepared to hold prior to securitisation. UCPs 211 can also submit both "positive" and "negative" preferences to the IID 102. Positive preferences include the preferred characteristics geographies, dwelling types, consumer cohorts) associated with any underlying EFMs that they would be prepared to warehouse, while negative preferences signal to the TIS 100 EFM attributes that should not be originated through the AOS 200.

Accordingly, negative preferences form an important component of the TID 112, imposing a list of characteristics that cannot flow to the AWD 210.

(iii) Current Investors Current investors are the penultimate category of IIP's 101 that input information into the IID 102. The Overall System 600 administers these transmissions on both a discretionary and automated electronic basis via the AMS 500, which is discussed hereafter. In short, many of the outputs produced by the AMS 500 reflect the results of its automated decision-rule analysis (drawing on data supplied by the AMD 502 and the TID 112), which dynamically monitors differences between the preferences of existing investors and the actual performance of the EFM pools. On the basis of the outcomes of the AMS' 500 decision-rule analysis, it electronically feeds-back new information to the IID 102 to assist in rectifying any unintended portfolio asymmetry found to exist at a given point in time. That is, the AMS 500 provides a feed-back control loop to the IID 102, and hence the TIS 100, the TID 112, and eventually the -68- 5097A-AU-D10 00 AOS 200, to influence the asset-selection rules controlled by the AOS 200 (also 0 discussed hereafter) such that the preferences of investors and the performance of the EFM pool are more closely aligned.

C.)

00 (iv) Direct Data Dissemination Suppliers The final class of IIP's 101 that input information into the IID 102 are the direct data dissemination providers. These entities have electronic connections into the IID 102 00oO that transmit regular batch or real-time informational updates on core data that is of importance to the TIS' 100 portfolio generation procedures. These entities include, 00 but are not limited to, financial market information providers, such as Bloomberg or SReuters, government statistical agencies, credit bureaus and mortgage insurers, and property market information suppliers.

1.1 Indicative TIS 100 Portfolio Generation Procedures As discussed above, the TIS 100 is responsible for electronically computing the target or idealised EFM portfolios that are outputted to the TID 112 and constitute an important input into the AOS' 200 decision making process when it seeks to source EFM assets. The TIS 100 has the capability to generate multiple target portfolios on the basis of information it electronically extracts from the IID 102. These target portfolios relate to both new EFM pools that the need to be constructed to satisfy the preferences of new classes of investors, in addition to target portfolios that the TIS 100 produces for existing EFM pools that are being managed by the AMS 500, and which will influence the characteristics of new tranches of EFMs that are being sourced by the AOS 200 in order to be introduced into those existing EFM pools. In light of the above, the inputs into the TIS 100 and the outputs it produces will depend upon the nature of the target portfolio.

After the TIS 100 electronically extracts the required data from the IID 102, it undertakes a number of key steps continuously through time in order to ensure that the multiple target portfolios contained within the TID 112 are at all times up-to-date.

A non limiting example of the architecture of these steps is set out below.

-69- 5097A-AU-D10 00 Indicative Portfolio Construction Step 1: The TIS 100 aggregates all contemporaneous investment preferences stored in the lID 102. These will include inputted active and passive EFM portfolio requirements in O addition to the so-called "specialist" investment mandates that reflect the portfolio 00 preferences of specific investors.

0Indicative Target Portfolio Construction Step 2: 00 On the basis of the aggregations outlined in Step 1, the TIS 100 quantitatively computes the multiple EFM target portfolios (drawing on additional core economic, 00 financial, demographic and other required data that it electronically extracts from the IID 102) applying the various portfolio optimisation methodologies outlined below such that the target portfolios maximise the "utility" or economic satisfaction of the various classes of investors that have communicated their preferences to the lID 102.

Indicative Target Portfolio Construction Step 3: Having computed the target portfolios' characteristics, the TIS 100 undertakes sophisticated statistical simulations of the impact of a wide range of contrived and randomised deviations from these target estimates and determines the influence of such on the portfolios' expected performance. After completing these simulations, the TIS 100 determines the maximum and minimum acceptable portfolio tolerance thresholds to a series of AOS 200 controlled attributes the pools' exposures to different geographic regions, dwelling types, and consumer characteristics). An example of the computer programming code used to conduct such portfolio simulations is contained in Annexure 1.

Indicative Target Portfolio Construction Step 4: The TIS 100 electronically outputs to the TID 112 the specific characteristics of the target EFM pools and the acceptable tolerance thresholds in the form of very detailed matrices that quantify to a high degree of resolution the preferred attributes of the EFM pools. An example of TIS 100 target portfolio output is contained in Annexure 2.

5097A-AU-D10 00 The TIS 100 can iterate through Steps 1 and 4 on a very rapid basis, and thereby 0 provide intra-day updates to the TID 112, if required.

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Q As discussed above, the TIS 100 utilises many sophisticated algorithms in order to 00 compute the target EFM portfolio characteristics that most accurately approximate the preferences of investors. In the next section, a number of representative specific portfolio construction methodologies are disclosed. These are employed by the TIS 00 100 to compute the target portfolio outputs that it transmits to the TID 112 based on inputs supplied by the IID 102 00 SThe TIS' 100 one-, two-, and three-dimensional value- and volume-weighted passive portfolio construction processes discussed previously typically rely on estimates of the "price" of the assets that comprise the portfolios. However, given that the collateral assets underlying the EFM arrangements are usually very illiquid they are individually bought and sold on an infrequent basis), a dependable proxy for their price at any point in time can be very difficult to obtain. When constructing passive portfolios the TIS 100 therefore harnesses a number of different proxies for the price of the individual assets in any given jurisdiction (referred to hereafter as a Statistical Local Area or Amongst other metrics, these measures include: The asset's last quarter median price; (ii) The asset's last four quarter average median price; and, (iii) The asset's last four quarter average volume-weighted median price.

Subject to the three price disclosed proxies above, the TIS 100 can construct passive value-weighted EFM portfolio estimates using the following formulae: Median Price,,, X Total DwellingsS,,,L, WSlA,

N

F (Median Price,,,s X Total Dwellings 2 s)

SLA,

-71 5097A-AU-D 00 0 Median Price S- X Total Dwellings2.,,s,, (N n O N Median Price,s,, 00n e t X Total Dwellings 0 0 ,,ss Median Price r.s, X Salest.s4, 0 j X Total Dwellings,,o,s4, 1 Salest,SLA, 00 Median Price X SalesTg 0t=s n X Total Dwellingszoo,.sa, s u, ESalests,, where Median Price is the median price of SLAI, in time period t is either of the three price proxies outlined earlier; Total Dwellings2ool can defined as the sum of freestanding houses, semi-detached homes and terraces, units or flats, and houses or units attached to other buildings in the year 2001; and Sales is the number of dwellings sold in SLA,, in time period t.

The TIS 100 is capable of producing a number of different "active" portfolio construction processes. One alternative is for the TIS 100 to ignore the investors' other asset holdings to stocks, bonds and cash) and to simply optimise the EFM pools' target weights based on the risk or return attributes of the underlying assets.

This can involve a wide variety of EFM-weighting strategies based on the TIS' 100 expectations of the future performance of certain geographies, asset types, and consumer cohorts, amongst other things. Consequently, these methodologies are likely to give rise to very different target portfolio outcomes in comparison to the passive techniques discussed previously.

Another more nuanced portfolio construction option involves the investor transmitting to the IID 102 information with respect to its existing asset exposures to stocks, bonds, cash and (commercial and industrial) property), which the investor updates from time to time, and the TIS 100 subsequently optimises the investor's entire portfolio holding including all asset-classes) with the addition of a pool of EFM -72- 5097A-AU-D 00 assets, subject to the investor's preferences with respect to either risk or return. In this manner, the TIS 100 can provide the investor with a "whole of wealth" asset-planning Sservice, without necessarily managing the investor's direct allocations to the non- O EFM asset-classes.

oO 00 More specific illustrations of the TIS' 100 portfolio optimisation capabilities are disclosed below. These procedures form but one part of the TIS' 100 suite of 00 algorithms and, subject to the requirements of investors, can be used to drive the target outputs that are transmitted to the TID 112. It is important to note here that the 00 TIS' 100 full range of portfolio generation procedures encompass even more complex Smethodologies involving quite advanced functionalities neural networks) and the material discussed herein should in no way limit the perceived scope of the TIS 100's activities. The nature of the actions that the TIS' 100 undertakes also needs to be contextualised against its preference aggregation and specialised mandate capacities (particularly in the case of the former, whereby the TIS 100 must first determine what portfolio construction technique is most likely to maximise the utility of the largest number of pooled investors).

Stand-alone TIS 100 Portfolio Optimisation with respect to Return Under each stand-alone TIS 100 portfolio optimisation option the investor 191 is not required to transmit to the lID 102 any additional information regarding their existing asset holdings. As such, the TIS 100 optimises the EFM portfolio as if it were the only asset held by the investor.

TIS 100 optimisations typically proceed by creating an objective mathematical function that is either maximised or minimised and then specify any constraints to which the objective function will be subject. These calculations are all performed by statistical applications embedded within the TIS 100.

To illustrate by way of example, assume the investor has communicated to the lID 102 an intention to secure a specialist investment mandate one in which the target EFM pool produced by the TIS 100 is tailored specifically to the investor's preferences) comprising an $X capital commitment. Assume further that the investor -73 5097A-AU-D10 00 has also inputted a preference for an expected return on its investment Y% higher

O

Sthan, say, the performance that it could expect to realise on a passive portfolio of EFMs. After extracting this information from the IID 102 and undertaking its O portfolio optimisation procedures, the TIS 100 is able to communicate to the investor 00 via the IID 102 the EFM pool's target portfolio characteristics comprising specific weights to a range of asset-level attributes, such as various geographies and 0dwelling types) in addition to the portfolio's expected risk profile, assuming that the 00 0 requested return is in fact achievable. Of course, this data is also transmitted to the STID 112 if the investor agrees to proceed with the transaction. The indicative portfolio 00 construction techniques upon which this TIS 100 generated information is based are 0set out in the formulae below.

The objective function under option is to minimise the EFM portfolio's risk subject to the investor's desired nominal portfolio return 12% per annum), and any other constraints as illustrated below: Minimise -wwjo',, by choosing wi (i 1, n) i,j=1 Subject to the following constraints: E(r) i=1 1 i=1 (Optional) w, 0 where w, are the n percentage portfolio weights to each EFM or group of EFMs (e.g.

the TIS 100 can optimise using state-level geographic units, which form the basis for the portfolio's asset inputs); n is the number of EFMs or number of groups of similar EFMs; oa are the expected statistical correlations of returns between each EFM or group of EFMs; r, are the expected returns attributable to each EFM or group of EFMs; and E(r) is the expected portfolio level return.

-74- 5097A-AU-D 00 The optimisation problem outlined above is solved by the TIS 100. In the event 0 constraint is not necessary, the TIS 100 processes the problem using Lagrangian Smathematics to solve for the n unknown variables the weight allocations to each O individual EFM or group of EFMs). In the event constraint is necessary, the TIS 00 100 solves the problem using quadratic programming techniques. These capabilities are embedded within the TIS' 100 statistical applications.

00 Equation above is the TIS' 100 formula for the expected volatility of the EFM portfolio. The ai's can be inputted into the equation by the TIS 100 automatically.

00 Equation states that the EFM portfolio's return must be set equal to the investor's Spreferred target. Again the ri's can be inputted automatically. Equation simply states that the weights must add to 100% (that is, all capital must be allocated to EFMs in this stand-alone portfolio optimisation example). Inequality is necessary in the event that there is an inability to take "short" positions in relation to EFMs, which is likely to be the case. A short position refers to the situation where an investor sells an asset before owning it (usually by borrowing that asset under an agreement to pay it back later) and then buys that same asset back in the future. It is the direct opposite (in an economic sense) of buying an asset in the ordinary course since the investor profits under a short sale when the price of the asset falls (rather than rises). It is desirable to provide such a facility to investors as derivative markets based on underlying EFM securities develop. In this preliminary case, inequality is a necessary constraint on the optimisation process.

Stand-alone Optimisation with respect to Risk The TIS' 100 task in option is similar to that outlined above except that the objective function and constraints are altered slightly. The actual methodology the TIS' 100 uses to determine the target portfolio weights is however essentially the same.

In this option, the TIS' 100 objective function is to maximise the portfolio level return not to minimise its risk as above) subject to a desired level of risk, and any other constraints as illustrated below: 5097A-AU-D10 Sn 0 Maximise w,r, by choosing wi (i 1, n) .=l 00 0 w,wjc, E(a) j=1 0 0 w, =1 00 0 (Optional) w, 0 where all the symbols have the same interpretation as above and E(a) represents the expected volatility of the portfolio defined in precisely the same fashion as it was in the objective function in immediately above.

Multi-Asset-Class Optimisation with respect to Return The TIS' 100 multi-asset-class optimisation procedures are conceptually similar to the stand-alone techniques outlined above except that the weights w, apply to all of the investment classes in the investor's proposed portfolio, including EFMs, and, say, stocks, bonds, cash and other real estate assets (where applicable). In addition, there may be a further constraint whereby the investor (such as a pension plan) stipulates an upper bound on their portfolio allocation to EFMs, as set out below.

The TIS' 100 optimisation problem becomes: n Minimise yw,wjo, by choosing w i (i 1, n) i,j=1 Subject to the following constraints: w,r= E(r) i=1 Ew, 1 i=1 -76- 5097A-AU-D10 00 O (Optional) w, >0 Cl O (Optional) wEFM x 00 Swhere WEFM is the maximum weight attributable to the EFM pool as pre-specified by the investor; w, are the total portfolio weights attributable to the remaining asset- 00 classes stocks, bonds and cash), and all other symbols are as previously defined.

Multi-Asset-Class Optimisation with respect to Risk 00 0In this second multi-asset-class option, the TIS' 100 objective function is modified CN slightly such that it maximises the investor's total portfolio level return it does not minimise its risk as above) subject to a desired level of risk, and any other constraints as illustrated below: n Maximise w,r, by choosing wi (i 1, n) Subject to the following constraints: Zw,wo'.j E(cr) i,j=l w, =1 1=1 (Optional) w, 0 (Optional) w.FM x% where all the symbols have the same interpretation as above.

3. The Asset Origination System ("AOS" 200) Harnessing its electronic connections with the TID 112, AOD 202 and AWD 210, the AOS 200 employs a range of static and dynamic feed-back and feed-forward decision-rules in order to select in real-time EFM applications submitted to it via its distribution agents the MMIPs 201). The AOS' 200 ultimate objective is to source EFM assets that most closely approximate the portfolio preferences stipulated -77- 5097A-AU-D0 00 by the TID 112 (and hence which satisfy the pre-specified portfolio desires of

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investors and, where applicable, UCPs 211, as inputted into the IID 102 and processed Sby the TIS 100). Fig. 4 exemplifies this process. The AOS 200 therefore compares O in real-time the data that it extracts from the AOD 202 (in relation to the application 00 characteristics that the MMIPs 201 input) with the target portfolio attributes and tolerance thresholds provided by the TID 112, and subject to the features of the EFM assets that the AOS 200 has already approved (as stored and extracted from the AWD 00 210), determine whether the submitted applications progress through to settlement.

Based on its static and dynamic decision-rules, the AOS 200 is also responsible for 00 managing the MMIPs' 201 remuneration systems, regulating the EFM contractual Sterms in order to source the appropriate assets and signalling to the MMIPs 201 changes in distribution and marketing needs by consumer cohort and geographic region. As a final task, the AOS 200 must interact with the AWD 201, and, once an EFM application has been approved, administer the transfer of capital from the UCPs 211 to the applicant that has successfully sought finance (via the MMIPs 201). The security that is provided by the applicant in exchange for the finance is the underlying EFM contract, which is, where applicable, held by the UCPs 211 for the duration of the warehouse period until such a time as the contracts are formally securitised (i.e.

they packaged into pools owned by the end-user investors). Of course, in a one-stage capital provision process the end-user investors can hold the assets from the very beginning of the origination cycle.

In addition to static asset evaluation rules, the AOS 200 also utilises dynamic "feedback" and "feed-forward" decision-rules (also known as "process control systems"), which rely on real-time electronic data transmissions from the AOD 202, the TID 112 and the AWD 210, in order to maximise the efficacy of its asset-selection activities.

The AOS' 200 real-time decisioning procedures involve the computation of so-called distribution "errors" deviations in the EFM application or wider portfolio characteristics relative to that which was targeted by the TID 112 through the TIS 100), which are used for the purposes of determining what asset evaluation actions the AOS 200 should take accept, reject, or request more application information).

-78- 5097A-AU-D 00 The two general steps that the AOS 200 undertakes when administering its decisioning systems involves at minimum: Indicative Decisioning Step 1: o After extracting the MMIPs' 201 inputted data from the AOD 202, the AOS 200 oO measures the difference between the applicants' observed attributes (which, in the technical process control lexicon, are known as "signal" or "disturbance" variables) and the AOS' preferred EFM application characteristics based on its 00 real-time assessment of differences between the TID's 112 targets and tolerance thresholds, and the actual approved) application attributes stored in the 00oO AWD 210 (where the output of this latter AOS 200 assessment can be referred Sto as the "set point" variables); and, The AOS 200 then inputs the differentials estimated in between "signal" and the "set point" variables into its decision rules and based on the outcomes of this process undertakes the required actions to either minimise errors observed prior to the actual "settlement" or final approval of the application, which can be classified as a "feed-forward" procedure, or minimise errors drawn from postapproval data, and thereby influence future asset-selection performance, which is a "feed-back" technique.

More specifically, the AOS' 200 "feed-forward" asset-selection processes include the use of any ex ante pre application approval) target portfolio preferences that derive from the TID 112 to screen current EFM applications (albeit that the AOS' 200 simultaneous use of information from both the TID 112 and the AWD 210 encompasses elements of both "feed-forward" and "feed-back" process control); the dynamic modification of the EFM's contractual terms and conditions in real-time in response to application attributes inputted by the MMIPs 201 into the AOD 202 (e.g.

an increase or decrease in the EFM's cost of capital based on the applicant's attributes), which in turn impact on the likelihood of the applicant accepting or rejecting the AOS' 200 proposed terms and conditions; ex ante MMIP 201 remuneration strategies structured to maximise the probability of the AOS' 200 agents sourcing applications that most closely fit investors' portfolio requirements; and the calibration of the content, structure and cost of EFM marketing programmes in order -79- 5097A-AU-D 00 to influence future EFM application patterns (all of which are known as "manipulated" variables).

O By way of contrast, AOS 200 "feed-back" asset-selection processes include any ex 00 post post application approval) changes to the EFM's terms and conditions, MMIP 201 remuneration systems, the content, structure and cost of EFM marketing programmes, and the AOS' real-time decisioning outcomes (which will be in part a 00 consequence of ex post data collected from the AWD 210) that are attributable to the characteristics of approved EFM applications, where the latter must have deviated 00 from preferences produced by the TID 112. In such events, the AOS' 200 process Scontrol system computes the differences between the target and observed variables and undertakes the appropriate asset-selection actions. This involves accepting or rejecting an application in real-time, or electronically transmitting information directly back to the IID 102 in order to effect changes to the TIS' 100 outputs and hence the data stored in the TID 112.

All of the AOS 200 steps above are undertaken on either a batch or real-time basis by an integrated computer system that has been designed to manage advanced process control technology.

In summary, the AOS 200 uses its direct electronic links with the TID112, AOD 202, and AWD 210 in combination with its static and dynamic feed-back and feed-forward decision-rules to minimise fluctuations between the target EFM portfolio characteristics generated by the TIS 100 and the actual EFM applications that are approved. Practically speaking, this involves several subsidiary processes, including, Extracting the MMIPs' 201 inputted application data and processing it against the AOS' 200 simple static rules, and then subsequently against more sophisticated dynamic rules that involve comparisons with the target portfolio characteristics contained within the TID 112 and the attributes of previously approved applications held in the AWD 210; Transmitting signals to the MMIPs 201 to adjust the content, structure and cost of their EFM marketing programmes to regulate EFM demand by geography and consumer cohort; 5097A-AU-D 00 Modifying the EFM contracts' terms and conditions on a batch basis and in real- 0 time such that approved applications most closely match the preferences of investors, as inputted into the IID 102; O Inputting information (oftentimes reflecting asset-selection errors) back into the 0 lID 102 so as to influence the outputs produced by the TIS 100 and hence the data stored in the TID 112; Dynamically managing the MMIPs' 201 remuneration system such that they 00 have strongest possible incentive to source EFMs applications that satisfy the expectations of the TID 112 while also continuously calibrating the MMIPs' 00 201 remuneration parameters though time in response to their observed Sperformance; and, Settling EFM transactions by transferring capital from the UCPs 211 in exchange for security the mortgage contracts), which represent the legal embodiment of the end-user investors' claims over the underlying collateral assets.

The sampling of AOS 200 procedures outlined above will now be examined in more detail and henceforth known as AOS Processes 200/1-200/6.

2.1 AOS Process 200/1 The information stored in the AOD 202 supplies the AOS 200 with access to a very detailed suite of characteristic-based data covering the EFM applicant's profile (e.g.

age, income, current address, credit history, proposed property's location, proposed property type, etc), which has been electronically inputted into the AOD 2020 by the MMIPs 201. The AOS 200 electronically extracts the relevant packets of application data and in real-time begins by processing this data through a series of static decision rules. For example, the initial AOS 200 rules data encompass the following: The applicant's age; The property-type fully detached, semi-detached, or attached); The tenure type freehold vs leasehold); The property's proposed address (this may involve one post-code, or the applicant selecting an SLA that encompasses multiple post-codes); The applicant's current income; -81 5097A-AU-D0 00 Whether the EFM will be a senior, stand-alone mortgage, or subordinated to a

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prime interest-bearing loan; Whether the EFM is being used for a first property purchase, to upgrade from an O existing home, to refinance the household's current mortgage, or to release 00 equity for consumption purposes; The type of prime interest-bearing loan and interest rate a standard variable-rate loan with a 8.5% interest rate), where applicable; 00 The requested loan-to-value ratio on the prime interest-bearing loan, where applicable 50%, 60%, oO The requested LVR on the EFM 10%, 15%, and, S(k) The applicant's minimum deposit expressed as a proportion of the value of the proposed property Note that the rules data outlined above are the bare minimum that the AOS 200 will require in order to complete its processing function. It is also likely that the AOS 200 will receive additional data stipulating whether or not the applicant in question has been approved for the purposes of their prime interest-bearing loan. This data can be received by the AOS in advance of, or subsequent to, processing the rules in order to determine whether the application progresses to the preliminary approval phase.

Once the rules data have been extracted by the AOS 200 from the AOD 202, the various static and dynamic feed-forward and feed-back rules can be processed. By way of illustration, these steps can involve the following automated real-time procedures: Step 1: MMIP 201 inputs EFM application data into AOD 202.

Step 2: AOS 200 identifies the arrival of new application data via a real-time electronic connector. AOS 200 consults rules and subject to their requirements, extracts relevant application data from the AOD 202.

Step 3: AOS processes initial rules. Simple AOS 200 rules include the following: RI: Is the applicant's age over 18? If yes, proceed to next rule.

-82- 5097A-AU-D 00 If no, stop process, store rejection data in the AOD 202 and signal rejection to MMIP 201.

R2: Is the applicant's tenure type freehold or leasehold? O If freehold, proceed to next rule.

0If leasehold, stop process, store rejection data in the AOD 0202 and signal rejection to MMIP 201.

R3: Can the applicant supply the minimum required deposit? 00 If yes, proceed to next rule.

If no, stop process, store rejection data in the AOD 202 Sand signal rejection to MMIP 201.

00 R4: Is the application for a senior, stand-alone EFM, or for an EFM that will be subordinated to a prime interest-bearing N loan? If the application is for a senior, stand-alone EFM, extract additional data from TID 112 and AWD 210 and determine whether any further stand-alone EFMs can be accepted.

If yes, proceed to next rule.

If no, stop process, store rejection data in the AOD 202 and signal rejection to MMIP 201.

If the application is for an EFM that will be subordinated to a prime interest-bearing loan, extract additional data from TID 112 and AWD 210 and determine whether any further subordinated EFMs can be accepted..

If yes, proceed to next rule.

If no, stop process, store rejection data in the AOD 202 and signal rejection to MMIP 201.

Are both the property-type and its geographic location within the acceptable limits as determined by reference to the TID 112 and the AWD 210? If yes, proceed to next rule.

If no, stop process, store rejection data in the AOD 202 and signal rejection to MMIP 201.

Step 5: If the application fails to successfully progress through the rules, the evaluation process stops once the AOS 200 has stored the rejection data in the AOD 202 and electronically transmitted its decision to the MMIP 201.

Step 6: If the application does satisfy all the rules, the AOS 200 transmits its approval decision in real-time to the MMIP 201 while at the same time sending the approved application data to the AWD 210. The -83 5097A-AU-DIO0 00 application has now moved on to the settlement phases of the O processing life-cycle.

The specific methodologies that the AOS 200 uses when automatically processing o some of its more complex feed-back and feed-forward decisioning requirements (as 00 referred to in illustrative Rules 4 and 5 above) are discussed in more detail. In order for the AOS 200 to determine whether an EFM application should be accepted or 00 rejected, an initial computation of differences (or errors) is undertaken between the idealised portfolio characteristics stored in the TID 112 and the previously approved application attributes that are held within AWD 210. The output of this analysis is 00 then processed by the AOS 200 against the data extracted from the AOD 202, which N, will in turn inform the AOS 200 as to what actions are appropriate accept, reject or request more information). In this first series of algorithms, the AOS 200 estimates whether the application information will satisfy the preferences of investors (based on the target and actual attributes stored in the TID 112 and the AWD 210, respectively), assuming that the application in question contains the standard terms and conditions.

In particular, the calculation of the error function, e, will be of the general form, n i=1 where the actual function is based on differences between the target application characteristics (which in turn are a function of the AOS 200 estimated differential between the attributes stored in the TID 112 and the AWD 210, as outlined previously) and the specific attributes that apply to the applicant in question. That is, n E K,(TC, 1=l where i are the 1 to N application characteristics, andf is a function of two variables; the target characteristic, TCi, for attribute, i, and the actual applicant characteristic, Ci.

The assessed characteristics, i, include: the applicant's age, sex, income, marital status, credit history, current address, previous transaction history, income leverage, loan-to-value ratio including the first mortgage, where one exists); the dwelling's -84- 5097A-AU-D10 00 location, type, price, size, land-to-value ratio; and, the MMIP's 201 location, network 0 membership, and prior EFM origination history. K are constants used to weight the relative characteristics, and X is as denoted the upper bound of the sum of acceptable O total divergences, e, from the AOS 200 estimated application preferences, TC.

00 The algorithm's function is utilised in the following fashion. If e X, then the application will be rejected and does not graduate to the next stage of the evaluation 00oO process. This information is communicated to both the AOD 202 and the MMIP 201 that sourced the application in the first place. In order to control for fraudulent 00 behaviour, the AOS 200 also compares all future applicant information against prior Ssubmissions that have been stored by the AOD 202 to ensure that the consumer and/or the MMIP 201 has/have not manipulated key variables income) to increase the probability of the application's success. If on the other hand e X, then the application passes through to the second AOS 200 evaluation stage, which involves the use of a more sophisticated contract calibration algorithm that is responsible for determining the contract's terms and conditions, and the relevant MMIP's 201 compensation.

2.2 AOS 200 Process 200/2 In the event that the application satisfies AOS 200 Process 200/1 and e X, AOS 200 has the capacity to process a more sophisticated round of contract calibration rules that in effect pose the question, "On what specific terms and conditions should this application be approved?". In response to this question, the AOS 200 can optimise the EFM contract's terms and conditions based on the magnitude of the difference between the applicant's observed characteristics and the preferred attributes determined in analysis undertaken in AOS 200 Process 200/1 based on the difference between the target and actual attributes stored in the TID 112 and the AWD 210, respectively. Once the terms and conditions on which the EFM is offered have been computed, the AOS 200 electronically transmits this information to the MMIP 201 by way of a direct real-time connection, which then informs the applicant of the final contract details. Concurrent with this process, AOS 200 transmits the relevant application data to the AOD 202. Even if the applicant decides to reject the EFM 5097A-AU-D10 00 offer, the AOD 202 will have stored a record of the terms and conditions in question 0 0for future evaluative purposes.

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O In order to compute the EFM's exact terms and conditions, the AOS 200 employs an 00 algorithm that involves an additive function across the different characteristic-based variables. The calculation of the EFM's terms and conditions function, P, will then be 0of the form: 00 n (11).

00 SThe algorithm's actual structure will be based on differences between the preferred attributes determined in analysis undertaken in AOS 200 Process 200/1 and those that are observed in the application itself: K,(TC, P (12), i=l where i,fi, TC,, and Ci are as defined above, Ki are new constants used to weight the relative characteristics, and P is the maximum value of the differences.

To ensure that each contract is calibrated appropriately, the most onerous possible terms utilised in equation are once again employed, and if: K, (TC, (13), i=1 the AOS 200 chooses to communicate a multiplicity of contractual possibilities back to the MMIP 201. (Observe that if K, (TC, P then the equation terms i=l are the only contractual opportunity available to the applicant as their characteristics were at the limit of the calculated error bands and AOS 200 requires the most attractive possible terms and conditions in exchange for approving the application.) -86- 5097A-AU-D0 00 These contractual possibilities include (with reference to the description of the EFM 0 contract parameters): a 1-1-1 state-dependent cost of capital; O(b) a -0 state-dependent cost of capital; 0 a 1-1-0 state-dependent cost of capital; 00 a 1-2-1 state-dependent cost of capital; a 1-2-2 state-dependent cost of capital; a 1-2-0 state-dependent cost of capital; 00 a 1-3-1 state-dependent cost of capital; a 1-3-2 state-dependent cost of capital; 00(h) a 1-3-3 state-dependent cost of capital; S(i) a 1-3-0 state-dependent cost of capital; or an x-y-z state-dependent cost of capital in addition to a standard time-dependent interest rate, and all derivations therein.

Either the AOS 200 or the MMIP 201 can then interact iteratively with the applicant (the former is be possible with an Internet-based EFM distribution system in which the consumer interfaces directly with the AOS 200 without the need for any MMIP 201 intermediaries) to determine the applicant's contractual preferences by altering the terms and conditions of the EFM contract until such a point as: n SK,(TCI P(14), i=l which represents the bounded maximisation of the calibration function in which some of the Ci variables have been manipulated by either the MMIP 201 or the AOS 200.

2.3 AOS 200 Process 200/3 In tandem with AOS' 200 assessment in Process 200/1 as to whether applications should be transferred to the contract calibration stage or rejected outright, the AOS 200 also transmits targeted marketing feed-back to the MMIPs 201 as a result of analyses undertaken by the AOS' 200 advertising output algorithm. This algorithm monitors the application sourcing activities of each of the MMIPs 201 relative to the forecasts of the AOS 200, where these expectations are dynamically determined by the AOS 200 over time and conditioned on assumptions regarding the application -87- 5097A-AU-D10 00 sourcing impact of relative rates of advertising spend. The AOS' 200 advertising

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0output algorithm compares the performance of each MMIP 201 with that which was Sforecast, and operates on a percentage tolerance basis as a function of different O application characteristics. The algorithm's two primary computations relate to: (1) 00 the difference between the actual and expected sum or rate of application rejections; and, the difference between the actual and expected sum or rate of application Sapprovals. The sum of rejections is given by: 00 S' T, i=TAP, 00 0 The rate of rejections is simply the sum of rejections over a given time period: 1 R I- T2 i=1 TAP, The change in the rate of rejections is equal to the difference in the rate rejections over time: 1 R, R T3 tk+1...n i=k+1TAP tl.K 1=1 TAP where Ri denote rejections of applications based on each application characteristic, i, that can be influenced by altering the value and composition of advertising; TAP, represents the total number of applications sourced, and Ti are the tolerances associated with the ratio of rejections during any given period. In order to determine whether the application sourcing activities of any MMIP 201 have moved in line with that which was estimated by the AOS 200, the algorithm can undertake computations of the following kind: 1 R S> T 2 n

TAP,

where E(R) is the AOS' 200 expected number of rejections. The introduction of expectations enables the AOS 200 to more closely monitor the performance of each or all MMIPs 201, and can be used in the context of inequalities and immediately above.

-88- 5097A-AU-DIO 00 Variables that can be altered through the use of advertising include the applicant type first time buyers, upgraders, refinancers and retirees), and their age, income and O location. By focussing on these application identifiers, the AOS 200 is (through its 00 associated MMIPs 201) able to exert an influence on the actual approved pool of applications' exposures to certain demographic cohorts, dwelling types and geographic regions.

00 In particular, the output of inequality above informs the AOS 200 of differences in 00 the ratio of rejected applications to the total number received relative to its preferred Stolerance parameter; inequality gives the rates of change in this ratio over time; and inequality provides the first derivative of the rates of change computed in inequality While higher order derivatives can also be utilised, the value extracted from these calculations is a decreasing function of the order of the derivative.

All advertising algorithm outputs outlined above are delivered to the AOD 202 and when the tolerances are greater than the AOS 200 notifies the MMIPs 201 of the results and thereby provides them with information required to adjust their advertising programmes to improve application sourcing.

The insights contained in the approval data (stored within the AOD 202) are materially different to those relating to the rejections, and therefore warrant further explanation. The acceptances data indicate the number and rates of EFM applications that have been approved by the AOS 200 over time. These in turn highlight the types of applicants that are prepared to use EFMs and have proved to be acceptable to the AOS 200. The kinds of algorithms that are used to analyse this data include the following inequalities: n

A

>T

4 (7) ,1 TAPi 1I n A, SA >T 5 (8) t =1 TAP, -89- 5097A-AU-D10 00 1 nA 1 k T Pi (9) k+ n TA, K 1=1A 1 E(A) A, O A T 2 00 tl n i TA P, 0 2.4 AOS 200 Process 200/4 00 Process 200/4 is one of the AOS' 200 feed-back control systems that minimises the Sestimated errors associated with the attributes of the ex post pool of approved EFM 0applications stored in the AWD 210 relative to the investors' ex ante preferences as 00 8originally specified by the TID 112.

As noted previously, the AOS 200 extracts from the AOD 202 what is essentially a mixture of regular and random multi-dimensional data input signals from the MMIPs 201 (random in the sense that it is difficult to predict whether a particular applicant at a given time will be, for example, a first-time buyer, an existing owner, or an elderly home owner; whether they are looking to take out an EFM against a detached house, terrace or unit; and the geographic location of the property in question Sydney, Melbourne, Brisbane, Adelaide and Perth), to name just a few potential parameters.

The estimated differences between the approved application attributes and the characteristics that were requested by the TID 112 are then fed back to the lID 102 by the AOS 200, such that future computations of the TIS 102 can account for the evolving complexion of the actual pool of approved EFM contracts. It is self-evident that this feed-back mechanism is crucial to the ongoing ability of the AOS 200 to optimise its asset-selection activities and satisfy the end-user investors' requirements.

In process system engineering, there are at least five potential methods of feed-back control, which are known as: two position; proportional; proportional plus integral; proportional plus derivative; and proportional plus integral plus derivative. In this context, the AOS' 200 "manipulated variables" include the EFM contract's terms and conditions, the remuneration supplied to the MMIPs 201, the quantum of finance available to each applicant the maximum LVR), and any advertising signals transmitted to the MMIPs 201. Each of the manipulated variables 5097A-AU-D10 00 is used by the AOS 200 for administering the various different control methodologies,

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0examples of which are outlined in time-steps below: 1. In "two position" control, if e A, then X applies, or if e B, Y applies, where O A and B are pre-determined AOS 200parameters, and X and Y are the 0 0 manipulated variables. While this is the simplest form of control, it is also the most rudimentary.

0 2. With "proportional" control, the manipulated variable, is determined by a 00 ratio, Kp, of the error plus a bias value, p where the bias value is the state the manipulated variable is in when there is no error. The error itself is defined as 00 Sthe target value less the actual value of the measured variable, while Kp is the N control ratio applied to the proportional error. This implies: p K,(TC, 3. In "integral" control, the manipulated variable is a ratio of the previous errors (excluding the current error), plus a bias value, p. K, is the control ratio applied to the sum of the previous errors for the integral action, and r denotes the reset time utilized for the integral action the integral control is applied every two weeks to all previous errors). Hence: p, K, ek (16), TI k=1 where the error, e k is equal to TCk Ck and all other variables are as previously defined.

4. In both "proportional and integral" control, the manipulated variable, is a n-1 ratio of all previous errors, ek including the current error, plus a bias k=i value, p. As before, TI is the reset time utilized for the integral action.

Accordingly: At n-I p, Ke, Ki ek (17).

TI k=1 If the AOS 200 utilises the most sophisticated "proportional-integral-derivative" form of control, the manipulated variable, is a ratio of all previous -91 5097A-AU-DIO 0 errors, e plus a proportion of the most recent error change, 0 k=At and the bias value, p KD is the control ratio applied to the most recent error.

O Once again, ro is the reset time utilized for the derivative action. Thus: 00 p, p+ Ke. K 1 ek KD (e (18).

T k=1 A 0oo STo take a simple example of the AOS 200 feed-back control options outlined above, the AOS 200 application error measurements are inputted into its PID system, which 00 OO 0 gives rise to the resultant control actions that are transmitted directly back to the IID CI 102. By way of practical illustration, Table 3 below outlines a PID control function where EFM portfolio's average the target dwelling price is $500,000 (as determined by the TIS 100 and communicated to the TID 112) and the average value of AOS' 200 approved dwellings is less than that which is desired. Table 3 shows that the AOS' 200 estimate of the PID control parameter, p, changes over time based on the errors that it computes. For the sake of simplicity, we suppose that that Tr and r/ are equal to t (which means that At r, 1 and r, At and that Kp, K 1 and Ko equal 1, implying that p 0. These are slightly unrealistic assumptions, given that Kp, Ki and KD may be too large for a system of this nature. Also observe that K 1 dominates the determination of p,.

Table 3 Illustrative AOS 200 Feed-Back Control Case Study n-I At A n Actual Price Error e, en-e,. ek Pn k=1 1 1.000 1 $400,000 $100,000 100,000 4 0.250 2 $300,000 $200,000 $100,000 100,000 400,000 0.200 3 $200,000 $300,000 $100,000 300,000 700,000 7 0.142 4 $300,000 $200,000 $(100,000) 600,000 700,000 0.100 5 $350,000 $150,000 $(50,000) 800,000 900,000 The output from the control algorithm p, is then transmitted by the AOS 200 to the IID 102. In turn, the TIS 100 extracts this information from the IID 102 to determine the target value of the originated dwellings, which it outputs to the TID 112. In this -92- 5097A-AU-D 00 example, as the error becomes larger, the signal to the IID 102 also rises indicating

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O that the target price must increase to ensure that the approved EFM portfolio's average price approximates the original $500,000 set point. With the Kp, Ki, Ko, TD O and ri parameters correctly calibrated, the output p, can be directly added to the target 00 O price or any other manipulated variable, such as the dwelling's location, size or type, to name just a few.

0 O 2.5 AOS 200 Process 200/5

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SIn AOS 200 Process 200/5, the AOS 200 uses a remuneration algorithm to determine 00 O the precise quantum and duration of payments that it makes to the MMIPs 201. In this C1 procedure there are a minimum of two constituent elements to the MMIP's 201 compensation: an upfront charge that is paid by the applicant; and, the ongoing trailing commissions provided by the AServS 300. The primary Process 200/5 computations are undertaken by the AOS 200, with subsidiary computations performed by the AServS 300 over the life of the approved applications. The key factors driving the MMIP's 201 remuneration include: how close the sourced application is to AOS's 200 ex ante preferences as determined with reference to the characteristics stored in the TID 112 and the AWD 210; the historical performance of the MMIP 201 relative to the expectations of the AOS 200; and the investment returns delivered by the EFM over its lifetime.

In order to estimate the MMIP's 201 optimal compensation package, MR, the AOS' 200 uses an algorithm to compute the MMIP's 201 application sourcing performance, and subsequently a remuneration reduction parameter, MRR, which is structured such that the larger the application's divergence from the target criteria, the greater the reduction in the MMIP's 201 remuneration, as given by the following: ZK,(TC, -C,)=MRR (19).

i=1 The AOS 200 defines the MMIP's 201 total compensation as the maximum remuneration less the reduction parameter; viz., MR Max Remuneration MRR. As the AOS 200 inputs historical data on the behaviour of the various MMIPs 201 into the AOD 202, it can calibrate their incentive structures more intelligently by -93- 5097A-AU-D10 00 rewarding past outperformance. Here the end-user investors in the EFM pools will

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0likely be most concerned with at least three variables: the rate of return attributable to each collateral asset dwelling); the duration of EFM repayment O period, which determines the distribution of the pools' cash-flows; and the 00 contribution of each MMIP 201 to the pool's face value the total value of the applications they are responsible for sourcing as a proportion of the total pool value).

SThe difference between each MMIP's 201 performance and that attributable to the 00 0average MMIP 201, to highlight just one benchmark, allows the AOS 200 to estimate Sthe Remuneration Adjustment Factor which is a key input into the MMIP's 00 201 total compensation, using the following base-case algorithm: 0K, (ROR, RORAverage K 2 (Duration, DurationArag

K

3 (Valuation, Valuationvera RAF where ROR denotes the rate of return attributable to the MMIP's 201 EFMs; Duration refers the MMIP's 201 average EFM holding period; and Valuation is the total face value of EFMs that the MMIP 201 has contributed to the pool.

MR (Max Remuneration MRR) x RAF (21) With the MMIP's 201 compensation parameters computed, the AOS 200 multiplies the percentage outputs by the face value of the EFMs to calculate the upfront origination fee paid by the applicant. At the same time, the AOS 200 communicates the trailing metrics determined in equation (21) above to the AServS 300 to allow it to compute the value of the ongoing payments that will need to be made to the MMIPs 201.

2.6 AOS 200 Process 200/6 After completing AOS 200 Processes 200/1 through 200/5, the AOS 200 finalises in real-time the EFM applications' terms and conditions and transmitted this information to the AOD 202, and, ultimately, via the MMIP 201, to the end-user applicant (assuming that the MMIP 201 intermediates between the applicant and the AOS 200).

The AOS 200 also electronically transmits all of the application-specific data to the AWD 210 so that it has a complete record of the attributes of the assets that have been approved. In the context of finalising the transaction, the AOS 200 needs to interface -94- 5097A-AU-D 00 with the MMIP 201 right through to the date of the application settlement, as there may be adjustments to the quantum of funds lent and/or the collateral asset (i.e.

Sproperty) valuation between the time of application approval and the transaction O close. In the event that there are alterations to any of these parameters, the bounded 00 maximisations in AOS 200 Processes 200/1 and 200/2 will be re-run and the results transmitted aback to the AOD 200 and MMIP 201.

oO 0 \On the date of the transaction settlement, the AOS 200 facilitates the transfer of the financial capital by directly communicating information about the quantum of capital 00 that needs to be drawn-down to the AWD 210 and hence the UCPs 211. Upon receipt Sof this data, the UCPs 211 release the funds for transfer to the applicant. Concurrently, the AOS 200 transmits the relevant settlement data to the AOD 202, MMIP 201, and AWD 210. At this point, the AWD 210 has all the information relating to the application characteristics age, income, credit history, marital status, dwelling type, price, size, location etc) and the date on which it was settled. As a final task, the AOS 200 communicates the settlement information to the IID 102, which enables the TIS 100 to refine the TID 112 dynamically through time as the applications are approved. As discussed, this continuous feedback-loop minimises any divergences between the target portfolio characteristics and the actual approved pool of EFM applications by allowing the TIS 100 to adjust its investment preferences with reference to the approved application attributes.

4. The Asset Securitisation System ("ASS" 400) At a time the ASS 400 determines either automatically via pre-specified parameters once a certain number or value of EFMs have been sourced, or a particular period of time has elapsed, as revealed by reference to the AWD 210 and the TID 112), or on a discretionary basis by the SM, the ASS 400 utilises its real-time electronic interfaces with the TID 112 and the AWD 210 to compare the characteristics of the EFMs that have been actually approved with the updated investor preferences contained in the TID 112 (recall that these are being continuously refined over time as new information is inputted into the IID 102). The ASS 400 then processes a series of static and dynamic feed-back and feed-forward decision rules to determine what actions, if any, are required in order to optimise the structure of the 5097A-AU-D 00 investment pool comprising the approved EFMs in a manner that most closely matches the preferences of the end-user investors as stored in the TID 112 (e.g.

attaching different types of financial rights to the EFM pools, restructuring the cash- O flow claims of the underlying EFM contracts (into, for example, their principal and 00oO income components), or reconstituting the pools using various active and passive optimisation procedures (similar to those previously disclosed as part of the TIS 100 targeting methodologies). This also involves the ASS 400 transferring the originated 00oO EFM assets from a warehouse vehicle controlled by the UCPs 211 (who in this scenario would have supplied the AOS 200 with underwriting capital on a relatively 00 short-term, intermediation basis) into the final investment portfolio that is to be Smarketed to third-party investors, or, in the case of a more simple one-stage capital provision process (whereby the original providers of the underwriting capital are the same investors who intend to hold onto the EFM assets over the long-term), simply calibrating the characteristics of the existing investment pool in which the EFM assets have been held for the duration of the AOS' 200 asset-selection process.

For the avoidance of doubt, it should be made clear that as is the case with the IID 102, TID 112, and AOD 202, the AWD 210 is a computerised database connected by way of direct electronic links to the AOS 200 and the ASS 400. As noted previously, the AWD 210 maintains details of all the AOS 200 approved applications that are being held as security by the UCPs 211 (and which were originally sourced by the MMIPs 201). These characteristics are collected by the MMIPs 201 and inputted into the AOD 202 (typically via a web-based interface) as part of the AOS 200 assetselection process. Once approved, the application data is transmitted by the AOS 200 to the AWD 210 for the purpose of aggregation, and, if appropriate, subsequently disaggregation, wherein the EFMs can be repackaged and on-sold to their long-term holders.

The characteristics collected and stored in the AWD 210 include the following: The applicant's age; The property-type fully detached, semi-detached, or attached); The tenure type freehold vs leasehold); The property's address; -96- 5097A-AU-DIO 00 The applicant's current income; 0 The applicant's credit history; Whether the EFM is a senior, stand-alone mortgage, or subordinated to a prime

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O interest-bearing loan; 00 Whether the EFM was used for a first property purchase, to upgrade from an existing home, to refinance the household's current mortgage, or to release equity for consumption purposes; 00 The type of prime interest-bearing loan and interest rate a standard variable-rate loan with a 8.5% interest rate), where applicable; 00 The LVR on the prime interest-bearing loan, where applicable 50%, The LVR on the EFM 10%, 15%, and, The applicant's deposit expressed as a proportion of the value of the proposed property The ASS 400 continually monitors the AWD 210 subject to its assorted decision-rules such as the UCPs' 211 limits stored in the AWD 210 and/or dynamic investor acceptance preferences contained in the TID 112. As soon as the AWD 210 stored characteristics minimum levels of portfolio diversification) reach their acceptable levels, the securitisation processes outlined above commences. Here it is once again worthwhile noting that ASS' 400 final portfolio construction algorithms encompass all of the procedures used by the TIS 100 to generate the idealised portfolio holdings that it outputs to TID 112 based on informational inputs supplied by the IID 102.

Once the securitisation process has been completed, the ASS 400 transfers all of the relevant EFM contract data from the AWD 210 and the Asset Servicing Database ("AServD") 302 onto the Asset Management Database 502. Concurrently, the ASS 400 determines the remuneration of the UCPs 211-in the event that they are holding the EFMs on a short-term intermediation basis-via proceeds realised from the securitisation event.

-97- 5097A-AU-D 00 5. The Asset Servicing System ("ASS" 300)

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The AServS 300 is responsible for all of the underlying contracts' administration requirements during their life, which are in turn outsourced to third-party Asset O Servicing Information Providers ("ASIPs") 301. These demands may involve 00 processing variations to the contract's terms and conditions that are requested by the AMS 500, administering refinancings of the first and subsequent mortgages, events of default, prepayments, renovations to the properties, ongoing management of 00 commissions paid to the MMIPs 201, and the processing of repayment cash flows through to end-user investors in conjunction with the AMD 502. Any data relating to 00 the contract servicing events is communicated by the ASIPs 301 to the AServD 302, Swhich then relays the details onto the AServS 300. In turn, the AServS 300 interfaces with both the AWD 210 during the warehouse period, and the AMD 502 once the contracts have been sold to third-parties. If the AMS 500 decides that it will make adjustments to the EFMs' terms and conditions maturity dates, the capital appreciation claim, the capital depreciation claim, and/or the prepayment provisions), it transmits this information to AServS 300 through the AServD 302, which then executes the instructions. Similarly, if either the AMS 500 or the AOS 200 wishes to make adjustments to the trailing commissions paid to the MMIPs 201, these will be communicated for direct action through the AServD 302 and onto the AServS 300.

The AServD 302 also receives pool valuation information from the AMS 500 which it combines with the MMIP 201 trailing commission information to ensure that the MMIP's 201 can be remunerated based upon a proportion of the ongoing pool valuation.

6. The Asset Management System ("AMS" 500) This component of the Overall System 600 optimises the risk-return profiles of the securitised EFM pools. As discussed, these pools were originally sourced and structured via the AOS 200 and ASS 400 in accordance with the preferences delineated in the TID 112 and are continuously optimised through time to ensure maximum utility to the end investor. In order to accurately measure the performance of each investment pool vis-d-vis initial expectations, and to place appropriate restrictions on what the AMS 500 can, and cannot, do in terms of either changes to the underlying contract terms, or with respect to the complexion of new tranches of assets 98- 5097A-AU-D 00 that are introduced into open-ended funds, an investment mandate (hereafter IM) will

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be designed by the AMS 500 and held by the AMD 502 based on the preferences supplied by the IID 102 and feedback received from the IMIPs 501.

00 The IM imposes constraints on the maximum exposures that the pool can have to any specific geographic region, consumer cohort or dwelling type, and the procedures by which new tranches of assets can be added. It also places precise limits on the nature 00 of the changes that can be made to the consumer's cost of capital (practically encapsulated via the EFM's claim on the collateral asset's prospective price 00 appreciation and depreciation), and the specific circumstances in which such changes Scan be made. Once computed by the AMS 500, the details of the IM are fed into the AMD 502, where the AMS 500 can dynamically interface with the IM and compare its parameters with the relevant secondary market metrics the pool's price, trading volume, volatility, geographic weights, yield etc). To the extent that AMS 500 observes by way of its dynamic decision-rules any material divergences between these parameters, and the differentials exceed the pre-specified thresholds that determine the maximum acceptable limits that are set within the IM, the AMS 500 may have the right to undertake certain corrective actions.

In order to effect these actions, a feedback control mechanism is required to determine the size of the adjustments that must be made. For each pool characteristic that has a performance expectation or target, the AMS 500 controls the system to minimise the error between the target and actual characteristics. Target characteristics include the pool's yield, capital growth, relative performance, total return, trading volume, volatility, correlations, co-integrations, longitudinal diversification and consumer or asset specific attributes. The formula that will govern the feedback control is based on utilising a ratio of current errors, a ratio of historical errors, and the difference between the most current errors. This error feedback control algorithm is similar in nature to those outlined in above and is constituted as follows: p1=p+Kpe +KI ek 1 e (21), 1 k=l At where all symbols have a comparable interpretation to those in equation (18) above.

This formula is used to alter: the targets portfolio attributes that derive from the TID 99- 5097A-AU-D10 00 112 to filter current applicants; the dynamic pricing of the contractual terms and conditions in response to inputted attributes from the MMIPs 201; and ex ante remuneration strategies structured to motivate the MMIPs 201 to issue contracts in

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O accordance with expectations and the advertising programs, all of which have been 00 discussed in detail previously. These adjustments can be based upon calibrating the parameters Kp, K 1 KoD. r and ro for each of the target attributes to ensure that the errors in the controlled variable characteristics are minimized over time. The AMS 00 500 therefore employs a sophisticated model of process control whereby the tuning Sparameter values are determined either theoretically or by a combination of empirical oO and theoretical tuning.

The AMS 500 also uses feed-forward control in which it develops a model of the way the investors' experience in the pool will be altered by either AMS 500 actions or the behaviour of consumers. As an example, if the yield profile in one specific region is not consistent with that which was originally forecast through the TIS 100, the AMS 500 instructs the AServS 300 (indirectly via the AServD 302) to reduce the EFM's cost of capital amongst particular classes of households first time buyers) for a finite period of time so as to stimulate higher trading activity. The key EFM terms and conditions that the AMS 500 can modify as a part of its ongoing portfolio management responsibilities include, but are not limited to, the EFM's cost of capital (ie the X:Y:Z relation discussed previously); maximum term; renovation provision; refinancing provision; prepayment provision; and exit penalties.

Some of the broad portfolio construction and investment management issues that impact on the way in which the AMS 500 functions are now considered.

When investors submitted their initial requirements to the IID 102 (which executes them through interfaces with the cascade of dependent systems), they will have communicated many specific preferences with respect to key portfolio-level characteristics such as active versus passive exposures, the pools' yield profiles, the incidence of their tax liabilities, and longitudinal (or time) diversification as explained above. In turn, these specifications have implications for the current and future structure of the securitised pools. For example, the pools can be closed- or open-end, 100- 5097A-AU-D 00 they can be leveraged by way of issuing debt and/or other specialised financial

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instruments, and they can be restructured into subsidiary securities that more accurately reflect the preferences of secondary-market participants. The primary tax, O yield and diversification considerations are now described with in the context of the 00 types of activities that the AMS 500 is capable of undertaking.

C6.1 Tax Structuring 00 In most jurisdictions there is a broad distinction drawn for taxation purposes between financial gains or losses sourced on capital account, and those sourced on revenue 00oO account. Where differences exist in the treatment of one vis-.-vis the other there are Spotential comparative advantages that exist in much the same way as they do in the context of gains from trade in international macroeconomic theory. Once the initial securitisation of the EFMs has taken place under the ASS 400, there exists the immediate potential for further subdivisions in accordance with the expectations of various tax clienteles as communicated directly through the IID 102, and the provisions made available to the AMS 500 under the IM.

By way of example, take the case of a single EFM. When the underlying home sells, the payoff on the contract will include a component that will accrue to the investor as return of principal and be taken for taxation purposes on capital account (the sum initially lent to the homeowner), as well as a further proportion of the price appreciation or depreciation on the home (depending on the performance of the underlying asset) that will accrue to the investor as income and be taken on revenue account. For a variety of reasons some investors have a relative preference for one form over the other. It is desirable for the AMS 500 to satisfy these preferences with more specific tax structures, and thereby improve the ability of the Overall System 600 to raise larger sums of capital in the investor market and therefore increase the ongoing quantum of funds available to consumers via the AOS 200 so as to alleviate the burdens which most home owners face. The easiest way for the AMS 500 to facilitate this process is to make a further (legal) restructuring of the rights attaching to each EFM by splitting them according to the two sources of financial gain (or loss) outlined immediately above. This is an automated procedure that is acceptable under the IM, and which is available to the AMS 500 in the event that the appropriate -101 5097A-AU-D 00 signals are received from the IID 102. The different sets of financial claims are then 0 structured as entirely separate securities: one that has rights to all returns of principal, and another that has more risky rights to the appreciation or depreciation accruing on

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O the contract. To the extent there are any relative preferences for one over the other, 00oO this allows and encourages a cross-subsidisation that increases the volume of funds that the AOS 200 can make available to consumers.

00 To illustrate via a crude example, whereas Investor 191A might have only been willing to pay $100 for a security that had claims to both sets of financial rights (i.e.

00oO principal, appreciation and depreciation), Investors 191A and 191B together are Swilling to pay $105 in total for the same combined package owing to their relative preferences and circumstances. This makes it easier to raise funds through the Overall System 600, and by doing so brings together these two disparate groups to achieve the objective providing equity capital. The algorithm the AMS 500 uses to give effect to these subsidiary structures is as follows: Consider bundled investment preferences under the TID 112, assume that there are two for present purposes, which are designated A and B. Let the tax rate associated with each be ACGT and BCGT respectively. Similarly let the effective rates of income tax be denoted in a similar fashion AIr and BIT.) If AccrT- BCGTr> X, where X is positive and real, And BIT- ACGT Y, where Y is positive and real, then instructions are sent by the AMS 500 to the AMD 502 to split the security into subsidiary securities as outlined above, Else, if AccrT- BCGT where X' is positive and real, And AIT BIT> where Y' X' Z, Z is positive and real, then instructions are sent by the AMS 500 to the AMD 502 to split the security into subsidiary securities as outlined above.

Else, bypass the process.

After the initial securitisation, any future preferences that are submitted to the IID 102 regarding idealised tax structures in light of regulatory changes) are dynamically 102- 5097A-AU-D 00 reviewed by the AMS 500 and if they satisfy the constraints stipulated by the IM

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while triggering the appropriate thresholds, instructions are transmitted back from the AMS to the IID 102 regarding future pool disaggregation by the ASS 400 on the basis O of these preferences.

00 6.2 Yield Profile The term "yield" is used to refer to cash payments made by the pools or similar 00 investment vehicles to their long-term holders over time (technically, this may described as the cash payment divided by the fund value). Some investors have a 00 preference for higher yields generally, or higher yields at particular times, while other Sinvestors have a preference for the alternative (that is, they would prefer that payments were reinvested by the pool and their returns realised in the form of growth in the value of the pool). Similarly, some investors have a preference for less volatile yields while others prefer specific yields at particular times, perhaps to match other liabilities to which they are subject. Of course, one needs to distinguish yield preferences driven by tax considerations from those yield preferences that are purely motivated by expectations regarding the timing of the future cash receipts.

To give a relatively straightforward example, pension funds paying complying annuities are in obvious need of a steady and predictable stream of cash flows to match the revenues of their investment management businesses with their liabilities to unit holders pensioners). These funds would likely have a preference for stable yields over the life of the investment. By way of contrast, superannuation funds with no immediate liabilities might display a fairly strong preference for little to no yield since cash distributions paid out on the underlying securities (receipts in the hands of the superannuation funds) would need to be reinvested, presumably incurring transaction costs on the way, and not necessarily in an asset class with equivalent performance characteristics. High yields in this context are seen as a significant performance leakage. There are number of ways in which the Overall System 600 can manage these problems, both in the ASS 400 structuring of the pool immediately prior to the securitisation event, and thereafter at the secondary-market portfolio level, in which case the burden of responsibility falls on the AMS 500.

103- 5097A-AU-D 00 Perhaps the most obvious example of matching yield preferences at either of the two junctions is for either the ASS 400 or AMS 500 to provide a straight swap facility (,i between the two parties that have yield preferences at disparate ends of the spectrum O (this action would of course be based on the integrity of the original investor 00 information fed to the ASS 400 or AMS 500 via the lID 102, and any constraints imposed on the AMS to undertake such activities, as determined by the IM). Clearly if 0one investor prefers yield and the other prefers capital gain (for reasons other than 00 taxation) there are gains from trade to be had if the two can arrive at a mutually agreeable price. One way to do this is for the ASS 400 or AMS 500 to engineer a 00 simple transfer by one investor to the other, whereby the investor 191A with yield Spreferences would "acquire" the yield from the other investor 191B in return for (Ni exchanging some of the underlying units of investor 191B in the fund (a "swap"). In terms of codifying whether a yield preference transaction should be undertaken, the following decision steps may be undertaken: If YieldA Yield, X, then offer a dividend for a capital swap to investors 191A and 191B where YieldA and YieldB are the yield preferences for investors 191A and 191B and X is the differential preference tolerance parameter.

For investors who prefer a relatively stable yield over the life of the pool, a reasonably straightforward mechanism to raise the yield in years when it is low is through the introduction of debt (or leverage), which can be paid back when yields are higher.

Once again, the ability of the AMS 500 to execute such intentions is based on any constraints imposed on it by the IM. Assuming that the IM stipulates an acceptable debt-to-equity ratio, there are a variety of forms of debt which the AMS 500 can instruct the ASS 400 to introduce in order to smooth the pool's distributions over time. In each case, the pool effectively borrows from debt providers to pay equity participants in the years when yields are low, and agrees to repay the debt plus interest back later at times when yields are comparatively high. Provided equity investors do not attribute too much risk to the increased leverage, the process of having the AMS 500 and ASS 400 re-engineer the cash flows in a manner more in line with their preferences is significantly value accretive. The formulaic interpretation of the above is: 104- 5097A-AU-DIO 00 If T arg et Yield Actual Yield X where X is the investor tolerance, then 0 Ointroduce debt. The quantum of debt finance to be introduced is bounded by the investment mandate. The target quantum of debt finance to be introduced is O sufficient to ensure the near term Target Yield- Actual Yield 0 00 oO To demonstrate by way of a very simple example, assume that a single pool contains 0only one EFM and it is known that the home underlying this EFM will sell in two 00 years (in a well diversified and statistically large enough pool the capacity to predict _the timing and value of future sales is high). Suppose also that the face value of the 00 0contract on day one is $100. Let us assume that at the end of year 2 the contract is going to return $100 of principal and $20 of appreciation with reasonable certainty. At the end of the year 1 a closed-end pool with no leverage would return zero yield (that is, it would not pay a distribution to the investor at the end of that year). Now consider the following alternative scenarios. At the end of year 1 the pool borrows $5 as debt at the rate of 10% per annum payable in 1 year. It passes the $5 through to the investor as a distribution. At the end of the year 2 the pool pays back $5.50 ($0.50 in interest) and pays the investor the remaining $114.50. It is not difficult to see that the introduction of debt has smoothed the yield over these two years.

Another way in which debt can be introduced into the pools is by simply borrowing on day one and buying more assets. Assuming that the cost of debt is lower than the total return generated by the underlying pool, such an approach increases the expected yield (and capital appreciation) of the pool over its useful life. This procedure, when combined with the mechanism outlined above, can raise and smooth the pool's yield at times when investors have exhibited a preference for such.

A suite of derivative products based on the underlying EFM contracts can also be engineered by the ASS 400 or the AMS 500. In much the same manner as the simple example above, this would allow the cash flows accruing to investors to be structured in a manner that is more sympathetic to their preferences. For example, some investors who do not wish to take the risk on the volatility associated with the yield can enter into a "fixed-for-floating" swap with a third-party institution where the ASS 400 or the AMS 500 provides the intermediating services. That is to say, an external 105 5097A-AU-D10 00 derivative provider is prepared to take the risk associated with fluctuations in yield

C

and pay the underlying investor in the pool (who retains rights to all returns of Sprincipal) a fixed yield per period. Investors who do not wish to take any risk at all O may find it beneficial to enter into a "total return swap". These instruments are well 00 known in financial markets dealing with other underlying assets, but are yet to be developed in relation to financial securities that comprise packaged EFMs. The general economic terms of a total return swap are quite straightforward. One party 00 takes all the risk associated with the return for a price-the return paid to the counterparty (which is generally lower than the expected return, the difference being 00 the premium accruing to the first party who has agreed to bare all the risk).

In summary, the yield preferences of investors are processed by the ASS 400 and AMS 500 through the interface of these systems with the AMD 502, lID 102 and TID 112 in a similar vein to that in which the more efficient tax structures were developed.

However, rather than splitting financial rights as in the case of the tax methods above, new financial claims (such as debt) are added to the pools at various stages in order to accede to the wishes of investors. This can take place immediately prior to the securitisation, in which case the transaction is managed exclusively by the ASS 400, or subsequent to this date, in which case the transaction is motivated by instructions relayed by the AMS 500, subject to any IM constraints.

6.3 Longitudinal Diversification While the diversification benefits accruing to investors in the pools administered by the AMS 500 are in part crystallized via the asset-selection and securitisation processes, there are potentially significant gains to be obtained in an open-end framework through the continuous and selective introduction of new tranches of assets. The benefits accruing in this regard are twofold: cross-sectional diversification owing purely to the increased size of the pool (which will impact the pool's risk-return profile on three dimensions: the number and type of underlying properties detached, semi-detached, and apartments); (ii) the number and type of households first time buyers, dwellers in their middle years, and elderly homeowners); and, (iii) the number of geographic regions in which those households and their properties are located Sydney, Melbourne, Brisbane, Adelaide, and -106- 5097A-AU-D10 00 Perth)); and time-series diversification by way of originating new bundles of 0 assets during different time periods (for example, in year 1, the ASS 400 may place 10,000 EFMs into an open-end pool; in year 2, the AMS 500 may instruct the ASS O 400 to add another 10,000 contracts (and hence 10,000 properties); in year 3, the 00 process may continue, and so on. In such situations, the investors' reliance on property valuations in one specific year year 1) is materially attenuated by continuously adding new tranches of assets that were originated in subsequent periods 00 years 1,2, 00 It is expected that investors will select their broad investment style open-end or Sclosed-end, and the extent to which they would like cross-sectional and time-series diversification) through the lID 102, which is linked to the TIS 100, and through this system, the TID 112. On the other hand, there will be opportunities for certain classes of investors to, in effect, construct their own personal portfolios, and determine the pool's specific weights to various dwelling types, consumer cohorts and geographic regions. In the funds management industry, this would be akin to a "specialist" wholesale investment mandate, wherein the investment vehicle's characteristics are specifically tailored to suit the preferences of one particular institution. This subject was examined in more detail in the present applications discussion of the TIS 100.

For investors who submitted a preference for ongoing time-series diversification through the lID 102, their initial and updated preferences are stored in this database, and communicated to the TID 112 which interfaces directly with the AMS 500. If investors in an existing secondary-market pool wish for new tranches of assets to be added to their fund, then the AMS 500 will learn of these expectations through the same process, which will then transmit the investors' instructions through to the ASS 400 such that additional packages of contracts are introduced to the existing pool, rather than simply placing them into a fresh structure or vehicle. As before, the activities of the AMS 500 will be bounded by any restrictions imposed by the IM, which it interfaces with through the AMD 302. The algorithm the AMS uses to give effect to these preferences can be structured along the following broad lines: Lookup TID 112, If longitudinal diversification preferences "yes", 107- 5097A-AU-D Then lookup AMD 502, longitudinal diversification preferences, Output AMD 502 to existing pool (also stored in a cell in the AMD 502) Else if longitudinal preferences "no", Then bypass process Do loop.

SUMMARY

AMS

AMD

AOD

AOS

AServS AServD

ASIP

ASS

AWD

IID

IIP

IMIP

MMIP

TID

TIS

UCPs OF ACR 500 502 202 200 300 302 301 400 210 102 101 501 201 112 100 211

:ONYMS

Asset Management System Asset Management Database Asset Origination Database Asset Origination System Asset Servicing System Asset Servicing Database Asset Servicing Information Provider Asset Securitisation System Asset Warehouse Database Investment Information Database Investment Information Providers Investor Market Information Provider Mortgage Market Information Provider Target Investment Database Target Investment System Underwriting Capital Providers The methods and processes described above in relation to Figs. 2, 3 and 4 are preferably practiced using a conventional general-purpose computer system 60, such as that shown Fig. 5 wherein the processes are implemented as software, such as an application program executed within the computer system 60. In particular, the steps of the processes are effected by instructions in the software that are carried out by the computer. The software can be divided into two separate parts; one part for carrying out the specific processes; and another part to manage the user interface between the latter and the user. The software is able to be stored in a computer readable medium, including the storage devices described below, for example. The software is loaded into the computer from the computer readable medium, and then executed by the 108- 5097A-AU-D 00 computer. A computer readable medium having such software or computer program recorded on it is a computer program product. The use of the computer program Sproduct in the computer preferably effects an advantageous apparatus for carrying out O embodiments of the invention.

00 The computer system 60 comprises a computer module 61, input devices such as a 0keyboard 62 and mouse 63, output devices including a printer 65 and a display device 00 \64. A Modulator-Demodulator (Modem) transceiver 76 is used by the computer module 61 for communicating to and from a communications network 80, for 00 example connectable via a telephone line 81 or other functional medium. The modem S76 can be used to obtain access to the Internet, and other network systems, such as a Local Area Network (LAN) or a Wide Area Network (WAN) or other computers 160, 260, 960, etc each with their own corresponding modem 176, 276, 976, etc and each having a data input terminal 162, 262, 962, etc. Each of the computers 160-960 are operated by an MMIP 201, for example.

The computer module 61 typically includes at least one processor unit 65, a memory unit 66, for example formed from semiconductor random access memory (RAM) and read only memory (ROM). There are input/output interfaces including a video interface 67, and an I/O interface 73 for the keyboard 62, mouse 63 and optionally a card reader 59, and a further interface 68 for the modem 76 or optionally a camera 77.

A storage device 69 is provided and typically includes a hard disk drive 70 and a floppy drive 71. A magnetic tape drive (not illustrated) can also be used. A CD- ROM drive 72 is typically provided as a non-volatile source of data. The components to 73 of the computer module 61, typically communicate via an interconnected bus 64 and in a manner which results in a conventional mode of operation of the computer system 60 known to those in the relevant art. Examples of computers on which the embodiments can be practiced include IBM-PC's and compatibles, Sun Sparcstations or alike computer systems evolved therefrom.

Typically, the application program of the preferred embodiment is resident on the hard disk drive 70 and read and controlled in its execution by the processor Intermediate storage of the program and any data from the network 80 is 109- 5097A-AU-D10 00 accomplished using the semiconductor memory 66, possibly in concert with the hard disk drive 70. In some instances, the application program is encoded on a CD-ROM or floppy disk and read via the corresponding drive 72 or 71, or alternatively is read

O

O from the network 80 via the modem device 76. Still further, the software can also be 00 loaded into the computer system 60 from other computer readable media including magnetic tape, a ROM or integrated circuit, a magneto-optical disk, a radio or infrared transmission channel between the computer module 61 and another device, a 00 computer readable card such as a PCMCIA card, and the Internet and Intranets including email transmissions and information recorded on websites and the like. The 00 foregoing is merely exemplary of relevant computer readable media. Other computer Sreadable media may be practiced without departing from the scope and spirit of the invention.

It should not be lost sight of that the purpose of the computer system 60 is to generate a digitally encoded electric signal (such as that illustrated in Fig. 6) which when applied to an output interface (such as the display device 64 or the printer produces an indicium or indicia which convey information and which are legible or intelligible to a human. For example, the electric signal illustrated in Fig. 6 is a binary encoded signal 01001 which when applied to the display device 64 or printer causes the indicium 9 to be displayed or printed.

The processes can alternatively be implemented in dedicated hardware such as one or more integrated circuits performing the functions or sub functions of the processes.

Such dedicated hardware can include graphic processors, digital signal processors, or one or more microprocessors and associated memories.

The foregoing describes only some embodiments of the present invention and modifications, obvious to those skilled in the financial and computing arts, can be made thereto without departing from the scope of the present invention.

The term "comprising" (and its grammatical variations) as used herein is used in the inclusive sense of "including" or "having" and not in the exclusive sense of "consisting only of'.

-110- 00 5097A-AU-DlO ANNEXURE I SAMPLE PORTFOLIO SIMULATION CODE The tbollowint, is a sample of* the portf'olio simulation code used by the TIS 100) within 00 a statistical utility known as SAS. As a precursor to thle more complicated code below we will first examine some more generic code. A normal variate X with mean MU anid variance S2 call bc generated with tis code: x=MU+sqrt(S2)* ranniio(sed);, A lognormal variate X with mean exp(MU S2/2) and variance cxp(2*MU 2*S2) 00 exp(2:'MU S2) can he generatedl with tis code: x=cxp(MU+s-qrt(S2)1:*annor-(seed)); The "rannor(sccd)" Component of' tile code is random number generator operation inl SAS.

00 If'wc have lognormal mean=mean and variance=var, then the valucs for MU and S2 should be: MU=1og((mecan**2))/sqrt(vi.-+meal:"*2-)); S2_=log(( var+mean* 2)/(meanl 11. 2 lifthe means are stored in the "weight" variable then (he TIS 1 00 can use a codle Similar to: data b(drop=wcighit); set a-, do iter= I to miean=weight; vai-0.0625; MIU=log((m-eanii12 )Isqr-t( var-+i-ean S2=log(( vari+mean 'l mcan z=exp(MU+sqrt(S2)*rannor( 12345)); Ou~tput; end; runi; 'rhe code below produces a data set "new?" which contains the target portfolio weights for each individual SLA in the country "sla 1050511I00'' Is the field name and its value "0.0028303554" is the target weight in that particular SLA). Around each target portfolio weight the TIS 100 is able to generate a randomn log-normal distribution with a user def'ined mean and variance. This code below creates 10.000 iterations (do while 10000):) around each mean/target portfolio weight with a variance of'var=0.0000000625. The variance selected is small in order to generate enough dispersion around what is a small mean. All Values in aqua are uiser defined and consequently variable. Ani added complexity to thle TIS 100) model is ,that portfolio theory requires that the SuIM 0'o'f'0 tfliweigts SuIM to equal I. one fuirther restriction in relation to residential real estate currently is that individuals cannot hold short positions negative weights). To over some this component in the simulations, the TIS 100 selects one SLA, a residual SLA -sla8054067 19". to satisf'y portfolio and residential real-estate theory. In this code thle distribution is not created until all the portfolio weights sum to one and the iterations produced for SLA ,.slag054067 19" are bound by some user defined tail distributions, in this ease "0<z05407190.0083635".These numbers are selected giveni that SLA 00 5097A-AU-DIO "slag0540671I9"' should bc distrihUicd ar'ound 0.0002832844. therefore the hounds specified provide a large distribution Of possible vaIlues.

0 Trhe calculated weighits then become inputS into the calculation of the portfolio returns O) and variances; in this case there will bc 10,000.

00 datit new2(drop=meana mcanh meanc meand MUa Mub MUc MUd S2a SI-b S2c SIMd): 00

W=I;

slit 10505 1100 0.0028363554 slit 105054800 0.0082595742 slit 105055200 0.00683 12324 00 slit 105057070 0.0091793455 slit 105057201 0.000935261 slit 105057202 0.0024583909 slit105106550) 0.0 122340982 slit 1051I08050) 0.0079377533 sklOS 108500 0.0094661762 slit 105154150 =0.00573 11489 slit105154450= 0.003867583; slalOS 156650 0.0064892567 slalOS5157151 0.0093935268; slit 105157152 0.0087832864; sla 105200350 0.0 111008 168 ski 105201550 =(0.0081572377 slit105252950) 0.0093179237 sl 05254900 0.0088994456; sla105301450) 0.0026881479 slit 10530)1500 0.0068261252; slit105308400) 0.00 1979778; sla 105350150O 0.0027752779 sla 105351300) 0.0023408457 ski 105351900 0.0026825 134 And so on...

var=-0.0000)000625; do while 10000)-; mu1L 105051 lI00=Iog((rnean 1050511I 00'*"2)/sqrt( var+rnean 1050511I00";"?-)); mu I 05054800=log( (mean 1050548)0* *2 )/sqrt( var+mean 1 050548001:;*2)); mulL I050552(X)=Iog((i-nean I 05055200":*2)Isq rt (var+mean 1 05055200""'~2))-, mu 105057070=1 og(( mean I 05057070*-"I2)/sclrt( var+mcan 105057070* mnu 105057201 =log((mecan 1050572011 :2)/sqrit(var+rnean 105057201 ~2) mI I 05057202=log((mean 105057202* *2)/sqrt( var-+mni 1050572021:112)); mu 1051I0655O=log( (mean 1051I06550*4:2 /sd rt( vai*+meian 105 1065504' mu 1051 08050=Iog((man lOS I0805O"::i")/sqg-(vai.±meanai 1051 08050:1:12))-, mnu 1051I08500=log( man 105 I 08500 vari+mcneii I051I08500*' 00 5097A-AIJ-DIO mu 1051541 50=Iog((mcan I1051541 50)"*2)/sqrt(vari+rnean 1051541 5011112)); mut 10.5154450=log((mean 1051 S 4 4 50"'"'1 2 )/sqrt(var-+mcanI 1051 54450Ir*2)); mu 1051 56650=Iog((rnean 1 051 S 6 6 50'1112)/sqct(vai-+rnecan 1051 566502112)); 0 mu 10515715 1I=Iog((mcan 105 157151:121 2)/scIrt(var+ mean 105157151"'2) 0 mut 1051I57! 52=Iog(( mean 1 05 1571I52"::'2')/sqrc-(var-+mcan 105 I 57 I521 00 mnu I O5200350=Iog((rncan 1 05200350112 Va+mcani I 05200350 mu L1052.01 550=Iog((mcan 105201.S50O":'2)/sqirt(vari+mcn 10I5201550:' mu LI 10525'2850=Iog((rncan I O 5 25 28 5(O':2)/sqi-i(var-+micani 105252850:1::2)); mu I OS?254 9 00=Iog(( mcan I 05 254900:: '2)/sq ri( vart+rneani I 05254900~l*2)):, 00 mu I 05301450=Iog((rncan I10530! 450'Il "2)/sqirr(vart+mcani 105301 C*N nl~u 105301 500=Iog((rncan I105301 S0011"')/sqrit(var+mcean 10530150:!)mu I 105308400=log(( mean 105308400' :I 2)scii-t( var-+mcan 1053084004* u 1053501 50=log((mcean 105350! '2))/sqrt(var-+mean 10535015042) 00 mu 105351 300=Iog((mcan 1 05351 3 00: 1 *2'-)/sql(var-+mcian 105351 JM 105351 900=log((mean 105351I 9 00)' 2-)/sqrt(var-+mcian I 05351900" mu I 05352550=log((inean I O5352550"'"2")/scjrrt(var-+m-can 10535255011!2)); mu11.1053571 00=log((imcan 105357 100""*'2)/sclr(var+mlcan 105357 1 mu1.1 05400200=1 og( mean I1054002-00* var+rncani 105400200" mu1. I 05403950=Iog((rncan z OS 4 0 3 9 50"!"'2))/sqi(vari+mcain I05403950**2)); m1uLI 105406250=log((imean 1 05406250" "2")/sqrl( ~va-+rncan I 05406250* mu LI 105450900=Iog(Omean I 05450900"' vari+mean 1 05450900) 1 1 mu I 05453800=log((mein I O5453800""~l'2)/sqlii(var,+-meani 1054538001112)); And so onl...

s2 105051 100=Iog((var+mcan 105051 100**2)/(rncan 105051100":"'2)); s21I05054800=Iog((var+mcan 105054800:1' mean 1050548001"112)): s2lI 5055200=log((var+rncan 1 05055 200'' 2)/(Imea n 1 05055200:1:*2)); s21I05 0 5 70 7 0=1log((vi r+ nicu n 105 05 7070' 1')(mcnI05 057070: s2 105057201 =log((var+mnean 10505720 1 *:l-2)/(fmean 10505 7201 sl I 05057202=Iog ((var+ mean I 05057202" '21)/(imean 105057,202"'.2)): s2 105lIO 6 55O=Iog(( vars- ean 105 106550"' mcan 1 05 106550:1:*2)); s2 105 1 8050=Iog((var-+mcan 105 108050"' "2)/(rncan lOS 108050"' s2 1051 8500=IOg((var+mean 105 108500**l2)/(mcan 105108500*' s2 1051541 50=log((var+i-can 1051541 50**"2)/(rncan 1051541 501"'2)); s2 105154450=Iog((var+mcan 1051 54450**"2)/(rmeanl 1051 54450:"11"2)); s2 105156650=log((var+rmcan 105 I 56650"' 4 '2)/(rncan 1051 56650*:"'2)); s2105 15715 I =lo g((varsmean 10515715 1*1' "2)/(imean 105157151 s2105 1571 52=log((var+mcan 1051571 2)/(nmewi 1051571 52"' s2lI 5200350=Iog(( var+mcean 105200350**"2)/(imeanl 105200350"' s2 105201 550=log((var+mcun I 052() I550**"2)/(rncan 105201 5501"11'2)); s2 105252850=1og((var+mnean 105252850"' "2)/(mcan I 05252850"I"2)); s2 I 05254900=Iog( (var+mcean 105254900"' "2)/(mican 105254900" s2 105301 450=log((var-nan 105301 450"'2)/(mcan 105301 s2 105301 500=Iog((var+mcan I 053() I5U0*$ 2)/(mean 105301 500"'2)): s2lI 5308400=log(( var+mean 105308400"' mean 1053084001' s2 1053501 50=iog((var+mcan 1053501 50*'')/(mcan 1053501 s2 105351 300=Ion-((var+rncan 105351 300:*l12)/(incan 105351I300:1;"2)); s2 105351 900=log( (var*+mcan 105351 900**"2)/(mean 105351I9001::02)); s2lI 5352550=IoO((var+rmcan I 05352550**"2)/(inean I 05352550*1"'2)); 00 5097A-AU-D1O s2105357 I 00=log((vir+rncan 105357 1 0'1*-)/(rncan 105357 100;1*I2)); si2lI 5400200=log((var+mcan I 05400200*: mcan 105400200*:l2)); s2lI 5403950=Iog((var+mcan 105403950" l: mean I 05403950* 0 s2 IO5 4 06250=log( (var+Incan 105406250"' "'2(i-mean I 05406250*: O s.,210 5 4 50900=log((var+mcan I OS 4 50900**"2)/(mean I 05450900z12)); 00s2 I 5453800=Iog( (var+rncan I 05453800"l' mcan I C5453 8001t1* 4 56350=Iog( (var+rncan I 05456350*4: "2)/(rnean I 05456350:' s210553075 I =Iog((var+mncan 10553075 I ""2)/(rmean 105530751**?"2)); s2 i 0 5530752=Iog((var+inean I O 5 53 0 7 52"'"2)/(mean 1 05530752***12))-, 00s2lIO5530753=Iog((var+rnicw I 055307531I2)/(inean I 05530753"'"2)); s? 105554 100=Iog((var+mami 105554 1 )/(mecan 105554 1 s2 1 555 4 700=Iog(( var+mean I 05554700 1*2 )/(rmean I 05554700"' s2) I O555350=Iog((var+mcean 10O 5 S5350*" 1 '2)(mcan I 05555350"'"2)); 00 s21I05555950=Iog((var+mcan I O 55 55950I*2)/(inean 1 055559501::"2)), 55 67 0 0=log((vatr+nil I 0 5 5 56 70 I 05556700*~1:2)):, s2 I 5558250=Iog((var+mcean I 0 5 S8 2 50*:l:2)f(rncan I 05558250""2)); CKI ~s2 I OS 60 0 5 00 =log( (var+rnean 10C5600500**"2)/(i-mean 105600500"' s2lIO 56 0 4 0X0=Iog((var+mcean 1 05604000"' 2)f(nmcan 1 05604000*: And so on...

z 1050511 00-tEX~nmu 1050511 00+SQRT(S2 10505 1 I 00)"'rannor(3));, z I 05054800=EXP(i'fu I 05054800+SQRT( S2 105054800) ran ino-( z. I05055200=EXP( muI 105055200+SQRT(S21I 0 5 0 55 2 0 0):"ranino-( z I 05057070=EXP(n mu 1 05057070+SQRT(S21I0505 7 070):*ranno-( z 10505720 1 =EXP(mu 105057201 -sSQRT(S2 105057201I )"~ran nor(3)); z. I 05057202=EXP(mu I 05057202+SQRT(S21I 5057202)"'mumi rzor(3)); z 1 05106550=EXP(mu 1051 06550+SQRT(S2- 1051 06550)*.urnnur(3));, z 105 108050-EXP(mlu 1051 08050+SQRT(S210510 OR(50Yramzino-( zI 051I09500=EXP(mut 1 051 08500.sSQIRT(S2 lOS I08500y'rannor(3)); z7I1051541 50=EXP(mu~ 1051541 50+SQRT(S2 1051541 50)"'rainnor,(3)); z 1051I54450=EXP(rnuI 1051I54450+SQRT(S2 lOS I54450):"'rannior-(3)):.

z7I1051 56650=EXP(mut 105 I 56650+SQRT'I(S2 1051 56650)"rannor(3)); 7I10515715 1 XP(mu 10515715 1 +SQRT(S2 105157151I )"'rannor(3)); z I1051571 52=EXP(mu 1051571 52+SQRT(S2 10.51571 52y)'rannior(3));, z 105200350=EXP(imu I 05200350+SQRT(S21I05200350)"Irannlor(3)), z I 05201 550=EXI"(mu 10520 1 550+SQRT'(S2 105201 550)*ran-iino,-(3)); z I 05252X50=EXP(Mu I 105252950+SQRT(S21I052152850)-"ra,,nnor(3)); z 105254900=EXP(im I 105 254900+SQRT(S2 105 254900) *ran nor-(3)); z 10530 1450=EXP(mu 10530 1450+SQRT(S2 105301 450)*Irannor-(3)); z.10530)1I500=EXP(MLI 105301 500+SQRT(S2 105301 500)Ylranlnor-(3)); z 105308400=EXP(mu LI 105308400+SQRT(S2 105 308400):!'ranino*( z 1053501 50=EXP(mu 1053501 50+SQRT(S2 1053501 50)*ranniitor(3)):.

z1I05351 300=EXP(mu 105351 300+SQRT(S2 105351 300):"'rannoi-(3)), z.10535 1900=EXP(muIL 105351 900+SQRT(S2 105351 900)'rianinor(3)); zI 05352550=EXP(irnu 1 05352 550+SQRT(S21I05352550);Irziinor-(3)); z 105357 1 00=EXP(mu 105357 1 C0+SQRT(S2 1053571 IOOY)rannor(3));, z I 054002.00=EXP(Li I 05400200+SQRT(S21I05400200)I' ratnnor-(3)); 105403950=EXP(Ilu I 105403950+SQZrT(S21I05403950)'1:ranniior(3)): 00 5097A-AU-DlO zi 05406250=EXP(Ilu I 105406250+SQRZT(S21 0 5 4 06250) 'rannlor(3))z I 05450900=EX P(imu I 05450900.SQRT(S21I0545090() ):ranino-( zI 05453800=EXP(rnu~ I05453 800+SQRTCS2]I

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4 5 3 8 0 0 )*:rannor-(3)); 0 zI 05456350=EXP(inu 1 0545 63 50-.SQRT(S 2105O 4 56 3 50) -ran no-( Oz 10553075 1 =EXP(mnu 10553075 1 +SQRT(S2 10553075 1 ):rannor(3)); 00 z 105530752=EXP(mu 1 055 30752+SQRT(S210 5 OS 3 0 7 5 2 )ran nor(3)); zi 05530753=EXP(inti I05530753+SQRT(S21I

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3 0753Y iainor-(3)); z. 105554 1 00=EXPOrnu 105554 1 00+SQRT(S2 105554] 00)*rannor(3)); z I 05554700=EXP(111 I 105554700+SQRT(S21I

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4 700)' ianinor-(3)); 00 z1I05555350=EXP(IIILI 105555350+SQIRT(S210555S5350):'rannor(3)y; 00 z I 05555950=EXP(rnu I 05555950+SQRT(S2 105555950y 1 z71 05556700=EXP(Mu I 105556700 SQRT(S21I OS 5 6 700)* rain.,I(3)), z I 05558250=EXP(rnui I05558250+SQRT(S2105558S250)'ra-nnior(3)); z.I 05600500=EXP(inu I 05600500+SQRT(S21I

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6 00500):,ralnnor-(3)); z I 05604000=EXP(mu 1 05604000+SQRT(S210 5 6 04000Y'rannllior-(3)), z105004500=EXP(mti I05604500+SQRZT(S2 105604500) i ran no-( z.105655 I 50=EXP(rnlu 1056551 50+SQR T(S2 1056551 SO)*rainnor(3));, z I 05656370=EX I~mu I 05656370+SQRT(S*2 I 05656370y'11 ran nor( z I 05058(X00=EX P(rnt I05658000+SQRT(S2 I OS 6

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8 000)11--ran nor(3)) z 105703I1 00=EXP(rnu 105703 1 00+SQRT(S2 1057031I 00)*rannor(3)); z I 05708550=EXP(mu I 05708550+SQRT(S2 I S 7 08550)":rinnor(3)): z 110051 720=EXP(inti I I 0051 720+SQRT(S2 110051 720)*irainnor(3)); z II 0054650=EXP(mu I10054650+SQRT( S2 I I OO 4 650)* ratnior(3)); z7I110055050=EXP(inu I 10055050+SQRT(S21II O55050) raininor(3)); z1 110055901 =EXP(mu1L 110055901 +SQRT(S2 11005590 1)*rannor(3)):, z I 10055902=EXP(imul I 0055902+SQRT(S21II0055902)*r-ainor(3)); z I 10056400=EXP(mu II 0056400+SQRT(S21II O5 6 4OO)" rli-,nnor(3)); z. 1101 02700=EX P(muIL 110 1 02700+SQRT( *S2 1101 02700Y"ran nor-(3)); 71 1101 03050=EXP(mti 110 1 03050+SQRT(S2 1101 03050)*rannor(3)); z.11 1o 03400=EXP(InuL 110 1 03400+SQIZT(S2110C1I0 3 400)*'ran nor(3));- 71 101 05650=EXP(ImuL 110 1 05650+SQRT(S2 110 I05650Y"irannor(3)); zi 1101 06800=EXP(mu LI 110i 06800+SQIRT(S21I 0106800)Y rannor(3)):, z1 1101 07000=EXP(mu)L 110 1 07000+SQRT'I(S2 1101 0700)krani-iinor(3)): zi 15054400=EXP~nu II 5054400+SQIRTI(S211I5054400):'rzanior(3));, zl I 5056900=E, X P(niu I I 5056900+SQRT(S21II 5

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5 6900)Yriunnior(3)); z I115058450=EX P(mu 11 505 8450+SQRT(S21II5O58450y:' ran nor(3)); z 11507695 I=EXP(niu 11507695 1 -sSQRT(S2 11507695 1)*rannor(3)), z11151 06952=EXP(mu 1 151 06952+SQRT(S2 1151 O6952)*r-annior(3)); z 15 108350=EXP(mu 1 151 08350+SQRT(S2 1151I08350)*rannor-(3));, z712005755 1 =EXPI1rnu 12005755 1 +SQRT(S2 12005755 1 ):rannor(3)); z712007485 1 =EXP(mu 12007485 1 +SQRT(S2 12007485 1 )*rannor(3)); z I 201 00250=EXP(iiiti 120 100250+SQIRT(S2 1201 00250)Y rannor(3)); z7120 101 350=EXP(mu 1 20101 350-sSQRZT(S2 120101 350)*ra nnor(3)); z 120106611 =EXP(mu 120106611 +SQRT'(S2 12010661 1 )'rannor(3));zi 2010661 2=EXP(inu 12010661 2+SQRT(S2 12010661 2)*riannor-(3)); z 1 201 07552=EXP(rnu 1 201 07552+SQRT(S2 1201 0 7552)* rannor-(3)); z 125011801 =EXPO-mu 125011 80 1+SQRT(S2 12501180 1 )rannor(3)):.

z 12503375 1 =EXP(muIL 12503375 1 +SQRT(S2 125033751I )*ivannor(3)); And so on...

00 5097A-AU-DIO riz805406719 =1 sum(of z1050512100--x805406279); 0 if O~z8O54O6719<O.002836355 0 t hlen dc); 00 outpu~L; X+1; end; W+1: 00 5097A-AU-D10 ANNEXURE 2 SAMPLE TIS 100 TARGET PORTFOLIO OUTPUT TIS 100 Target EFM Portfolio Output Passive Value-Weighted EFM Pool ______Weighting Metric Last Last Last Last Four Four Four Four Quarter Quarter Quarter Quarter Volume Volume Av. Av. -Based -Based (Geographic Identifier 10505 10510 10515 10520 10525 10530 10535 10540 10545 10553 10555 10560 10565 10570 11005 20505 20510 20520 20525 20530 20535 20540 Median Price 5.38% 3.10% 5.11% 2.61% 2.85% 1.38% 1.99% 2.90% 2.77% 1.93% 4.62% 4.28% 3.65% 2.07% 0.25% 3.36% 2.87% 0.51% 1.12% 1 .88% 0.41% 1.05% 2.30% 3.59% 1.34% 0.81% 3.92% 0.71% 0.92% 0.49% 0.08% 0.09% 7.93% 0.25% 0.17% Mean Price 5.49% 3.79% 5.20% 2.45% 2.68% 1.32% 2.08% 2.72% 2.68% 1.81% 5.05% 4.19% 3.69% 2.12% 0.26% 3.61% 2.71% 0.49% 1.03% 1.82% 0.38% 1.00% 2.34% 3.43% 1.27% 0.78% 4.08% 0.68% 0.89% 0.49% 0.07% 0.08% 7.97% 0.26% 0. 17% Median Mean Free Standing Attached Price Price Properties Properties 5.39% 5.53% 49.84% 50.16% 3.11% 3.79% 36.36% 63.64% 5.16% 5.24% 74.14% 25.86% 2.62% 2.46% 77.06% 22.94% 2.86% 2.69% 88.50% 11.50% 1.35% 1.29% 97.64% 2.36% 2.01% 2.10% 61.98% 38.02% 2.94% 2.75% 77.22% 22.78% 2.78% 2.69% 93.27% 6.73% 1.94% 1.81% 96.01% 3.99% 4.65% 5.06% 55.84% 44.16% 4.32% 4.21% 88.62% 11.38% 3.66% 3.71% 69.63% 30.37% 2.09% 2.12% 94.83% 5.17% 0.25% 0.26% 96.56% 3.44% 3.36% 3.62% 47.04% 52.96% 2.90% 2.74% 89.10% 10.90% 0.51% 0.50% 96.61% 3.39% 1.13% 1.04% 83.41% 16.59% 1.90% 1.84% 86.43% 13.57% 0.41% 0.38% 96.14% 3.86% 1.03% 0.99% 96.13% 3.87% 2.32% 2.38% 79.84% 20.16% 3.64% 3.49% 93.54% 6.46% 1.36% 1.31% 94.87% 5.13% 0.82% 0.80% 97.43% 2.57% 3.98% 4.14% 81.14% 18.86% 0.73% 0.70% 85.39% 14.61% 0.90% 0.87% 96.24% 3.76% 0.50% 0.50% 91.41% 8.59%.

0.08% 0.07% 93.47% 6.53% 0.09% 0.09% 97.04% 2.96% 7.92% 7.93% 83.82% 16.18% 0.25% 0.26% 93.39% 6.61% 0.17% 0.17% 99.41% 0.59% 20545 20550 20555 20560 20565 20575 20580 20585 21015 23520 30505 30510 30515 00 5097A-AU-DIO 30520 0.67% 0.66% 0.64% 0.64% 95.67% 4.33% 30525 0.46% 0.45% 0.46% 0.45% 95.38% 4.62% 30530 0.63% 0.61% 0.63% 0.61% 96.27% 3.73% 0 30540 0.52% 0.50% 0.52% 0.50% 97.08% 2.92% O 30545 0.38% 0.38% 0.38% 0.39% 83.70% 16.30% 00 30550 0.75% 0.77% 0.75% 0.77% 96.64% 3.36% 31020 0.19% 0.18% 0.17% 0.17% 97.60% 2.40% 40505 1.66% 1.58% 1.65% 1.57% 94.50% 5.50% 40510 1.67% 1.59% 1.68% 1.59% 85.45% 14.55% 00 40515 1.73% 1.69% 1.70% 1.66% 83.06% 16.94%.

ON 40520 1.94% 1.88% 1.95% 1.89% 90.65% 9.35% 41015 0.16% 0.15% 0.15% 0.14% 97.33% 2.67% 50505 1.71% 1.74% 1.74% 1.78% 72.77% 27.23% 00 50510 1.71% 1.67% 1.70% 1.66% 94.31% 5.69% 50515 2.77% 2.73% 2.78% 2.73% 93.73% 6.27% 50520 2.25% 2.22% 2.27% 2.23% 95.21% 4.79% 50525 1.68% 1.64% 1.68% 1.64% 91.37% 8.63% 51(X)1 0.04% 0.04% 0.04% 0.04% 99.63% 0.38%, 52505 0.01% 0.01% 0.01% 0.01% 98.89% 1.11% 5097A-AU-D SAMPLE EOUJITY FINANCE MORTGAGE COtRACT [Name of lender] ABNI I Loan Agreement General Terms [Month) 2005 0 Copyright 2005 IMPORTANT NOTE This document does not contain all the terms of your loani agreement or, if your loan Is regulated under the Consumer Credit Code. a]ll of the information we are required by law to give you before the agreement is made. Further terms and information are in the Loan Aurtement DetailIs.

00 00) 0 00 5097A-AU-DIO About this agreement This agreement is made up of two documents: the Details and these General Terms. They should be read together.

The loan agreement documents only become binding on us if you have signed the offer in the Details and we have accepted your offer.

The meaning of words printed like tis and some other key words is explained at the end of these General Terms.

Contents nAve How you obtain the loan amount 1 2 What you must pay and wehen 3 4 Appreciation payment 6 Depreciation discount 7 8 9 Early repayment I I Default 12 13 14 General matters 15 16 17 18 19 21 22 23 24 How we lend the loan amount What must happen What you must Repayment

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Other Requirement to pay appreciation payment 2 Right to depreciation discount 2 Calculation of appreciati on payment and depreciation discount 2 4 Valuing the Repaying early 6 When you are in default 6 What can happen 7 Default 7 Consumer Credit Code 8 Establishing your loan account and accounting for transactions 8 8 How we may exercise our rights 8 Blanks 9 Our 8 9 Notices, other communications and service of documents 9 Variations 9 Applicable Meaning of Schedule I -How does the 112/1 rule" work' 13 Schedule 2 Examples of an allowance for improvments 16 Things you should know about your proposed credit contract.. 18 00

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00 5097A-AU-D10 [Name of lender] Loan Agreement General Terms How you obtain the loan amount 1 How we lend the loan amount 1.1 We agree to lend you the loan amount at the time you request it. The loan amount is only available in one drawing. Except to the extent that the Details indicate that the loan amount is to be paid to others, we pay the money to you or as directed by you or your agent.

2 What must happen first However, we only have to lend if: we have received: all securities and related documents; evidence of any insurance we require (such as fire and all risks, public liability insurance and strata title insurance); any report, valuation or survey we require; any other document or information we reasonably require (including title searches, planning certificates, replies to property requisitions and priority agreements regulating our interest under the security and those of any other mortgagee); which are satisfactory to us; and you are not in default under this agreement (for example, you have paid all relevant fees and charges and have not given us any misleading financial or other information) and no-one who provides a security is in default under that security or has withdrawn from it.

What you must pay and when 3 What you must pay You must repay all amounts you borrow from us and other amounts under clauses and 6.

4 Repayment Date for repayment 4.1 You must repay the total amount owing on the darefor repayment.

4.2 The date for repayment is the earliest of the following: the date on which you transfer or convey the whole of your interest in the property by arm's-length bona fide sale; the date on which an authority resumes or compulsorily acquires the whole or part of the property; or the 25th anniversary of the entry dare; or if you die (or, in the case of two or more of you as joint tenants of the property, the last of you dies): the date of the next transfer or conveyance of the property after your death; or the date 12 months after you die (or the last of you dies), whichever is the earlier.

You agree to notify us as soon as either of the events described in or (b) above occurs, or as soon as you have reasonable grounds to believe that such an event is likely to occur.

5097A-AU-D10 Other amounts Enforcement expenses may become payable under this agreement or any mortgage or other security in the event of a breach.

Other amounts to be paid 5.1 You must pay us when we ask: all fees and charges in the circumstances indicated in the Details and any changed or new fee or charge notified to you; an amount equal to any government charges and duties on receipts or withdrawals under this agreement, calculated in accordance with the relevant legislation. Without limiting this obligation, you must pay stamp duty imposed on credit business (Queensland). These are payable whether or not you are primarily liable for such charges and duties; any amount we spend if we take over any works including approved works as a result of your failure to comply with any requirement under a security; our reasonable expenses of giving consent, monitoring or taking other steps In connection with any works; and when we ask, any reasonable expenses we reasonably incur in enforcing this agreement or a security after you are in default (including: in the case of a mortgage, expenses incurred in preserving and maintaining the property such as by paying insurance, rates and taxes for the property; and (ii) the use of our staff and facilities).

These payments include any amount which we pay because we reasonably believe it is or may be payable, even if we subsequently discover that it was not necessary to pay the amount (for example, if you renew your insurance over mortgaged property but fail to tell us that you have done so, and we then take out insurance over the same property).

Changes to fees and charges 5.2 To the extent they are known, the amounts of the fees and charges current at the disclosure date are shown in the Details.

By giving you advance notice (in writing or by newspaper advertisement), we may change the amount, or frequency of payment, of any fee or charge, or impose a new one. Some changes in government fees and charges are publicised by the government and not us.

Information on current fees and charges is available from us on request.

Appreciation payment and depreciation discount 6 Requirement to pay apprecation payment You must pay the appreciation payment if the repayment value is higher than the entry value.

7 Right to deprtelatlon discount 7.1 If the appraised value on the dare for repayment is less than the entry value, then you may be entitled to have the total amount owing adjusted by the depreciation discount in accordance with the "1/2/I rule" set out in clause 8.

7.2 You are not entitled to the depreciation discount if you prepay the total amount owing prior to the date for repayment, or if the total amount owing has become immediately due for payment under clause 13.

8 Cllculatlon of appreciation payment and depreciatlon discount 8.1 We do not charge you interest on the amounts we lend you under this agreement, unless you 00 0 00 00 00 0\ 0O

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00 5097A-AU-DI 0 are in default. If you are in default, then we charge you interest at the default rare on the amounts specified in this agreement.

8.2 The total amount owing may be more, or less, than the original loan amount, depending on: the difference between the property's entry value and repayment value, and whether any other amounts become payable (for example, if you are in default).

8.3 When you repay the total amount owing, you must pay the appreciation payment in accordance with the "1/2/1 rule" described in clause 8.5 unless you are entitled to receive a depreciation discount in accordance with the "1/2/1 rule".

8.4 If you choose to repay early under clause I1, or if the total amount owing has become immediately due for payment under clause 13, then a different rule the "1/2/0 rule", described in clause 8.9 operates.

You still have to pay the appreciation payment under the "1/2/0 rule" but will not be eligible for the depreciation discount.

The "1/2/1 rule" works as follows: where the repayment value is greater than the entry value, the appreciation payment you must pay is two times the ratio of the loan amount to the entry value, multiplied by the difference between the repayment value and the entry value; and where the repayment value is less than the entry value, the depreciation discount is equal to the ratio of the loan amount to the entry value, multiplied by the difference between the entry value and the repayment value.

Assume that the loan amount was 20% of the entry value (in other words, the mortgage has a loan-to-property-value ratio at the entry date). Applying the "1/2/1 rule", you will be required to repay us on the datefor repayment the loan amount we originally advanced to you adjusted to reflect three alternative scenarios: if the property's repayment value is higher than the entry value, you must repay us the loan amount plus an appreciation payment equal to 40% of the property's value increase; if your property's repayment value is less than the entry value, you must repay us the loan amount less a depreciation discount of of theproperty's value decrease; or if your property's repayment value Is the same as the entry value, you must repay us the original amount that we lent to you.

The description comes from the relationship between the loan, the 40% share of the gain, and the 20% share of the loss (le, 20/40/20 or 1/2/1).

8.6 If the loan amount was other than 20% of the entry value, then the amounts calculated under the "1/2/1 rule" (and any appreciation payment or depreciation discount) vary proportionately. For example, assume that the loan amount was only 10% (ie, one-half of 20%) of your property's entry value. Then, if the property's repayment value is higher than the entry value, you must pay us the loan amount plus 5097A-AU-DI0 an appreciation payment equal to of that rise in value; but if the property's repayment value is less than the entry value, you must pay us the loan amount less a depreciation discount equal to 10%0 of the fall in that value.

8.7 Schedule I contains several examples that illustrate the application of the "1/2/I rule".

8.8 The "1/2/0 rule" works as follows.

If you prepay the loan amount under clause I or the total amount owing has become due for payment under clause 13, then where the repayment value is greater than the entry value, the appreciation payment you must pay is two times the ratio of the loan amount to the entry value, multiplied by the difference between the repayment value and the entry value.

If you prepay the loan amount under clause 11, or the total amount owing has become due for payment under clause 13, there is no depreciation discount, even if the repayment value is less than the entry value.

Assume that the loan amount was of the property's entry value (in other words, the mortgage has a loan-to-property.value ratio at the entry date). On that assumption: if the property's repayment value is higher than the entry value, you must repay us the loan amount plus an appreciation payment equal to 40% of the property's value increase, but if the property's repayment value is less than the entry value you must repay us the original amount that we lent to you.

8.9 If the loan amount was other than 20% of the entry value, then the amounts calculated under the "1/2/0 rule" vary proportionately. For example, assume that the amount we lent you was only 10%/ (ie, one-half of 20%) of your property's entry value. Then, ifthe property's repayment value is higher than the entry value, you must pay us the loan amount plus an appreciation payment equal to 20% of that rise In value; but If the property's repayment value is less than the entry value, you must pay us the loan amount.

8.10 If the property's appraised value stays the same between the entry date and the date of prepayment, then the total amount owing under the "1/2/0 rule" is once again equal to the loan amount (ie, 10% of the property's appraised value at the entry date).

8.11 Each time the appraised value must be determined for the purposes of this agreement.

we may obtain a complying valuation to determine the appreciation payment or depreciation discount (if any), at your expense.

9 Improvements 9.1 You must get our consent and all necessary approvals from authorities (and the governing body if the property is part of a sharedscheme) before you carry out or permit works, or enter into a contract to carry them out.

9.2 If the amounts you spend on any approved works exceed the prescribed amount (you must substantiate those amounts by giving us copies ofbona fide tax invoices), you may sock credit for any increase in the value of the property attributable to the approved works, by way of an adjustment to the repayment value.

9.3 However, in order to receive an allowance for improvements you must: ensure that the works are approved works; and get a complying valuation of the property as at the date the works commence; and complete the works within 6 months of starting them, unless at our absolute discretion we allow you longer, and get a further complying valuation of the property as at the date the works have been completed; and 5097A-AU-D10 submit a request to us to give you an allowance for the improvements (which must include evidence that the improvements have been carried out in accordance with plans and specifications approved by us and by relevant authorities and have been certified fit for occupation); and give us a survey report, evidence of upstamping of any security, certificates of compliance, and increased insurance cover and any other information we reasonably require.

9.4 Under clause 9.2 of this agreement, you cannot qualify for an allowance unless you spend at least the prescribed amount on the approved works. However, any allowance is then calculated by reference to the value that the improvements add to the property. That is, you need to reach the threshold amount in order to qualify for an allowance for improvements, but the amount of the allowance is not tied to the amount you spent.

The prescribed amount is determined from bona fide tax invoices. This means that if you do the work yourself, rather than engage a builder, your qualifying expenditure will be limited to the costs of goods, services and materials you purchase; the value of your own labour will not be counted for the purposes of the prescribed amount.

Calculating the allowance 9.6 Suppose that at some time during the loan term you undertake improvements with our consent which quality you to seek an allowance under this clause 9. Any increase in the property's appraised value attributable to those improvements (the mprovement amount) will be determined by comparing the complying valuations obtained before and after the improvements. On the dale for repayment we will give you an allowance (subject to the qualification below) for that improvement amount. We will give you an allowance by reducing the repayment value used for the purposes of the "1/2/1 rule" by the amount of the allowance.

That is, the repayment value will be reduced by the difference between the property's appraised value as at the date the works commence before the improvements were started, and the property's appraised value as at the date the works were completed.

9.7 Despite clause 9.6, an allowance for improvements cannot reduce the repayment value below the entry value.

9.8 Schedule 2 contains several examples that illustrate the application of this clause 9.

9.9 You must: ensure that the works comply with all laws, requirements of authorities, easements and covenants; and ensure that the works are done competently, by licensed contractors and In accordance with plans and specifications approved by us, are insured as required under any legislation, and are completed within a reasonable time; and obtain and give us relevant certificates and permits we require (such as certificates of satisfactory completion and compliance, occupancy permits, and contracts of insurance); and comply with any conditions of our consent.

9.10 If you fail to comply with clause 9.9 and whether or not we take over the works in accordance with our rights under a securtry then: you may not claim credit under clauses 9.2 and 9.3 for the amount you spent on the works; and 5097A-AU-D0 you must procure the transfer to us of any licences or copyrights to prevent a breach of copyright.

Valulng the property 10.1 All valuations in connection with this agreement (including any made before you entered into this agreement) must be carried out by valuers selected from our panel of approved valuers.

10.2 The valuations will be made on the basis of the fair market value of the property, being the price that a willing but not anxious seller would accept from a willing but not anxious buyer.

10.3 A valuation or determination that conforms to the process set out in this section is a complying valuation.

10.4 You must co-operate fully in the valuation process, including by giving unhindered access to the property to valuers and other consultants and giving us other information that we reasonably require.

10.5 If the property is purchased or sold on the open market, we may choose to accept as the fair market value of the property (at the date of the transfer), the consideration shown on the face of the relevant contract.

10.6 You must consult with us before you sell the property. (This allows us to discuss with you the various procedures, rights and obligations under this mortgage, including how the property's appraised value is calculated.) In selling, you must take reasonable steps to achieve the fair market value for the property at the time of the sale.

If we consider that the property was sold below fair market value, we can require a valuation.

10.7 You must give us: a copy of that contract: certified by a solicitor or licensed conveyancer as accurate and complete; and declared by you to show the full consideration paid and received in connection with the sale; and any other information you have, or to which you have access, which may be relevant to the value of the property (for example, information about an actual or prospective rezoning of the area, or a proposed development of another property which may have a negative or positive impact on the value of the property).

10.8 If: we consider for any reason that the consideration shown on the face of a contract may not be the fair market value of the property or the full consideration paid or received; or the property was acquired or sold other than by an armslength contract executed by you (for example, where it was transferred to you by a relative, or was compulsorily acquired from you, or was transferred by your executor), then we may Instruct one of our approved valuers to value the property as at either or both of the entry date and the date for repayment or any other date on which the property is bought or sold.

10.9 You must pay the costs of this valuation and any inspections required by it.

5097A-AU-D10 10.l01f you do not agree with that valuation, then you may ask us to nominate another approved valuer to conduct a second valuation, also at your expense.

10.11 If the second valuation differs from the first, then the fair market value of the property is to be either the mid-point of the two valuations or the consideration shown on the face of the contract, at our election.

Alternatively, we may elect to invoke the provisions of clause 10.13.

10.12 Except as provided in clause 10.13, you must pay for any valuation that is required in connection with this agreement. For example, if you wish to prepay under clause 11, a complying valuation must be obtained to determine any appreciation payment. If you do not agree with a valuation under this agreement, then you may ask us to nominate another approved valuer to conduct a second valuation, also at your expense.

10.13 If we so elect (acting reasonably), we may seek one or more further valuations, at our expense.

The value of the property will then be the mid.

point between the closest two of all the valuations obtained under this Schedule.

10.14 Any complying valuation will be considered a complying valuation as at a particular date If that date is within a period of 42 days before or after the date of the valuation.

Early repayment 11 Repaying earty How much and when you may prepay 11.1 You may repay the total amount owing (but only the whole of the total amount owing) at any time before the date for repayment in accordance with this clause

II.

11.2 To prepay, you must: give us at least I month's notice of your intention to prepay and the date on which you intend to prepay; and get a complying valuation as at the date of the prepayment (this is necessary to ascertain the property's appraised value).

Your decision is final 11.3 Once you have notified us of your decision to repay, you cannot change your mind you must repay on the date you told us you would prepay.

Default 12 When are you In default? You are in default if: you do not pay on time any amount due under this agreement or another loan agreement you have with us; or you do something you agree not to do, or you don't do something you agree to do under this agreement; or you give, or another person gives, us incorrect or misleading information in connection with this agreement or a security; or you are in default of another security interest affecting the property, whether or not any mortgagee of the property (except us) exercises a power of sale or a power of foreclosure; or we reasonably believe you or another person acting on your behalf has acted fraudulently in connection with this agreement or a security; or we reasonably believe you knew or ought reasonably to have known that the entry value was not the fair market value of the property at the entry date; or you become, or a security provider becomes, Insolvent or steps are taken to make you or them so; or anybody else (whether or not purporting to act on your behalf, or as your executor, administrator or trustee in bankruptcy) transfers or conveys the whole or part of the property; or 5097A-AU-D10 you transfer or convey less than the whole of the property; or you transfer or convey the whole or part of the property other than by arm's-length bona fide sale; or you cease to reside in the property as your principal place of residence unless we have waived this requirement in writing; or you declare a trust over the whole or part of the property or any estate or interest you hold in it; or you are, or a security provider is, in default under a security or withdraws from it or breaches its terms, or a security is or may be unenforceable.

13 What can happen then? Notice and grace period 13.1 If you are in default, we may give you a notice stating that you are in default.

If you do not, or cannot, correct the default within any grace period given in the notice or required by law (or if you are in default again for a similar reason at the end of that period), then, at the end of that period and without further notice to you, the total amount owing becomes immediately due for payment (to the extent it is not already due for payment).

We may then sue you for that amount, or enforce any security, or do both.

Exceptlons to notice and grace period 13.2 In limited circumstances set down by law (such as if we are unable to locate you), we need not give the notice or wait until the end of any grace period given in a notice.

Instead, if you are in default, the total amount owing becomes immediately due for payment without notice.

We may then immediately sue you for that amount, or enforce any security, or do both.

14 Default Interest Under this agreement, a default rate of interest may be charged when payments are in default.

Default Interest 14.1 If you are in default, the default rate of interest set out in the Details may be charged daily on any amount while it is overdue.

Note: The overdue amount on which default interest is charged can include the total amount owing if that total amount owing becomes due for payment under clause 13 (for example, because you do not correct a default within the period of grace) and you do not pay it immediately.

Capltallag default Interest 14.2 If you do not pay these default interest charges, we add them to the overdue amount monthly (this is known as "capitalising"). You are then liable for default interest charges on the new amount overdue.

Default rate 14.3 The default rate is 4% per annum above the 90-day Bank Bill Swap Reference Rate last published in the Australian Financial Review on or before the date for payment of the amount on which the default interest is payable (and if no such rate has been published for 7 days, then at another rate we set in good faith). Default interest accrues daily from (and including) the date on which it commences up to (but excluding) the date of actual payment.

Default interest is calculated on actual days elapsed and a year of 365 days.

Obllgatlons not affected 14.4 Your obligation to pay on time is not cancelled by this clause.

5097A-AU-D General matters 1s Consumer Credit Code This clause applies to the extent that a Consumer Credit Code applies to this agreement.

If.

that Code would otherwise make a provision of this agreement illegal, void or unenforceable; or a provision of this agreement would otherwise contravene a requirement of that Code or impose an obligation or liability which is prohibited by that Code, this agreement is to be read as if that provision were varied to the extent necessary to comply with that Code or, if necessary, omitted.

16 Establishing your loan account and accounting for transactions 16.1 You authorise us to open a loan account in your name and to debit to it each part of the amount you borrow on the date we lend it and any amount which you must pay under this agreement on or after the date it becomes due, without first notifying you.

16.2 We may assign any date we consider appropriate to a debit or credit to the loan account (except that, in the case of a debit, the date must not be earlier than the date on which the relevant transaction occurs).

However, we credit payments to your loan account as soon as practicable after we (and not any other person) actually receive them. This is not necessarily the-same day that you pay.

16.3 We may subsequently adjust debits and credits to the loan account and the balance owing on your loan account so as to accurately reflect the legal obligations of you and us (for example, because of an error or because a cheque is dishonoured).

If we do this, we may make consequential changes (including to default interest charges).

16.4 Unless otherwise specifically provided, we may use any payment we receive in connection with this agreement to reduce the total amount owing in any order we choose.

16.5 (We give you a statement for your loan account every 6 months (generally, in July and January) until there is no balance owing on your loan account.] 17 Consemt You must comply with all conditions and requirements in any consent we give.

Is How we may exercise our rights 18.1I We may exercise a right or remedy or give or refuse our consent in any way we consider appropriate including by imposing conditions.

18.2 If we do not exercise a right or remedy fully or at a given time, we can still exercise it later.

18.3 Our rights and remedies under this agreement and any security are in addition to other rights and remedies provided by law independently of it.

18.4 Our rights and remedies may be exercised on our behalf by: any of our directors or any other person we authorise.

18.5 We are not liable for loss caused by the exercise or attempted exercise of, failure to exercise, or delay in exercising, a right or remedy.

18.6 We may do anything which you should have done under this agreement or a srecurity but which you have not done or in our opinion have not done properly. You must pay us any amounts we expend or expenses we incur in so doing.

5097A-AU-DI0 19 Blanks You agree that we may fill in any blanks in any document related to this agreement (such as an acknowledgment).

Our certificates We may give you a certificate or formal statement about a matter or about an amount (including break costs) payable in connection with this agreement. This is sufficient evidence of the matter or amount, unless it is proved to be incorrect.

21 Assignment 21.1 We may assign or otherwise deal with our rights under this agreement in any way we consider appropriate. You agree that we may disclose any information or documents we consider desirable to help us exercise this right. You also agree that we may disclose information or documents at any time to a person to whom we assign our rights under this agreement.

21.2 Your rights are personal to you and may not be assigned without our written consent.

22 Notices, other communlceatons and service of documents 22.1 Notices, certificates, consents, approvals and other communications in connection with this agreement must be in writing unless we agree in writing otherwise.

22.2 Communications from us may be signed by our solicitor, or by any of our officers whom we have authorised to communicate to you.

22.3 Communications to you may be: given personally; or left at your residential or business address last known to us; or sent by post to your postal or residential or business address last known to us; or sent by fax to your residential or business fax number last known to us.22.4 Communications to us must be: left at: any office we tell you; or our registered office; or sent by prepaid post or fax to any of those places.

22.5 A communication is taken to be given: in the case of a communication given personally on the date stated on the communication or the date it is received by the person to whom it is addressed, whichever is the later; or in the case of a communication sent by post on the date stated on the communication or the date when it would have been delivered in the ordinary course of post, whichever is the later; or in the case of a communication sent by fax on the date stated on the communication or the date on which the machine from which it was sent produces a report indicating that the communication was sent to the fax or other number of the person to whom it is addressed, whichever is the later or in the case of a communication given by newspaper advertisement the date it is first published 22.6 We may serve any document in a court action (including a writ of summons, other originating process or third or other party notice) on you by delivering it to the property or by leaving it there. This clause does not prevent any other method of service.

22.7 You and we agree that each will exercise their rights under this agreement and any security in good faith.

5097A-AU-Dl 0 23 Variations We may vary any term of this agreement.

(if a Consumer Credit Code applies to this agreement, we may only do so in accordance with that Code). We Must notify you of any variation before it takes effect.

24 Applicable law This agreement is governed by the law in force in New South Wales. You and we submit to the non-exclusive jurisdiction of the cowrts of that place.

Meaning of words th "f20rue"isdscibd nclus 89 the "1/2/1 rule" is described in clause 8.5.

appraised value, in relation to the property, means the fair market value as agreed by you and us in writing, or failing agreement as ascertained by a complying valuation.

appreciatlion payment means the amount calculated as the appreciation payment in accordance with the 1/2/ rule" or "1/2/0 rule".

approved works means all works in connection with which you have obtained our consent and all necessary approvals from authorities (and the governing body if the property is part of a shared scheme) before you carry out or permit works, or enter into a contract to carry them out.

balance owing on your loan account means, ait any time, the difference between all amounts credited and all amounts debited to you under this agreement at that time. When this amount is to be calculated for the end of a day, it includes all debits and credits assigned to that day.

banking day means a day other than a Saturday or Sunday, or a public, special or bank holiday in New South Wales.

business day means a day other than a Saturday or Sunday, or a public or special holiday in New South Wales.

compiying valuation means a valuation that complies with the processes (including the appointment of valuers) set out in clause date/or repayment means the date on which the total amount owing must be repaid in accordance with clause 4.2.

default rate see clause 14.

depreciation discount means the amount calculated as the depreciation discount in accordance with the rule.

Details means the Loan Agreement Details which are part of this agreement.

the disclosure date is stated in the Details.

entry date means the date you tell us to lend you the loan amount (even though the actual date we lend you the loan amount may be a later date).

entry value means the appraised value on the entry date less any amounts that you or we or any other person receives In connection with the compulsory acquisition of an interest in the property (such as compensation if the property is acquired for a road-widening scheme).

governing body means each entity which manages or administers any shared srcheme of which the property is part.

Improvement amount means any increase in the appraised value of the property as a result of any improvements carried out in accordance with this agreement.

Insolvent means being an insol vent under administration or insolvent or having 5097A-AU-D10 a controller appointed (each as defined in the Corporations Law), in receivership, in receivership and management, in liquidation, in provisional liquidation, under administration, wound up, subject to any arrangement, assignment or composition, protected from creditors under any statute, dissolved (other than to carry out a reconstruction while solvent) or otherwise unable to pay debts when they fall due.

loan account means an account we establish in your name for recording all transactions in connection with this agreement.

the loan amount is set out in the Details.

prescribed amount, for the purposes of clause 9, means an amount in Australian dollars we determine from time to time, in our absolute discretion.

the property means each one or more of the following which the context allows: the land described in any security, and each fixture, structure or improvement on the land or fixed to it; and your estate and interest in the land and rights which may have arisen or may arise in connection with it, repayment value means the appraised value on any of: the date for repayment; or the date prior to the datefor repayment on which you prepay the total amount owing in accordance with clause II; or the date the total amount owing becomes immediately due for payment under clause 13, as applicable. The repayment value may be adjusted if we give you an allowance under clause 9.

security means each security interest described in the Details under "Security" and any substitute or additional security Interest given in connection with this agreement.

The property the subject of any mortgage of real property, described in the Details under "Security", comprises: the land described in any security and each fixture, structure or improvement on the land or fixed to it; and your estate and interest in the land and rights which may have arisen or may arise in connection with it; and rights to personal property left on the property if we take possession; and rights to set off any money we owe the mortgagor against the amount secured by that mortgage.

security Interest means any security for the payment of money or performance of obligations including a mortgage, charge, lien, pledge, trust or power.

Security interest also includes a guarantee or an indemnity.

security provider means each person (other than you) who gives a security.

shared scheme means each scheme or plan regulated by a shared scheme law that affects the property. Examples of properties which are often part of a shared scheme are strata or stratum title home units, and town houses and properties in integrated developments.

shared scheme law means any legislation that provides for the: subdivision and development of land with shared property; or subdivision of buildings; or management of land which is subdivided and has shared property; or 5097A-AU-D10 management of subdivided buildings.

total amount owing means, at any time, the balance owing on your loan account at that time, plus all accrued default interest charges and other amounts which you must pay under this agreement but which have not been debited to your loan account at that time (including the appreciation payment) less any amounts that have not been credited to your loan account (including any depreciation discount).

we, us, our mean [Name of lender] (ABN and includes its successors and assigns.

works means: building work; or excavation or earthworks on the property, or work demolishing, removing or altering any part of the property, or any building or development work required by an authority in connection with the property.

you means the person or persons named in the Details as "Customer". If there are more than one, you means each of them separately and every two or more of them jointly. You includes your successors and assigns.

A reference to: any thing includes the whole and each part of it; and a document includes any variation or replacement of it; and law means common law, principles of equity, and laws made by parliament (and laws made by parliament include regulations and other instruments under them, and consolidations, amendments, re-enactments or replacements of them); and the words including or such as when introducing an example do not limit the meaning of the words to which the example relates to that example or examples of a similar kind; and the word person includes an individual, a firm, a body corporate, an unincorporated association or an authority.

The singular includes the plural and vice versa.

Headings are for convenience only and do not affect the interpretation of this agreement.

5097A-AU-DI0 Schedule 1 How does the "1/2/1 rule" work? The following examples illustrate how the "1/2/1 rule" operates: Note: the examples assume that the total amount owing has not increased under other provisions of the agreement for example, because you are in default or because we have expended money where you have failed to do something under the agreement and you have not repaid those amounts.

Example 1: Assume that we lent you $100,000 on 1 June 2005, and that at the entry date your property's appraised value was $500,000.

Note: if you and we cannot agree on the appraised value, it is set by a valuation process; the appraised value might not be the same amount as the purchase price. The mortgage has a 20% loan-to-property-value ratio, because $100,000 is equal to 20% of the property's appraised value.

If the property's appraised value on the date or repayment has increased to $600,000, then the total amount owing Includes the original $100,000 loan amount plus an appreciation payment equal to of the value gain between the two dates. You must pay us an appreciation payment of $40,000 (ie, 40% of the property's S 100,000 value gain), in addition to the $100,000 we originally lent you. The total amount owing has therefore increased and is $140,000.

If the property's appraised value on the date for repayment has decreased to $400,000, then the total amount owing includes the original $100,000 loan amount less a depreciation discount of 20% of the value loss between the two dates. We must bear $20,000 of the loss (ie, 20% of the property's 3100,000 value decrease). The total amount owing therefore reduces to $80,000 (ie, the $100,000 we originally lent you minus the $20,000 loss that we bear).

If the property's appraised value on the date for repayment remains the same (ie, at $500,000), then the total amount owing is the original $100,000 loan amount. That is, you repay us the same amount we originally lent you.

These three scenarios are illustrated in the table below.

00 00) 0 00 5097A-AU-D Calculating the effect of any apprecialtion payment or depreciation discount on the total amount owing when a $500,000 property's appraised value rises, tais Or stays the same Scenario 1: Scenario 2: Scenario 3: property's property's property's appraised value appraised value appraised value rises ralls stays same Property's original appraised S500,000 $500,000 $500,000 value Property's new appraised value $600.000 1 $400,000 $50,0 Property's value change +$100,000 -S100,000 so Your share of the value change +S60,000 -$80,000 so Our share of the value change 4540,000 -$20,000 so (appreciation (depreciation ptrrjent) discount)________ 1Loan amount $100,000 1 $100,000 S$I00,00 Total amount owing I $140,0001 $80,0001 $100,000 Example 2: If the facts were the same as in Example 1, except that we had lent you $50,000 (ie, 10% of the $500,000 property's appraised value), then the calculations would be as follows; If the property's appraised value on the date for repayment has increased to $600,000, then the total amount owing includes the original $50,000 we lent you plus an appreciation payment equal to 206/9 of the property's S$100,000 appraised value increase (ie, $20,000). The total amount awing is therefore $70,000.

If the property's appraised value on the date/or repayment has decreased to $400,000, then the total amount owing includes the original $50,000 we lent you less a depreciation discount equal to of the property's 100,000 appraised value decrease (ic, 10,000). The total amount owing has therefore fallen and is $40,000.

Ifr the property's appraised value on the date/or repayment stays the same at $500,000, then the total amount owing is equal to the original $50,000 we lent you. The total amount owing has therefore stayed the same.

00 5097A-AU-DIO 0 The appreciation payment can also be expressed by the following formula: 00 Where: RA is the appreciation payment I is the loan amount 00 Y. is the entry value 00 v, is the repayment value.

CKI Similarly. the depreciation discount can be expressed by the following formula:

V,)

Where: RD is the depreciation discount I s the loan amount Y, Is the entry value v, Is the repayment value.

Claims (3)

137- 5097A-AU-D0 00 modified portfolio data and if said modified portfolio will result in either: (c) 0 the difference between said desiderata data and said modified portfolio data being less than the difference between said desiderata data and said initial O portfolio; or said modified portfolio remaining within predetermined 00 acceptable error bands of said desiderata data, said data processing means signals denoting the acceptance of said applications meeting said periodically set or modified application criteria. 00 2. A method of accepting, rejecting or referring in real time or on a batch basis 00 applications from consumers to a financing entity for financial accommodation Sin which an asset is used as collateral, said method comprising the steps of: inputting into a data input terminal data relating to the collateral, consumer and/or said financial accommodation, said data input terminal being connected to a data processing means to which is connected a data storage means, (ii) storing in said data storage means both initial portfolio data relating to said applications accepted to date which collectively characterise a financial portfolio of said financing entity, and desiderata data relating to desired characteristics of said portfolio, (iii) amalgamating said input data and said initial portfolio data to produce a modified portfolio data representative of said portfolio if said application were accepted, (iv) comparing said modified portfolio data with said desiderata data, and accepting said application only if either one or more of the following apply: the difference between said desiderata data and said modified portfolio data is less than the difference between said desiderata data and said initial portfolio; or if said modified portfolio remains within predetermined acceptable error bands of said desiderata data. 3. A computer implemented financial system for maintaining a close approximation between an actual pool of investments, each investment comprising a financial arrangement between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation over unique collateral, and a desired pool of investments, said

138- 5097A-AU-DIO0 00 system having an investment mandate specifying target values for a plurality O Sof investment characteristics each of which is stored in a memory bank operated by said system, said system further having a data store in which is C maintained the actual values of said plurality of investment characteristics of 00 said actual pool of investments, said system comparing the values in said memory bank and said data store, and permitting as additions to said actual Opool of investments only those additional investments having investment 1 characteristics which either reduce the difference between said target Ovalues and said actual values or ensure that said actual values remain 00 within predetermined acceptable error bands of said target values. 4. A method for periodically setting application acceptance, or investment, criteria so as to maintain a close approximation between an actual pool of investments to which additions are being made, or applications accepted, in accordance with predetermined set application criteria and that of a desired pool of investments, said investment pool comprising financial arrangements each between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation, said method comprising the steps of: establishing an investment mandate specifying target values for a plurality of investment characteristics; (ii) storing each of said investment characteristics in a computer operated data store; (iii) storing the actual value of said plurality of investment characteristics of said actual pool of investments in said data store; and one of, (iv) monitoring the investment characteristics of said actual pool and periodically setting or modifying said application acceptance criteria as required such that if a batch of applications meeting said set criteria are accepted and amalgamated with said actual pool characteristics to produce modified pool characteristics, said modified pool will result in either the difference between said specified target values and said modified pool characteristics being less than the difference between said specified target values and said actual pool; or said modified pool characteristics remaining

139- 5097A-AU-D 0 within either said specified target values or predetermined acceptable error O Sbands of said specified target values; or continually or periodically monitoring the investment characteristics of Q said actual pool and the rate of additions to such pool in accordance with said 00 set application acceptance criteria and based on a target frequency of changes to said set application acceptance criteria and the rate of additions to said Sactual pool, periodically setting or modifying said application acceptance 00 0criteria such that: if a batch of applications meeting said set criteria are Oaccepted and amalgamated with said actual pool characteristics to produce 00 modified pool characteristics, said modified pool will result in either the difference between said specified target values and said modified pool characteristics being less than the difference between said specified target values and said actual pool, or said modified pool characteristics remaining within either said specified target values or the acceptable error bands of said specified target values; and said setting will most likely remain for as long as possible or for a period which meets said target frequency of changes to said setting taking into consideration said rate of additions to said actual pool. A computer implemented financial system for managing and communicating with financial accommodation distribution agents so as to maintain a close approximation between an actual pool of investments and a desired pool of investments, said investment pool comprising financial arrangements each between a consumer seeking financial accommodation and an entity willing to provide such financial accommodation, and maximising distribution agent efficiency and minimising distribution agent hindrance, said system having an investment mandate specifying target values for a plurality of investment characteristics each of which is stored in a memory bank operated by said system, said system further having a data store in which is maintained the actual values of said plurality of investment characteristics of said actual pool of investments, said system comparing the values in said memory bank and said data store, and in real time or on a batch basis transmitting a signal representing advertised application criteria which, if met, will result in acceptance of said application based on said criteria representing investment -140- 5097A-AU-D10 00 characteristics which reduce the difference between said target values and said actual values or ensure that said actual values remain within predetermined acceptable error bands of said target values; and/or transmit O a signal indicative of acceptance of applications or summary application data 00 to said distribution agents to the extent said application or summary application data either represents investment characteristics which if accepted into said actual pool either reduces the difference between said target 00 values and said actual values or ensures that said actual values remain within said acceptable error bands of said target values. 00 0", 141