P603,744,442.46 RESIDENTIAL MORTGAGE-BACKED … · RESIDENTIAL MORTGAGE-BACKED SECURITIZATION OF...

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P603,744,442.46

RESIDENTIAL MORTGAGE-BACKED SECURITIZATION OF LOW-COST AND SOCIALIZED HOUSING LOANS

ARRANGER AND UNDERWRITER

17 AUGUST 2012

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THE SECURITIES BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE.

THE ISSUANCE OF THE NOTES SHALL BE ENTITLED TO EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SECTION 12 OF THE SECURITIES REGULATION CODE AND ITS IMPLEMENTING RULES AND REGULATIONS AS AN EXEMPT SECURITY UNDER SECTION 9.1(A) OF THE SECURITIES REGULATION CODE. ON 16 AUGUST 2012, THE SECURITIES AND EXCHANGE COMMISSION CONFIRMED THAT THE SENIOR NOTES ARE EXEMPT SECURITIES PURSUANT TO SECTION 9.1(A) OF THE SRC CONSIDERING THAT THE SENIOR NOTES ARE GUARANTEED BY HOME GUARANTY CORPORATION, AN INSTRUMENTALITY OF THE GOVERNMENT OF THE PHILIPPINES, HENCE, EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SECTIONS 8 AND 12 OF THE SRC AND ITS IRR.

ALL DISCLOSURE REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION CONTAINED HEREIN IS TRUE AND CURRENT TO THE BEST OF THE ISSUER’S KNOWLEDGE.

THIS OFFERING CIRCULAR IS PROVIDED SOLELY FOR THE OFFER AND SALE OF THE CLASS A SENIOR NOTES. NONE OF THE ISSUER, NHMFC, ARRANGER AND UNDERWRITER, OR TRUSTEE MAKES ANY RECOMMENDATION AS TO WHETHER SENIOR NOTEHOLDERS SHOULD PURCHASE THE SENIOR NOTES PURSUANT TO THE OFFER, NOR SHOULD THIS OFFERING CIRCULAR BE CONSTRUED AS INVESTMENT, ACCOUNTING, FINANCIAL, LEGAL OR TAX ADVICE BY SUCH PARTIES OR THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS, ATTORNEYS OR EMPLOYEES. SENIOR NOTEHOLDERS MUST MAKE THEIR OWN DECISION AND SHOULD CONSULT THEIR OWN ATTORNEYS, ACCOUNTANTS AND OTHER ADVISORS WITH REGARD TO TENDERING NOTES AND DELIVERING CONSENTS.

BAHAYBONDS 2 SPECIAL PURPOSE TRUST

=P300,000,000.00 Fixed Rate Class A Senior Notes Due 2017 Issue Price: 100% of Face Value

Interest Rate: 4.8% p.a.

=P120,000,000.00 Fixed Rate Class B Senior Notes Due 2022 Issue Price: 100% of Face Value

Interest Rate: 6.0% p.a.

=P 183,744,442.46 Variable Rate Class C Subordinated Notes Due 2022 Issue Price: 100% of Face Value

Interest Rate: Variable

The date of this Offering Circular is 17 August 2012.

Arranger and Underwriter LAND BANK OF THE PHILIPPINES

The Bahay Bonds 2 Special Purpose Trust (Trust Account Number 45756 TA01) is offering Class A Senior Notes due 2017 (the “Class A Senior Notes”) in the aggregate principal amount of up to P300,000,000.00 and Class B Senior Notes due 2022 (the “Class B Senior Notes”) in the aggregate principal amount of up to P120,000,000.00. The Class A Senior Notes and the Class B Senior Notes are collectively referred to hereafter as the “Senior Notes”.

The Class A Senior Notes shall have a maturity date of 17 August 2017 (the “Class A Maturity Date”), and a fixed interest rate equivalent to 4.8% p.a. Interest on the Class A Senior Notes shall be payable

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quarterly in arrears on November 17, February 17, May 17 and August 17 of each year, or if such day is not a Business Day, the next Business Day (“Interest Payment Date”). The first Interest Payment Date will fall on 17 November 2012.

The Class A Senior Notes shall be redeemed on the Class A Maturity Date or as otherwise set out in the Transaction Documents.

The Class B Senior Notes shall have a maturity date of 17 August 2022 (the “Class B Maturity Date”), and a fixed interest rate equivalent to 6.0% p.a. Interest on the Class B Senior Notes shall be payable quarterly in arrears on the Interest Payment Date. The first Interest Payment Date will fall on 17 November 2012.

The Class B Senior Notes shall be redeemed on the Class B Maturity Date or as otherwise set out in the Transaction Documents.

The Senior Notes are backed by Residential Loans and shall constitute direct, unconditional, secured and unsubordinated Philippine Peso-denominated obligations of the Issuer and shall rank pari passu and pro rata without any preference or priority amongst themselves (except that the Class B Senior Notes are subordinated to the Class A Senior Notes during an accelerated amortization period due to a Non-Payment Default) and at least pari passu with all other present and future secured and unsubordinated obligations of the Issuer, other than obligations preferred by the law; provided, that the obligations of the Issuer are limited to its assets, which consist mainly of the Residential Loans. If the assets or the proceeds of enforcement against the assets of the Issuer are insufficient to pay in full all obligations of the Issuer under the Notes, there shall be no further recourse to the Issuer and all unsatisfied obligations shall be extinguished.

PhilRatings has assigned a conditional Aa rating to the Class A Senior Notes and the Class B Senior Notes. Obligations rated Aa are of high quality and are subject to very low credit risk. The obligor’s capacity to meet its financial commitment on the obligation is very strong. The final rating will be affirmed upon finalization of the RMBS issuance and submission of required final and signed documents to the credit rating agency. PhilRatings will continue to monitor significant developments relating to the Class A Senior Notes issuance, particularly with respect to collection, payment, and default. The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Class A Senior Notes and Class B Senior Notes are outstanding.

The Senior Notes will be issued and offered for sale in the Philippines through the Arranger and Underwriter. It is intended that upon issuance, the Class A Senior Notes shall be issued in scripless form and listed on the Philippine Dealing & Exchange Corporation (“PDEx”). The Class A Senior Notes shall be issued in minimum denominations of P5,000 each, and in increments of P5,000 thereafter beyond the minimum. The Class B Senior Notes shall be issued in minimum denominations of P100,000 each, and in increments of P10,000 thereafter beyond the minimum.

As an added incentive to the purchase of the Class A Senior Notes, individual Class A Senior Noteholders will be entitled to participate in an electronic raffle draw. The prizes for winning investors shall be three house and lot packages amounting to approximately P400,000.00 each, inclusive of all taxes. Raffle dates shall be held in December 2012, December 2014 and July 2017, pursuant to mechanics duly approved by the parties to the transaction / issuance of the Notes.

Land Bank of the Philippines-Trust Banking Group (“LBP-TBG”), as SPT Bank, is duly registered and qualified to perform trust functions under the General Banking Laws and as such with the Bangko Sentral ng Pilipinas (“BSP”).

The Issuer, with principal office at 21st Floor, M. H. del Pilar Street corner Dr. J. Quintos Street, Malate, Manila, shall issue asset-backed securities (“ABS”) in the form of Notes amounting to PP603,744,442.46 . The assets underlying the Notes will be made up of long term mortgages from NHMFC’s best performing portfolio of approximately 3,364 low cost and socialized housing accounts

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(the “Residential Loans” or “Asset Pool”). Structurally, this transaction will be undertaken pursuant to Republic Act No. 9267 (the “Securitization Act”) and its Implementing Rules and Regulations (the “Securitization Rules”) and are divided into fixed rate Class A Senior Notes, fixed rate Class B Senior Notes, and variable rate Class C Subordinated Notes.

The Issuer will be responsible for the administration and management of the Asset Pool, and will monitor compliance by all parties, the roles of which have been set out in further details in the Transaction Documents, as defined herein.

The payments from borrowers are processed by a primary servicer, which shall be NHMFC (the “Servicer”). On every Monthly Collection Transfer Date, the Servicer shall pass the interest, principal and fee payments from the Obligors to the Issuer. The Issuer, through the Trustee and Paying Agent, in turn pays predefined interest and principal repayment to the Senior Noteholders. All interest payments on the Class C Subordinated Notes will be deposited in the Seller Restricted Account. The amounts in the Seller Restricted Account shall be used to fund any Shortfall. The amounts in the Seller Restricted Account will be released to the Class C Subordinated Noteholder only upon the occurrence of the earlier of: (x) full payment of the Senior Notes or (y) exercise by NHMFC as Seller of the Clean Up Call Option. When the outstanding balance of the Senior Notes falls to 10% or less of the principal balance of the Senior Notes as of Issue Date, or when the outstanding principal balance of all the Residential Loans falls to 10% or less of the original principal balance of all the Residential Loans, whichever occurs earlier, NHMFC has an option to buy back the remaining Residential Loans from the Issuer as part of the Clean-Up Call Option given to NHMFC.

NHMFC, as Servicer, may engage a sub-servicer pursuant to the Servicing Agreement, to increase the collection efficiency and recovery of the delinquent Residential Loans provided that NHMFC shall be responsible for sub-servicer duties as Primary Servicer. A back-up servicer may be identified to service the Residential Loans in the event NHMFC, as the Primary Servicer is unable to service said Asset Pool, or the Senior Noteholders exercise their right to remove the Servicer.

PhilRatings provided for the ratings of the Senior Notes, examined the legal structure of the transaction (notably, the true sale element), the quality of the securitized Residential Loans and the ability of the Servicer to service the Asset Pool as well as the Guarantor’s credit. Based on this analysis and the amount of the credit enhancement and other supporting arrangements, the conditional rating of the Senior Notes has been determined. The Senior Notes shall be amortized using the controlled amortization method or the accelerated amortization method. Principal payments from the Residential Loans will be applied towards the principal repayment of the Senior Notes. Losses from the Residential Loans shall be first covered by the Excess Spread, if any. Remaining uncovered losses shall be applied then to the Class C Subordinated Notes until the latter’s size is reduced to zero. Any uncovered losses from that point shall be covered by the HGC Guaranty. Excess Spread shall be applied to first cover credit losses before paying interest on the Class C Subordinated Notes.

The transaction shall carry a cash-flow guarantee from the Home Guaranty Corporation (“HGC”). HGC is a government-owned and controlled corporation created in 1950 as the Home Financing Commission. It is tasked to operate a credit guaranty program in support of government’s efforts to promote home ownership by providing risk guarantees and fiscal incentives for housing credits extended by financing institutions, thereby stimulating the flow of funds from both the government and private sectors for housing and urban development. In this structure, HGC provides full guarantee in form of cash and amortizing bonds that provide for the expected installments payments of the defaulted Residential Loans. The HGC Guaranty shall cover all the Residential Loans up to the full amount and value of the Class A Senior Notes and Class B Senior Notes. Upon a call on the HGC Guaranty, the cover for each Defaulted Residential Loan shall be one hundred per cent (100%) of the outstanding principal of all the Defaulted Residential Loans plus interest thereon of up

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to eleven percent (11.0%) per annum or the actual interest rate stipulated in Residential Loan Agreement, whichever is lower.

Upon the occurrence of certain events, however, the transaction shall enter into Accelerated Amortization Periods. Under an Accelerated Amortization Period (Upon the occurrence of a Non-Payment Default), the Trustee shall automatically cause the transfer of all amounts standing to the credit of the SPT Collection Account, the Liquidity Reserve Account, the Commingled Reserve Account, the Income Collection Account, and the Seller Restricted Account into the Principal Collection Account, and shall apply the amounts in accordance with the application of payments under the Trust Agreement. Under an Accelerated Amortization Period (Upon the occurrence of an Early Amortization Event), the Trustee shall apply the balances in the Accounts in accordance with the application of payments under the Trust Agreement.

Investing in the Senior Notes involves certain risks (see section on “Risk Factors”). However, the transaction is a residential mortgage-backed securitization in the Philippines under the Securitization Act. A successful securitization by a government financial institution such as NHMFC through a special purpose trust provides diversity and added liquidity to debt capital markets and provides a significant boost to the Philippine securitization market.

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TABLE OF CONTENTS

TABLE OF CONTENTS............................................................................................................................ 6 FORWARD LOOKING STATEMENTS ........................................................................................................ 7 TRANSACTION OVERVIEW .................................................................................................................... 8 TRANSACTION STRUCTURE ................................................................................................................. 10 CASHFLOW DIAGRAM ........................................................................................................................ 11 TRANSACTION SUMMARY .................................................................................................................. 12 REGULATIONS IN THE PHILIPPINES FOR SECURITIZATION AND MORTGAGE BACKED SECURITIES ................ 33 SECURITIZATION PROCESS .................................................................................................................. 34 RISK FACTORS ................................................................................................................................... 37 USE OF PROCEEDS ............................................................................................................................. 41 TERMS AND CONDITIONS OF THE CLASS A SENIOR NOTES ..................................................................... 42 TERMS AND CONDITIONS OF THE CLASS B SENIOR NOTES ..................................................................... 44 AMORTIZATION SCHEDULE ................................................................................................................. 45 THE ISSUER ....................................................................................................................................... 47 THE SELLER AND SERVICER ................................................................................................................. 49 THE GUARANTOR .............................................................................................................................. 77 DESCRIPTION OF THE MORTGAGE LOAN ASSETS ................................................................................... 82 RATINGS ........................................................................................................................................... 87 TAX CONSIDERATIONS ....................................................................................................................... 88 DISTRIBUTION & SALE OF THE NOTES .................................................................................................. 90 ENROLLMENT, CLEARANCE AND SETTLEMENT OF THE NOTES................................................................. 91 SUMMARY OF TRANSACTION DOCUMENTS ......................................................................................... 92 APPENDIX 1 - MASTER DEFINITIONS AGREEMENT ................................................................................. 98

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FORWARD LOOKING STATEMENTS

This Offering Circular contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “plan,” “may,” “will,” “would,” “could” and similar expressions, as they relate to LBP-TBG, are intended to identify a number of these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond LBP-TBG’s control. In addition, these forward-looking statements reflect current views of LBP-TBG with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including:

general economic, political and other conditions in the Philippines;

LBP-TBG’s management’s expectations and estimates concerning its future financial performance;

LBP-TBG’s level of indebtedness;

LBP-TBG’s capital expenditure program and other liquidity and capital resources requirements;

inflation in the Philippines and any devaluation of the Peso;

existing and future governmental regulation; and

the risk factors discussed in this Offering Circular as well as other factors beyond LBP-TBG’s control.

Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Offering Circular might not occur in the way the Issuer expects, or at all. Investors should not place undue reliance on any forward-looking information. Any forward-looking statement found in this Offering Circular is made only as of the date of this Offering Circular and LBP-TBG undertakes no obligation to update such forward-looking statements publicly to reflect subsequent events or circumstances.

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TRANSACTION OVERVIEW

The Issuer will offer, sell and issue, up to P420,000,000.00 worth of Senior Notes. The assets underlying the Notes will be made up of long-term mortgages or residential loans from NHMFC’s best performing portfolio of approximately 3,364 Residential Loans. Each Residential Loan account to be sold by NHMFC to the Issuer has an original principal balance not exceeding P400,000.00.

The issuance of the Notes will be structured pursuant to the Securitization Act, with the Residential Loans being transferred to the Issuer on a without recourse basis.

The Class A Senior Notes are to be issued to retail investors and will be listed on PDEx. The Class B Senior Notes are to be issued to institutional investors. The Class C Subordinated Notes shall be issued exclusively to NHMFC. The issue price of both the Senior and the Class C Subordinated Notes shall be 100% of the face value. The Class A Senior Notes will mature five years from issue date, the Class B Senior Notes will mature 10 years from issue date, and the Class C Subordinated Notes will be paid after full payment of the Senior Notes. On 1 August 2012, the HUDCC confirmed that the Assets “constitute a portfolio of socialized or low-cost housing packages.”

Holders of the Senior Notes benefit from the following Liquidity and Credit enhancements:

A. Liquidity Enhancements

1. Commingled Reserve Account. This account is put upfront at Closing, in the amount equal to expected cash collections for three (3) months, purposely to cover any lag time between collection period and reporting period. 2. Liquidity Reserve Account. This account is put up to cover any shortfall, meet tax, expenses and coupon and principal payments on the Senior Notes arising from time lag between the start of delinquency of a current account until the receipt of cash flow from the HGC Guaranty. The required balance of the Liquidity Reserve will, on any date be an amount representing nine (9) months coverage for tax, expenses and coupon and principal payments on the Notes. 3. Excess from the required balance of Commingled Reserve and Liquidity Reserve Accounts are accumulated in the Principal Account to fund principal repayments.

B. Credit Enhancements

1. Excess Spread. As first loss protection, excess available income (net of expenses) in any interest period is applied to cover credit losses in that interest period;

2. Class B Senior Notes Protection of Class A Senior Notes. Principal protection is provided due to the shorter five-year term of the Class A Senior Notes compared to the 10 year tenor of the Class B Senior Notes. In a Non-Payment Default scenario, Class A Senior Notes have priority in interest and principal repayments;

3. Seller Restricted Fund. The variable interest of the Subordinated Notes will be accumulated in a restricted bank account under the name of the Seller for redemption of clean-up call option or fund principal or interest payment or any Shortfalls;

4. Subordination. When there is no Excess Spread and the Liquidity Reserve Account reaches zero, the insufficient amount or the full amount of the outstanding principal balance or the whole defaulted residential loan will be deducted from the principal of the

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Subordinated Note. This is available until the principal amount of the Subordinated Note reaches zero; and,

5. Guaranty by HGC. HGC will guarantee cash flow for each residential loan sold by NHMFC to SPT, covering the full outstanding principal amount of defaulted residential loans, and up to 11% interest rate. The HGC Guaranty will be invoked when the size of the Subordinated Notes reduces to zero due to absorption of losses from defaulted residential loans. The payment from HGC shall be in the form of a (i) Cash Coverage. This portion shall cover the actual amount of the unpaid monthly amortizations of the Obligor but not more than fourteen (14) Monthly Installments on each Defaulted Residential Loan. If there is any payment thereafter from such Defaulted Residential Loan to SPT, SPT shall return such amount to HGC and (ii) Bond Coverage. The HGC Amortizing Bonds represent HGC’s total obligation and commitment to pay all the scheduled Monthly Installments in excess of the fourteen (14) Monthly Installments covered by the Cash Coverage. For more details on the Guaranty by HGC, refer to page 98.

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TRANSACTION STRUCTURE

Figure 1: Transaction Structure

Party Name Seller National Home Mortgage Finance Corporation (“NHMFC”)

SPT Bank Land Bank of the Philippines-Trust Banking Group (“LBP-

TBG”)

Arranger and Underwriter Land Bank of the Philippines (“LandBank”)

Selling Agent LandBank

Market Makers LandBank Philippine Commercial Capital Inc.

Trustee Development Bank of the Philippines-Trust Services

Servicer NHMFC

Registrar (for the Class A Senior Notes) and Paying Agent

Philippine Depository & Trust Corp.

Guarantor Home Guaranty Corporation (“HGC”)

Rating Agency Philippine Rating Services Corporation (“PhilRatings”)

Portfolio Auditor PricewaterhouseCoopers

Transaction Counsel and Tax Advisor Romulo Mabanta Buenaventura Sayoc & de los Angeles

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CASHFLOW DIAGRAM

Figure 2: Cashflow Diagram

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TRANSACTION SUMMARY

THE PARTIES

Issuer BahayBonds 2 Special Purpose Trust (Trust Account Number 45756 TA01)

Seller National Home Mortgage Finance Corporation (“NHMFC”). NHMFC is the main government home mortgage institution created in 1977 under Presidential Decree No. 1267. NHMFC was established with the primary purpose of developing and providing a secondary market for home mortgages granted by public and/or private home financing institutions.

Arranger and Underwriter

The Arranger and Underwriter is Land Bank of the Philippines (“LandBank”), with principal office at 15/F LandBank Plaza 1598 MH del Pilar St., corner Dr. J. Quintos Sts., Malate, Manila The Arranger and Underwriter may appoint sub-underwriters to ensure the best possible distribution of the Senior Notes.

Selling Agent LandBank

Market Makers LandBank

Philippine Commercial Capital Inc. (“PCCI”)

SPT Bank Land Bank of the Philippines-Trust Banking Group (“LBP-TBG”), with principal office at 21/F LandBank Plaza 1598 MH del Pilar St., corner Dr. J. Quintos Sts., Malate, Manila, a banking corporation duly registered and qualified to perform trust functions under the General Banking Laws and as such with the BSP.

Trustee and Account Bank

Development Bank of the Philippines, a government financial institution organized and existing pursuant to Executive Order No. 81 dated December 3, 1986, otherwise known as the 1986 Revised Charter of the Development of the Philippines, as amended by Republic Act No. 8523 dated February 14, 1998, duly authorized to perform trust functions and other fiduciary business, with principal office at Sen. Gil J. Puyat Avenue, Makati City

Servicer NHMFC

Back-up Servicer Trustee shall assume the role of Back-up Servicer upon the termination of NHMFC as the Servicer until the time the SPT can select a Back-up Servicer to perform the roles and obligations under the Servicing Agreement.

Registrar and Paying Agent (for the Class A Senior Notes)

Philippine Depository & Trust Corp., a corporation duly authorized to perform registry functions by appropriate authorities and organized and existing under and by virtue of laws of the Republic of the Philippines, with principal office at the 37th Floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue, Makati City

Guarantor Home Guaranty Corporation, which is authorized to operate a housing loan

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Guaranty program under Republic Act No. 8763, and is authorized to guaranty the Residential Loans acquired by the Issuer from NHMFC, in accordance with the provisions of the Guaranty Agreement. Under the same law, HGC is authorized, among other powers, to guaranty the payment in favor of any natural or juridical person, of any and all forms of mortgages, loans and other forms of credit facilities and receivables arising from financial contracts exclusively for residential purposes and the necessary support facilities thereto.

Portfolio Auditor PricewaterhouseCoopers/Isla Lipana & Co.

Transaction Counsel and Tax Advisor

Romulo Mabanta Buenaventura Sayoc & de los Angeles

Rating Agency Philippine Rating Services Corporation (“PhilRatings”)

THE DATES AND PERIODS

Amortization Method

The structure has no revolving period. The Class B Senior Notes shall be amortized using a Controlled Amortization Method (pre-scheduled amortization) which may be converted to the Accelerated Amortization Period (upon the occurrence of a Non-Payment Default) or to an Accelerated Amortization Period (upon the occurrence of an Early Amortization Event. The Class A Senior Notes and the Class C Subordinated Note shall not be amortized.

Controlled Amortization Period

The period commencing on (and including) the Closing Date and ending on:

(a) (but excluding) the date on which an Early Amortization Event has occurred; or

(b) (and including) the date on which all liabilities of the Issuer under the Transaction Documents (including the Notes but excluding the remaining outstanding balance of the Subordinated Note) are discharged in full; or

(c) (and including) the date on which the Seller exercises its Clean-up Call option,

whichever occurs first.

Accelerated Amortization Period (Upon the occurrence of a Non-Payment Default

The period commencing on (and including) the date on which a Non-Payment Default has occurred and ending on (and including) the date on which all the assets of the Issuer have been used to repay its outstanding obligations.

Accelerated Amortization Period (Upon the occurrence of an Early Amortization Event)

The period commencing on (and including) the date on which an Early Amortization Event has occurred and ending on (and including) the date on which all liabilities of the Issuer under the Transaction Documents (including the Senior Notes but excluding the remaining outstanding balance of the Subordinated Note) are discharged in full.

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Non-Payment Default

When the Issuer fails to pay (i) any interest on the Senior Notes on any Interest Payment Date or (ii) the Principal Amount Outstanding of the Senior Notes in accordance with the Repayment Schedule

Early Amortization Events

The period commencing on (and including) the date on which any of the following events has occurred:

(a) HGC Guaranty Trigger Event;

(b) Servicer Termination Events; or

(c) Events of Default.

Events of Default

The occurrence of any of the following events:

(a) A breach by the Issuer of any term or condition of the Senior and Subordinated Notes or provisions of any of the Transaction Documents or any of the Transaction Documents cease to remain binding obligations on any of the parties thereto or become unenforceable for any other reason;

(b) Any judgment or order is made by any court of competent jurisdiction or a supervisory authority having jurisdiction or a resolution is passed by the Issuer for the appointment of a liquidator, receiver or trustee of the Issuer or of all or substantially all of its assets in any bankruptcy, reorganization, winding-up, suspension of payment, or liquidation or other proceedings analogous in purpose or effect

(d) An order is made or an effective resolution is passed for the winding up or dissolution without winding up (otherwise than for the purpose of reconstruction or amalgamation), or any event analogous thereto shall occur in respect of the Issuer

(e) Any debt of the Issuer becomes due and payable prior to its stated maturity by reason of a default or event of default (howsoever described and whether or not involving culpability on the part of any person), or the security created for any other indebtedness becomes enforceable;

(f) Any approval, license or authorization by and of the Issuer required in relation to the performance of its payment or other material obligations under, or for the validity or enforceability of, the Notes, the trust deed or any other document relating to the issue, offer or invitation of the Notes is revoked, rescinded, suspended or otherwise limited in effect such that the Issuer fails or cannot perform its obligations thereunder;

Collection Period In reference to Residential Loan Collections, the period from (but excluding) one Collection Period End Date to (and including) the next following Collection Period End Date, provided that the first Collection Period shall commence on (and include) the Cut-Off Date and end on (and include) the first Collection Period End Date, as illustrated in the Timeline for Reporting and Collections attached as Schedule B to the Master Definition Agreement.

Collection Period End Date

In reference to Residential Loan Collections, the day falling on the last day of each calendar month, as illustrated in the Timeline for Reporting and Collections attached as Schedule B to the Master Definition Agreement,

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provided that the first Collection Period End Date shall be 30 April 2012.

Closing Date Issue Date

Cut-Off Date 31 March 2012

Monthly Servicer Report Date

For a particular Collection Period, the day falling three calendar months plus seven Calendar Days after the Collection Period End Date of such Collection Period, or if such date is not a Business Day, the next following Business Day

Monthly Collection Transfer Date

The Business Day following the Monthly Servicer Report Date

Trustee Report Date The Business Day following the date on which the Trustee receives the Monthly Servicer Report.

Monthly Allocation Date

The day falling three Business Days after the date on which the Trustee receives the Monthly Servicer Report but in any event no later than the day falling three Business Days prior to the next Interest Payment Date when the Trustee transfers the monthly Interest to the Paying Agent.

THE NOTES

Rating on the Class A Senior Notes

The Class A Senior Notes have been assigned a conditional Aa rating by PhilRatings. The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Class A Senior Notes are outstanding.

Rating on the Class B Senior Notes

The Class B Senior Notes have been assigned a conditional Aa by PhilRatings. The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Class B Senior Notes are outstanding.

Issue Price 100% of the par value of the Senior Notes.

INTEREST ON THE SENIOR NOTES

Interest Rate on the Class A Senior Notes

A fixed rate of 4.80% per annum, prior to and on the Maturity Date.

Interest Payment on the Class A Senior Notes

Interest on the Class A Senior Notes will be payable quarterly in arrears on each Interest Payment Date.

Interest Rate on the Class B Senior Notes

A fixed rate of 6.00% per annum, prior to and on the Maturity Date.

Interest Payment on the Class B Senior Notes

Interest on the Class B Senior Notes will be payable quarterly in arrears on each Interest Payment Date.

Interest Payment November 17, February 17, May 17 and August 17 of each year, or if such

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Date day is not a Business Day, the next Business Day.

The first Interest Payment Date will fall on 17 November 2012.

The cut-off date in determining the existing Noteholders entitled to receive interest or principal amount due shall be the day two Business Days prior to the relevant Interest Payment Date (the “Record Date”) which shall be the reckoning day in determining the Noteholders entitled to receive interest, principal or any other amount due under the Notes. No transfers of the Notes shall be made during this period intervening between and commencing on the Record Date and the relevant Interest Payment Date.

Interest Period Each period from (and including) one Interest Payment Date to (but excluding) the next Interest Payment Date, provided that the first Interest Period shall commence on (and include) the Closing Date and end on (but exclude) the first Interest Payment Date

See Schedule B of the Master Definition Agreement for an example of the Interest Period timeline.

Calculation of Interest Amount

Interest on the Senior Notes shall be calculated on a 30E/360 ISMA day count basis.

PRINCIPAL ON THE SENIOR NOTES

Principal Payment The Issuer shall pay the full principal amount outstanding of the Class A Senior Notes on the Class A Maturity Date.

The Issuer shall pay the principal amount outstanding of the Class B Senior Notes in accordance with the amortization schedule set out in Table 5 of this Offering Circular

Maturity Date of the Class A Senior Notes

The Principal Amount Outstanding of the Class A Senior Notes will be repaid in full on 17 August 2017, or if such day is not a Business Day, the next Business Day.

Maturity Date of the Class B Senior Notes

The Principal Amount Outstanding of the Class B Senior Notes will be repaid in full on 17 August 2022, or if such day is not a Business Day, the next Business Day.

Legal Final Maturity Date

The Maturity Date of the longest tenor Residential Loan + 12 months, or if such day is not a Business Day, the next Business Day.

Clean-up Call

The Seller may repurchase all (but not some only) of the outstanding Residential Loans and HGC Amortizing Bonds on the Clean-Up Call Exercise Date.

The Seller shall only be entitled to exercise the Clean-up Call when the outstanding balance of the Senior Notes falls to 10% or less of the principal balance of the Senior Notes as of Issue Date, or when the outstanding principal balance of all the Residential Loans falls to 10% or less of the original principal balance of all the Residential Loans, whichever occurs earlier.

Liquidity 1. Commingled Reserve Account. This account is put upfront at Closing,

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Enhancements in the amount equal to expected cash collections for three (3) months, purposely to cover any lag time between collection period and reporting period.

2. Liquidity Reserve Account. This account is put up to cover any shortfall, meet tax, expenses and coupon and principal payments on the Senior Notes arising from time lag between the start of delinquency of a current account until the receipt of cash flow from the HGC Guaranty. The required balance of the Liquidity Reserve will, on any date be an amount representing nine (9) months coverage for tax, expenses and coupon and principal payments on the Notes.

3. Excess from the required balance of Commingled Reserve and Liquidity Reserve Accounts are accumulated in the Principal Account to fund principal repayments.

Credit Enhancements

1. Excess Spread. As first loss protection, excess available income (net of expenses) in any interest period is applied to cover credit losses in that interest period; 2. Class B Senior Notes Protection of Class A Senior Notes. Principal protection is provided due to the shorter 5-year term of the Class A Senior Notes compared to the 10-year tenor of the Class B Senior Notes. In a Non-Payment Default scenario, Class A Senior Notes have priority in interest and principal repayments; 3. Seller Restricted Fund. The variable interest of the Subordinated Notes will be accumulated in a restricted bank account under the name of the Seller for redemption of clean-up call option or fund principal or interest payment shortfalls; 4. Subordination. When there is no Excess Spread and the Liquidity Reserve Account reaches zero, the insufficient amount or the full amount of the outstanding principal balance of the defaulted residential loan will be deducted from the principal of the Subordinated Note. This is available until the principal amount of the Subordinated Note reaches zero; and,

5. Guaranty by HGC. HGC will guarantee cash flow for each residential loan sold by NHMFC to SPT, covering the full outstanding principal amount of defaulted residential loans, and up to 11% interest rate. The HGC Guaranty will be invoked when the size of the Subordinated Notes reduces to zero due to absorption of losses from defaulted residential loans. The payment from HGC shall be in the form of a (i) Cash Coverage. This portion shall cover the actual amount of the unpaid monthly amortizations of the Obligor but not more than fourteen (14) Monthly Installments on each Defaulted Residential Loan. If there is any payment thereafter from such Defaulted Residential Loan to SPT, SPT shall return such amount to HGC; and (ii) Bond Coverage. The HGC Amortizing Bonds represent HGC’s total obligation and commitment to pay all the scheduled Monthly Installments in excess of the fourteen (14) Monthly Installments covered by the Cash Coverage. For more details on the Guaranty by HGC, refer to page 98.

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Enrollment The Class A Senior Notes will be listed on the PDEX.

THE LOANS

Residential Loans The Residential Loans will be Philippine Peso-denominated Residential Loans generated by the Seller in respect of its residential loan and mortgage business. A total of 3,364 Residential Loans with an aggregate Principal Amount Outstanding as at the Cut-Off Date of approximately P603,744,442.46 will be purchased by the Issuer from the Seller.

Collections on the Residential Loans will be the main source of funds to meet the Issuer’s obligations to make payments on the Senior Notes, to pay the Class C Subordinated Notes and to pay all of its expenses. All Collections received on or in respect of the Residential Loans from (but excluding) the Cut-Off Date to the Closing Date will also be for the account of the Issuer.

Perfection Under the Securitization Act, the transfer of Residential Loans under a Residential Loan Document will be effected by either an absolute sale, assignment or exchange agreement signed by the Seller and the Issuer, on a without recourse basis to the Seller

No notice of the transfer will be given to the relevant Obligors under each such Residential Loan Document until the occurrence of a Servicer Termination Event.

Defective Residential Loan

The Seller shall represent and warrant to the Issuer that the Residential Loans transferred to the Issuer by the Seller satisfy the Eligibility Criteria and warranties in relation to a Residential Loan in accordance with the Residential Loan Sale and Purchase Agreement.

In the event that it is subsequently determined that any of the Residential Loans did not satisfy the Eligibility Criteria or any warranty in relation to a Residential Loan is incorrect on the date so represented or warranted by the Seller, such ineligible Residential Loans shall constitute Defective Residential Loans, whereupon the Seller will be obliged to repurchase such Defective Residential Loans at their aggregate Principal Amount Outstanding on the Monthly Collection Transfer Date falling immediately after the date on which the determination of such Defective Residential Loans in accordance with the Residential Loan Sale and Purchase Agreement occurs and the amount equal to the Principal Amount Outstanding of such Defective Residential Loans will be treated as (and be taken to constitute) “Deemed Collections” in the Collection Period in which such determination occurs.

Defaulted Residential Loan

At the time of any determination, any Residential Loan which (without double counting) is a Residential Loan any amount of which is and remains unpaid for more than six Monthly Installments after its due date.

Delinquent Residential Loan

At the time of any determination, a Residential Loan any amount of which is and remains unpaid for more than one installment but not more than six installments after its due date) and which, at such time, is not a Defaulted Residential Loan.

Book Value In respect of any Residential Loan, the book value of such Residential Loan

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determined as the outstanding principal amount as of the Cut-Off Date.

ELIGIBILITY CRITERIA

Eligibility Criteria 1. Residential Loan has been generated by the Seller by, under or pursuant to, a Residential Loan Document;

2. Seller has not, in relation to such Residential Loan, received written notice of, and is not otherwise aware of, having made due enquiries, any bankruptcy, insolvency, reorganization or liquidation of the Obligor of such Residential Loan;

3. Seller is the legal, absolute and beneficial owner of each Residential Loan, and has good and valid title and rights to, and benefit and interest in each Residential Loan. It has not sold, transferred, pledged, mortgaged, encumbered, assigned, conveyed or otherwise disposed of, or granted any right of participation in, or agreed to sell and assign, or otherwise dispose of or grant a right of participation in any Residential Loan;

4. There is no adverse claim or any pending or threatened litigation involving the property subject of the Mortgage, whether in court or in any administrative office;

5. Residential Loan Document relating to the Residential Loan has been duly authorized, is in full force and effect and constitutes legal, valid and binding obligations of the Obligor thereunder, enforceable against such Obligor in accordance with the terms thereof, subject (in the case of enforceability) to applicable insolvency laws;

6. There has not been any dispute which is continuing, whether with respect to any amount expressed to be payable under or in respect of the Residential Loan or the timing or manner of payment of any such amount or otherwise, between the Seller and the Obligor and no claim which is continuing has been made or, as far as the Seller is aware, threatened by the Obligor that such Residential Loan or the relevant Residential Loan Document is invalid, voidable, unenforceable, or terminable;

7. Residential Loan and all transaction documents, including but not limited to the Residential Loan Document has been transferred to the Seller from the originating institution and the Seller has therefore full and sole perfected title to and ownership in the Residential Loan which is the subject of the Residential Loan Document relating thereto and neither such Residential Loan Document, or Residential Loan is subject to any Encumbrance;

8. Transfer of the Residential Loan is not prohibited for any reason and does not, by the terms of the relevant Residential Loan Document, require prior notice to, or consent from, the Obligor, and has not violated and will not violate any law, decree or material agreement by which the Seller is bound;

9. Residential Loan Document with respect to the Residential Loan constitutes the entire agreement between the Seller and the

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Obligor in respect of such Residential Loan;

10. Neither the Residential Loan, nor any part thereof, is included in any other pool of Residential Loans for the purpose of any other securitization transaction, nor has such Residential Loan been sold, transferred or assigned or in any other way disposed of to any third party;

11. No lawsuit is currently instituted by any third party with respect to the Residential Loan or to property mortgaged under the Residential Loan;

12. Residential Mortgage Agreement related to the Residential Loan provides for repayments of principal and interest in equal monthly installments in an amount sufficient to fully amortize the principal balance of that Residential Loan by the Legal Final Maturity Date;

13. Neither the Residential Loan nor any installment or part thereof is more than 3 installments past due and has never been classified as more than 6 installments past due in the preceding 24 months prior to the Cut-Off Date (in each case, after the lapse of any applicable grace period which shall not be longer than 15 days);

14. Residential loan has fixed interest rate throughout the life of the loan with minimum interest rate of 9%;

15. The original term of the Residential Mortgage Agreement relating to the Residential Loan shall not be more than 25 years and the remaining term does not exceed 15 years;

16. The remaining term of the Residential Mortgage Agreement shall not be less than 12 months;

17. The amounts payable by the Obligor in respect of the Residential Loan are denominated in Philippine Pesos only, and the maximum original balance of a residential Loan is Php400,000 and the minimum outstanding balance of a Residential Loan is Php10,000;

18. The Obligor of such Residential Loan is an individual who is a citizen of the Philippines;

19. The property mortgaged under the Residential Loan includes the parcel of land and all improvements thereon and no ongoing construction of any mortgaged property is ongoing; and

20. The initial Loan-to-Value ratio does not exceed 100%.

SERVICING

Services The Servicer will provide certain services to the Issuer, including, but not limited to, the collection of monies and general management of the Residential Loans and dealing with the Obligor, hiring of a sub-servicer, instituting any action in court or enforcing the terms and conditions of the Residential Loan Documents, and submission of a Monthly Servicer Report.

Monthly Servicer Report

A report relating to a Collection Period made by the Servicer to the Issuer and the Trustee on each Monthly Servicer Report Date.

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The Monthly Servicer Report shall relate to the Collection Period, which is the third month preceding the month in which the Monthly Servicer Report is made.

The Monthly Servicer Report shall include, among other things:

Information relating to the Residential Loans and Collections;

The status of the Residential Loans, including Defaulted Residential Loans and the Delinquent Residential Loans; and

Collections from HGC Amortizing Bonds.

The contents of the Monthly Servicer Report may be changed by the Servicer pursuant to instructions given by the Trustee or the Issuer.

Appointment of the Servicer

The appointment of the Servicer (whilst the Seller is the Servicer) will be for a period commencing on the Closing Date and ending on the date on which all amounts owed by the Issuer under the Transaction Documents have been fully discharged, unless a Servicer Termination Event has occurred, in which case the Trustee shall undertake the obligations of the Servicer under the Servicing Agreement until it can find and appoint a suitable back-up Servicer

Servicer Termination Events

Any of the following events shall have occurred:

(1) (a) (i) the Servicer fails to pay, transfer or deposit any amount as required pursuant to the Servicing Agreement or any other Transaction Document and such failure continues unremedied for a period of two Business Days; or (ii) the Servicer fails to deliver any Monthly Servicer Report in accordance with the terms of the Servicing Agreement;

(2) the Servicer has failed, in any material respect, to perform or observe any of its other covenants and obligations under the Servicing Agreement or any other Transaction Document to which it is a party (other than a failure described in either sub-paragraph of paragraph (a) above) and (except where such failure is incapable of remedy) such failure continues unremedied for a period of five Business Days;

(3) the Servicer (whilst the Seller is the Servicer) ceases or proposes to cease to carry on its residential loan and mortgage business;

(4) a court or agency or supervisory authority having jurisdiction enters a decree or order for the appointment of a receiver, trustee, or liquidator for the Servicer in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or for the winding up or liquidation of its affairs and that decree or order continues unstayed and in effect for a period of 45 consecutive days;

(5) the Servicer consents to the appointment of a receiver, trustee, or liquidator in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or similar proceedings of or relating to the Servicer or relating to substantially all of its property, or the Servicer admits in writing its inability to pay its debts generally as they become due, files a petition for its bankruptcy or reorganisation, or suspension of payments or rehabilitation, or makes an assignment for the benefit of its creditors (other than in its ordinary course of business), or voluntarily

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suspends payment with respect to all or any class of its debts (unless it has initiated a dispute with respect thereto but only insofar as such dispute relates to the non-existence of such debts or to the timing of when such debts become due and payable);

(a) the suspension, revocation, termination or withdrawal, in each case with no replacement or substitution therefor of any approval, authorisation, consent or licence required by the Servicer to carry out any of its duties or obligations under the Servicing Agreement or any other Transaction Document to which it is a party;

(b) the Servicing Agreement becomes void, voidable or unenforceable;

(c) a Material Adverse Change has occurred in respect of the Servicer. A Material Adverse Change means in relation to the Servicer, a material adverse change on (i) the ability of the Servicer to perform or comply with any of its obligations, or to exercise any of its rights, under the Servicing Agreement or Transaction Document to which it is a party in a timely manner, and (ii) the business, operations or financial condition of the Servicer;

(d) any representation, warranty or statement which is made (or deemed or acknowledged to have been made) by the Servicer in the Servicing Agreement or any other Transaction Document proves to be incorrect in any material respect;

(e) the results of any review conducted pursuant to the Servicing Agreement reveal any matter to be materially adverse to the interests of the Issuer or the Trustee; and

If any event described in paragraphs (a) to (j) above has occurred, the Trustee shall promptly thereafter serve a Servicer Termination Event Notice on the Servicer with a copy to the Issuer and the Rating Agency. The Trustee may exercise its discretion action to determine that such event shall immediately constitute Servicer Termination Event or shall grant a waiver to such events.

For the avoidance of doubt, Trustee shall not be obliged to exercise any discretion or take any action in relation to a Servicer Termination Event or any event that may constitute a Servicer Termination Event unless it has actual knowledge of the occurrence of such Servicer Termination Event or such event that may constitute a Servicer Termination Event.

Back-up Servicer Stage

Upon the receipt by Servicer of the Servicer Termination Event Notice, the Issuer, on recommendation of the Trustee, shall appoint a Back-Up Servicer according to the Servicer Selection Criteria to assume all the rights, duties and obligations of the Servicer. From the time of receipt by the Servicer of the Servicer Termination Event Notice until such time that the Back-up Servicer shall have been appointed, the Trustee shall assume the rights, duties and obligations of the Servicer.

Sub-Servicer Servicer may contract with any sub-servicer to perform a portion of its duties pursuant to this Agreement, provided that such engagement (a) is permitted by applicable Philippine Law and is qualified to be a Servicer under the Securitization Act; (b) is for types of services that such sub-servicer can provide at an equal or higher standard than the Servicer is able

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to provide, (c) does not result in Servicer delegating all or the majority of its servicing duties to such contractors, and (d) is with the prior written approval of SPT. Notwithstanding the appointment of a Sub-Servicer, the Servicer will remain liable pursuant to this Agreement, and for all acts of the Sub-Servicer. The fees of the Sub-Servicer shall be for the account of Servicer

COLLECTIONS AND THE ISSUER’S ACCOUNTS

Collections The Residential Loan Collections, HGC Amortizing Bond Collections, and the Insurance Payments

Deemed Collections

Amounts that are deemed to be payable by Servicer to the Issuer in respect of the Residential Loans in accordance with the Transaction Documents, including, in respect of a Monthly Collection Transfer Date and the Collection Period to which such date relate, the aggregate of:

(a) the aggregate Principal Amount Outstanding of the Residential Loans identified during such Collection Period; and

(b) any other reduction (other than by (i) actual payment of the amounts due in respect of the Residential Loans or (ii) charge-off in accordance with the accounting principles of the Servicer) in the Principal Amount Outstanding of the Residential Loans during such Collection Period.

Servicer’s Collection Accounts

The Servicer Collection Accounts shall be the various Philippine Peso-denominated bank accounts in Servicer’s name where the following Collections are deposited:

Collections received at Servicer Offices (its head and regional offices);

Payments by Obligors by cash or checks through the banking system; and/or

Salary deductions from employers.

SPT Collection Accounts

The Philippine Peso-denominated bank accounts of the Issuer established with the relevant Account Bank

Income Collection Account

An account in the Issuer’s name, managed by the Trustee, containing the payments/amounts representing interest and penalties from the Residential Loans, proceeds from any foreclosure sale, and any other amount that does not represent payment of the principal on the Residential Loans.

Principal Collection Account

An account in the Issuer’s name, managed by the Trustee, containing the amounts representing principal payments by the Obligors under the Residential Loans, interest and income earned from Eligible Instruments, and excess amount of the Required Liquidity Reserve Amount and Required Commingled Reserve Account.

Seller Restricted Account

The account opened under the Seller’s name, and maintained and operated by the Account Bank, where the variable interest payments for the Subordinated Notes shall be credited.

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Commingled Reserve Account

An account in the Issuer’s name which shall contain three months of expected Collections as determined by the Servicer

Required Commingled Reserve Amount

An account in the Issuer’s name which shall contain three months of expected Collections as determined by the Servicer

Releases from the Commingled Reserve Account

The amount in the Commingled Reserve Account may be released in portions by the Trustee on a monthly basis transferred to the Principal Collection Account if the amount in Commingled Reserve Account is higher than the Required Commingled Reserve Amount. The amount to be released shall be calculated by the Trustee and included in the Monthly Trustee Report.

Liquidity Reserve Account

A Philippine Peso-denominated bank account of the Issuer established with the relevant Account Bank.

This account shall be a reserve account to cover any Shortfall to meet the tax, Senior Expenses, principal payments, and coupon payments on the Senior Notes from the time lag from the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the HGC Guaranty.

Required Liquidity Reserve Amount

An amount equivalent to the expected tax, Senior Expenses, and coupon and principal payments on the Senior Notes for a period of nine months, representing the time lag from the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the HGC Guaranty.

Releases from the Liquidity Reserve Account

The amount in the Liquidity Reserve Account may be released in portions by the Trustee on a monthly basis transferred to the Principal Collection Account if the amount in Liquidity Reserve Account is higher than the Required Liquidity Reserve Amount. The amount to be released shall be calculated by the Trustee and included in the Monthly Trustee Report.

Tax Reserve Account An account in the Issuer’s name, managed by the Trustee, containing the amounts for payments of the SPT Tax.

GUARANTOR CONDITIONS

Type of Guaranty and Extent of Guaranty

Every call on the HGC Guaranty shall be in the form of a Mixed Cash/ Bond Coverage.

The HGC Guaranty shall cover all the Residential Loans up to the full amount and value of the Class A Senior Notes and Class B Senior Notes. Upon a call on the HGC Guaranty, the cover for each Defaulted Residential Loan shall be one hundred per cent (100%) of the outstanding principal of all the Defaulted Residential Loans plus interest thereon of up to eleven percent (11.0%) per annum or the actual interest rate stipulated in Residential Loan Agreement, whichever is lower

HGC Guaranty When the size of the Class C Subordinated Notes reduces to zero due to

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Trigger Event

allocation of defaults. The outstanding value of the Class C Subordinated Notes will be tested and monitored and reported in the Monthly Servicer Report.

Guaranty Mechanism

(a) Every call on the HGC Guaranty shall be in the form of a Mixed Cash/ Bond Coverage.

(b) Cash Coverage. This portion shall cover the actual amount of the unpaid monthly amortizations of the Obligor but not more than fourteen (14) Monthly Installments on each Defaulted Residential Loan. If there is any payment thereafter from such Defaulted Residential Loan to SPT, SPT shall return such amount to HGC.

(c) Bond Coverage. The HGC Amortizing Bonds represent HGC’s total obligation and commitment to pay all the scheduled Monthly Installments in excess of the fourteen (14) Monthly Installments covered by the Cash Coverage. The HGC Amortizing Bonds shall be negotiable and, with respect to each Guaranteed Payment Obligation arising out of a Defaulted Residential Loan, shall:

(i) have a maturity date that is equivalent to the remaining term of the Defaulted Residential Loan.

(ii) contain the schedule of amortization due to the SPT as well as the details of principal and interest combination for each amortization due.

Prepayment Option After 3 years from the issuance of each HGC Amortizing Bond, HGC shall have the option to fully repay each HGC Amortizing Bond. HGC shall notify SPT (through Trustee) and Servicer to exercise such option with the details of which HGC Amortizing Bonds is being repaid.

The HGC Amortizing Bonds shall carry the unconditional guarantee of the Republic of the Philippines.

Guaranty of the Republic Of The Philippines

The payment of the HGC Amortizing Bonds to be issued by HGC pursuant to this Agreement shall be fully and unconditionally guaranteed by the Republic of the Philippines to the full extent of the Guaranty as provided for under Clause Error! Reference source not found. pursuant to the provisions under Administrative Order No. 10 dated 14 August 1998 and Department of Finance (DOF) Circular No. 2-99 dated 07 September 1999 and subsequent amendments thereto

APPLICATION OF FUNDS

(d) On each Monthly Collection Transfer Date, the amount of Collections received or deemed to have been received by the Servicer in respect of the immediately preceding Collection Period (for the avoidance of doubt, including any Deemed Collections in respect of that preceding Collection Period) will be transferred from the Servicer’s Collection Accounts to the SPT Collection Account less the Insurance Payments to be paid to the insurance

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companies by the Servicer under the Servicing Agreement. Provided, that the Collections received or deemed to have been received by the Servicer in respect of the first Collection Period, less the Insurance Payments, shall be transferred by Servicer to the Seller Restricted Account on or before the first Monthly Collection Transfer Date.

(e) Application of Funds During the Controlled Amortization Period

(i) On each Monthly Allocation Date during the Controlled Amortization Period, the balances of the SPT Collection Account shall be distributed by the Trustee into the Income Collection Account and into the Principal Collection Account. Two Business Days after the Monthly Servicer Report Date, the Trustee shall cause the transfer of any income earned on investments in Eligible Instruments into the Principal Collection Account. The amounts to be distributed into the Income Collection Account and the Principal Collection Account shall be based on the Monthly Trustee Report.

(ii) On each Monthly Allocation Date, the Trustee shall apply the amounts in the Income Collection Account and Principal Collection Account in the following order of priority and as indicated in the Application of Funds attached as Schedule E of the Master Definition Agreement. On each Interest Payment Date, the Trustee shall transfer the appropriate amounts to: [a] the account of the Paying Agent for Class A Senior Notes; and [b] the account of the Class B Senior Noteholders (excluding the amounts to be transferred into the Tax Reserve Account, Liquidity Reserve Account, Commingled Reserve Account, and Seller Restricted Account, and also excluding any amounts that are to be paid to the Service Providers by the Trustee), and cause or instruct the Paying Agent to cause, as applicable, the payments/distributions to be made:

For the Income Collection Account:

(i) first, an amount equal to the Tax Provision determined in respect of such Monthly Allocation Date shall be transferred to the Tax Reserve Account;

(ii) second, the Senior Expenses, ranking pari passu, except for the Servicer Fee. Provided that if Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;

(iii) third, the coupons for the Senior Notes shall be paid;

(iv) fourth, the Servicer Fee (only when Seller is the Servicer);

(v) fifth, such amount as would be sufficient to replenish the reserve up to the Required Liquidity Reserve Amount and Required Commingled Reserve Amount for the next Interest Period shall be transferred to the Liquidity Reserve Account and Commingled Reserve Account;

(vi) sixth, the Junior Expenses ranking pari passu and pro rata among the Service Providers; and

(vii) finally, any remaining balance shall be transferred to the Seller Restricted Account.

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Senior Expenses and Junior Expenses incurred within a particular Collection Period must be filed with the Trustee on or before the Collection Period End Date of the Collection Period immediately succeeding the Collection Period in which the expense was incurred. Claims for expenses that are filed shall be included by the Trustee in the Monthly Trustee Report for the month immediately succeeding the date of approval of such claim, and the allocation of payments therefor shall be made in the immediately succeeding Monthly Allocation Date. Such expenses shall be paid to the Service Providers by the Trustee on the immediately succeeding Interest Payment Date. The claim and payment period for Junior Expenses and Senior Expenses is illustrated in Schedule D of the Master Definition Agreement.

For the Principal Collection Account:

(viii) first, in the event that the amounts available under the Income Collection Account are insufficient for the purpose of replenishing the Liquidity Reserve Account and Commingled Reserve Account for the next Collection Period, such amount as would be necessary to replenish the reserve up to Required Liquidity Reserve Amount and Required Commingled Reserve Amount for the next Collection Period shall be transferred to the Liquidity Reserve Account and Required Commingled Reserve Amount;

(ix) second, repayment of the principal amount on the Senior Notes due shall be made in accordance with the Repayment Schedule; and

(x) finally, payment of the Subordinated Notes shall be made but only after the Senior Notes have been repaid in full.

For the Tax Reserve Account:

The Trustee shall apply the balance of the Tax Reserve Account, to the extent of such balance, in or towards the satisfaction, in full, of the following amounts in the following order of priority:

(xi) any SPT Tax Payable shall be paid on or before the date such tax is due in accordance with applicable tax Laws; and

(xii) transfer to the Principal Collection Account an amount equal to the Excess Tax Provision on such date.

For purposes of paying the SPT Tax Payable, Trustee shall prepare the relevant tax return/s on behalf of the Issuer.

For the Liquidity Reserve Account:

The Trustee shall apply amounts standing to the credit of the Liquidity Reserve Account as follows:

(xiii) at least three Business Days prior to the due date of the SPT Tax Payable on any day on which the amount standing to the credit of the Tax Reserve Account is less than the SPT Tax Payable, the Trustee shall apply to the Tax Reserve Account an amount equal to such Tax Payment Shortfall;

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(xiv) on each Monthly Allocation Date, the Trustee shall apply to the Principal Collection Account an amount equal to the Shortfall (if any) in respect of such Monthly Allocation Date;

(xv) on each Monthly Allocation Date, the Trustee shall transfer to the Principal Collection Account any amount equal to the Excess Liquidity Reserve Amount (if any) in respect of such Monthly Allocation Date. Such amount shall be included in the Monthly Trustee Report;

For the Commingled Reserve Account:

Provided that the amount in the Commingled Reserve Account is higher than the Required Commingled Reserve Amount, on each Monthly Allocation Date, the Trustee shall transfer the amount calculated to the Principal Collection Account. Such calculation and amount shall be included in the Monthly Trustee Report. The order of priority for the payments/distributions from the Income Collection Account under items (b)(ii)(iv), (b)(ii)(v), and the Principal Collection Account under items (b)(ii)(viii), (b)(ii)(viii), shall only apply for so long as there is available cash in the appropriate account. If the balance in the Income Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall carry forward any outstanding balance for inclusion in the next Monthly Allocation Date. If the balance of the Principal Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section (excluding a deficit in the Commingled Reserve Account an/or the Liquidity Reserve Account, which shall be covered by the Principal Collection Account), then the Trustee shall transfer to the Principal Collection Account from the Seller Restricted Account an amount equal to such Shortfall.

(f) Application of Funds During the Accelerated Amortization Period (upon the occurrence of an Early Amortization Event)

(i) On each Monthly Collection Transfer Date during the Accelerated Amortization Period, without the occurrence of an Event of Default, the balances of the SPT Collection Account, including any cash received from the HGC in the event of an exercise of the HGC Guaranty, shall be distributed by the Trustee into the Income Collection Account and into the Principal Collection Account. Two Business Days after the Monthly Servicer Report Date, the Trustee shall cause the transfer of any income earned on investments in Eligible Instruments into the Principal Collection Account. The amounts to be distributed to the Income Collection Account and the Principal Collection Account shall be based on the Monthly Servicer Report

(ii) On each Monthly Allocation Date, the Trustee shall apply the amounts in the Income Collection Account and Principal Collection Account in the following order of priority and as indicated in the Application of Funds attached as Schedule E to the Master Definition Agreement. On each Interest Payment Date, the Trustee shall transfer the appropriate amounts to: [a] the account of the Paying Agent; and [b] the account of the Class B Senior Noteholders (excluding the amounts to be transferred into the Tax Reserve Account, Liquidity Reserve Account, Commingled Reserve Account, and Seller Restricted Account, and also excluding any amounts that are to be paid to the Service Providers by the Trustee) and instruct the Paying Agent to cause the payments/distributions to be made:

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(x) first, an amount equal to the Tax Provision determined in respect of such Monthly Allocation Date shall be transferred to the Tax Reserve Account;

(xi) second, the Senior Expenses, ranking pari passu among the Service Providers, except for the Servicer Fee. Provided that if Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;

(xii) third, the coupons for the Senior Notes shall be paid;

(xiii) fourth, the Servicer Fee (only when Seller is the Servicer);

(xiv) fifth, the remaining available cash shall be transferred to the Principal Collection Account in order to repay the Senior Notes, until all Senior Notes are repaid;

(xv) sixth, the Junior Expenses ranking pari passu and pro rata among the Service Providers, provided they are approved by the Trustee, save for Trustee Junior Expenses that must be approved by the Issuer; and

(xvi) finally, after all Senior Notes have been repaid, any remaining balance shall be used to pay other obligations of the Seller.

For purposes of the Senior Expenses and Junior Expenses, but except for the fees of the Service Providers that must be paid when they fall due, without need of any claim or notice from the Service Provider, Senior Expenses and Junior Expenses incurred within a particular Collection Period must be filed with the Trustee on or before the Collection Period End Date of the Collection Period immediately succeeding the Collection Period in which the expense was incurred. Claims for expenses that are filed shall be included by the Trustee in the Monthly Trustee Report for the month immediately succeeding the date of approval of such claim, and the allocation of payments therefor shall be made in the immediately succeeding Monthly Allocation Date. Such expenses shall be paid to the Service Providers by the Trustee on the immediately succeeding Interest Payment Date. The claim and payment period for Junior Expenses and Senior Expenses is illustrated in Schedule D of the Master Definition Agreement.


(xvii) first, such amount as would be necessary to replenish the Commingled Reserve and Liquidity Reserve up to the Required Commingled Reserve Amount and Required Liquidity Reserve Amount for the next Collection Period shall be transferred to the Liquidity Reserve Account; provided, that if an HGC Guaranty Trigger Event has occurred, only the Commingled Reserve Account shall be replenished; and if a Servicer Termination Event has occurred, only the Liquidity Reserve Account shall be replenished;

(xviii) second, payment of the principal amount on the Senior Notes due shall be made in accordance with the Repayment Schedule; and

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(xix) finally, when the Senior Notes have been repaid in full, any remaining balance shall be used to pay other obligations of the Seller.



(xx) any SPT Tax Payable shall be paid on or before the date such tax is due in accordance with applicable tax Laws; and

(xxi) transfer to the Principal Collection Account an amount equal to the Excess Tax Provision on such date.

For purposes of paying the SPT Tax Payable, Trustee shall prepare the relevant tax return/s on behalf of SPT.



(xxii) at least three Business Days prior to the due date of the SPT Tax Payable on any day on which the amount standing to the credit of the Tax Reserve Account is less than the SPT Tax Payable, the Trustee shall apply to the Tax Reserve Account an amount equal to such Tax Payment Shortfall;

(xxiii) on each Monthly Allocation Date, the Trustee shall apply to the Income Collection Account an amount equal to the Shortfall (if any) in respect of such Monthly Allocation Date;

(xxiv) on each Monthly Allocation Date, the Trustee shall transfer to the Principal Collection Account any amount equal to the Excess Liquidity Reserve Amount (if any) in respect of such Monthly Allocation Date. Such amount shall be included in the Monthly Trustee Report.


Provided that the amount in the Commingled Reserve Account is higher than the Required Commingled Reserve Amount, on each Monthly Allocation Date, the Trustee will transfer the amount calculated by the Trustee to the Principal Collection Account. Such calculation and amount shall be included in the Monthly Trustee Report.

If a Servicer Termination Event occurs, on the day of the occurrence of that Servicer Termination Event, the Trustee shall transfer all amounts in the Commingled Reserve Account to the Income Collection Account and Principal Collection Account to cover any Collections that have not been transferred from the Servicer’s Collection Accounts to the SPT Collection Accounts. In the event that no Back-Up Servicer has been appointed, the Trustee shall assume the role of Servicer, and the amounts to be transferred to the Income Collection Account and Principal Collection Account shall be calculated by the Trustee by using as basis, the latest Monthly

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Servicer Report. Once transferred to the Income Collection Account and Principal Collection Account, the Collections shall be applied, when appropriate, in accordance with the provisions of Sections (b) and (c).

(iii) The order of priority for the payments/distributions from the Income Collection Account under items (b)(ii)(iv), (b)(ii)(v), and the Principal Collection Account under items (b)(ii)(viii), (b)(ii)(ix), shall only apply for so long as there is available cash in the appropriate account. If the balance in the Income Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall carry forward any outstanding balance for inclusion in the next Monthly Allocation Date. If the balance of the Principal Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall apply to the Seller Restricted Account an amount equal to such Shortfall.

(g) Application of Funds During the Accelerated Amortization Period (upon the occurrence of a Non-Payment Default)

(i) Following the occurrence of a Non-Payment Default, the Trustee shall automatically cause the transfer of all amounts standing to the credit of the SPT Collection Account, the Liquidity Reserve Account, the Commingled Reserve Account, the Income Collection Account, and the Seller Restricted Account into the Principal Collection Account and apply the amounts in the following order of priority:


(xi) second, the Senior Expenses, ranking pari passu among the Service Providers, except for the Servicer Fee. Provided that if the Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;

(xii) third, the coupons for the Class A Senior Notes shall be paid;

(xiii) fourth, the principal of Class A Senior Notes shall be paid;

(xiv) fifth, the coupons for the Class B Senior Notes shall be paid;

(xv) sixth, the principal of Class B Senior Notes shall be paid;

(xvi) seventh, the Servicer Fee (only when Seller is the Servicer);

(xvii) eighth, the Junior Expenses ranking pari passu and pro rata among the Service Providers, provided they are approved by the Trustee, save for Trustee Junior Expenses that must be approved by the Issuer; and

(xviii) finally, any remaining balance shall be used to pay other obligations of the Seller.

In the event that the amounts in the Accounts are not sufficient to fully satisfy the obligations above, the Trustee will sell all the remaining Residential Loans and any other asset of the Issuer, and use all the proceeds from such sale(s) to satisfy the

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remaining obligations in the order of priority as stated in Sections (d)(i)(x) to (d)(i)(xviii).

(h) For the avoidance of doubt, the Trustee shall have no obligation to credit amounts to the Principal Collection Account and/or the Income Collection Account unless the Servicer has informed the Trustee through the Monthly Servicer Report as to whether the amounts deposited in the SPT Collection Account represent Principal Collection Account Collections and/or Interest Collections, as the case may be.

(i) Unless a Non-Payment Default has occurred, on the date on which all the Issuer’s obligations to make any payment under the Transaction Documents have been fully discharged, the Trustee shall directly release to the Seller all amounts standing to the credit of the SPT Collection Account, Income Collection Account, Principal Collection Account, Liquidity Reserve Account, Tax Reserve Account, Commingled Reserve Account, and Seller Restricted Account by remitting the same to the Seller Bank Account.

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REGULATIONS IN THE PHILIPPINES FOR SECURITIZATION AND MORTGAGE BACKED SECURITIES

Republic Act No. 9267 (the Securitization Act) sought to promote the development of the capital market in the Philippines by supporting securitization and providing its legal and regulatory framework. The Securitization Act also sought to create a favorable market environment for a range of asset-backed securities or what would have been commonly called ABS, and introduced changes in taxation.

The Securitization Act set the definition for Securitization, ABS, Asset Pool, Credit Enhancement, Originator, Servicer, Special Purpose Entity, Special Purpose Corporation and Special Purpose Trust. The Act likewise discussed what it deemed to be a “true sale,” thus created a clearly defined and ready set of framework that was absent from jurisprudence and Civil Code provisions.

The salient features of the Securitization Act include the removal of what Philippine legislators and the members of the Technical Working Group termed “friction costs” – essentially taxes that would have made the securitization unpalatable or uneconomical. The sale or transfer of assets to an SPE is exempt from value-added tax and documentary stamp tax, or any other taxes imposed in lieu thereof. Except for registration fees with the SEC, registration and annotation fees related to or incidental to the transfer of assets, or the security interest thereto, are reduced by the Securitization Act by 50% of the original fee amount. Therefore, the cost of perfecting security interests in the Registry of Deeds and other governmental institutions where said security interests are recorded has been reduced to half of the normal registration/ annotation costs.

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SECURITIZATION PROCESS

The securitization process generally consists of the following steps:

(a) Mortgage origination;

(b) Mortgage analysis and pool selection;

(c) Sale of the mortgage pool to a special purpose vehicle;

(d) Credit enhancement; and,

(e) Issuance and sale of ABS to investors, and secondary trading.

STEP 1. MORTGAGE ORIGINATION

Residential mortgages originated by banks or other financial institutions generate regular payments of interest and principal that make such assets a source of predictable cash flow and therefore ideal candidates for securitization. In the Philippines, the major mortgage lenders include private banks and contractual savings institutions, such as SSS, GSIS and the HDMF. These three institutions provide in-house primary mortgage lending to their members or pool their funds for the purchase of mortgages that meet the low-cost housing criteria of the UHLP.

STEP 2. MORTGAGE ANALYSIS AND POOL SELECTION

From among the loans in their portfolio, originating institutions select a pool of mortgages to be securitized. Firms commonly form pools of homogenous mortgages, or mortgages that are similar in maturity, amount and other characteristics. Homogeneity of mortgages facilitates pool stratification, the task of dividing the pool into different classes or tranches, which in turn facilitates securitization. The mortgages in the pool usually have an aggregate principal amount outstanding that is about equal to the gross amount of finance to be raised.

STEP 3. SALE OF MORTGAGE POOL TO SPECIAL PURPOSE VEHICLE

Issues surrounding the sale of the mortgage pool to the SPV, which can either be a trust or a corporation, affect the way the ABS issues are structured and priced, as well as the way in which such transaction are regulated. These crucial issues include the following:

RECOURSE

Once the mortgages in the pool have been selected, they are sold by the originating institution to an special purpose entity or “SPE”, a separate entity. Depending on the originator-SPE preferences, there are varying degrees of transfer of risks, claims, and rights of ownership over the pool of the SPE. Generally, in a sale made without recourse the SPE acquires complete ownership rights over all the cash flows arising from the pool, and assumes all the risks that were borne by the originator (particularly from the credit risk). If the originator transfers all ownership rights and relinquishes all its claims to the mortgage pool to the SPE, the SPE is said to be bankruptcy remote. Thus, sales made without recourse (to the originator) insulate the mortgages from claims by the originator’s owners and creditors if the originator becomes bankrupt. In fact, securitization not only makes the assets bankruptcy remote but, to the greatest extent possible, also structures the securities so as to free them from the risk of asset deterioration through credit enhancements. Thus, an SPE is desirable because a bankruptcy-remote vehicle isolates the assets from undue claims on cash flow and protects the interests of investors.

In contrast, the originator chooses to retain some ownership interest, rights, or credit risk in the pool or is required to provide liquidity or insurance for any or all of the SPE’s risks over the mortgage

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pool, then the loan sale is generally considered to be with recourse. Recourse restrictions, by definition, do not make the assets bankruptcy remote. Such transactions may take a number of forms, the more common of which include instances when:

The originator takes a junior interest in the pool, retains ownership over the portion or tranche, allowing the tranche to absorb much of the credit risk in case of deterioration in the quality of mortgages in the pool (i.e. the originator agrees to absorb first losses on the mortgages as a credit enhancement); and,

The SPE requires the originator to replace any defective mortgages in the pool with an asset or mortgage with similar characteristics, to satisfy a warranty on the asset pool.

The distinction between recourse and nonrecourse transactions is crucial, because the extent of the SPE’s recourse to the originator in a transaction determines its share of risk, for which regulatory authorities may require it to set aside provisions (i.e. capital provisions or other forms of protection against risk).

MORTGAGE POOL VALUATION AND PRICING

Without a liquid secondary mortgage market where mortgages can be valued at market rates, the selling price of mortgages sold to an SPE will generally be equal to the present discounted value of the outstanding principal of the mortgages. However, the appropriate discount factor to be used in valuing mortgages should take market interest rates, as well as the following factors, into account:

The general quality of the mortgage themselves. It is reasonable to expect that higher mortgage quality will be associated with mortgages with lower loan-to-value ratios and longer seasoning.

The originator’s experience in generating quality mortgages. An originator with a history of poor screening and servicing standards, leading to a history of poor asset quality, may be in no position to demand a good price for its mortgage pool, regardless of the quality of the assets in the pool.

ACCOUNTING TREATMENT

If the mortgage pool is sold without recourse, the originator can take the mortgages in the pool off its balance sheet, and receive a liquidity infusion from the SPE in the form of the sale proceeds. For this reason, without-recourse ABS is usually considered a form of off-balance sheet financing.

Although the sale of the mortgage pool by the originator to the SPE takes the loans off the originator’s books, the contractual agreement between the SPE and the originator still binds the latter to administer the mortgage portfolio on behalf of the SPE. Administration includes servicing the mortgage payments and providing other forms of customer service.

STEP 4. CREDIT ENHANCEMENTS TO HEIGHTEN INVESTOR DEMAND FOR ABS

Because the SPE, which issues the ABS, is the link between the primary mortgage market and the wholesale capital market, its structure and nature are very important. MBS or ABS is distinguished from an ordinary bond transaction by the use of an SPE to insulate the ABS from the underlying risk of default by the primary mortgagors or nonpayment by the services or originators. Thus, it is generally important to give the SPE special privileges or fiscal benefits that would increase the demand for its ABS.

The SPE must resort to credit enhancements to shield potential investors from losses arising from deterioration in the underlying mortgage pool (recall that the outstanding value of the mortgage pool is about equal to the aggregate value of ABS to be sold). The credit enhancements may be external, such as a letter of credit from a bank (providing liquidity support in case of borrower arrears) or a guarantee from a financial insurance company (providing investor coverage against losses on the underlying portfolio). Internal credit enhancements often take the form of structural

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enhancements, in which the single aggregate cash flow arising from the pool is divided into tranches, such that junior tranches absorb losses ahead of more senior tranches. Another important type of internal credit enhancement is overcollateralization, in which the SPV deliberately sets the aggregate value of the ABS sold at less than the value of the cash flows from the underlying mortgage pool. Thus, the greater the extent of collateralization, the greater the protection given to investors. Usually, a combination of internal and external credit enhancements is used.

In a conventional bond issue, the credit rating is an independent assessment of the ability of the bond issuer to repay; in an ABS issue, the credit rating will depend on the quality of the borrowers of mortgages in the pool. But the credit rating is also a benchmark that allows the SPE to determine how much credit enhancement is needed to achieve a particular rating for the issue.

In addition to credit enhancements, the SPE makes sure that the return to be offered to ABS investors is sufficiently covered by the weighted composite interest rate to be earned on the mortgage pool. The spread between the two rates, less servicing and administration costs, will be shared by the originator and the SPE.

STEP 5. ISSUANCE AND SALE OF ABS TO INVESTORS; SECONDARY TRADING

Once the credit enhancements are in place and the ABS have been properly structured to match desired investor preferences, the securities can be sold directly to investors by the SPE, or through an underwriter or investment bank. ABS pass through to investors, at a specific coupon rate, the principal and interest scheduled to be paid each month by mortgagors on the outstanding balance of the pool of loans backing the security, including any unscheduled prepayments. The pass-through rate on the ABS will be lower than the interest rate on the underlying pool.

Secondary trading where ABS markets are sufficiently deep and liquid is generally done through the bond market or through the stock market. Since underlying mortgage assets are [long term (usually 10-25 years)], investors in ABS tend to be institutional investors. Once the ABS are sold, the SPE remits the proceeds (less the guarantee fee) to the originator, which may be able to take the underlying mortgage pool off its balance sheet, depending on the regulatory framework for recourse transactions. ABS holders receive a pro-rata share of the cash flows from the pool of mortgages.

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RISK FACTORS

An investment in the Senior Notes involves risks and such investment is only suitable for investors who have knowledge and experience in financial and business matters necessary to enable them to evaluate the risks and merits of such an investment. The following section summarizes such risks associated with the investment in the Senior Notes. Only sophisticated investors who have knowledge and experience in financial and business matters necessary to enable them to evaluate the risks and the merits of an investment in the Senior Notes should consider any investment therein. In addition to the other information contained in this Offering Circular, prospective purchasers of the Senior Notes are strongly advised to read and carefully consider, in light of their own financial circumstances and investment objectives, the factors discussed below and to conduct their own independent investigation of the risks posed by the Senior Notes and consult their own financial and legal advisors on the risks associated with the investment in the Senior Notes prior to making an investment in the Senior Notes.

Any investment in debt securities carries risks. Different debt securities carry different risks and an investment in any debt securities has to be evaluated on its own merits. An investment in the Senior Notes is in that respect no different. Potential investors in the Senior Notes are strongly encouraged to evaluate the Senior Notes on their own merit and not by reference to any other debt securities whether of a comparable nature or otherwise.

RISKS RELATED TO LIMITED RECOURSE OBLIGATIONS

There is no recourse against NHMFC in respect of defaults by Obligors in respect of their obligations under the Residential Loans. Neither does NHMFC stand behind the Senior Notes.

The Senior Noteholders bear the risk of any default by the Obligors in the payment of the Monthly Installments. There is no recourse against NHMFC in respect of such default.

The Senior Notes do not represent in any way obligations of NHMFC nor does NHMFC provide any guarantee or other assurance in respect of the Issuer’s obligations on the Senior Notes.

The Issuer’s ability to make payments on the Senior Notes depends upon the collection of amounts owing by the Obligors in respect of the Residential Loans.

Obligors may fail to pay Monthly Installments due to various factors, including but not limited to: loss of jobs, other sources of income, or pension entitlements, increase in cost of living expenses without any increase in income. A significant increase in defaults or delinquencies by Obligors could lead to a default or delay in the payment of interest on or redemption of the Senior Notes.

The obligations of the Issuer are limited to its assets

The obligations of the Issuer are limited to its assets, which consist mainly of the Residential Loans. If the assets or the proceeds of enforcement of the assets of the Issuer are insufficient to pay in full all obligations of the Issuer under the Notes, there shall be no further recourse to the Issuer and all unsatisfied obligations shall be extinguished.

RISKS ASSOCIATED WITH AN INVESTMENT IN THE SENIOR NOTES

The market for the Senior Notes is not fully developed.

The Senior Notes may be considered a relatively new type of securities for which there is currently no established secondary market. There can therefore be no assurance that a secondary market will develop or, if a secondary market does develop, as to the liquidity of that market for the Senior Notes or that it will continue for the entire tenure of the Senior Notes, as to the ability of Senior

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Noteholders to sell their Senior Notes, or the prices at which Senior Noteholders would be able to sell the Senior Notes.

The market value of the Senior Notes may be subject to fluctuation.

Trading prices of the Senior Notes may be influenced by numerous factors, including the operating results and/or financial condition of the Issuer, political, economic, financial and any other factors that can affect the capital markets, the industry, or the Issuer. Adverse economic developments could have a material adverse effect on the market value of the Senior Notes.

An investment in the Senior Notes is subject to interest rate risk.

Senior Noteholders may suffer unforeseen losses due to fluctuations in interest rates. The Senior Notes are fixed income securities and may therefore see their price fluctuate due to fluctuations in interest rates. Generally, a rise in interest rates may cause a fall in bond prices. The Senior Notes may be similarly affected resulting in a capital loss for Senior Noteholders. Conversely, when interest rates fall, bond prices and the prices at which the Senior Notes trade may rise. Senior Noteholders may enjoy a capital gain but interest received may be reinvested for lower returns.

An investment in the Senior Notes is subject to inflation risk.

Senior Noteholders may suffer erosion on the redemption of their investments due to inflation. Senior Noteholders would have an anticipated rate of return based on expected inflation rates on the purchase of the Senior Notes. An unexpected increase in inflation could reduce the actual return.

The Issuer may in certain circumstances exercise rights of Early Redemption.

The Issuer may redeem all, but not less than all, of the outstanding Senior Notes on any Interest Payment Date occurring after an exercise by NHMFC of the Clean-up Call.

The ratings on the Class A Senior Notes and Class B may be changed at any time and this may adversely affect the market value of the Senior Notes

The Class A Senior Notes and Class B Senior are conditionally rated Aa by PhilRatings. The ratings address the likelihood of full and timely payment of interest and principal to Senior Noteholders. A rating is not a recommendation to purchase, hold or sell the Senior Notes as such ratings do not comment on the market price or suitability for a particular investor. There is no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by an assigning rating organization in the future, if, in its judgment, circumstances in the future so warrant. In such circumstances, the market price and liquidity of the Senior Notes may decrease, and no person or entity would be obligated to provide any additional credit enhancement with respect to the Senior Notes. Any reduction, suspension or withdrawal of a rating of the Senior Notes will not constitute an Event of Default with respect to the Senior Notes.

RISKS RELATED TO THE MORTGAGE ASSETS

The Issuer’s ability to make payments on the Senior Notes is dependent upon timely and complete payment by the Obligors and in the event a Residential Loan becomes delinquent, the Issuer’s ability to make payments on the Senior Notes on a timely basis may depend upon the timing and the amount of the realizations from any foreclosure proceedings commenced in respect of the related Mortgaged Property or a call on the HGC Guaranty.

There is no assurance, in the event of a default by an Obligor that the cash flow generated by the Residential Loans will be timely or sufficient to ensure payment when due, or at all, of principal and interest due on the Senior Notes. The Issuer may be dependent on the timely resolution of, and the amount of realizations from, foreclosure proceedings commenced on the related Mortgaged Property or a call on the HGC Guaranty.

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The Mortgaged Properties are real estate assets and in the event a Residential Loan becomes delinquent and foreclosure proceedings are commenced in respect of the related Mortgaged Property, the amount of realizations from such proceedings is subject to conditions affecting the real estate market and the particular Mortgaged Property.

The market for the Mortgaged Properties is subject to certain real estate risks which include, but are not limited to, adverse changes in the national, regional or local economic and demographic conditions, real estate values generally and in the locale of the property, interest rates, inflation, the supply of and demand for residential properties, zoning laws or other governmental rules and policies and competitive conditions (including the construction of new competitive properties). If the real estate market collapses or falls sharply, the market value of the Mortgaged Properties may be adversely affected. Such risks, as well as general economic conditions, may result in the delay or inability to find buyers for Mortgaged Properties in foreclosure proceedings and/or adversely affect the amount of realizations from the resolution of such proceedings. Furthermore, foreclosure proceedings will generally take time to be completed. In the event a Residential Loan becomes delinquent and the sale of the related Mortgaged Property is delayed or the proceeds therefrom are insufficient to satisfy the outstanding amount due under the related Residential Loan, the Issuer’s ability to make payments on the Senior Notes on a timely basis or at all may adversely be affected.

The Residential Loans have the benefit of fire and allied perils and mortgage redemption insurance. Such fire and allied perils and mortgage redemption insurance are, however, provided only by two insurers. Senior Noteholders may suffer losses if any of the insurers defaults on its obligations or is excused from its obligations or delays in meeting its obligations.

NHMFC requires Obligors to obtain fire and allied perils and mortgage redemption insurance. Such insurance policies are provided only through the GSIS and the Pag-Ibig MRI Pool, Inc. A default in the performance of their obligations by these insurance providers may result in losses to the Issuer.

In making claims against the insurance providers, NHMFC is dependent upon the Obligors or their personal representatives, in the case of the death of the Obligor, to furnish complete and timely details and evidence to support a claim against the insurance providers. Delays in obtaining such details or evidence could compromise a claim or the amount that may be claimed against the insurance providers and result in losses.

Obligors may also be dependent upon their salary or other periodic income to make payment of the Monthly Installments due from them.

The Monthly Installments due on the Residential Loans may be paid from the monthly salary or other periodic income of the Obligors. An Obligor may lose her/his salary or other periodic income pension in certain circumstances. Such loss could adversely affect the ability of an Obligor to make timely and complete payment of the Monthly Installments due from her/him.

In the event a Residential Loan goes into default, reliance will be placed on the Servicer to take enforcement proceedings.

Among the responsibilities of the Servicer is the taking of enforcement action or proceedings in the event of a default by an Obligor in the performance of her/his obligations under a Residential Loan Agreement. In the undertaking of such responsibility, the Servicer is entitled to exercise a reasonable discretion in the action to be taken and to deduct from the proceeds of realization any legal costs incurred by it.

Senior Noteholders may suffer losses if the Servicer fails to remit payments received from Obligors to the Issuer in accordance with the Servicing Agreement

Obligors will continue to make payments with respect to the Residential Loans to NHMFC. Under the Servicing Agreement, NHMFC (in its capacity as the Servicer) is required to remit or procure the

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remittance to the Income Collection Account or the Principal Collection Account, as the case may be, of any payments with respect to the Residential Loans payable to the Issuer.

If NHMFC (in its capacity as the Servicer) fails to remit or procure the remittance of such payments to the Income Collection Account or the Principal Collection Account, as the case may be, in accordance with the Servicing Agreement, the ability of the Issuer to make payments under the Senior Notes would be adversely affected.

RISKS RELATED TO THE ISSUER

The BIR issued BIR Ruling No. 516-2012 dated August 3, 2012, which characterizes the Notes as “deposit substitutes”, the yield from which are generally subject to a final withholding tax. NHMFC filed a Request for Reconsideration of the above-mentioned BIR ruling arguing that the Notes, being low-cost or socialized housing-related asset-backed securities and guaranteed by the Home Guaranty Corporation are exempt from income tax under Section 33 of the Securitization Act of 2004 and Section 19 of the Home Guaranty Corporation Act of 2000. The request for reconsideration is pending resolution by the BIR.

In the event that withholding taxes are imposed in respect of payments to Senior Noteholders of amounts due pursuant to the Senior Notes, the Issuer is obliged to gross-up or otherwise compensate Senior Noteholders for the lesser amounts the Senior Noteholders may receive as a result of the imposition of withholding taxes by the BIR

DEPENDENCE ON SERVICER

The collection of payments from the Residential Loans is dependent upon the proper performance by the Servicer of its obligations under the Servicing Agreement.

The performance by the Servicer of its obligations is to a certain extent in turn dependent upon the performance of its employees who will be performing the various roles of the Servicer and the continued services of these employees.

Like other employers, the Servicer has to manage its employees and is dependent on its success in recruiting and retaining its employees.

Additionally, in the event that the Servicer for any reasons whatsoever is no longer capable of performing any of its functions under the Servicing Agreement, the availability of a Back-up Servicer is limited given that the Servicer has had vast experience servicing the Residential Loans and possesses the necessary infrastructure.

CHANGE IN LAW

The structure of the transaction and the issue of the Senior Notes are based on Philippine law, tax and administrative practice as at the date of this Offering Circular. No assurance can be given that Philippine law, tax (or changes in tax rates) or administrative practice will not change after the date hereof or that such change will not adversely impact the structure of the transaction and the treatment of the Senior Notes.

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USE OF PROCEEDS

The Issuer shall use the proceeds of P 420,000,000.00 from the issuance of Senior Notes to cover various Transaction Costs described in Table 3 below and also to set up the Liquidity and Commingled Reserve and shall pay the remainder to the Seller towards the payment considerations of the purchase of the Residential Loans.

Table 3: Use of Proceeds (by the Issuer)

Utilization by the Issuer Pesos Estimated proceeds from Sale of Senior Notes 420,000,000.00 Less

Professional Fees 11,784,294.42 PDEx Listing Fee 250,000.00 Documentary Stamp Tax 3,018,722.21 SEC Filing Fee 291,793.21 Rating Agency Fee 1,008,000.00 Reserves 90,295183.32 Miscellaneous Costs 1,358,287.50 Payment to the Seller 312,019,719.32

The Seller shall utilize the proceeds to purchase additional housing receivables.

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TERMS AND CONDITIONS OF THE CLASS A SENIOR NOTES

THE OFFER. The SPT, through the Underwriter and Selling Agent named herein, is offering P300 Million Peso-denominated Class A Senior Notes at Php5,000.00 per Note, with an Interest Rate of 4.8% p.a.

OFFER PRICE. The P300 Million peso-denominated Class A Senior Notes are being offered at Php5,000.00,, with an interest rate of 4.8% p.a., due in 2017.

OFFER PERIOD. The Offer Period shall commence at 9:00am on July 26, 2012 and end at 3:00 pm on August 7, 2012. The SPT and the Underwriter reserve the right to extend or terminate the Offer Period.

PRINCIPAL REPAYMENT. The Class A Senior Notes will be redeemable at par on Maturity Date.

INTEREST RATE. 4.8% per annum. Interest will be calculated on a 90/360 day basis and will be paid quarterly, in arrears.

PAYMENTS. The principal of, interest on, and all other amounts payable on the Class A Senior Notes shall be paid by the Issuer to the Class A Senior Notes through the Paying Agent pursuant to the Registry and Paying Agency Agreement. On each Interest Payment Date and on the basis of the payment report submitted by the Registrar to the Trustee, the Trustee shall transfer to the Paying Agent for deposit into the Payment Account such amount as may be required for the purpose of the payments due on the relevant Interest Payment Date. Pursuant to PDTC Rules, the Paying Agent shall pay, or cause to be paid, on behalf of the SPT on each Interest Payment Date the total amounts due in respect of the Class A Senior Notes by crediting, the Cash Settlement Account of the Class A Senior Noteholders. The Paying Agent shall generate and send to each Class A Senior Noteholder a credit advice of payments credited to their account. Payment by the Trustee to the Paying Agent via deposit into the Payment Account shall discharge the SPT of any and all liability for the relevant payments due under the Class A Senior Notes.

The principal of, and interest on, and all other amounts payable on the Class A Senior Notes shall be payable in Philippine Pesos. The SPT shall ensure that so long as any of the Class A Senior Notes remains outstanding, there shall at all times be a Paying Agent for purposes of the Class A Senior Notes. In the event the Paying Agent shall be unable or unwilling to continue to act as such, the SPT, upon recommendation of the Trustee shall appoint a qualified financial institution in the Philippines authorized to act in its place. The Paying Agent may not resign its duties or be removed without a successor having been appointed.

INTEREST PAYMENT DATES. Subject to limitations described in the Selling Materials, interest on the Class A Senior Notes will be payable on November 17, February 17, May 17 and August 17 of each year (each an Interest Payment Date). The Interest on the Class A Senior Notes will be calculated on a 90/360 basis and will be paid quarterly in arrears on each Interest Payment Date.

If the Interest Payment Date is not a Business Day, Interest will be paid on the next succeeding Business Day, without adjustment as to the amount of Interest to be paid.

CLEAN-UP CALL. A Clean-Up Call takes place when the Issuer may redeem all (but not some only) of the outstanding Class A Senior Notes on any Interest Payment Date occurring after the date of repurchase by NHMFC of the remaining Purchased Residential Loans from the Issuer. NHMFC shall only be entitled to exercise the Clean-Up Call when the outstanding balance or when the outstanding balance of the Class A Senior Notes reaches 10% or less of its original balance or when the outstanding principal balance of the Residential Loans falls to 10% or less of the original principal balance of the Residential Loans, whichever occurs earlier. The consideration shall be at current book value of the Residential Loans.

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NON-PAYMENT DEFAULT. In case of a Non-Payment Default, the Trustee shall use all the remaining assets of the SPT to satisfy all the remaining obligations of the SPT. After all the assets of the SPT have been distributed, the SPT shall have no further liability to the Class A Senior Noteholders.

MINIMUM SUBSCRIPTION. Each Application must be for a minimum of Php5,000.00, and thereafter, in multiples of Php5,000.00. No Application for multiples of any other amount shall be considered. In case an Application fails to indicate the applied Class A Senior Notes in the minimum amount of

Php5,000.00,, the entire Application shall be rejected.

LISTING AND TRADING. The Class A Senior Notes are expected to be listed on the PDEx on August 17, 2012. Trading is expected to commence on the same date.

ELIGIBLE INVESTORS. The Class A Senior Notes may be owned or subscribed to by any person, corporation cooperatives or entity. In addition, under certain circumstances the SPT may reject an Application or reduce the number of Class A Senior Notes applied for subscription or purchase.

SECONDARY TRADING. All secondary trading of the Class A Senior Notes shall be effected using the trading facilities of PDEx. Trading of the Class A Senior Notes in the secondary market may expose investors to the following potential risks:

Market Risk. This is the potential for the investment to experience losses from fluctuations in prices.

This risk cannot be diversified away and may be brought about by general market conditions such as, but not limited to, political events, natural disasters, etc.

Interest Rate Risk. This risk refers to the potential for changes in the investment’s value due to interest rate changes. Sale and purchase of the Class A Senior Notes in the secondary market may result in capital gain or loss. The price of the Class A Senior Notes is inversely related with market interest rates (i.e. when interest rates increase, bond prices fall and vice versa). This risk impacts on the investments if they are not held until maturity.

Liquidity Risk. This risk pertains to the possibility of loss due to the lack of marketability of an investment (i.e. it cannot be bought or sold quickly enough to prevent or minimize a loss). Liquidity risk arises when, among other reasons, there are small outstanding issues of the security being bought or sold, there are no ready buyers or there is too little buy / sell activities in the market.

Default Risk. This is the risk that investor may encounter due to an issuer’s inability to settle the principal and / or interest payments when they fall due. The issuer’s failure may be a result of unfavorable changes in its financial standing. This risk may also involve a counterparty defaulting on an obligation).

INSURANCE ON THE CLASS A SENIOR NOTES. The Class A Senior Notes do not represent deposits or liabilities of NHMFC. They are not insured with the Philippine Deposit and Insurance Corporation.

SELLING AND TRANSFER RESTRICTIONS. Initial placement of the Class A Senior Notes and subsequent transfers of interests in the Class A Senior Notes shall be subject to normal Philippine selling restrictions for listed securities as may prevail from time to time.

TITLE AND TRANSFER. Legal title to the Class A Senior Notes shall pass by endorsement and delivery to the transferee and registration in the Registry of Noteholders to be maintained by the Registrar. Settlement of the Class A Senior Notes in respect of such transfer or change of title to the Class A Senior Notes, including the settlement of documentary stamp taxes, if any, arising from subsequent transfers, shall be similar to the transfer of title and settlement procedures for listed securities in the PDEx.

REGISTRY RULES. The Noteholders shall hereby be bound by the registry rules and procedures of the Registrar, as the same may be amended from time to time.

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TERMS AND CONDITIONS OF THE CLASS B SENIOR NOTES

The Class B Senior Notes constitute direct, unconditional, unsubordinated and secured obligations of the Issuer ranking at least pari passu among themselves and with all its other present and direct, unconditional, unsubordinated, but subordinated only to Class A Senior Notes in the accelerated amortization period with non-payment default, and secured obligations of the Issuer (other than subordinated obligations and those preferred pursuant to mandatory provisions of law). The Class B Senior Notes shall be in the form of the fixed rate promissory Class B Senior Note in the name of the original Class B Senior Noteholder, substantially in the form hereto attached as Schedule B. The Class B Senior Notes shall be in certificated form only.

PURCHASE PRICE. The Class B Senior Notes are priced at face value.

PAYMENT. All amounts payable under this Agreement shall be paid in Pesos.

AMOUNT OF THE CLASS B SENIOR NOTES. The total aggregate principal amount of Class B Senior Notes to be offered and sold to the Class B Senior Noteholder shall be One Hundred Twenty Million Pesos (P120,000,000.00).

REPAYMENTS OF THE CLASS B SENIOR NOTES. The principal amounts shall be paid in accordance with the amortization schedule set out in Table 5 of this Offering Circular. All payments of the principal amount shall be made on Interest Payment Date by RTGS or credit account or manager’s checks or corporate checks drawn against a bank duly licensed by the BSP located in Metro Manila, value dated as of the Interest Payment Dates and the Legal Final Maturity Date.

EARLY REDEMPTION. Prior to Legal Final Maturity Date, upon the exercise by the Seller of the Clean Up Call Option, Issuer shall repay all the principal amounts outstanding on the Class B Senior Notes on the Interest Payment Date following the Clean-Up Call Payment Date. The Trustee shall notify the Class B Senior Noteholder of the Clean Up Call Exercise.

INTEREST.

(a) For the Class B Senior Notes, the interest will be paid quarterly on the Interest Payment Date. The Issuer shall pay interest on the outstanding principal amount of the Class B Senior Notes at an interest rate of 6.0% p.a.

(b) Interest payments on the Class B Senior Notes shall be made by RTGS, credit to account manager’s checks or corporate checks drawn against a bank duly licensed by the BSP located in Metro Manila value dated as of Interest Payment Date and shall be made available at the office of the Trustee.

COMPUTATION OF INTEREST. The payments of interest for the Class B Senior Notes shall be computed on a ninety over three hundred sixty (90/360) day basis.

EXEMPT SECURITIES. The Class B Senior Notes are guaranteed by the Home Guaranty Corporation and as such, the Notes are deemed as exempt securities under SRC 9.1(a). A request for confirmation of exemption is pending with the SEC.

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AMORTIZATION SCHEDULE

The repayment of principal on the Class A Senior Notes shall occur on 17 August 2012.

The repayment of principal on the Class B Senior Notes shall follow a pre-determined schedule, in other words a “scheduled amortization” method of repayment. Table 5 below shows the amortization schedule of the Class B Senior Notes.

Table 5: Amortization Schedule of the Class B Senior Notes

Period Principal Repayment Class B Senior Notes Balance 17-Nov-12 - 120,000,000 17-Feb-13 - 120,000,000 17-May-13 - 120,000,000 17-Aug-13 - 120,000,000 17-Nov-13 - 120,000,000 17-Feb-14 - 120,000,000 17-May-14 - 120,000,000 17-Aug-14 - 120,000,000 17-Nov-14 - 120,000,000 17-Feb-15 - 120,000,000 17-May-15 - 120,000,000 17-Aug-15 - 120,000,000 17-Nov-15 - 120,000,000 17-Feb-16 - 120,000,000 17-May-16 - 120,000,000 17-Aug-16 - 120,000,000 17-Nov-16 - 120,000,000 17-Feb-17 - 120,000,000 17-May-17 - 120,000,000 17-Aug-17 - 120,000,000 17-Nov-17 6,000,000 114,000,000 17-Feb-18 6,000,000 108,000,000 17-May-18 6,000,000 102,000,000 17-Aug-18 6,000,000 96,000,000 17-Nov-18 6,000,000 90,000,000 17-Feb-19 6,000,000 84,000,000 17-May-19 6,000,000 78,000,000 17-Aug-19 6,000,000 72,000,000 17-Nov-19 6,000,000 66,000,000 17-Feb-20 6,000,000 60,000,000 17-May-20 6,000,000 54,000,000 17-Aug-20 6,000,000 48,000,000 17-Nov-20 6,000,000 42,000,000 17-Feb-21 6,000,000 36,000,000 17-May-21 6,000,000 30,000,000 17-Aug-21 6,000,000 24,000,000

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17-Nov-21 6,000,000 18,000,000 17-Feb-22 6,000,000 12,000,000 17-May-22 6,000,000 6,000,000 17-Aug-22 6,000,000 -

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THE ISSUER

The Issuer, BahayBonds 2 Special Purpose Trust, is established under Trust Account # 45756 TA 01 with LBP-TBG.

LBP-TBG is duly registered and qualified to perform trust functions under the General Banking Laws and as such with the BSP, and duly organized and validly existing pursuant to the Securitization Act and the Securitization Rules, will act as the Issuer, the purchaser of the Loans from NHMFC and the issuer of the Notes.

LBP-TBG provides a wide range of personal and corporate trust and other fiduciary services. Personal trust products and services for customers include living trust accounts, safekeeping, estate planning, guardianship, and investment management. Corporate trust services and products include trusteeship, securitization, investment management, administration of employee retirement plan, pre-need plan, mortgage/collateral trust indenture, and safekeeping services for local corporations. Trust agency services include acting as bond registrar, receiving, collecting and paying agent, loan facility agent and escrow agent.

In accordance with regulations governing the conduct of a trust business, the business activities of LBP-TBG are being carried out through its Trust Committee which, in turn, reports directly to the LBP Board of Directors, which is composed of three directors, the LBP President and the head of LBP-TBG. All administrative functions not limited to new policies to be implemented and all investment decisions of the Trust Banking Group must be approved and authorized by LBP-TBG’s Trust Committee. The LBP-TBG, in its capacity as the administrator of the SPT, and the LBP, in its capacity as Arranger, Underwriter and Noteholder are related parties, being under the direct control and supervision of the LBP Board of Directors.

LBP-TBG manages four Unit Investment Trust Funds (“UITFs”). The UITFs are invested in a diversified portfolio, composed primarily of fixed-income securities of the Government, fixed-income issued by a corporation, equities and U.S. dollar – denominated funds investments of the Government. These UITFs, are centrally managed and marketed through LBPs branches. LBP-TBG believes that, due to its distinctive competence, it continues to enjoy a competitive advantage in government transactions.

As of 31 December 2011, the LBP-TBG managed, in aggregate, approximately P67.5 Billion of funds, of which approximately P67.4 billion were from investment management accounts and P83.20 million were UITFs and traditional trust and fiduciary services. As of 30 June 2012, funds managed by LBP-TBG increased by P15.6 billion mostly from fund management and other fiduciary services. Revenue from the trust business is generated through trust fees from the management of UITFs, corporate and personal trust products and other fiduciary services.

This year’s substantial growth in trust assets, a 58.8% increase from 31 December 2011 levels of P67.5 billion, was driven by the increased volume of investment management accounts which hit P46.3 billion as of 30 June 2012. LBP-TBG aggressively marketed this product to both retail and corporate investors. The Special Deposit Accounts facility of the BSP provided the appropriate outlet for the incremental funds generated during the year. LBP-TBG closely collaborated with other LandBank units in promoting and penetrating LandBank's client base.

LBP -TBG TRUST COMMITTEE MEMBERS (AS OF 15 JULY 2012)

POSITION NAME Chairman - Undersecretary, Department of

Labor and Employment Hon. Danilo P. Cruz

Vice Chairman - Undersecretary, Department of Agriculture

Hon. Antonio A. Fleta

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Member - President and CEO, LandBank Ms. Gilda E. Pico Member - Representative, Private Sector Dir. Tomas T. de Leon, Jr.

Member - First Vice President & Trust Officer, LBP-TBG

Ms. Josephine G. Cervero

LBP-TBG SENIOR MANAGEMENT (AS OF 15 JULY 2012)

POSITION NAME First Vice President & Trust Officer Ms. Josephine G. Cervero

Assistant Vice President, Trust Portfolio Management Department

Mr. Josefino P. Cerin

Department Manager, Trust Marketing Department

Mr. Camilo G. Sanchez

Department Manager, Trust Operations Department

Ms. Lamelita G. Aquino

All authorizations, approvals and other acts legally necessary for the issuance of the Notes, and for the Issuer to enter into and comply with its obligations under the Trust Agreement, have been obtained or effected or shall have been obtained or effected on or before the issuance of the Notes.

All government authorizations, approvals, rulings, registrations and other acts legally necessary for the issuance of the Notes, and for the Issuer to enter into and comply with its obligations under the Trust Agreement and all applications which may be duly accepted by the Issuer, have been obtained or effected or shall have been obtained or effected on or before the issuance of the Notes.

All conditions imposed under the Securitization Act have been or will have been complied with by the Issuer as of the date and/or time that they are required to be complied with.

The obligations of the Issuer under the Notes and the Trust Agreement will constitute its legal, valid and binding obligations enforceable in accordance with the terms thereof and the issuance of the Notes will not conflict with, nor constitute a breach of or default of, the charter or any resolution of the Board of Directors of the Issuer, or any contract or other instrument by which the Issuer is bound, or by any law of the Republic of the Philippines or any regulation, judgment, or order of any office, agency or instrumentality thereof applicable to the Issuer.

Except as the Issuer may have otherwise disclosed in writing to the Noteholders, through the Trustee, on or prior to the date hereof, there are no legal, administrative or arbitration actions, suits or proceedings pending or, to the best of its knowledge, threatened against or affecting the Issuer which, if adversely determined, would have a material adverse effect on the business operations, properties, assets or financial conditions of the Issuer or which enjoin or otherwise adversely affect the execution, delivery or performance of this Agreement, the issuance of the Notes.

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THE SELLER AND SERVICER

BACKGROUND

NHMFC, as the Seller, is the main government home mortgage institution created in 1977 under Presidential Decree No. 1267. NHMFC was established with the primary purpose of being the Government Secondary Mortgage Institution (SMI) to develop and provide a secondary market for home mortgages granted by public and/or private home financing institutions. Under Executive Order No. 90, NHMFC was entrusted to implement the Unified Home Lending Program (UHLP), a system of subsidized lending for low-cost housing. Loans originated under the UHLP lending guidelines were purchased by NHMFC for eventual securitization. Between 1987 to 1996, NHMFC functioned as the sole lending window of the UHLP. Within the same period, it “took out” or purchased mortgages originated by low-cost housing developers using funds lent to it by the SSS, GSIS, and HDMF.

In 2004, NHMFC entered into a Restructuring Agreement with SSS and HDMF on the funding from these two entities. NHMFC has remained updated in its obligations to the two funders.

In 2006, after a successful financial turnaround (effective 2004), NHMFC began the process of transforming itself to become the Government Secondary Mortgage Institution (SMI), thereby operationalizing its original mandate.

In 2007, NHMFC implemented its rationalization program and streamlined itself from an 850-strong plantilla down to 300 plantilla items. Correspondingly, its manpower complement was reduced from almost 700 to the present 270 personnel. NHMFC also embarked on a capability-building program for the officers and staff, its systems and procedures. In line with this transformation process and pursuant to Executive Order No. 272, NHMFC created the Social Housing Finance Corporation (SHFC), an NHMFC subsidiary, and transferred to SHFC the administration of the Community Mortgage Program (or CMP). Simultaneously, the NHMFC Board approved the creation of an Asset Management Company (AMC) to manage and administer its collection servicing functions. Although still under study, this is in line with NHMFC’s overall thrust to remove/transfer all extraneous programs/functions of the NHMFC that do not directly relate/impact to its SMI role.

NHMFC continues to gain strength in operationalizing its original mandate as an SMI. From 2004 to the present, NHMFC enjoys a positive net income position. In 2009, NHMFC successfully issued the first housing mortgage-backed securities called BahayBonds. This marked the return of NHMFC as the premiere government secondary mortgage institution. In late 2010, NHMFC also implemented its Housing Loan Receivables Purchase Program (or HLRPP). In January 2012, NHMFC successfully finalized the restructuring of its loan with the GSIS. The Restructuring Agreement was signed on April 10, 2012, simultaneous with the substantial payment of the UHLP portfolio and thus, now owned by NHMFC.

BAHAYBONDS: THE MAIDEN ISSUE

The Development of a “Secondary Housing Mortgage Market” in the Philippines is one of the key economic goals of the government. With the passage of the Securitization Act of 2004 establishing a framework for SMIs in the Philippines, the infrastructure is finally in place to move forward.

Mortgage securitization provides a cost-effective way for the government to support economic development by leveraging its contribution to housing through the use of private capital and risk sharing. By providing the legal framework for securitization along with selective forms of credit enhancement (such as government guarantees), the government can offer powerful incentives for private sector participation and help mobilize both domestic and international capital for housing development. In order to provide the government with this much needed new tool to stimulate

50

economic growth and housing development, NHMFC launched and successfully completed the first securitization of its low delinquency accounts.

In 2009, NHMFC issued the first mortgaged-backed securitization in the country with its issuance of P2.06 Billion worth of BahayBonds (now referred to as BahayBonds 1 or BB1). The maiden issue consisted of P1.75 Billion worth of Senior Notes (which has been rated by PhilRatings as Prs Aa for the past three years) and P310 Million of Subordinated Notes (rated as Prs Baa). The BB1 Senior Notes were subscribed by three commercial banks while the BB1 Sub Notes were subscribed by NHMFC. The issue was twice oversubscribed and won an award from the Asset Asian Awards as the “Best Securitization Deal for 2009” in an awards ceremony held in Hongkong the following year. In 2011, as a result of the same transaction, HGC awarded NHMFC with an Excellence Award in Creative Fund Sourcing and Mobilization on its Annual Clients’ Appreciation Night.

COLLECTION PROGRAMS

NHMFC continues to give priority to the collection of all accounts under its various programs. It aims to improve the quality of accounts through aggressive and focused collection plans designed according to specified classes of accounts that are replicable across all the regions of the country.

Total Collections

Total cash collections for the year 2011 were recorded at P2.386 Billion, which is a 95.44 per cent accomplishment of the annual target of P2.5 Billion for a monthly average of P198.83 Million. The bulk of the cash collection came from the UHLP (P2.3152 Billion or 97.03%), followed by Folio I (Open Housing) (P49 Million), PEA by (P14 Million) and lastly by collection from SHDLP accounts (P8 Million). Compared to 2010 total collections, 2011 collections showed a decrease by almost 3.35%. The reason for the decrease in collection of these programs is as follows:

(a) Reduction in collection due to the decrease in number of employers remittance to NHMFC;

(b) Reduction in collection due to the full payment of the regular payor; and

(c) Reduction in Hi-Del collection due to the Sale of Non-Performing Loans.

Table 6: Status of Receivables Per Program (As of 31 March 2012) Program No. of

Accounts Loan

Amount (Million Pesos)

Outstanding Balance (Million Pesos)

Expected Monthly Collection

(Million Pesos)

Expected Yearly

Collection (Million Pesos)

Folio I 4,357 510.41 2,847.25 5.5 66.0 Folio II (UHLP) 71,328 12,918.1

3 17,344.14

227.50 2,730

SPD 7,387

504.28 413.86 .46

.554

PEA 909 198.60 149.69 2.19

26.28

IL/SAMOR III 5,407 1,148.19 1,619.47 19.65 235.80 Acquired Asset 6,945

1,410.74

1,877.62 20.28 243.36

SAMOR III (Installment)

180

36.67 36.09 0.43 5.16

BFS-Repurchased 215 52.27 77.79 .87 10.44

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HLRPP 4,484 1,009.27 1,517.46 25.63 307.56 Securitized Accounts(BB1)

9,558 2,032.71 1,306.39 27.16 325.92

TOTAL 110,770 19,821.27

27,189.76 329.67 3,951.07

STATUS OF NHMFC OBLIGATIONS AND PAYABLES

NHMFC’S Obligations to Funders

Table 7: NHMFC’S Obligations to Funders (As of 31 March 2012) Total HDMF SSS GSIS Total Drawdown Releases

P42,102,862,915.00

P5,533,000,000.00

P30,075,000,000.00

P6,494,862,915.00

Total Payments Prior to Restructuring

37,736,118,649.81

4,732,081,893.22

27,589,991,619.02

5,414,045,137.57

Restructured Loan 48,926,859,011.7

5

6,525,914,786.87

40,515,317,218.32

1,885,627,006.56

Payments Made on Restructured Loans

22,342,633,532.86

3,354,077,763.21

18,988,555,769.65

Principal Balance Due, As of March 31, 2012

16,246,556,472.67

1,773,608,247.20

12,587,321,218.91

1,885,627,006.56

As of April 10, 2012, NHMFC made a substantial payment to GSIS bringing the principal loan balance to P1,358,745,296.30

STATUS OF RELEASE OF EQUITY FOR NHMFC UNDER CISFA

(As of March 31, 2012)

Table 8 Authorized Capital Stock 5,500,000,000 Less Paid in Capital: Original Paid Up Capital 500,000,000 Released in August 1995 900,000,000 World Bank Liability Converted to Equity 1,582,005,642 Released in June 1996 as equity support 135,000,000 Released in August 1996 representing 10% annual contribution of PCSO to Socialized / Low-Cost Housing pursuant to Sec. 6 of R.A. No. 1169

73,504,141

Released in in 1997 Programmed Equity Released in 2008

180,000,000 500,000,000

Balance (Programmed Equity in 2011 and 2013)

3,870,509,783.00

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1,629,490,217.00

*Programmed Equity to be Released In:

CY 2009

(Released to NHMFC on 6/04/2012)

400,000,000

CY 2013 1,229,490,217 Total 1,629,490,217

FINANCIAL HIGHLIGHTS (BASED ON AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 2010)

Operating and Miscellaneous Revenues. Compared with last year’s level, total revenues decreased by 50.70 percent or P1.139 Billion primarily due to a decrease in Interest Income (by 24%) and non-receipt of subsidy income, despite the more than five times increase of gain on sale of disposed assets for 2010.

January – December 2010 January – December 2009 Increase(Decrease) Amount Growth Rate

P1,107,546,031.00

P2,246,331,950.00

(P1,138,785,919.00)

(50.70%)

Expenditures. Total expenditures for the period valued at P1.068 Billion decreased by 1.33%. The decrease was attributed to the decrease in Maintenance and Operating Expenses by 43 percent or P198 Million, and Personal Services by 7 percent. On the other hand, Financial Expenses comprised largely by Interest Expenses increased by 56% the largest portion of total expenditures at 52.80%.

January – December 2010 January – December 2009 Increase/Decrease Amount Growth Rate

P1,068,121,129.00 1,082,476,491.00 14,355,362.00 1.33%

Assets. Total assets as of December 2010 stood at P35.234 Billion, higher by P101 Million or .29% over last year’s level of P35.133 Billion.


P35,234,721,733.00

35,133,091,753.00 101,629,980.00

.29%

Liabilities. Total liabilities posted a slight increase of P62 Million or .15% higher than the previous year.


P42,007,846,777.00

41,945,658,340

62,188,437.00

.15%

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NHMFC FINANCIAL STATEMENTS

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NOTES TO THE FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

1. GENERAL INFORMATION

NHMFC is a government-owned and controlled corporation created under P.D. No. 1267 on December 21, 1977. The primary purpose for the creation of NHMFC is to develop and provide for a secondary market for home mortgages granted by the public and/or private home financing institutions.

The registered office of NHMFC is located at Filomena Building III, 104 Amorsolo Street, Legaspi Village, Makati City. NHMFC operates within the Philippines. The personnel complement for the current year 2010 is 347, with 217 regular and 130 agency-hired employees.

2. ACCOUNTING POLICIES

The principal accounting policies used are consistent with those used in the previous financial year.

Basis of preparation 2.1 Adoption of New Government Accounting System Revised Chart of Accounts

A new chart of accounts is adopted to comply with the requirements of the New Government Accounting System (NGAS) – Revised Chart of Accounts for Corporations prescribed under COA Circular No. 2004-002 dated April 29, 2004 and 2004-008 dated September 20, 2004.

2.2 Financial Statements

The financial statements of NHMFC were prepared and presented in accordance with state accounting principles.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1 Accounting basis

NHMFC uses the accrual basis of accounting. The effects of transactions and events on assets and liabilities are recognized in time periods to which they relate.

Accrual of interest income is computed on accounts with zero to three months arrearages following the provisions of Circular No. 202, Series of 1999 issued by the BSP.

3.2 Going concern basis

The financial statements are prepared on historical cost and going concern basis. Despite the transfer of the Community Mortgage Program (CMP) to NHMFC’s wholly-owned subsidiary, the Social Housing Finance Corporation (SHFC), effective October 16, 2005 pursuant to E.O. No. 272 and the formal closing of the non-performing loans (NPLs) sale on November 10, 2005, the financial statements are prepared on a going concern basis for the following reasons: (1) NHMFC shall endeavor to become the premiere government secondary mortgage institution (SMI) through programmed securitizations of selected mortgages/assets in order to develop an active secondary market for home mortgages; (2) it shall continue to manage and service Unified Home Lending Program (UHLP) accounts with low to moderate delinquencies until such time that securitization of mortgages shall be in place; and (3) it shall strive to aggressively implement a collection system that will enable itself to comply with the amortization payment requirements under the loan restructuring agreement.

3.3 Related party disclosures

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The new standard under Philippine Accounting Standard (PAS) 24 ensures that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may be affected by the existence of related parties and by transactions and outstanding balances with such parties. Related party transactions are transfer of resources, services or obligations between related parties, regardless of whether a price is charged.

3.4 Allowance for doubtful accounts

Allowance for doubtful accounts is computed at two per cent of gross loan portfolio and at five per cent of “no payment since take-out mortgages” in compliance with BSP Circular No. 148, series of 1997.

3.5 Property and equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method based on the estimated life of the property with 10% salvage value.

Repairs and maintenance and minor replacements are charged to expense as incurred. Major repairs and betterments are capitalized.

Leasehold improvements are amortized over five years or the actual length of lease contract using the straight-line method with ten per cent salvage value.

4. CASH AND CASH EQUIVALENTS

The account consists of the following:

2010 2009 Cash on hand 4.1/ 6,886,834 21,674,776 Cash in bank – local 4.2/

Cash in bank - combo account 77,076,627 434,373,270 Cash in bank - savings account 68,565,013 58,620,289 Cash in bank - time deposit 917,269,241 1,048,860,007

Cash in bank – foreign 4.3/ 861,752 893,086

1,070,659,467 1,564,421,428 4.1 Cash on hand

The account represents collections of Cash Collecting Officers and Supervising Tellers, cash advances granted to Cash Disbursing Officers, and Petty Cash Fund established at the Head Office and Regional/Satellite Offices to defray immediate or emergency minimal disbursements.

4.2 Cash in bank – local


(a) Funds deposited with government banks for payroll and corporate operating funds.

(b) Cash in banks earns interest at prevailing interest rates of .5 per cent per annum for savings account and 2.5 per cent to 4 per cent per annum for time deposit.

4.3 Cash in bank - foreign

The account represents the dollar account opened to accommodate dollar payment (non refundable) by participating bidders for bid documents during the sale of Non Performing Loans accounts. The account earns interest at 3.2 per cent per annum.

5. RECEIVABLES

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2010 2009 (As restated)

Loans receivable 5.1/ 200,217,571 257,928,606 Interest receivable 5.2/ 695,664,189 947,706,396 Notes receivable 5.3/ 159,086,022 159,086,022 Advances to Balikatan Housing Finance

Incorporated (BHFI) 5.4/ 98,652,490 98,652,490 Other receivables 5.5/ 89,386,641 97,602,038 Due from officers and employees 5.6/ 28,235,940 32,319,219 Due from subsidiaries/affiliates 5.7/ 21,375,863 78,615,361 Due from GOCCs 5.8/ 11,142,817 11,142,817 Housing Loan Receivable Purchase Program

(HLRPP) 5.9/ 427,468 -

1,304,189,001 1,683,052,949

Allowance for doubtful accounts 28,472,139 27,930,933

1,275,716,862 1,655,122,016

5.1 Loans receivable

The account pertains to the current portion of regular accounts retained by NHMFC under the old program after the outright assignment of P4.42 billion to HDMF as payment for trust liabilities due to the latter. The loans are amortized monthly up to a maximum term of 25 years with interest rates ranging from 9 per cent to 16 per cent depending on the classification as well as amount of financing availed of.

5.2 Interest receivable

The account represents accrual of interest income as shown below:


Folio II 457,119,356 687,028,256 Folio I 168,257,301 181,047,807 Developmental loans 69,492,153 69,492,153 Others 661,567 89,060 Refinanced loans 104,923 104,923 Sales contract 28,889 - Community Mortgage Program - 9,944,197 695,664,189 9,944,197 Allowance for doubtful accounts 13,913,283 13,372,077 709,577,472 33,260,471

5.3 Notes receivable

The account represents Subordinated Debt Series B which earns interest at 18 per cent per annum.

5.4 Advances to BHFI

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The account represents Junior Working Capital advanced by NHMFC for the account of funders.

5.5 Other receivables



Claims for disallowed payments a/ 66,331,754 66,331,754 Bahayan Mortgage Participation Certificates b/ 13,700,000 13,700,000 Accounts receivable - others c/ 9,354,887 17,570,284 89,386,641 97,602,038 Allowance for doubtful accounts 14,558,856 14,558,856

193,332,138 209,762,932

(a) Claims for disallowed payments consist of the disbursements/transactions disallowed in audit by the COA debited to the above account and credited to Contingent Surplus – Claims for disallowed payments. The former account is presented in the balance sheet under Receivable while the latter is presented in the Statement of Changes in Capital Deficiency.

(b) Bahayan Mortgage Participation Certificates (BMPC) represents sales of BPMCs in 1980 to 1981, net of two per cent discount, which have not been paid within the 60 or 90 days credit terms. The provision for doubtful accounts has brought down its value to P1.

(c) Accounts receivable-others refers to loan amortization collections made by collecting banks that have not been remitted to NHMFC as verified by the Treasury Department.

5.6 Due from officers and employees

The account represents cash advances granted to officers and employees on official travel within the Philippines or abroad, which should be liquidated in full upon completion of travel. Included also in this account are the car loans of officers.

5.7 Due from subsidiaries/affiliates

The account represents advances made by NHMFC for various expenses incurred by SHFC, AKPF and BHFI.

5.8 Due from GOCCs

The account is composed of the following:

2010 2009 Funders (Securitization) a/ 8,286,642 8,286,642 Home Guaranty Corporation b/ 1,375,427 1,375,427 Home Development Mutual Fund c/ 132,633 132,633 Others d/ 1,348,115 1,348,115 11,142,817 11,142,817

(a) Funders (Securitization) represent out of pocket expenses advanced by NHMFC for the securitization project.

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(b) Home Guaranty Corporation (HGC) represents the balance of the aggregate loan value of mortgages assigned pursuant to the credit insurance agreement between HGC and NHMFC.

(c) Home Development Mutual Fund (HDMF) pertains to cash advances and other charges collectible from HDMF.

(d) Others represents the part of the assets/liabilities acquired by NHMFC upon absorption of the Private Sites and Services Projects Office in Y1988

5.9 HLRPP receivable

The account represents the current portion of purchased mortgages/receivables originated by public/private financial institutions and developers in accordance with the terms, conditions and standards of NHMFC to serve as the underlying collaterals for accounts eligible for securitization.

6. OTHER CURRENT ASSETS


2010 2009 Rentals and other deposits 6.1/ 43,422,601 35,219,706 Prepaid insurance 1,073,877 763,858 Office supplies inventory 895,715 891,207 Other prepaid expenses 57,781 91,112 Prepaid rent 27,352 13,800

45,477,326 36,979,683 6.1 Rentals and other deposits

The account refers to deposits made by NHMFC to various lessors for office space rental and services.

7. LONG - TERM RECEIVABLES

Previously termed as Loan Installment Receivables, Long-term Receivables (LTR) the account represents mortgages purchased from the accredited originating institutions/ developers/community mortgage associations consisting of the following:


Regular LTR

Folio II 7.2/ 3,983,414,881 3,150,356,233 Loans Receivable-PRA 7.3/ 159,293,026 165,160,114 Folio II Buy Back 7.4/ 100,530,918 - Folio I 7.1/ 84,309,102 95,024,535 CMP 7.5/ 80,000,000 120,352,823 HLRPP 7.6/ 636,561 -

4,408,184,488 215,377,358 Past due loans receivables 7.7/ 15,641,402,865 16,787,720,212 Items in litigation 7.8/ 1,343,045,068 1,133,059,058 Insurance receivable 7.9/ 488,521,098 514,823,087 Sales contract receivable 7.10/ 243,484,581 222,605,678

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Others 4,600,359 909,379 Liquidity reserve - 114,480,335 Commingle reserve - 82,435,922

26,537,422,947 19,071,411,029 Allowance for doubtful accounts 565,035,762 544,806,933

25,972,387,185 38,687,628,991 7.1 Regular LTR - Folio I

The account pertains to receivables retained by NHMFC under the old program after the outright assignment of P4.42 billion to HDMF as payment for trust liabilities due to the latter. The loans are amortized monthly up to a maximum term of 25 years with interest rates ranging from 9 per cent to 16 per cent depending on the classification as well as amount of financing availed of.

7.2 Regular LTR - Folio II

The account refers to the loans extended to the borrowers under the UHLP of NHMFC. The loans are also amortized monthly for a maximum period of 25 years with a rate ranging from 9 per cent to 16 per cent depending on the loan package availed of.

7.3 Loans receivable – Philippine Reclamation Authority (PRA), formerly Public Estate Authority

The account refers to mortgage take-outs under the PRA Pabahay 2000 Project.

7.4 Folio II Buy Back

The account represents the 486 Defective Loans and Social Put Loans repurchased/buy-back from BHFI. Pursuant to the provisions of the Loan Sale and Purchase Agreement between NHMFC and BHFI on defective mortgages as specifically stated in Section 4.01(b) and Section 10.01, BHFI is entitled to return to NHMFC 500 accounts per year for three (3) consecutive years starting 2006 as Social Putback. Under the same agreement, BHFI can also return accounts that breached the representation and warranties under the Loan Sale and Purchase Agreement or the so called “Defective Accounts”.

7.5 CMP

The account pertains to the retained CMP project originated by National Housing Authority (NHA) for loans extended to qualified borrowers under the community association of BASECO. The loans bear six per cent interest and are amortized for a maximum period of 25 years.

7.6 HLRPP receivable

The account represents the non-current portion of purchased mortgages/receivables originated by public/private financial institutions and developers in accordance with the terms, conditions and standards of NHMFC to serve as the underlying collaterals for accounts eligible for securitization.

7.7 Past due loans receivables



Folio II - Regular LTR 15,266,475,300 16,026,570,558 Folio I - Regular LTR 374,775,534 384,487,803 Loan Installment Receivable (LIR) - Refinanced 152,031 152,031 CMP - 376,509,820

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15,641,402,865 16,787,720,212

The past due loans reported under Folio I, Folio II, CMP and LIR - Refinanced represent the total outstanding balance of borrowers account which were more than three months in arrears as at December 31, 2010.

The segregation and classification of the entire outstanding balance of these delinquent accounts to past due are in compliance with BSP Circular No. 143, s. of 1997 amending Section 1. Item e of Subsection 304.1 (Books 1 and 11) and 4304 Q.1 (Book IV) and item c of Section 3304 (Book 111) quoted as follows:

“Loans/receivables payable in installments - the total outstanding balance thereof shall be considered past due in accordance with the following schedule:

Mode of Payment Minimum Number of Installments in Arrears Monthly 3 Quarterly 1 Semestral 1 Annually 1

Provided, however, that when the total amount of arrearages reaches 20 per cent of the total outstanding balance of the loan/receivable, the total outstanding balance of the loan/receivable shall be considered as past due, regardless of the number of installments in arrears.”

7.8 Items in litigation

The account pertains to the actual outstanding balance of delinquent loans of home borrowers transferred to the Legal Department of NHMFC for foreclosure or with petitions already filed in court.

7.9 Insurance receivable

The account pertains to the mortgage redemption insurance premium component of the borrowers monthly loan amortizations advanced by NHMFC for accounts with more than 12 months in arrears.

7.10 Sales contract receivable

The account pertains to the Sale of Mortgage Rights (SAMOR) under the 1998 SAMOR program with approved installment payments of five years and above. Amortization payments of borrowers for Sales Contract Receivables are recorded as Deposit on Rights Sold (see Note 14.1b).

8. LONG-TERM INVESTMENTS

The account is composed of the following:

2010 2009

(As restated) Investment in SHFC 8.1/ 8,141,938,602 7,256,353,347 Investment in BHFI 8.2/ 751,350,747 751,350,747 Investment in Bahay Bonds-Junior

Notes 8.3/ 310,898,054 310,898,054 Investment in Balikatan Holdings

Two (BHT) 8.4/ 147,276 147,276 Investment in Balikatan Property

Holdings, Incorporated (BPHI) 8.5/

62,500

62,500

63

Investment in PLDT Stocks 285,500 285,500 Investment in HGC Debenture Bonds 225,209,051 - 9,429,891,730 8,319,097,424 Allowance for doubtful accounts 183,254,585 183,254,585

18,676,528,875 8,502,352,009 8.1 Investment in SHFC

On January 20, 2004, Executive Order No. 272 was issued by the President of the Republic of the Philippines authorizing the NHMFC to organize and establish the SHFC as a wholly-owned subsidiary, in accordance with the Corporation Code and pertinent rules and regulations issued by the Securities and Exchange Commission.

As a subsidiary, SHFC was created primarily to be the lead agency to undertake social housing programs that will cater to the formal and informal sectors in the low-income bracket and shall take charge of developing and administering social housing program schemes, particularly the Community Mortgage Program (CMP) and the Amortization Support and Developmental Financing Programs of the Abot-Kaya Pabahay Fund (AKPF) as well as other social housing programs of the NHMFC in order to allow the NHMFC to focus on its primary mandate that is, developing the secondary market for home mortgages.

Presently, SHFC is merely a trustee of the transferred CMP Funds. The NHMFC remains in control of the affairs of SHFC and did not abandon its obligation to use its ownership under a trust relationship having retained its full ownership over the subject funds.

The Investment in SHFC account consists of the P10 million corporate equity investment and CMP assets consisting of cash amounting to P532.042 million and mortgages amounting to P4,492.064 million transferred by NHMFC to SHFC under the Trust Agreement dated October 24, 2005 in pursuance of Executive Order (EO) No. 272 dated January 20, 2004. EO No. 272 provides for the transfer of the assets and liabilities of NHMFC under its Community Mortgage and AKPF Programs to the wholly-owned subsidiary, SHFC. For the reason that certain CMP mortgages were funded out of proceeds from borrowings, the receivables that were transferred to SHFC were those funded out of government appropriations which were identified as those taken-out from 1994 up to September 30, 2005.

To rationalize the operations of NHMFC into Government Secondary Mortgage Institutions and to consolidate the servicing of all CMP accounts, NHMFC has decided to entrust, assign, and transfer the remaining 272 CMP accounts to SHFC in February 22, 2010. The consideration of the assignment is in the amount of P649.212 million representing the original principal amount of the CMP retained accounts, unpaid insurances less guaranty deposits. The amount of P649.212 million was offset against the amount of SARO released for CMP subsidy for calendar years 2000-2001. The cut-off date of the transfer was December 31, 2009. All payments made by the Community Associations and its member-beneficiaries after said cut-off date shall be for the account of SHFC. NHMFC has likewise turned over to SHFC the CMP Servicing System, CMP computer programs and all files/records used in the 272 CMP accounts.

8.2 Investment in BHFI

The account represents NHMFC’s equity as a joint venture partner in BHFI consisting of P746.451 million preferred shares, P4.900 million common shares and P3,372.61 million mortgage receivables. In pursuance of the implementation structure and strategy designed to effect the transfer of assets to a Special Purpose Entity (SPE), NHMFC incorporated and registered with the Securities and

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Exchange Commission the Balikatan Housing Finance, Incorporated (formerly Balikatan Housing, Inc.) pursuant to Board Resolution No. 3349 dated November 30, 2004 and authorized by the Office of the President of the Philippines thru the Executive Secretary’s Memorandum dated December 28, 2004. This corporation was organized as a financing company under the Finance Company Act.

This is the corporation where NHMFC transferred all of the high delinquency NPLs in exchange for shares and debt. Initially, NHMFC owned 100 per cent of BHFI but upon closing, eventually retained only 49 per cent of the equity, with Deutsche Bank Global Opportunities (DBGO) owning 51 per cent. Thus, NHMFC became a minority partner in BHFI.

With the formal closing of the sale of NPLs to DBGO in November 2005, the Final Purchase Price was P5.173 billion with total cash proceeds of P4.262 billion and P.910 billion NHMFC equity in BHFI broken down as: Investment in BHFI in the amount of P.751 billion and P.159 billion Subordinated Debt B under Notes Receivable. NHMFC remitted P3.299 billion and P0.463 billion to SSS and HDMF, respectively, as payment of the High Delinquency Funder Loan Payable.

8.3 Investment in Bahay Bonds – Junior Notes

Last March 23, 2009, the NHMFC launched its maiden securitization issue using more than 12,000 prime residential mortgage loans. The NHMFC issued P2.060 billion worth of asset-backed securities called Bahay Bonds. To date, the NHMFC securitization operations is on its second year with NHMFC collecting service fees income and excess spread totaling P13.346 million and P33.348 million during the year, respectively.

8.4 Investment in BHT

The account represents NHMFC’s equity as a joint venture partner in BHT where NHMFC owns 81.82 per cent common equity interest while DBGO owns 18.18 per cent. The purpose of BHT is to own and hold the share of BHO.

8.5 Investment in BPHI

Since the high delinquency NPLs are collateralized by real estate mortgages, the BHFI may need to foreclose on some of the underlying mortgages. Under the law, foreign equity in corporations who can own land is limited to 40 per cent. Since the foreign equity component of the BHFI is 51 per cent, then the BHFI cannot own the land. Thus, there is a need to create BPHI as a separate corporation that will own the land. To qualify BPHI under the law on foreign equity restrictions, the capital stock of this corporation must be layered (or “grandfathered”) through additional corporations – BHO and BHT. Such layering will mirror a 51 per cent - 49 per cent capital structure in the BPHI between DBGO and NHMFC, respectively. The purposes of the BPHI are to foreclose and bid on the underlying real estate mortgages and to own, refurbish and sell real estate after foreclosure.

8.6 Investment in PLDT stocks

The account pertains to NHMFC’s PLDT trunk line and direct lines.

8.7 Investment In HGC debenture bonds

The account represents the investments in government securities with maturity date in Y2012.

9. OTHER GARNISHED/FORECLOSED ASSETS

The account pertains to property acquired by NHMFC judicially or extra-judicially on the settlement of loans/receivables and/or other reasons. Valuation of the asset includes outstanding principal, six months accrued interest, unpaid insurances and capitalized foreclosure expenses. The breakdown according to programs is as follows:

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Folio II 876,252,834 843,798,004 Developmental loans 185,189,571 187,123,738 Community Mortgage Program 54,741,845 95,049,082 Folio I (19,064) 129,223 1,116,165,186 1,126,100,047 Allowance for doubtful accounts 22,323,304 20,865,623

1,138,488,490 2,273,065,717 10. PROPERTY AND EQUIPMENT


Leasehold Improve-ments

Office Equipment

Office Furniture and Fixtures

Transpor-tation Equipment

IT Equipment and Software

Library Materials

Other Property and Equipment

Tools Total

Cost January 1,

2010 0 0 0 0 0 0 0 0 0

Additions 312,209 469,343 74,208 - 30,279,3

34 - 40,386 - 40,386 December31,

2010 312,209 469,343 74,208 0 30,279,3

34 0 40,386 0 31,175,480

Accumulated depreciation

January 1, 2010 624,418 938,686 148,416 0

60,558,668 0 80,772 0

31,215,866

Depreciation 88,009 305,286 15,674 1,142,51

1 6,298,75

3 1,728 235,13

1 1,557 8,088,649

December 31, 2010 712,427

1,243,972 164,090

1,142,511

66,857,421 1,728

315,903 1,557

39,304,515

Net Book

Value, December 31,

2010 0 0 0 0 0 0 0 0 0 Net Book

Value, December 31,

2009 653,522 980,886 130,087 7,856,56

4 33,105,9

77 6,814 864,21

6 6,908 43,604,974

11. OTHER ASSETS

The account includes the following:

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Other assets held in trust - Abot-Kaya Pabahay

Fund (Note 16) 11.1/ 551,668,544 599,271,867 Liquidity reserve AKPF 11.2/ 112,813,871 - Unamortized mortgage origination cost 11.3/ 89,608,896 102,807,254 Commingle reserve AKPF 11.4/ 69,716,413 - Application system development cost 30,104,361 30,104,361 Sundry debits 10,735,558 10,735,558 Land and land improvement held in trust 6,795,904 6,795,904 Project investment 41,993 41,993 Deferred interest on BMPC 9,009 9,009

871,494,549 47,686,825

11.1 Other assets held in trust – Abot Kaya-Pabahay Fund (AKPF)

The amortization and developmental financing assets of the AKPF amounting to P601.164 million and liabilities of P5.383 million were transferred to the SHFC in October 2005 pursuant to E.O. No. 272. The interest and liquidity support subsidy funds amounting to P501.90 million were retained by NHMFC.

11.2 Liquidity reserve AKPF

The account pertains to the reserve account established to cover any shortfall, Issuer expenses and coupon payments of the Senior Notes from the time lag of the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the Guaranty.

11.3 Unamortized mortgage origination cost

Previously termed as Deferred Charges, this account includes unamortized mortgage origination and appraisal costs paid to originators of Unified Home Lending Program mortgages up to March 31, 1992 and on CMP mortgages. These costs are amortized over the term of the mortgage contract. Commitment cost of ¾ of 1 per cent per annum charged by the International Bank for Reconstruction and Development (IBRD) on the principal amount of the housing sector loan is also included in this account.

11.4 Commingle reserve AKPF

The account pertains to the bank account of the Issuer established with the relevant Account Bank into which amount equal to expected Collections for three months is deposited from the proceeds of the Senior Notes issuance to cover the lagging time between the Collection Period and the Monthly Servicer Report. The Commingle Reserve Account shall be used upon the occurrence of a Servicer Termination Event.

12. PAYABLE ACCOUNTS



Interest payable 12.1/ 131,310,898 1,631,609 Dividends payable 12.2/ 36,000,000 36,000,000 Accounts payable 7,817,646 7,994,549

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Due to officers and employees 7,756,308 3,700,161

182,884,852 49,326,319 12.1 Interest payable

The account represents the accrued interest expense on loans payable to the funders as shown below:

2010 2009 Government Service Insurance System (GSIS) a/ 129,679,289 - Home Development Mutual Fund 86,723 86,723 Others 1,544,886 1,544,886

131,310,898 1,631,609

Interest payable GSIS represents accrued interest expenses on loans payable to GSIS.

12.2 Dividends payable

The account represents the accrual of dividends on net earnings for prior years based on the repayment schedule agreed upon by DOF and NHMFC.

13. INTER-AGENCY PAYABLES



Due to National Treasury 13.1/ 712,956,429 712,956,429 Due to subsidiaries/affiliates 13.2/ 59,273,980 55,128,319 Due to BIR 2,620,842 2,223,663 Due to GSIS 1,177,933 2,377,475 Due to HDMF 685,914 666,982 Due to PhilHealth 71,054 64,929

776,786,152 773,417,797 13.1 Due to National Treasury

The account represents advances made by the Bureau of Treasury (BTR) for the payment of the World Bank loan released to NHMFC through the BTR. The amount due includes interest charged by the BTR on the advances.

13.2 Due to subsidiaries/affiliates

The account represents bank remittances of CMP accounts for the account of SHFC.

14. OTHER CURRENT LIABILITIES



Guaranty deposit payable 79,876,623 80,812,669

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Financing charges payable 8,114,436 8,114,436 Tax refund payable 815,186 818,529 Other payables 14.1/ 1,138,392,814 1,011,083,721

1,227,199,059 1,100,829,355 14.1 Other payables

Breakdown of this account follows:


Insurance payable a/ 298,373,188 293,801,237 Deposits on rights sold b/ 215,601,754 165,746,557 Other Payable – AKPF c/ 203,872,253 - Guaranty fee payable d/ 117,006,458 120,000,000 Undistributed collections e/ 100,023,442 117,019,046 Deposits – option money 76,364,777 38,259,458 Accrued other expense payable 55,352,189 205,414,874 Miscellaneous liabilities 20,963,458 22,446,066 Other liabilities 14,561,837 14,811,439 Due to financial advisor 13,835,302 13,512,344 Transaction registration deposit 6,598,072 6,598,072 Deposits on acquired assets-housing fair 6,242,507 4,539,189 Insurance claims payable 4,437,989 4,437,989 Deposits-special restructured program 2,938,055 2,939,055 Provident fund payable 1,278,493 1,101,433 Other Payables – Professional Fees 393,994 - Home Mortgage Multi Purpose Cooperative 164,046 115,559 Home Mortgage Employees Association, Inc. 154,607 111,010 Deposits – procurement 98,084 98,084 Claims for disallowed payments 88,746 88,746 Due to contractor 36,082 36,082 Advances - Ministry of Human Settlements 7,481 7,481 1,138,392,814 456,962

a. Insurance payable account is credited for the receipt of the Mortgage Redemption Insurance (MRI) premium compose of the borrowers monthly loan and debited upon payment of the insurance premiums to the MRI Pool.

b. Deposits on right sold pertains to the downpayment and amortization payments of buyers of Acquired Assets sold under the SAMOR program, cash sale and sheriff sale temporarily lodged to this account since distribution as to proper accounts cannot be determined at the time of receipt. As at December 31, 2010, the balance of the account represents accumulated collections from CY 2007 up to CY 2010. This balance will be distributed to its proper accounts upon full implementation of NHMFCs Information Technology Road Maps under the Acquired Asset Management System.

c. Other payable–AKPF represents amount of loan released by AKPF to fund Commingle and Liquidity Reserve accounts. The amount presented in the balance sheet is inclusive of interest payable of P1.874 million.

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d. Guaranty fee payable pertains to the guaranty by the National Government on NHMFC’s UHLP loans with GSIS, HDMF, and SSS equivalent to one per cent of the 22 per cent of Guarantee Fee (GF) based on the outstanding loan balance pursuant to the Memorandum of Agreement entered into by and among the Republic of the Philippines, represented by the Secretary of Finance, the Housing and Urban Development Coordinating Council, the SSS, GSIS and HDMF and the NHMFC on February 4, 1994.

On December 11, 2008, NHMFC submitted a proposal to the Bureau of Treasury (BTr) with the computation of the GF based on the declining balance of the loan, to amortize the arrears (Y1989-2007 unpaid GF) up to Y2018, and to compute the current GF at the end of each year based on actual loan balance payable of the following year. The proposal was for a GF payable of P678.559 million as at December 31, 2009. This was accepted by the DOF subject to the reconciliation of GF payable balances by and between BTR and NHMFC.

As at December 31, 2010, the computed unpaid GF was in the amount of P613.729 million and recognized GF Payable in the amount of P117.006 million. However, BTR confirmed the GF obligation of NHMFC in the amount of P614.273 million as at December 31, 2010.

On the other hand, under the Letter of Guarantee dated April 12, 1995 issued by the DOF, the computation of GF obligation consisted of the following:

The loans outstanding as at December 31, 1994 were covered by full and unconditional NG Guarantee to the extent of 22 per cent of P8.91 billion;

The borrowings by NHMFC in 1995 up to the maximum amount of P11.80 billion shall be covered by the full and unconditional guarantee of the NG to the extent of 22 per cent thereof while the loans are outstanding; and

The guarantee cover shall be subject to a one per cent guarantee fee to be paid by NHMFC to the NG.

Based on the above stated DOF Letter of Guarantee, the GF payable would only be P88.527 million. NHMFC has already paid a total GF of P692.705 million as at December 31, 2010. It appears NHMFC has an overpayment to the GF in the amount of P604.178 million as at December 31, 2010.

There was no record of a new Letter of Guarantee issued by the DOF to cover the loans outstanding from 1996 and onwards.

These findings were brought to the attention of DOF. Should the DOF consider NHMFC’s position and issue a new Letter of Guaranty, NHMFC shall recompute the GF payable based on the current loan outstanding balance and adjust the recorded P117.006 million GF payable as at December 31, 2010.

Had the provision for guarantee obligation been made as required under the Memorandum of Agreement and BTR confirmation, the effect would be an increase in liabilities and deficit as at year-end by P497.267 million, and a decrease in net income during the year by same amount.

e. Undistributed collections (UC) - In the absence of any other account to which collections can be properly classified, the payments of the borrowers for their loan amortization are temporarily recorded as UC categorized under the general caption of Other Payables (formerly Other Liabilities). The reason for this is that the distribution as to the proper accounts to be credited for these payments cannot be determined at the time of their receipt.

The application of these amounts to the corresponding borrowers’ loan accounts is done at a later date that is why the UC always carries a balance at the end of any given period. As collections from borrowers’ amortization, this account is actually a reduction of the Receivable accounts, which if not accordingly distributed will render the balances of the affected accounts inaccurate.

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For purposes of fair presentation of the account balances in the 2010 financial statements, the Undistributed Collections amounting to P712.504 million Unified Home Lending Program (UHLP), CMP, Folio I and PRA were distributed using ratios based on the average of the actual distributions made during the year. This distribution shall, however, be subject to reversal on the first transaction day of the following year.

The remaining balance of Undistributed Collections as at December 31, 2010 and 2009 pertains to the Advances from Borrowers, broken down as follows:


Advances from borrowers

Folio II 54,363,259 65,314,794 SAMOR 37,119,249 37,127,962 Sundry credits 4,841,767 5,307,137 PRA 3,667,903 3,489,219 CMP 31,264 5,779,934

100,023,442 117,019,046

15. LOANS PAYABLE – DOMESTIC

The account represents obligations to Funders of the UHLP with detailed as follows:

2010 2009

(As restated) Social Security System 26,578,876,709 27,502,029,737 Government Service Insurance System 5,186,758,674 5,239,904,068 Home Development Mutual Fund 4,023,379,795 4,160,316,457

35,789,015,178 36,902,250,262

In March 2003, the NHMFC Board, SSS and HDMF approved the Restructuring and Disposition Strategy for UHLP portfolio. The GSIS opted not to participate in the said strategy.

In view of the approval of the loan restructuring the balances of NHMFC’s obligations with SSS and HDMF were adjusted to conform with the amounts reflected in the agreement. As a consequence, total liabilities to SSS and HDMF were increased by P7.27 billion and P0.54 billion, respectively and segregated into: 1) Allocated Low Delinquency Funder Loan; 2) Allocated Moderate Delinquency Funder Loan; 3) Allocated High Delinquency Funder Loan; 4) Allocated Accrued Interest; and 5) Allocated Accrued Penalties.

The above increase in SSS and HDMF liabilities of P7.81 billion represents the difference in the balances of the liability accounts reported in the books of NHMFC compared with those of the funders as of the cut-off date of December 31, 2002.

The approval of the restructuring agreement made the contingent liabilities a real obligation, hence, the adjustment of the NHMFCs obligations with SSS and HDMF. However, the said approval yielded for NHMFC the benefit of a much lower interest rate of only 4 per cent per annum compared to the previous rates charged by SSS and HDMF of 11.32 per cent and 12.17 per cent, respectively. In addition, interest shall be computed only on the outstanding principal balance of the Allocated Low and Moderate Delinquency Funder Loans and not on the Allocated High Delinquency Funder Loan, the Allocated Accrued Interest and the Allocated Accrued Penalties components.

The balances of Loans Payable under SSS and HDMF as at December 31, 2010 are as follows:

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Restructured Loan SSS HDMF

Low Delinquency 1,476,655,614 113,610,510 Moderate Delinquency 3,877,923,862 706,047,149 High Delinquency 8,648,776,302 1,171,423,850 Allocated Accrued Interest

11,961,415,991 1,524,283,148

Allocated Accrued Penalties

614,104,940 508,015,138

26,578,876,709 4,023,379,795

The loan agreement between NHMFC and GSIS was deemed terminated in December 2002 based on communications between the two parties. The effect of the termination was reflected in the books in December 2003. However, because of the lack of a formal settlement of the loan as of this date, COA recommended to restore the GSIS principal loan obligation in the books of NHMFC by reversing previous entries recording the termination of the loan (see Note 12.1a).

In the proposed Memorandum of Agreement (MOA), NHMFC, in settlement of its obligation is willing to transfer to GSIS the loan portfolio and other loan mortgages granted to non-GSIS members. However, in a pre-transfer evaluation conducted to determine the sufficiency of securities under the Deed of Assignment for liquidation purpose, a discrepancy was found. The NHMFC valued the loan portfolio at P6,134.588 million while the GSIS valued the same at P5,534.485 million.

16. OTHER LONG-TERM LIABILITIES


2010 2009 Abot-Kaya Pabahay Fund (Note 11) 551,668,544 599,271,867 Notes payable - PRA 16.1/ 129,602,723 132,556,152 Accounts payable- matured securities 2,003,123 2,003,123

683,274,390 733,831,142

16.1 Notes payable - Philippine Reclamation Authority (PRA)

The account pertains to the guaranty transfer price of the PRA special housing loan program as agreed upon by NHMFC and PRA.

17. DEFERRED CREDITS



Unrealized income from capitalized arrearages of

Restructured Loans - Folio II 3,206,721,346 2,258,249,464 12% unrealized service fee income from

remittance of GSIS collections 95,557,919 85,806,347 Unrealized income recognized from take-out of

PRA accounts against payable to BTR 28,372,094 28,273,874

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Unrealized income from capitalized interest income from commingle and liquidity reserve 10,856,054 -

Unrealized income recognized from negotiated sale and unrealized service fee income from renewal of MRI coverage with more than 12 months in arrears 7,179,733 13,673,780

3,348,687,146 13,673,780 18. CAPITAL STOCK

The account represents the amount received from the National Government in payment of capital as released by the Department of Budget and Management and subsequently by the Bureau of Treasury.

Originally, as embodied in its charter, NHMFC had an authorized capital stock of P500 million divided into 500,000 shares at P1,000 par value per share. The authorized capital was fully subscribed and paid up by the Government of the Republic of the Philippines (GRP) as at December 31, 1986 with the release of P305 million appropriation for the NHMFC for that particular year.

With the passage into law of the Comprehensive and Integrated Shelter Finance Act (RA 7835) on December 22, 1994, the Corporation’s authorized capital stock is now Five billion five hundred million pesos (P5,500,000,000) divided into five million five hundred thousand (5,500,000) shares of common stock with par value of One Thousand Pesos (P1,000) per share, to be fully subscribed and paid up by the GRP.

19. PAID IN CAPITAL

The paid in portion of the authorized capital stock consists of the following:

Original paid in capital 500,000,000 Additional paid in capital 500,000,000 Released in August 1995 900,000,000 NHMFC’s loan from World Bank - IBRD converted to equity a/ 1,582,005,642 Released in June 1996 as equity support to NHMFC 135,000,000 Released in August 1996 representing 10 per cent annual contribution

of PCSO to Socialized Low-Cost Housing pursuant to Section 6 of R.A. 1169 73,504,141

Programmed equity in 1997 180,000,000

Total paid in capital 3,870,509,783

Department of Justice Opinion No. 18 Series of 1996 dated January 24, 1996 states that the principal loan of US $76.73 million from the World Bank - IBRD is ipso jure or by operation of law, which means that it is an outright conversion, and therefore, the full amount of the loan thus converted to equity should be deemed part of the fully paid capital of the NHMFC Section 6 of R.A. No. 7835 (Comprehensive and Integrated Shelter Financing Act of 1994).

20. GOVERNMENT EQUITY


2010 2009 Donated capital a/ 2,022,509 2,005,869

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Equity in sites and services b/ 39,840,799 39,840,799 Claims for disallowed payments c/ 66,331,754 66,331,754

108,195,062 108,178,422

a. Donated capital

The account pertains to furniture and fixtures and other assets acquired through the World Bank Technical Fund for the regionalization of NHMFC operations. It also includes donations from government agencies and other individuals. In 2010, the increase represents donation from HLURB of one airconditioning unit worth P16,640 to our Cagayan de Oro Satellite Office.

b. Government equity in sites and services

The account covers the Government of the Philippines (GOP) counterpart fund and the fund from the World Bank which were used for the construction of the civil works in various Private Sites and Service Projects Office (PSSPO) projects absorbed by NHMFC.

c. Contingent Surplus - Claims for disallowed payments

The account consists of disbursements/transactions disallowed in audit by the COA debited to the above account and credited to Contingent Surplus – Claims for disallowed payments. The former account is presented in the balance sheet under Receivable while the latter is presented in the Statement of Changes in Capital Deficiency.

21. DEFICIT

The Deficit account consists of the following:

2010 2009 Deficit at beginning of year 10,791,254,791 12,408,333,319 Prior period errors 21.1/ - (453,223,069) As restated 10,791,254,791 11,955,110,250 2009 Net income, as restated - 1,163,855,459 2010 Net income 39,424,902 -

Deficit at end of year 39,424,902 13,118,965,709 21.1 Prior period errors


Miscellaneous income (penalty) from long-term receivables 2,365,118 Interest income from long-term receivables 567,062,036 Adjustment on loan loss provision 16,663,397 Various adjustments (net) to income and expenses (132,867,482)

453,223,069 22. SUBSIDY INCOME

The account pertains to funds released by the National Government to cover the implementation of the Community Mortgage Program.

23. COMPLIANCE WITH TAX LAWS

In compliance with the requirements set forth by Revenue Regulation No. 15-2010, hereunder are the information on taxes, licenses and fees paid or accrued during the taxable year:

74

A. National 2010 2009

BIR Registration 500 500 500 500

B. Withholding taxes paid/accrued for the year:

2010 2009

Taxes on compensation and benefits/creditable withholding taxes 2,620,842 2,223,662

Percentage tax 13,441,279 20,225,901 Corporate income tax (Net Operating Loan Carry

Over from 2008 to 2010 due to recognition of loss in NPL sale in 2007) - -

16,062,121 22,449,563 24. OFF-BOOKS DISCLOSURES Software Ventures International Technologies, Inc. (SVIT) Claim

In 1999, several demands were made by SVIT for NHMFC to pay for services rendered by it under the Collection Outsourcing Agreement dated October 7, 1999, which was allegedly terminated abruptly. The said Compromise Agreement provided, among others, that NHMFC shall pay SVIT the amount of P118,259,799.05. A series of negotiations thereafter took place which culminated in the execution of a Compromise Agreement which was signed by the parties in January 2007. Per Resolution No. 3503, Series of 2007, the Board confirmed the terms of the Compromise Agreement with the condition that the same be submitted, thru the Office of the Solicitor General or Office of the Government Corporate Counsel (OGCC), to a court of competent jurisdiction for approval.

This condition, according to SVIT, is contrary to law and jurisprudence and imputed bad faith on the NHMFC Board of Directors and its officers. Sometime in August 2007, SVIT filed a case before the Philippine Dispute Resolution Center, Inc. (PDRCI). Per Board Resolution No. 3547, Series of 2007, Management was given authority by the NHMFC Board of Directors to participate in the arbitration proceedings before the PDRCI.

The Arbitral Tribunal rendered its decision in said case on June 20, 2008. The important part of the dispositions of the Final Award is reproduced here as follows:

The National Home Mortgage Finance Corporation is hereby ordered to pay SVI Technologies, Inc., the amount of One Hundred Eighteen Million Two Hundred Fifty-Nine Thousand Seven Hundred Ninety-Nine and 05/100 Pesos (P118,259,799.05), Philippine Currency. The National Home Mortgage Finance Corporation is further ordered to pay the SVI Technologies, Inc. interest which has accrued up to June 20, 2008 the amount of P9,868,474.74. Finally, the National Home Mortgage Finance Corporation is ordered to pay the SVI Technologies, Inc. attorney’s fee in the amount of P1,000,000.00.

In order to keep the said award from being final and executory, and in accordance with the general laws on arbitration and procedural rules of the PDRCI, NHMFC on August 4, 2008, filed a petition

75

before the Regional Trial Court, Makati City for modification of the Final Award. In fine, what NHMFC seeks is for the non-imposition of interests and attorney’s fees amounting to approximately P10.8 million.

On 05 January 2010, the Makati RTC, Brach 147 rendered its Decision dismissing NHMFC petition for lack of appropriate basis. While the trial court dismissed NHMFC’s petition, no express confirmation was made by the trial court on the Final Award. Subsequent thereto, SVIT filed on 01 February 2010 an Omnibus Motion for Confirmation and Execution Pending Appeal of the Final Award with the court. A motion for Reconsideration was filed by the OGCC on 03 February 2010.

On 05 May 2010, the Court issued an Order denying NHMFC’s Motion for Reconsideration and granting SVIT’s Omnibus Motion for Confirmation and Execution Pending Appeal. NHMFC elevated the case to the Court of Appeals having filed a Petition for Review on the matter.

On 13 October 2010, NHMFC was informed of an Order dated 27 September 2010 from the Makati RTC Branch 147 directing the issuance of a Writ of Execution to enforce payment by NHMFC to SVIT of the principal amount of P118,259,700.05 with interest on the said principal amount at the rate of 12 per cent per annum from July 6, 2008 until the said amount is fully paid.

On 14 October 2010, NHMFC received a final demand letter from PhilExim demanding for the immediate payment and direct remittance of the amount of P100 million.

NHMFC paid the principal amount of P118,259,799.05, with one check dated October 29, 2010 for P100 million payable to PhilExim and another check dated October 29, 2010 for P18,259,799.05 payable to SVIT.

There is a remaining issue to be resolved by the Court of Appeals i.e., the award for interest and attorney’s fees amounting to P10,868,474.77. SVIT is claiming for the said amount which has been granted by the Regional Trial Court of Makati.

The OGCC has filed a Petition for Certiorari before the Court of Appeals on February 11, 2011, questioning the Order dated January 20, 2011, which granted SVIT’s Motion for Execution. The Petition filed before the Court of Appeals was dismissed and the Decision of the Regional Trial Court was re-affirmed on March 21, 2011 per Resolution of even date. The OGCC filed Petition for Review on Certiorari via registered mail on April 20, 2011 before the Supreme Court and on April 23, 2011 filed a Manifestation to the mailing of said Petition for Review on Certiorari.

CURRENT DIRECTORS OF NHMFC

Hon. Jejomar C. Binay Chairman Hon. Felixberto U. Bustos, Jr. Vice Chairman Hon. Amando C. Tetangco, Jr. Member Hon. Cesar V. Purisima Member Hon. Florencio B. Abad Member Hon. Livia Alicia R. Ramos Alternate for NHMFC President Felixberto U. Bustos Hon. Mario L. Relampagos Alternate for Sec. Florencio B. Abad Hon. Diwa C. Gunigundo Alternate for Gov. Amando C. Tetangco

CURRENT OFFICERS OF NHMFC: Felixberto U. Bustos, Jr. President Livia Alicia R. Ramos Executive Vice President Atty. Aldrich Fitz U. Dy Corporate Board Secretary Atty. Daniel Q. Lacuata Vice President, Corporate Support Services Group Daisy S. Dulay Vice President, Securitization Group

76

Daniel L. Olan Vice Precident, Collection Accounts Management Group Lourdes C. Bacani Department Manager, Corporate Planning and Management

Information Systems Department Ramon O. Castañeda Department Manager, Internal Audit Department Rosabella C. Jose Department Manager, Mortgage Pooling Department Maria Luisa M. Favila Department Manager, Securities and Liquidity Support Department Carolina C. Cortez Officer-In-Charge, Treasury Department Tita R. Puzon Department Manager, Cash and Custodianship Department Cynthia M. Villanueva Department Manager, Administrative and Finance Department Atty. Rodolfo N. Erbon Department Manager, Legal Department Atty. Erika Katheryn B. Fernandez

Officer-In-Charge , Central Office Collection Management Department

Adornico P. Redondo Officer-in-Charge, Regional Accounts Servicing Department

77

THE GUARANTOR

COMPANY BACKGROUND

Home Guaranty Corporation is a wholly-owned Government Financial Institution tasked to operate a mortgage guaranty program in support of the Philippine Government’s effort to promote home ownership. HGC traces its origin to the Home Financing Commission (HFC), which started operation in 1955 in accordance with its charter under Republic Act 580.

In 1979, Executive Order No. 535 was enacted, upgrading HFC from a commission to a corporation and giving HFC the exclusive jurisdiction over the registration and supervision of homeowners associations (HOA).

On 17 December 1986, HFC was renamed the Home Insurance and Guaranty Corporation (“HIGC”) through E.O. No. 90. HIGC was tasked to assist developers to undertake low and middle income mass housing production as well as to encourage private institutional funds and commercial lenders to finance such housing developments and long-term mortgages through a viable system of guarantees, loan insurance and other fiscal incentives.

In December 2000, HFC’s 50-year corporate life expired. R.A. 8763, known as the Home Guaranty Corporation Act of 2000, was signed on 7 March 2000 renaming HIGC to Home Guaranty Corporation (HGC), increasing its authorized capital to Php50 Billion and extending its corporate life for another fifty (50) years.

BOARD OF DIRECTORS AND MANAGEMENT

As mandated by RA 8763, HGC is governed by its Board of Directors composed of seven (7) members.

Board of Directors

Hon. Cesar V. Purisima Chairman Secretary, Department of Finance Hon. Jejomar C. Binay Vice Chairman Vice President of the Republic of the Philippines

Chair, Housing and Urban Development Coordinating Council (HUDCC)

Hon. Arsenio M. Balisacan

Member Director General, National Economic and Development Authority (NEDA)

Atty. Manuel R. Sanchez Member President, Home Guaranty Corporation Magleo V. Adriano Danilo V. Fausto

Member Member

Private Sector Representative Private Sector Representative

Florante A. Castillo Member Private Sector Representative

Executive Officers

Atty. Manuel R. Sanchez President Corazon G. Corpuz Acting Executive Vice President and

Concurrent Vice-President, Corporate Services Group Atty. Romulo Q. Fabul Vice President Melinda M. Adriano Vice-President, Guaranty Group Engr. Rafael P. De los Santos Vice-President, Asset Management & Disposition Group Atty. Danilo C. Javier Vice-President, Legal Group Atty. Jimmy B. Sarona Vice-President, Management Services Group

78

GUARANTY PROGRAMS

HGC guarantees the payment of credits and receivables from housing related financial contracts. These guarantees are issued in favor of financial institutions and housing developers. HGC charges guaranty fees which comprise the core of its revenue stream. These fees come from guaranty enrollments (for new accounts) and guaranty renewals.

HGC’s guaranty services are classified into the following programs:

Developmental Loan Guaranty – covers loans extended for the development of subdivisions, townhouses, dormitories, apartments and other residential dwelling units.

Retail Loan Guaranty – covers loans/credit facilities extended for the purchase or lease of single-family residences.

Guaranty Covering Securitization Schemes – extended to fixed income securities which are issued for housing purposes. This guaranty may also cover receivables from housing loans used as collateral for issued securities. To qualify for guaranty, the issuance of such securities must be secured by a pool of acceptable financial assets such as real estate properties and housing mortgages/receivables. The guarantees extended to Commercial Papers, Asset Participation Certificate (APC) funded projects and Asset/Mortgage Backed Securities are examples of guaranty programs under this category.

Cash Flow Guaranty – a component of the Abot-Kaya Pabahay Fund Program (R.A. 6846) which is a premium-free guaranty coverage for socialized housing loans directly funded by SSS, GSIS, HDMF and their accredited financial institutions.

GUARANTY PROGRAM FOR ASSET PARTICIPATION CERTIFICATES (APCS)

The APC Guaranty is a form of guarantee extended to asset-backed securities. The issuance of APCs is a non-traditional funding scheme pursued by selected developers of residential projects wherein APCs are issued to investors against a pool of assets. HGC, as guarantor of the APCs, commits to pay the investors in the event of default by said developers.

About Php15 Billion worth of APCs were issued in the 1990s to fund the government’s flagship projects. These projects included the Smokey Mountain Development and Reclamation, Old Bilibid Compound, Tahanan Asset Pool in Subic, National Government Center and Sariling Pabahay sa Riles, among others. The guarantee program on APC-funded projects was discontinued in 2001 because of high default rate.

GUARANTY CAPACITY

Under the new HGC Charter, HGC can provide guarantees up to twenty times (20x) its net worth. With a net worth of Php4.605 Billion as of Dec. 2011, HGC’s guaranty capacity is Php92.1 Billion.

SOVEREIGN GUARANTY

The Republic of the Philippines fully and unconditionally guaranties the guaranty obligations of HGC incurred in accordance with Republic Act No. 8763 (HGC Act of 2000) both as to principal, and as to interest up to eleven percent (11%) for socialized housing, ten percent (10%) for low-cost housing, nine and one-half percent (9.5%) for medium-cost housing, and eight and one-half percent (8.5%) for open housing.

With the Sovereign Guaranty the Republic of the Philippines shall succeed to all the rights of the holders of such bonds, debentures, collateral, notes or other instruments to the extent of the payments made, unless the sums so paid by the Republic of the Philippines shall be refunded by the Corporation within a reasonable time.

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FINANCIAL HIGHLIGHTS

For the year ended

December 31

in Actual Pesos

2011 2010

(as restated) 2009

(as restated) 2008

(as restated) 2007

(as restated) 2006

(as restated) Audited Audited Audited Audited Audited Audited

OPERATING REVENUES

Guaranty Fees 506,529,215 390,432,064 565,512,964 424,580,833 409,425,274 345,660,567 Interest Income-

Installment Receivable

43,927,283 37,929,386 37,668,190 39,062,532 42,990,604 42,166,894

Other Income 97,946,965 86,731,606 78,942,759 79,306,576 80,276,185 65,021,583

TOTAL 648,403,463 515,093,056 682,123,913 542,949,941 532,692,063 452,849,044

OPERATING EXPENSES

Personnel Services 91,522,620 87,700,282 92,139,573 75,385,033 85,904,596 75,305,392 Maintenance and Other Operating

Expenses 169,288,759 158,619,331 176,564,982 150,797,208 180,169,121 142,330,971

TOTAL 260,811,379 246,319,613 268,704,555 226,182,241 266,073,717 217,636,363

INCOME FROM OPERATIONS 387,592,084 268,773,443 413,419,358 316,767,700 266,618,346 235,212,681

OTHER REVENUES (EXPENSES) 117,843,369 211,133,257 (948,171,297

) (193,442,578) (1,841,295,151) (51,880,480)

INCOME BEFORE FINANCIAL CHARGES

505,435,453 479,906,700 (534,751,939)

123,325,122 (1,574,676,805) 183,332,201

Interest Expense on Zero Coupon Bonds

810,196,418 966,236,964 966,236,963 966,988,806 1,344,429,653 939,579,108

Interest on Guaranty Obligation 198,793,808 198,793,808 34,211,205 8,797,006

Interest on Debenture Bonds

87,820,341 147,831,989 181,763,597 288,330,417 174,557,564 218,148,631

Bank Charges 69,445 106,667 80,777 86,019 137,938 26,611 Documentary Stamp

Expenses - 138,459 228,322

Sub-Total 1,096,880,012 1,313,107,887 1,182,520,864

1,264,202,248 1,519,125,155 1,157,754,350

INCOME (LOSS)

BEFORE INCOME TAX

(591,444,559) (833,201,187) (1,717,272,8

03) (1,140,877,12

6) (3,093,801,960) (974,422,149)

Final Tax 30,910,678 49,296,534 48,810,070 48,633,023 64,250,224 2,818,286 Provision for Income

Tax 10,500,808 8,028,116 11,878,227 8,154,801 7,944,912

NET LOSS (632,856,045) (890,525,837) (1,777,961,100)

(1,197,664,950)

(3,165,997,096) (977,240,435)

80

RESULTS OF OPERATIONS

Bulk of HGC’s operating revenues comes from its guaranty business. In the last six years, guaranty fees on the average comprised 78% of HGC’s operating revenues while an average of 7% came from interest income arising from the sale of acquired assets on installment basis.

The growth in guaranty volume is driven by the number of credit financial institutions that are willing to extend loans to the housing and property development sector because of the comfort HGC’s guaranty provides.

In 2011, HGC’s outstanding guarantees grew from Php25.81 Billion in 2000 to Php78.34 Billion as of December 2011. A total of Php33.75 Billion new enrollments under the retail guaranty and Php4.16 Billion in developmental guaranty programs were recorded for year 2011 alone.

On top of the guarantees provided under the regular program, HGC also extended guarantees under a special program called Abot Kaya Pabahay Program. Total guarantees extended under this program amounted to Php25.69 Billion for year 2011.

GUARANTY PORTFOLIO (IN MILLIONS)

Program 2011 2010 2009 2008 2007 2006 2005 2004 2003

Retail 78,287.94 62,483.39 67,414.32 71,827.29 71,718.54 62,819.55 51,191.46 41,571.71 43,127.28

Developmental 50.99

264.04 921.89 1,073.14 1,153.79 753.24 358.00 178.50 158.97

Total 78,338.93 62,747.43 68,336.21 72,900.43 P72,873.33 63,572.79 51,549.46 41,750.21 43,286.25

FINANCIAL ANALYSIS

KEY FINANCIAL RATIOS

2011 2010 2009 2008 2007 2006

Operating Revenue Growth

25.88% -24.49% 25.63% 1.93% 17.63% 28.96%

Operating Income Margin

59.78% 52.18% 60.61% 58.34% 50.05% 51.94%

Current Ratio

0.52 0.56 0.53 0.43 0.69 0.74

Debt to Equity Ratio 9.13 6.79 3.98 3.71 3.90

TOTAL CURRENT ASSETS 3,174,322,654 4,330,881,527

3,581,876,285 2,152,225,117 3,680,853,820

10,261,726,467

TOTAL ASSETS 29,489,247,176

29,921,109,903

29,347,224,498

30,879,294,573

26,286,129,702 34,966,492,397

TOTAL CURRENT

LIABILITIES 6,101,816,451 7,694,790,771 6,819,447,46

8 4,970,246,192 5,367,679,126 13,937,804,91

7

TOTAL LIABILITIES 24,883,865,08

5 26,967,603,86

6 29,937,077,3

74 24,679,013,16

5 20,702,333,469 27,837,070,07

8

NET WORTH 4,605,382,091 2,953,506,037 4,410,147,12

4 6,200,281,407 5,583,796,232 7,129,422,319

TOTAL LIABILITIES AND NET WORTH

29,489,247,176

29,921,109,903

29,347,224,498

30,879,294,573

26,286,129,702 34,966,492,397

81

5.40

HGC’s operating revenues improved by 25.88% from Php515.09 million in 2010 to Php648.40 million in 2011. This, along with financially prudent operations, led to the 44.21% growth in operating income, from Php268.77 million in 2010 to Php387.59 million in 2011. The operating income margin from 2006 to 2011 ranged from 50.05% to 60.61%. However, due to guaranty call payables arising from APC funded projects, HGC’s liquidity and leverage position is fluctuating but has stabilized in 2011. Leverage has improved from 9.13 in 2010 to 5.40 in 2011 while the current ratio has decreased slightly from 56% in 2010 to 52% in 2011. Interest-servicing of the Zero-Coupon Bond maturing in 2013 is eating up the bottom-line income of HGC resulting in a net loss of Php632.86 million in 2011.

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DESCRIPTION OF THE MORTGAGE LOAN ASSETS

Mortgage Loan Portfolio

The statistical information in this Offering Circular concerning the Residential Loans is presented as of the Cut-Off Date. The aggregate outstanding principal balance of the Residential Loans Assets as of this date is P603,744,442.46 represented by 3,364 loans from different regions in the Philippines. All of the Residential Loans originated between 1987 and 1996.

The statistical distribution of the characteristics of the Residential Loans as of the Closing Date may vary from that as of the Cut-off Date due to payments by the Obligors, delinquency and defaults.

Table 12: Original Contractual Term to Maturity Original Contractual

Term to Maturity (Years)

Number of Mortgage

Loans

Proportion of Mortgage

Pool by Number

Principal Amount

Outstanding of Mortgage

Loans (Pesos)


Pool by Outstanding

Principle Amount

14 and below 317 9.42% 57,983,669.20 9.60% 15-17 1,726 51.31% 359,512,840.51 59.55% 18-21 9 0.27% 1,187,916.44 0.20% 22-25 1,312 39.00% 185,060,016.31 30.65%

more than 25 0 0.00% 0.00 0.00% Total 3,364 100.0% 603,744,442.46 100.0%

Maximum: 25.00 Minimum: 5.92

Weighted Average: 18.49

Table 13: Year of Origination Year of

Origination Number of

Mortgage Loans Proportion of

Mortgage Pool by Number

Principal Amount Outstanding of

Mortgage Loans (Pesos)


Pool by Amount

1987 2.00 0.06% 253,046.77 0.04% 1988 33.00 0.98% 4,282,404.46 0.71% 1989 113.00 3.36% 17,037,213.70 2.82% 1990 215.00 6.39% 30,584,017.92 5.07% 1991 333.00 9.90% 56,725,868.50 9.40% 1992 349 10.37% 65,092,305.81 10.78% 1993 581 17.27% 114,297,937.36 18.93% 1994 659 19.59% 127,264,160.24 21.08% 1995 868 25.80% 151,551,791.63 25.10% 1996 211 6.27% 36,655,696.07 6.07%

after 1996 0 0.00% 0.00 0.00% Total 3,364 100% 603,744,442.46 100%

83

Table 14: Remaining Contractual Term to Maturity

Remaining Contractual Term to

Maturity (months)

Number of Mortgage

Loans

Proportion of Mortgage Pool by

Number

Principal Amount

Outstanding of Mortgage Loans

(Pesos)

Proportion of

Mortgage Pool by

Amount 0-12 0.00 0.00% 0.00 0.00

13-36 26.00 0.77% 2,377,713.82 0.00 37-60 246.00 7.31% 26,553,879.80 0.04

61-120 1,952.00 58.03% 331,957,091.19 0.55 121-180 1,140.00 33.89% 242,855,757.65 0.40

more than 180 0.00 0.00% 0.00 0.00 Total 3,364 100% 603,744,442.46 100%



Table 15: Interest Rate Charged Remaining

Contractual Term to Maturity (months)

Number of Mortgage

Loans


Pool by Number



Proportion of Mortgage Pool

by Amount

0-12 0.00 0.00% 0.00 0.00 13-36 26.00 0.77% 2,377,713.82 0.00 37-60 246.00 7.31% 26,553,879.80 0.04

61-120 1,952.00 58.03% 331,957,091.19 0.55 121-180 1,140.00 33.89% 242,855,757.65 0.40

more than 180 0.00 0.00% 0.00 0.00 Total 3,364 100% 603,744,442.46 100%



Table 16: Original Principal Balance

Original Principal Balance (Pesos)

Number of Mortgage

Loans


Pool by Number

Principal Amount


Loans (Pesos)


by Amount

Less than 50,000 0.00 0.00% 0.00 0.00 50,000.00 to 100,000 9.00 0.27% 905,891.85 0.00

100,000.01 to 150,000 317.00 9.42% 39,133,834.56 0.06 150,000.01 to 200,000 1,322.00 39.30% 177,696,843.8

6 0.29

84

200,000.01 to 250,000 1,079.00 32.07% 201,425,777.73

0.33

250,000.01 to 300,000 228.00 6.78% 57,654,365.15 0.10 300,000.01 to 350,000 189.00 5.62% 52,903,011.38 0.09 350,000.01 to 400,000 220 6.54% 74,024,717.93 0.12

Total 3,364 100% 603,744,442.4

6 100%

Maximum: 393,750.00 Minimum: 81,500.00

Weighted Average: 213,676.16

Table 17: Principal Amount Outstanding Principal Amount

Outstanding (Pesos) Number of Mortgage

Loans


Pool by Number

Principal Amount


(Pesos)


Pool by Amount

Less than or Equal to 50,000

20.00 0.59% 789,404.07 0.00

50,000.01 to 100,000 470.00 13.97% 39,901,999.77 0.07 100,000.01 to 150,000 958.00 28.48% 121,906,165.82 0.20 150,000.01 to 200,000 827.00 24.58% 140,990,920.97 0.23 200,000.01 to 250,000 547.00 16.26% 122,491,994.56 0.20 250,000.01 to 300,000 224.00 6.66% 60,993,657.06 0.10 300,000.01 to 350,000 143.00 4.25% 46,117,343.80 0.08 350,000.01 to 400,000 100 2.97% 37,627,835.30 0.06

more than 400,000 75 2.23% 32,925,121.11 0.05 Total 3,364 100% 603,744,442.46 100%

Maximum: 659,220.42 Minimum: 14,995.62


Table 18: Monthly Amortization Principal Amount

Outstanding (Pesos) Number of Mortgage

Loans


Pool by Number

Principal Amount


Loans (Pesos)


Amount

Less than or Equal to 50,000

20.00 0.59% 789,404.07 0.00

50,000.01 to 100,000 470.00 13.97% 39,901,999.77 0.07 100,000.01 to 150,000 958.00 28.48% 121,906,165.8

2 0.20

150,000.01 to 200,000 827.00 24.58% 140,990,920.97

0.23

200,000.01 to 250,000 547.00 16.26% 122,491,994.5 0.20

85

6 250,000.01 to 300,000 224.00 6.66% 60,993,657.06 0.10 300,000.01 to 350,000 143.00 4.25% 46,117,343.80 0.08 350,000.01 to 400,000 100 2.97% 37,627,835.30 0.06

more than 400,000 75 2.23% 32,925,121.11 0.05

Total 3,364 100% 603,744,442.4

6 100%

Maximum: 659,220.42 Minimum: 14,995.62


Table 19: Delinquency

Status Number of Mortgage

Loans


Pool by Number




by Amount

No Missing payments 2845 84.57% 516,642,179.25 85.57%

Missing 1 payment 333.00 9.90% 53,858,375.57 8.92% Missing 2 payments 126.00 3.75% 22,827,615.67 3.78% Missing 3 payments 60.00 1.78% 10,416,271.97 1.73%

> 3 Missing Payments 0.00 0.00% 0.00 0.00% Total 3,364 100% 603,744,442.46 100%



Table 20: Original LTV at Take Out

Status Number of

Mortgage Loans


Pool by Number

Principal Amount


(Pesos)


Amount

No Missing payments 2845 84.57% 516,642,179.25 85.57%

Missing 1 payment 333.00 9.90% 53,858,375.57 8.92% Missing 2 payments 126.00 3.75% 22,827,615.67 3.78% Missing 3 payments 60.00 1.78% 10,416,271.97 1.73%

> 3 Missing Payments 0.00 0.00% 0.00 0.00% Total 3,364 100% 603,744,442.46 100%



86

Table 21: Current LTV based on Original Valuation at Take out

LTV (%) Number of Mortgage

Loans


Pool by Number




by Amount

0 to 10.99 6 0.18% 346,322.53 0.06% 11-20 29.00 0.86% 1,786,291.13 0.30% 21-40 284.00 8.44% 28,202,128.61 4.67% 41-60 883.00 26.25% 120,323,861.68 19.93% 61-80 959.00 28.51% 173,771,581.70 28.78% 81-95 838.00 24.91% 187,624,863.00 31.08%

96-100 147.00 4.37% 34,990,066.75 5.80% More than 100 218.00 6.48% 56,699,327.06 9.39%

Total 3,364 100% 603,744,442.46 100%

Maximum: 188.22 Minimum: 2.31 Weighted Average: 69.30

Table 22: Geographical Location of the Properties Geographical Location Number of

Mortgage Proportion of

Mortgage Principal Amount

Outstanding Proportion of

Mortgage of the Properties

Loans Pool by

Number of Mortgage

Loans Pool By

Amount ARMM 7 0.21% 932,673.90 0.15% BICOL REGION 30 0.89% 4,568,656.52 0.76% CAGAYAN VALLEY 23 0.68% 3,298,862.07 0.55% CAR 1 0.03% 70,896.86 0.01% CARAGA 27 0.80% 3,703,428.90 0.61% CENTRAL LUZON 261 7.76% 47,441,257.71 7.86% CENTRAL MINDANAO 26 0.77% 3,778,522.09 0.63% CENTRAL VISAYAS 88 2.62% 14,555,643.88 2.41% EASTERN VISAYAS 9 0.27% 1,811,897.92 0.30% ILOCOS REGION 12 0.36% 1,800,323.71 0.30% NCR (METRO MANILA) 523 15.55% 92,846,529.84 15.38% NORTHERN MINDANAO 186 5.53% 27,969,176.82 4.63% SOUTHERN MINDANAO 556 16.53% 85,155,602.39 14.10% SOUTHERN TAGALOG 1,529.00 45.45% 303,039,703.34 50.19% WESTERN MINDANAO 26 0.77% 3,314,001.41 0.55% WESTERN VISAYAS 60 1.78% 9,457,265.10 1.57%

TOTAL : 3,364 100.00% 603,744,442.46 100.00%

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RATINGS

PhilRatings has assigned a conditional Aa rating to the Class A Senior Notes, and a conditional rating of Aa rating to the Class B Senior Notes. Obligations rated Aa are of high quality and are subject to very low credit risk. The obligor’s capacity to meet its financial commitment on the obligation is very strong. The conditional rating will be affirmed upon finalization of the RMBS issuance and submission of required final and signed documents to the credit rating agency. PhilRatings will continue to monitor significant developments relating to the Senior Notes issuance, particularly with respect to collection, payment, and default. The rating is subject to regular annual reviews, or more frequently as market developments may dictate, for as long as the Senior Notes are outstanding.

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TAX CONSIDERATIONS

Tax on Issuance of the Senior Notes

Documentary stamp tax for the primary issue of the Senior Notes and the execution of the Notes Facility Agreement, if any, shall be for the Issuer’s account.

Tax on Transfers Senior Noteholders may transfer their Senior Notes at anytime, to a Qualified Buyer, regardless of tax status of the transferor vis-à-vis the transferee.

Under the Securitization Act, the secondary transfer of the Senior Notes (including redemption for retirement) is exempt from VAT, DST, and GRT.

Class A Senior Noteholders may transfer their Class A Senior Notes at anytime, regardless of tax status of the transferor vis-à-vis the transferee. Should a transfer between Class A Senior Noteholders of different tax status occur on a day which is not an Interest Payment Date, tax exempt entities trading with non-tax exempt entities shall be treated as non-tax exempt entities for the interest period within which such transfer occurred. A Class A Senior Noteholder claiming tax-exempt status is required to submit a written notification of the sale or purchase to the Trustee and the Registrar, including the tax status of the transferor or transferee, as appropriate, together with the supporting documents required by the Registrar, within three days of such transfer. Transfers taking place in the Register of Class A Senior Noteholders after the Class A Senior Notes are listed on PDEx shall be allowed between tax-exempt and non tax-exempt entities upon announcement by the Issuer to the Class A Senior Noteholders of the issuance of written confirmation by the Bureau of Internal Revenue that all coupon payments on the Notes are exempt from final withholding tax.

Interest and Principal payments

Under the Securitization Act and Republic Act No. 8763 (the Home Guaranty Corporation Act of 2000), interest income on the Senior Notes is exempt from income tax. All payments of principal and interest are to be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of Republic of the Philippines, including the final withholding tax, if applicable, on the yield on the Senior Notes , and including, but not limited to, issue, registration or any similar tax or other taxes and duties, including interest and penalties, if any. If such taxes or duties are imposed, the same shall be for the account of the Issuer; provided however that, the Issuer shall not be liable for the following:

(a) Gross Receipts Tax under Section 121 of the Tax Code;

(b) Taxes on the overall income of any securities dealer or Noteholder, whether or not subject to withholding; and

(c) VAT under Sections 106 to 108 of the Tax Code, and as amended by Republic Act No. 9337.

Tax status of the Trusts, such as the Issuer, are treated as individuals (not corporations) for

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Issuer tax purposes. The Issuer will be required to file a quarterly income tax return.

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DISTRIBUTION & SALE OF THE NOTES

The Notes will be issued and offered for sale in the Philippines by the Issuer, under the Securitization Act. The Class A Senior Notes and Class B Senior Notes shall be guaranteed by HGC, and as such, shall be exempt from the registration requirements purusant to Section 9.1(a) of the Securities Regulation Code. The Class C Subordinated Notes shall be subscribed by the Seller and hence not included in the planned distribution.

ARRANGER AND UNDERWRITER

The Arranger and Underwriter is Land Bank of the Philippines, with principal office at 15/F LandBank Plaza 1598 MH del Pilar St., corner Dr. J. Quintos Sts., Malate, Manila The Arranger and Underwriter may appoint sub-underwriters to ensure the best possible distribution of the Senior Notes.

THE UNDERWRITING AGREEMENT

The Issuer and the Underwriter shall be subject to the terms and conditions stated in the Underwriting Agreement.

METHOD OF DISTRIBUTION Class A Senior notes shall be sold to retail clients through the Selling Agent while Class B Senior Notes will be sold to qualified institutional buyers. The final allocation of the Senior Notes shall be subject to the availability of the Senior Notes and the acceptance by the Issuer. The Arranger and Underwriter and the Issuer, reserve the right to accept, reject, or scale down any application or offer to purchase the Senior Notes.

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ENROLLMENT, CLEARANCE AND SETTLEMENT OF THE NOTES

The Issuer intends to list the Class A Senior Notes in PDEx for secondary market trading. Secondary market trading in PDEx shall follow the applicable PDEx rules and conventions, among others, rules and conventions on trading and settlement, Upon listing of the Senior Notes with PDEx, investors shall course their secondary market trades through PDEx Trading Participants for execution in the PDEx Trading Platform in accordance with PDEx Trading Rules, Conventions and Guidelines, and shall settle such trades on a Delivery versus Payment (DvP) basis in accordance with PDEx Settlement Rules and Guidelines. The PDEx rules and conventions are available in the PDEx website <www.pdex.com.ph>.

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SUMMARY OF TRANSACTION DOCUMENTS

RESIDENTIAL LOAN SALE AND PURCHASE AGREEMENT

Under the Residential Loan Sale and Purchase Agreement (“LSPA”), the Issuer shall purchase from NHMFC and NHMFC shall sell, transfer, assign and convey to the Issuer on a ‘without recourse’ basis all of NHMFC’s right, title, interest, benefit, and obligations in and to the Residential Loans as of the Closing Date. The obligations assumed by the Issuer under the LSPA are strictly limited to contractual obligations under the LSPA and the Residential Loan Documents which are to be performed after the Closing Date. All obligations of the Seller for tort, or breaches of contract or otherwise accruing or occurring prior to the Closing Date shall remain with NHMFC. The sale of the Residential Loans to the Issuer shall be on a without recourse basis, which means that the amounts to be ultimately recovered on the Residential Loans are not guaranteed by NHMFC. However, the Issuer may demand rescission of the purchase of any Defective Residential Loan or any Restructured Residential Loan.

The Total Purchase Price for the Residential Loans shall be P 603,744,442.46, representing the book value of the Residential Loans as of the Cut-Off Date. The Total Purchase Price shall comprise: (1) a Cash Consideration in the amount as described in the section “Use of Proceeds”, which shall be directly remitted to the Seller Bank Account; and (2) a Note Consideration in the total amount of P 183,744,442.46 which shall be received by NHMFC on a deferred payment basis through the issuance by the Issuer of Class C Subordinated Notes with variable interest rate. All interest payments on the Class C Subordinated Notes will be deposited in the Seller Restricted Account. The amounts in the Seller Restricted Account shall be used to fund any Shortfall. The amounts in the Seller Restricted Account will be released to the Class C Subordinated Noteholder only upon the occurrence of the earlier of: (x) full payment of the Senior Notes or (y) exercise by NHMFC as eller of the Clean Up Call Option. Principal repayments on the Class C Subordinated Notes will be made only after the outstanding principal of the Senior Notes is zero.

Under the LSPA, without prejudice to the “true sale” and “without recourse” nature of the transaction, NHMFC has the obligation to service and administer all of the Residential Loans pursuant to the Servicing Agreement (discussed below).

The LSPA grants NHMFC a Clean-Up Call right by virtue of which it may repurchase from the Issuer, all (but not some) of the outstanding Residential Loans and HGC Amortizing Bonds once the principal amount of the Senior Notes falls to 10% or less of the principal balance of the Senior Loans as of Issue Date or when the outstanding principal balance of all the Residential Loans falls to 10% or less of the original principal balance of all the Residential Loans. Upon exercise by NHMFC of its Clean-Up Call, it shall pay the Issuer the Clean-Up Call Payment by: (i) issuing a Clean-Up Call Note in an amount equivalent to the remaining outstanding principal balance of the Subordinated Note as of the latest Monthly Trustee Report and (ii) paying the Clean-Up Call Cash Portion in an amount equivalent to the balance of the Clean-Up Call Payment less the Clean-Up Call Note. The exercise of the Clean-Up Call by NHMFC will result in the settlement of the Issuer’s obligations under the Senior Note and the other Transaction Documents.

Under the LSPA, the Issuer shall have the right to rescind, annul and cancel the sale of any Defective Residential Loan or Restructured Loan, and NHMFC shall (i) replace such Defective Residential Loan or Restructured Residential Loan with another Residential Loan that meets the Eligibility Criteria with substantially the same value and quality as the Defective Residential Loan or Restructured Residential Loan would have if it were not defective or restructured, or (iii) inform the Issuer that NHMFC agrees to the rescission and cancellation of such Defective Residential Loan or Restructured Residential Loan for an amount equivalent to the Residential Loan Rescission Cash Value.

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RESIDENTIAL LOAN AND MORTGAGE DEED OF ASSIGNMENT

On Closing Date, the Issuer and NHMFC as Seller will execute a Residential Loan and Mortgage Deed of Assignment by virtue of which, NHMFC shall absolutely sell, transfer, assign, deliver, and convey to the Issuer as Purchaser, on a “without recourse” basis, all of its right, title, and interest in the Residential Loans, Mortgages, and Security Interest.

SERVICING AGREEMENT

The Issuer appoints NHMFC as the Servicer to service, manage, and administer the Residential Loans and HGC Amortizing Bonds. The appointment of the Servicer will be for a period commencing on the Closing Date and ending on the date on which all amounts owed by the Issuer under the Transaction Documents have been fully discharged.

The Servicer shall for and on behalf of the Issuer the Residential Loan Collections and where applicable, HGC Amortizing Bond Collections. It shall hold such collections in behalf of and in trust for the Issuer and remit the same to the SPT Collection Account. The Servicer shall submit a Monthly Servicer Report which among others, includes details and a breakdown of the Residential Loan Collections and defaults in payments under the Residential Loan Documents.

The Servicer shall keep the Trustee promptly and regularly informed of all material events as may become known to the Seller affecting the Residential Loans, including any claim against any Residential Loan or Mortgaged Property. The obligations of the Servicer include defending the Residential Loan and any Mortgaged Property from claims by the Obligor or third parties. In servicing, managing, and administering the Residential Loans, Servicer shall have full power and authority to do any and all things in connection with such servicing, management, and administration that it might deem necessary or desirable, provided that Servicer shall not engage in asset management or administration. The Servicer is authorized and empowered to execute and deliver, in the name and on behalf of the Issuer, any and all documents or instruments necessary to maintain the lien on each Mortgaged Property, any and all instruments of satisfaction or cancellation or of partial or full release or discharge, any and all deeds, assignments, bills of sale or other instruments of transfer and conveyance, all documents, affidavits, and pleadings necessary to conduct any litigation or other proceedings involving the Issuer, or the Residential Loans, any and all documents necessary to effect Foreclosure Proceedings or the marketing and sale of the Residential Loans, and all other comparable instruments with respect to the Residential Loans. However, the Servicer shall have no authority to waive penalties and charges, or restructure any Residential Loan.

The Servicer may be terminated by the Issuer, upon recommendation of the Trustee, on the following grounds:

(a) (i) the Servicer fails to pay, transfer or deposit any amount as required pursuant to the Servicing Agreement or any other Transaction Document and such failure continues unremedied for a period of two Business Days; or (ii) the Servicer fails to deliver any Monthly Servicer Report in accordance with the terms of the Servicing Agreement;

(b) the Servicer has failed, in any material respect, to perform or observe any of its other covenants and obligations under the Servicing Agreement or any other Transaction Document to which it is a party (other than a failure described in either sub-paragraph of paragraph (a) above) and (except where such failure is incapable of remedy) such failure continues unremedied for a period of five Business Days;

(c) the Servicer (whilst the Seller is the Servicer) ceases or proposes to cease to carry on its residential loan and mortgage business;

(d) a court or agency or supervisory authority having jurisdiction enters a decree or order for the appointment of a receiver, trustee, or liquidator for the Servicer in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or for the

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winding up or liquidation of its affairs and that decree or order continues unstayed and in effect for a period of 45 consecutive days;

(e) the Servicer consents to the appointment of a receiver, trustee, or liquidator in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or similar proceedings of or relating to the Servicer or relating to substantially all of its property, or the Servicer admits in writing its inability to pay its debts generally as they become due, files a petition for its bankruptcy or reorganisation, or suspension of payments or rehabilitation, or makes an assignment for the benefit of its creditors (other than in its ordinary course of business), or voluntarily suspends payment with respect to all or any class of its debts (unless it has initiated a dispute with respect thereto but only insofar as such dispute relates to the non-existence of such debts or to the timing of when such debts become due and payable);

(a) the suspension, revocation, termination or withdrawal, in each case with no replacement or substitution therefor of any approval, authorisation, consent or licence required by the Servicer to carry out any of its duties or obligations under the Servicing Agreement or any other Transaction Document to which it is a party;

(b) the Servicing Agreement becomes void, voidable or unenforceable;

(c) a Material Adverse Change has occurred in respect of the Servicer. A Material Adverse Change means in relation to the Servicer, a material adverse change on (i) the ability of the Servicer to perform or comply with any of its obligations, or to exercise any of its rights, under the Servicing Agreement or Transaction Document to which it is a party in a timely manner, and (ii) the business, operations or financial condition of the Servicer;

(d) any representation, warranty or statement which is made (or deemed or acknowledged to have been made) by the Servicer in the Servicing Agreement or any other Transaction Document proves to be incorrect in any material respect;

(e) the results of any review conducted pursuant to the Servicing Agreement reveal any matter to be materially adverse to the interests of the Issuer or the Trustee; and

Upon the occurrence of any Servicer Termination Event Issuer, acting through the Trustee may terminate the services of Servicer by serving a Servicer Termination Event Notice. The existence of a Servicer Termination Event, including the decision of whether to grant a waiver as to the existence thereof, shall be determined at the sole reasonable discretion of the Issuer, upon recommendation of the Trustee

In case of a Servicer Termination Event, the Trustee shall act as Servicer in the interim until it can find and appoint a suitable Back-up Servicer.

TRUST AGREEMENT

As of Closing Date, the Development Bank of the Philippines-Trust Services will act the as the Trustee to act for and on behalf of the Noteholders to perform the functions provided in the Trust Agreement and in the Transaction Documents. The appointment of the Trustee shall commence upon the Closing Date and shall subsist for as long as the Senior Notes or any portion thereof is outstanding, and until the Bureau of Internal Revenue has issued the tax clearance for the closure of the SPT account, unless the services of the Trustee are otherwise terminated pursuant to the provisions of this Agreement.

The primary responsibility of the Trustee is the establishment and operation of the Operative Accounts for the Transaction as well as the application of funds on each Monthly Allocation Date. Aside from these prime responsibilities, the Trustee is also charged with, among other things:

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(a) Reportorial Obligations

i. Rendering the Monthly Trustee Report to the Issuer, the Seller, and the Noteholders containing information, among others, distribution of collections into principal and income component, income from investment in Eligible Instruments, status of Subordinated Note and Trigger Events, application of funds, and the payments to be made to the Noteholders, Service Providers and to the Bureau of Internal Revenue.

ii. On the Legal Final Maturity Date or upon the settlement of all claims following the full repayment of the Senior Note, or upon the exercise of a Clean-Up Call, or upon the termination of the Trustee, the Trustee shall likewise render a Final Trustee Report.

(b) Obligations in Relation to the Servicer

i. Approving in writing the request of the Servicer to engage the services of a Sub-Servicer.

ii. In the event of a Servicer Termination Event, finding and appointing a suitable Back-Up Servicer, and in the interim, acting as temporary Servicer.

iii. If any of the Servicer Termination Events has occurred, the Trustee shall promptly serve a Servicer Termination Event Notice on the Servicer with a copy to the Seller, the Noteholders and the Service Providers. The Trustee may exercise its discretion or obtain the written directions of the Majority Noteholders to determine whether it shall consider such event as a Servicer Termination Event or grant a waiver of such Servicer Termination Event.

iv. inform Servicer as to the form of data discs recording on the servicing history of Residential Loans, including but not limited to payments made, delinquencies, default, and other information that may be requested by the Trustee;

v. accept on behalf of the Issuer, all Residential Loan Documents, Residential Loan Files, Transfer Certificates of Title for the Mortgaged Properties and any other document necessary for the servicing of the Residential Loans that are in the Servicer’s possession, and all data discs recording

vi. give notice to Obligors and other concerned parties, including but not limited to employers of Obligors that have agreed to salary deductions as payment mode, of the change in Servicer and payment channels.

(c) Obligations in Relation to a Clean-Up Call

i. In the event that the Trustee receives a Clean-Up Call Notice from the Seller, the Trustee notifies the Purchaser and all Service Providers of the Clean-Up Call.

ii. The Trustee shall cause the application of payments to all parties concerned in the event of a Clean-Up Call.

(d) Investments in Eligible Instruments

i. Prior to the occurrence of an Event of Default, the Trustee may invest amounts not yet to be used to pay obligations and standing to the credit of the Operative Accounts, in Eligible Instruments.

(e) Obligations in Relation to the HGC Guaranty

i. Notify Issuer and Servicer of the occurrence of the HGC Guaranty Event as soon as the Class C Subordinated Notes has reached zero.

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ii. Send monthly report to the Servicer one business day before Monthly Servicer Report Date for cash payments received from HGC for the HGC Amortizing Bonds under the terms and conditions of the Guaranty Agreement

iii. Assist the Servicer when necessary and as provided in the Guaranty Agreement in making guaranty claims process against HGC to protect the best interest of the Noteholders.

iv. Keep all original HGC Amortizing Bonds, and furnish Servicer copies of such HGC Amortizing Bonds.

(f) Determination of Senior and Junior Expenses

The trust arrangement established pursuant to the Trust Agreement does not create a debtor-creditor relationship between the parties, and all monies, fund or assets shall not be insured with the Philippine Deposit Insurance Corporation. Losses, if any, shall be for the sole account and risk of the Issuer.

HGC GUARANTY

The HGC Guaranty shall cover all the Residential Loans up to the full amount and value of the Class A Senior Notes and Class B Senior Notes. Upon a call on the HGC Guaranty, the cover for each Defaulted Residential Loan shall be one hundred per cent (100%) of the outstanding principal of all the Defaulted Residential Loans plus interest thereon of up to eleven percent (11.0%) per annum or the actual interest rate stipulated in Residential Loan Agreement, whichever is lower.

Every call on the HGC Guaranty shall be in the form of a Mixed Cash/ Bond Coverage. The Cash Coverage. This portion shall cover the actual amount of the unpaid monthly amortizations of the Obligor but not more than fourteen (14) Monthly Installments on each Defaulted Residential Loan. If there is any payment thereafter from such Defaulted Residential Loan to SPT, SPT shall return such amount to HGC. The HGC Amortizing Bonds represent HGC’s total obligation and commitment to pay all the scheduled Monthly Installments in excess of the fourteen (14) Monthly Installments covered by the Cash Coverage

The interest income generated from each HGC Amortizing Bond shall be exempt from any and all taxes to the extent of the Guaranteed Interest Rate. In the event that the rate of interest charged in a Defaulted Residential Loan is lower than the Guaranteed Interest Rate, the tax exemption on the interest earned for such payment obligation shall be to the extent of the amount corresponding to the interest rate indicated in the relevant Defaulted Residential Loan Agreement

The SPT through its Servicer (or the Trustee if Servicer fails to act) shall call on the HGC Guaranty upon the occurrence of the HGC Guaranty Trigger Event. The HGC Guaranty Trigger Event shall occur when the outstanding principal amount of the Class C Subordinated Note has reached zero, and there are still Defaulted Residential Loans, as provided in the relevant Monthly Servicer Report. For calls on the HGC Guaranty subsequent to the occurrence of the HGC Guaranty Trigger Event, the SPT through its Servicer (or the Trustee if Servicer fails to act) shall call on the HGC Guaranty for every Defaulted Residential Loan

The HGC Guaranty shall subsist until the Legal Final Maturity Date.

After 3 years from the issuance of each HGC Amortizing Bond, HGC shall have the option to fully repay each HGC Amortizing Bond. HGC shall notify SPT (through Trustee) and Servicer to exercise such option with the details of which HGC Amortizing Bonds is being repaid.

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HGC represents and warrants that the payment of the HGC Amortizing Bonds to be issued by HGC pursuant to this Agreement shall be fully and unconditionally guaranteed by the Republic of the Philippines to the full extent of the Guaranty as provided for under Clause Error! Reference source not found., pursuant to the provisions under Administrative Order No. 10 dated 14 August 1998 and Department of Finance (DOF) Circular No. 2-99 dated 07 September 1999 and subsequent amendments thereto.

A copy of the Guaranty Agreement can be requested by email from the Trustee.

REGISTRY AND PAYING AGENCY AGREEMENT

This agreement sets out the terms and conditions of the appointment of Philippine Depository & Trust Corp. (“PDTC”) as the Registry and Paying Agent for the Class A Senior Notes.

As Registrar, PDTC, shall be responsible for safekeeping the duly executed Notes, establishing and maintaining an electronic registry system, hereinafter referred to as the Registry which will reflect the pertinent information on the Class A Senior Noteholders, their holdings of the Class A Notes, and the transactions relating to the Class A Notes.

As Paying Agent, PDTC be responsible for handling the periodic payment of interest and principal, when due, to the Class A Noteholders.

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APPENDIX 1 - MASTER DEFINITIONS AGREEMENT

Accelerated Amortization Period (Upon the occurrence of a Non-Payment Default

The period commencing on (and including) the date on which a Non-Payment Default has occurred and ending on (and including) the date on which all the assets of the Issuer have been used to repay its outstanding obligations.

Accelerated Amortization Period (Upon the occurrence of an Early Amortization Event)

The period commencing on (and including) the date on which an Early Amortization Event has occurred and ending on (and including) the date on which all liabilities of the Issuer under the Transaction Documents (including the Senior Notes but excluding the remaining outstanding balance of the Subordinated Note) are discharged in full.

Account Bank Development Bank of the Philippines Trust Services

Accounts SPT Collection Account, Income Collection Account, Principal Collection Account, Tax Reserve Account, Commingled Reserve Account, Liquidity Reserve Account, and, Seller Restricted Account

Allowable Expense Amount For each Servicer Provider, the amount of P50,000 per annum

Application of Funds The manner and procedure of applying the funds and collections from the Residential Loan as specifically described in Schedule E of the MDA

Asset Pool See “Residential Loans”

Authorization or authorization Any approval, authorization, consent, direction, declaration, exemption, franchise, license, permission, permit, order, registration or resolution of, filing with, or notification to any governmental or regulatory authority or any third party.

Back-Up Servicer Upon the occurrence of a Servicer Termination Event, the servicer recommended by the Trustee and approved by the Issuer to take over the duties and responsibilities of the original Servicer

BahayBonds2 SPT or SPT The special purpose trust established by LBP-TBG, pursuant to the SRC

BIR Bureau of Internal Revenue

BSP Bangko Sentral ng Pilipinas

Business Day or Banking Day Any day which is not a Saturday, a Sunday, or non-

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working holiday or a day in Makati City and the City of Manila, Philippines on which banks are authorized or required to close.

Certificate of Defective Residential Loan A fully and properly completed and executed certificate of Purchaser in the form attached as Schedule E of the LSPA and delivered to Seller in accordance with Article IX of the LSPA.

Certificate of Rescission A fully and properly completed and executed certificate of Purchaser in the form attached as Schedule F of the LSPA.

Class A Senior Noteholder A holder of Class A Senior Notes

Class B Senior Noteholder A holder of Class B Senior Notes

Class A Senior Notes A portion of the Notes in the amount of P300,000,000.00 offered to retail investors

Class B Senior Notes A portion of the Notes in the amount of P120,000,000.00 offered to institutional investors

Class C Subordinated Notes A portion of the Notes in the amount of P183, 744,442.46, representing the deferred payment to the Seller for the Residential Loans.

Clean-Up Call Cash Portion The cash portion of the Clean-Up Call Payment in an amount equivalent to the balance of the Clean-Up Call Payment less the Clean-Up Call Note

Clean-Up Call Exercise The manifestation by Seller of its exercise of the Clean-Up Call by sending a Clean-Up Call Notice to the Trustee

Seller may effect a Clean-Up Call Exercise only by delivery of a Clean-Up Call Notice to the Trustee on a Clean-Up Call Exercise Date

Clean-Up Call Exercise Date Five Business Days after the Monthly Trustee Report Date on which a Clean-Up Call Exercise is effected

Clean-Up Call Note The note portion of the Clean-Up Call Payment in an amount equivalent to the remaining outstanding principal balance of the Subordinated Note as of the latest Monthly Trustee Report

Clean-Up Call Notice The notice in writing given by the Seller to the Trustee of its intention to exercise the Clean-Up Call

Clean-Up Call Payment The market value of the remaining Residential Loans and HGC Amortizing Bonds

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Clean-Up Call Payment Date The Interest Payment Date following a Clean-Up Call Exercise

Clean-Up Call Timeline As illustrated in Schedule A of the MDA

Clean-Up Call Trigger Event When the outstanding principal balance of all the Residential Loans falls to 10% or less of the original principal balance of all the Residential Loans

or

When the aggregate outstanding principal amount of the Senior Notes falls to 10% or less of the principal balance of the Senior Notes as of Issue Date, as certified by the Trustee, based on the relevant Monthly Servicer Report, whichever occurs earlier.

Clean-Up Call The option given to the Seller to repurchase the Residential Loans upon the happening of a Clean-Up Call Trigger Event.

Closing Date 17 August 2012

Collateral The real or personal property, guaranty, pledge, mortgage, or other security interest, if any, including without limitation, the Mortgaged Property, securing repayment of a Residential Loan, which Collateral is valid and existing as of the Cut-off Date, and which otherwise secures the repayment of all or part of a Residential Loan.

Collateral Documents Any mortgage, deed of trust, security agreement, guaranty, letter of credit, pledge, loan agreement, or other instrument creating a security interest in, or lien upon, real and/or personal property comprising the Collateral securing a Residential Loan.

Collection Period In reference to Residential Loan Collections, the period from (but excluding) one Collection Period End Date to (and including) the next following Collection Period End Date, provided that the first Collection Period shall commence on (and include) the Cut-Off Date and end on (and include) the first Collection Period End Date, as illustrated in the Timeline for Reporting and Collections hereto attached as Schedule B.

Collection Period End Date In reference to Residential Loan Collections, the day falling on the last day of each calendar month, as illustrated in the Timeline for Reporting and Collections hereto attached as Schedule B, provided that the first Collection Period End Date shall be 30 April 2012.

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Collections The Residential Loan Collections, HGC Amortizing Bond Collections, and the Insurance Payments

Commingled Reserve Account An account in the Issuer’s name which shall contain three months of expected Collections as determined by the Servicer

Controlled Amortization Period The period commencing on (and including) the Closing Date and ending on:

(a) (but excluding) the date on which an Early Amortization Event has occurred; or

(b) (and including) the date on which all liabilities of the Issuer under the Transaction Documents (including the Notes but excluding the remaining outstanding balance of the Subordinated Note) are discharged in full; or

(c) (and including) the date on which the Seller exercises its Clean-up Call option,

whichever occurs first.

Credit Loss Outstanding principal balance of a Residential Loan at the time it becomes a Defaulted Loan

Cut-off Date 31 March 2012

Deemed Collections Amounts that are deemed to be payable by Servicer to the Issuer in respect of the Residential Loans in accordance with the Transaction Documents, including, in respect of a Monthly Collection Transfer Date and the Collection Period to which such date relate, the aggregate of:

(a) the aggregate Principal Amount Outstanding of the Residential Loans identified during such Collection Period; and

(b) any other reduction (other than by (i) actual payment of the amounts due in respect of the Residential Loans or (ii) charge-off in accordance with the accounting principles of the Servicer) in the Principal Amount Outstanding of the Residential Loans during such Collection Period.

Defaulted Residential Loan At the time of any determination, any Residential Loan which (without double counting) is a Residential Loan any amount of which is and remains unpaid for more than six Monthly Installments after its due date

Defaulted Residential Loan Amount The principal amount that is unpaid by an Obligor equivalent to over six Monthly Installments or more

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after its due date

Defaulted Residential Loan Document The Residential Loan Document covering such Defaulted Residential Loan

Defect In respect of any Defective Residential Loan, the fact, circumstance, event, or occurrence that causes a representation and warranty under the LSPA to be untrue in any material respect.

Defective Residential Loan A Residential Loan that has a Defect and as to which Seller has breached a representation and warranty under the LSPA.

DST Documentary Stamp Tax

Early Amortization Event The period commencing on (and including) the date on which any of the following events has occurred:

(a) HGC Guaranty Trigger Event;

(b) Servicer Termination Events; or

(c) Events of Default.

Eligibility Criteria The minimum criteria that must be met in order for a loan to be included in the Residential Loan portfolio owned and held by the Issuer. The criteria are enumerated in Schedule C of this MDA.

Eligible Instruments Obligations issued or fully guaranteed by the Government of the Republic of the Philippines or issued by the BSP, registered securities and such other readily marketable investments which the Philippine Securities and Exchange Commission may, from time to time, approve or authorize.

Event of Default The occurrence of any of the following events:

(a) A breach by the Issuer of any term or condition of the Senior and Subordinated Notes or provisions of any of the Transaction Documents or any of the Transaction Documents cease to remain binding obligations on any of the parties thereto or become unenforceable for any other reason;

(b) Any judgment or order is made by any court of competent jurisdiction or a supervisory authority having jurisdiction or a resolution is passed by the Issuer for the appointment of a liquidator, receiver or trustee of the Issuer or of all or substantially all of its assets in any bankruptcy, reorganization, winding-up, suspension of payment, or liquidation or other proceedings analogous in purpose or effect

(d) An order is made or an effective resolution is

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passed for the winding up or dissolution without winding up (otherwise than for the purpose of reconstruction or amalgamation), or any event analogous thereto shall occur in respect of the Issuer

(e) Any debt of the Issuer becomes due and payable prior to its stated maturity by reason of a default or event of default (howsoever described and whether or not involving culpability on the part of any person), or the security created for any other indebtedness becomes enforceable;

(f) Any approval, license or authorization by and of the Issuer required in relation to the performance of its payment or other material obligations under, or for the validity or enforceability of, the Notes, the trust deed or any other document relating to the issue, offer or invitation of the Notes is revoked, rescinded, suspended or otherwise limited in effect such that the Issuer fails or cannot perform its obligations thereunder;

Event of Default Notice A notice sent by Trustee to the Issuer and the Noteholders upon occurrence of an Event of Default.

Excess Spread The amount remaining in the Income Collection Account after the payment of the Junior Expenses

Excess Tax Provision In respect of a completed fiscal year of the Issuer or any Monthly Allocation Date, the amount that is in excess of the SPT Tax Payable, after the SPT Tax Payable has been paid for such fiscal year.

Fire and Allied Perils Insurance A term insurance secured and paid by a mortgagor of a Residential Loan for the protection of the mortgagee in case of the destruction of the mortgaged improvement(s) arising from fire and allied perils prior to full payment of the relevant Residential Loan.

Foreclosure Proceedings The judicial or extra-judicial proceedings (including, but not limited to, attachment and execution or substitute performance in lieu of foreclosure (including, but not limited to, dacion en pago)) by which the creditor of a non-performing mortgage loan seeks full or partial payment of the outstanding amount of such mortgage loan, together with the related interest and expenses, pursuant to Philippine Law. Foreclosure Proceedings include, but are not limited to, auctions of property subject to a mortgage in full or partial satisfaction of a non-performing loan (whether judicial actions, extra-judicial auctions, or otherwise).

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GAAP Generally Accepted Accounting Principles in the Philippines as set forth in Philippine Financial Reporting Standards

GRT Gross Receipts Tax

General Banking Law The General Banking Law of 2000, Republic Act No. 8791

Guaranteed Interest Rate Interest on the Defaulted Residential Loan of up to 11% per annum or actual interest rate stipulated in Residential Loan Agreement, whichever is lower.

Guaranteed Payment Obligation 100% of the outstanding principal of all the Defaulted Residential Loans plus the Guaranteed Interest Rate on such Defaulted Residential Loans

Guarantor HGC, which is authorized to operate a housing loan Guaranty program under Republic Act 8763, and is authorized to guaranty the Residential Loans acquired by the Issuer from NHMFC, in accordance with the provisions of the Guaranty Agreement. Under the same law, HGC is authorized, among other powers, to guaranty the payment in favor of any natural or juridical person, of any and all forms of mortgages, loans and other forms of credit facilities and receivables arising from financial contracts exclusively for residential purposes and the necessary support facilities thereto.

Guaranty Agreement The guaranty agreement by and between the Issuer, HGC and the Trustee for the terms and conditions of the HGC Guaranty

Guaranty Claim The guaranty claim filed by the Servicer on behalf of SPT against HGC pursuant to the Guaranty Agreement.

Guaranty Claim Supporting Documents The documents that must be submitted by SPT through the Servicer to HGC in support of the Guaranty Claim.

Guaranty Claim Approval Documents The documents that must be submitted by SPT through the Servicer to HGC after receipt of the notification of approval of Guaranty Claim.

Guaranty Fee Payment Date February 17th and August 17 of each year prior to Maturity Date

First Guaranty Fee Payment Date Closing Date

HGC Amortizing Bond Collection All sums received or recovered from HGC pursuant to

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any HGC Amortizing Bond issued to the Issuer by HGC.

HGC Amortizing Bonds The amortizing bonds issued by HGC pursuant to the HGC Guaranty

HGC Guaranty The full guaranty provided by HGC on the Residential Loans.

HGC Guaranty Trigger Event When the size of the Class C Subordinated Notes reduces to zero due to allocation of defaults. The outstanding value of the Class C Subordinated Notes will be tested and monitored and reported in the Monthly Servicer Report.

Home Guaranty Corporation or HGC A government owned and controlled corporation (GOCC) mandated by law (Republic Act 8763) to promote sustainable home ownership by providing risk coverage or guarantees and tax/fiscal incentives to banks and financial institutions/investors granting housing development loans / credits, and home financing.

Income Collection Account An account in the Issuer’s name, managed by the Trustee, containing the payments/amounts representing interest and penalties from the Residential Loans, proceeds from any foreclosure sale, and any other amount that does not represent payment of the principal on the Residential Loans.

Insolvency Event In relation to the Trustee, when (i) the Trustee has filed any petition for bankruptcy, reorganization, winding-up, suspension of payment, or liquidation or other proceedings analogous in purpose or effect; or (ii) the Trustee has applied for or consented to the appointment of a receiver or trustee for the bankruptcy, reorganization, winding-up, or liquidation of the Issuer or (iii) there has been a court order or judgment confirming the bankruptcy or insolvency of the Trustee or approving any reorganization, winding-up or liquidation of the Trustee or a substantial portion of its property and assets.

Insolvency Proceedings Any proceedings for suspension of payments or bankruptcy or other insolvency, rehabilitation, or reorganization procedure under the Law, including but not limited to procedures under the Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No. 10142), the Insolvency Law (1909), Presidential Decree No. 902-A, and the Rules on Corporate Rehabilitation, pending or commenced with respect to a Loan or an Obligor.

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Insurance Payments Any payment made by the Obligor for the insurance policies in relation to its Residential Loan that forms part of the Collections.

Insurance Policies The mortgage redemption insurance, fire insurance, and allied perils insurance policies taken out by the Obligor pursuant to the Residential Loan Document, and any other insurance as may be required by the Servicer pursuant to its home lending guidelines.

Insurance Proceeds Any amount recovered by the Servicer on behalf of the Issuer pursuant to any claim on the Insurance Policies.

Interest Payment Date/s November 17, February 17, May 17 and August 17 of each year, or if such day is not a Business Day, the next Business Day

Interest Period Each period from (and including) one Interest Payment Date to (but excluding) the next Interest Payment Date, provided that the first Interest Period shall commence on (and include) the Closing Date and end on (but exclude) the first Interest Payment Date

See Schedule B for an example of the Interest Period timeline.

Issue The issuance of the Senior Notes by the Issuer under the Terms and Conditions of the Senior Notes

Issue Date Closing Date

Issuer Bahay Bonds 2 Special Purpose Trust (Trust Account # 45756 TA01)

Junior Expenses Reasonable out of pocket expenses of the Service Providers, not forming part of Senior Expenses which are in excess of the Allowable Expense Amount, approved by the Issuer upon recommendation of the Trustee; provided that, any out of pocket expenses of the SPT in excess of the allowable expenses shall be approved by the Trustee.

Law (i) any statute, decree, constitution, regulation, rule, order or any directive of the government of the Philippines, (ii) any treaty or other agreement to which the Philippines is a signatory or party, (iii) any judicial or administrative interpretation or application of any Law described in clause (i) or (ii) above, and (iv) any amendment or revision of any Law described in clause (i), (ii) or (iii) above.

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Legal Final Maturity Date Maturity Date of the longest Residential Loan Term + 12 months, or if such day is not a Business Day, the next Business Day

Liquidity Reserve Account A Philippine Peso-denominated bank account of the Issuer established with the relevant Account Bank.

This account shall be a reserve account to cover any Shortfall to meet the tax, Senior Expenses and coupon payments on the Senior Notes from the time lag from the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the HGC Guaranty.

Listing Agent Philippine Dealing & Exchange Corporation or PDEx, or its successor listing agent

Loan Evidence Any agreement or document evidencing the indebtedness of an Obligor under a Residential Loan, together with any rider, addendum or amendment thereto. The Loan Evidence might include, without limitation, original documents or copies thereto.

Loan Proceeding Any judicial or extra-judicial proceeding with respect to a Residential Loan or an Obligor or other interested Person, including, but not limited to, any lawsuit, settlement, payment order application procedures, preservative measures such as provisional attachment, lien of attachment, provisional disposition, preliminary injunction and mandatory execution procedures, including, but not limited to any Insolvency Proceeding or Foreclosure Proceeding

Loan Sale and Purchase Agreement or LSPA

The Loan Sale and Purchase Agreement by and between NHMFC, as seller, and the Issuer, as purchaser, pursuant to which SPT has purchased the Residential Loans from NHMFC, including all the Schedules and Exhibits thereto.

Majority Senior Noteholders The Senior Noteholders holding more than 50% of the outstanding principal of the Senior Notes, at any given time

Market Value For purposes of determining the amount of the Clean-Up Call Payment, the book value of Residential Loans and HGC Amortizing Bonds subject of the Clean-Up Call

MDA Master Definition Agreement

Monthly Allocation Date The day falling three Business Days after the date on which the Trustee receives the Monthly Servicer Report but in any event no later than the day falling

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three Business Days prior to the next Interest Payment Date when the Trustee transfers the monthly Interest to the Paying Agent.

Monthly Collection Transfer Date The Business Day following the Monthly Servicer Report Date

Monthly Installment The monthly payment of an Obligor pursuant to a Residential Loan that includes payment of principal, interest, insurance, penalties

Monthly Servicer Report A report relating to a Collection Period made by the Servicer to the Issuer and the Trustee on each Monthly Servicer Report Date.

The Monthly Servicer Report shall relate to the Collection Period, which is the third month preceding the month in which the Monthly Servicer Report is made.

The Monthly Servicer Report shall include, among other things:

Information relating to the Residential Loans and Collections;

The status of the Residential Loans, including Defaulted Residential Loans and the Delinquent Residential Loans; and

Collections from HGC Amortizing Bonds.

The contents of the Monthly Servicer Report may be changed by the Servicer pursuant to instructions given by the Trustee or the Issuer.

Monthly Servicer Report Date For a particular Collection Period, the day falling three calendar months plus seven Calendar Days after the Collection Period End Date of such Collection Period, or if such date is not a Business Day, the next following Business Day

Monthly Trustee Report A report made by the Trustee to the Issuer, Class B Noteholders, Servicer, and Guarantor on each Monthly Trustee Report Date. The Monthly Trustee Report shall include the information required under the Trust Agreement

Monthly Trustee Report Date The day falling two Business Day after the Monthly Servicer Report Date

Mortgage Any mortgage and/or other security interests securing the repayment of any Residential Loan

Mortgage Agreement Any mortgage agreement or any instrument

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evidencing the Mortgage

Mortgage Loan Any Residential Loan secured by a Mortgage.

Mortgaged Property The real or personal property and any improvements or fixtures on such real or personal property that are encumbered by a Mortgage, which Mortgage is valid and existing as of the Cut-off Date.

Mortgage Redemption Insurance A term insurance secured and paid by a mortgagor of a Residential Loan who is not beyond the age of 65 at the time the loan documents are first received by NHMFC, for the protection of the mortgagee in case of death or permanent disability of the mortgagor prior to full payment of the relevant Residential Loan.

NHMFC National Home Mortgage Finance Corporation

Non-Payment Default When the Issuer fails to pay (i) any interest on the Senior Notes on any Interest Payment Date or (ii) the Principal Amount Outstanding of the Senior Notes in accordance with the Repayment Schedule

Noteholders The holders of the Senior Notes and/or the Class C Subordinated Notes

Notes The following:

Class A Senior Notes

Class B Senior Notes

Class C Subordinated Notes

Notes Facility Agreement The agreement executed between the Issuer and the Class B Senior Noteholders in relation to the terms and conditions of the purchase by the Class B Senior Noteholders of the Class B Senior Notes.

Obligor With respect to any Residential Loan, the unreleased obligors (including the borrower or guarantors, co-borrowers, if any)

Offer The issuance of the Senior Notes by the Issuer under the Terms and Conditions of the Senior Notes

Offer Period 26 July 2012 to 7 August 2012

Offering Circular The document prepared by the Issuer as the selling material for the Senior Notes

Operative Accounts Collectively, the SPT Collection Account, Income Collection Account, Principal Collection Account, Tax

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Reserve Account, Liquidity Reserve Account, and Commingled Reserve Account

Paying Agent Philippine Depository & Trust Corporation

Payment Account The account to be opened by the Paying Agent out of which all payments under the Registry and Paying Agency Agreement shall be made.

Person Any natural person, cooperative, corporation, limited partnership, general partnership, joint stock company, limited liability company, joint venture, association, company, trust bank, trust company, land trust, business trust, governmental authority, or other organization or entity, whether or not a legal entity

Philippine Law Any statute, decree, constitution, regulation, rule, or order of the Philippine Government; and

Any treaty or other agreement to which the Philippine Government is a signatory or a party; and

Any judicial or administrative interpretation of any Philippine Law described in (a) or (b) hereof; and

Any amendment or revision of any Philippine Law described in clause (a), (b), or (c) hereof

Php or P Philippine Pesos, the currency of the Republic of the Philippines

Preliminary Sales Report a report consolidating the preliminary sales report

Principal Collection Account An account in the Issuer’s name, managed by the Trustee, containing the amounts representing principal payments by the Obligors under the Residential Loans, interest and income earned from Eligible Instruments, and excess amount of the Required Liquidity Reserve Amount and Required Commingled Reserve Account.

Promissory Note An original promissory note or other similar original instrument evidencing the indebtedness of an Obligor under a Residential Loan, together with any rider, addendum, or amendment thereto.

Registry Confirmation The advice sent by the Registrar to the Class A Senior Noteholders confirming the details of such Class A Senior Noteholders

Purchaser The BahayBond Special Purpose Trust, a trust administered by LBP-TBG, duly licensed to perform trust functions under the General Banking Law, and

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created solely for the purpose of the securitization of the Residential Loans from the Seller, and qualified as a special purpose entity under the Securitization Act

Rating Agency Philippine Rating Services Corporation

Registrar and Paying Agent Philippine Depository & Trust Corporation

Repayment Schedule The schedule of principal payments on the Senior Notes as provided in Schedule F of this MDA

Required Commingled Reserve Amount An account in the Issuer’s name which shall contain three months of expected Collections as determined by the Servicer

Required Liquidity Reserve Amount An amount equivalent to the expected tax, Senior Expenses, and coupon payments on the Senior Notes for a period of nine months, representing the time lag from the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the HGC Guaranty.

Rescission Cut-Off Date The date when the Certificate of Rescission is given by Purchaser to Seller

Rescission Payment Period Within three Business Days of Seller’s receipt of the Certificate of Rescission

Residential Loan Individually, any of the loans, and the accompanying Mortgages, and the other related assets purchased by the Issuer from Servicer pursuant to the LSPA, including any substitute Residential Loan, under the terms of the LSPA.

Residential Loan Agreement The loan agreement, Residential Promissory Note, Mortgage Agreement or any agreement or instrument or note evidencing the Residential Loan and Mortgage.

Residential Loan and Mortgage Deed of Assignment

The deeds of assignment executed by the Seller in favor of Purchaser on Closing Date, in respect of all the Residential Loans and Mortgages

Residential Loan Books and Records All documents, records and data, regardless of form or medium, related to the Residential Loans, including but not limited to original Residential Loan Agreements, documents registering such Agreements, mortgage deeds, documents registering such deeds, promissory notes or similar evidences of indebtedness, expert appraisals and property register records.

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Residential Loan Cash Payment

Shall have the meaning given that term in Section 2.2 A of the LSPA.

Residential Loan Certificate of Closing The certificate to be executed by the Seller and the Purchaser at Closing, substantially in the form of Schedule E of the LSPA.

Residential Loan Collection All sums received or recovered from any Obligor in respect of the Residential Loans through the Servicer’s Collection Accounts;

The proceeds of any claims received under any Insurance Policies, but limited to the amounts due and payable under or in respect of the Residential Loans;

The proceeds of sale of any mortgage which is the subject of any Residential Loan Document or of the implementation of any other enforcement procedures in relation to the Residential Loans, in each case limited to the amounts due and payable under or in respect of the Residential Loans;

Any sums received or recovered from HGC in respect of the Residential Loans;

When the Seller acts as the Servicer, any Deemed Collections;

If the Seller ceases to be the Servicer, an amount equal to any Deemed Collections collected by the Back-up Servicer from the Seller; and

All moneys (other than those moneys collected under paragraphs (a) through (f) inclusive) paid to the Issuer by the Seller or the Servicer under the Residential Loan Sale and Purchase Agreement or this Agreement

Residential Loan Documents With respect to each Residential Loan, any Residential Loan Agreement, credit agreement, Residential Loan Note or other promissory note, bond, mortgage, pledge, Security Interest, guarantee or surety agreement, or any other agreement, document, instrument or other writing evidencing any obligation of any Borrower with respect to any Residential Loan and any assignment, reinstatement, extension, endorsement or modification thereof.

Residential Loan File With respect to a particular Residential Loan shall mean the contents of the file identified as the file for such Residential Loan maintained by the Seller, including, without limitation, the Books and Records, the Residential Loan Fact Summary, and the

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Residential Loan Document Listing contained therein, and including documents and other papers added to such file after review by Purchaser.

Residential Loan Note With regard to any Residential Loan, an original promissory note with respect to such Residential Loan, if any.

Residential Loan Rescission Cash Payment

The amount equivalent to the outstanding principal balance of a Defective Residential Loan or a Restructured Residential Loan as the Rescission Cut-Off Date

Residential Loan Summary The summary for each Residential Loan duly certified as true and correct by an authorized officer of the Seller in charge of handling the Residential Loans

Residential Loans The 3,364 Residential Loans being sold under the LSPA as identified in the Residential Loan Summary (and “Residential Loan” means any one of them), together with all rights, claims, powers, privileges and obligations arising therefrom or related thereto including, without limitation, the Residential Loan Rights. If a single entry in the Residential Loan Schedule reflects the existence of more than one Residential Loan, the term "Residential Loan" shall refer to all such Residential Loans.

RTGS Real Time Gross Settlement

Sales Report A summary prepared by the Underwriter on the investors for the Senior Notes

SEC The Philippine Securities and Exchange Commission

Securities Regulation Code or SRC The Securities Regulation Code, Republic Act No. 8799

Securitization The Offer by the Issuer for public distribution and sale in the Philippines an aggregate of P603,744,442.46 principal amount of Notes in accordance with the Securitization Act (Republic Act 9267) consisting of P 420,000,000 worth of Class A Senior Notes and Class B Senior Notes and P183,744,442.46 worth of Class C Subordinated Notes backed by the Residential Loans purchased by the Issuer from the Seller.

Securitization Act or Securitization Act of 2004

Republic Act No. 9267 (2004) also known as “The Securitization Act of 2004”, and its implementing rules and regulations

Security Interest Any Mortgage, guaranty, pledge, lien, security interest or other interest in Collateral Property

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granted in connection with any Residential Loan.

Seller National Home Mortgage Finance Corporation or NHMFC, the main government home mortgage institution created in 1977 under Presidential Decree No. 1267, for the purpose of developing and providing a secondary market for home mortgages granted by public and/or private home financing institutions.

Seller Bank Account The bank account of Seller specified in writing by Seller to the Trustee and Paying Agent where remittances and payments to Seller will be made.

Seller Restricted Account The account opened under the Seller’s name, and maintained and operated by the Account Bank, where the variable interest payments for the Subordinated Notes shall be credited.

Senior Expenses The predetermined fees of the Service Providers;

Reasonable expenses incurred by a Service Provider in connection with its duties under the appropriate service agreement, prior to the occurrence of an event of default under such appropriate service agreement, and which are within Allowable Expense Amount; and

Reasonable expenses incurred by a Service Provider in connection with its duties under the appropriate service agreement in excess of the Allowable Expense Amount, and which are approved by the Issuer pursuant to the recommendation of the Trustee

Senior Noteholder A holder of a Senior Note

Senior Notes The Class A Senior Notes and the Class B Senior Notes in the aggregate amount of P420,000,000.00 available for public distribution and sale

Service Providers (a) Servicer

(b) Trustee

(c) Rating Agency

(d) Registrar

(e) SPT Bank

(f) HGC as Guarantor

(g) Account Bank

(h) Paying Agent

(i) Listing Agent

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Servicer NHMFC

Servicer Selection Criteria An entity must have the following minimum requirements:

(a) a strong capital base and good debt ratings;

(b) a good reputation as a sophisticated provider of asset administration services;

(c) experience and a track record in acting as a servicer, for itself or for a third party;

(d) experienced personnel capable of managing a servicing program with efficient collection, tracking, accounting, and repossession operations;

(e) loan servicing capabilities/network in at least all the major cities throughout the Philippines;

(g) existing quality servicing and information technology systems, data communications capability, systems staff and disaster recovery plan; and

(h) qualifications prescribed under the Securitization Act or any other relevant rule or regulation.

Servicer Termination Event Any of the following events shall have occurred:

(a) (a) (i) the Servicer fails to pay, transfer or deposit any amount as required pursuant to the Servicing Agreement or any other Transaction Document and such failure continues unremedied for a period of two Business Days; or (ii) the Servicer fails to deliver any Monthly Servicer Report in accordance with the terms of the Servicing Agreement;

(b) the Servicer has failed, in any material respect, to perform or observe any of its other covenants and obligations under the Servicing Agreement or any other Transaction Document to which it is a party (other than a failure described in either sub-paragraph of paragraph (a) above) and (except where such failure is incapable of remedy) such failure continues unremedied for a period of five Business Days;

(c) the Servicer (whilst the Seller is the Servicer) ceases or proposes to cease to carry on its residential loan and mortgage business;

(d) a court or agency or supervisory authority

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having jurisdiction enters a decree or order for the appointment of a receiver, trustee, or liquidator for the Servicer in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or for the winding up or liquidation of its affairs and that decree or order continues unstayed and in effect for a period of 45 consecutive days;

(e) the Servicer consents to the appointment of a receiver, trustee, or liquidator in any insolvency, bankruptcy, corporate reorganisation, suspension of payments, rehabilitation, or similar proceedings of or relating to the Servicer or relating to substantially all of its property, or the Servicer admits in writing its inability to pay its debts generally as they become due, files a petition for its bankruptcy or reorganisation, or suspension of payments or rehabilitation, or makes an assignment for the benefit of its creditors (other than in its ordinary course of business), or voluntarily suspends payment with respect to all or any class of its debts (unless it has initiated a dispute with respect thereto but only insofar as such dispute relates to the non-existence of such debts or to the timing of when such debts become due and payable);

(f) the suspension, revocation, termination or withdrawal, in each case with no replacement or substitution therefor of any approval, authorisation, consent or licence required by the Servicer to carry out any of its duties or obligations under the Servicing Agreement or any other Transaction Document to which it is a party;

(g) the Servicing Agreement becomes void, voidable or unenforceable;

(h) a Material Adverse Change has occurred in respect of the Servicer. A Material Adverse Change means in relation to the Servicer, a material adverse change on (i) the ability of the Servicer to perform or comply with any of its obligations, or to exercise any of its rights, under the Servicing Agreement or Transaction Document to which it is a party in a timely manner, and (ii) the business, operations or financial condition of the Servicer;

(i) any representation, warranty or statement

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which is made (or deemed or acknowledged to have been made) by the Servicer in the Servicing Agreement or any other Transaction Document proves to be incorrect in any material respect;

(j) the results of any review conducted pursuant to the Servicing Agreement reveal any matter to be materially adverse to the interests of the Issuer or the Trustee; and

If any event described in paragraphs (a) to (j) above has occurred, the Trustee shall promptly thereafter serve a Servicer Termination Event Notice on the Servicer with a copy to the Issuer and the Rating Agency. The Trustee may exercise its discretion action to determine that such event shall immediately constitute Servicer Termination Event or shall grant a waiver to such events.

For the avoidance of doubt, Trustee shall not be obliged to exercise any discretion or take any action in relation to a Servicer Termination Event or any event that may constitute a Servicer Termination Event unless it has actual knowledge of the occurrence of such Servicer Termination Event or such event that may constitute a Servicer Termination Event.

Servicer Termination Event Notice A notice sent by the Issuer to Servicer upon occurrence of a Servicer Termination Event informing Servicer of the Servicer Termination Event and notifying Servicer of the termination of its services, without prejudice to the implementation of the Transfer Plan for Back-up Servicer

Servicer’s Collection Accounts The various Philippine Peso-denominated bank accounts in Servicer’s name where the following Collections are deposited:

(a) Collections received at Servicer’s Offices (its head and regional offices);

(b) Payments by Obligors by cash or checks through the banking system;

(c) Salary deductions from employers

Servicing Agreement The Agreement between the Issuer and NHMFC whereby NHMFC will service the Residential Loans on behalf of the Issuer.

Servicing Fee The amount indicated in Section 5.1 of the Servicing Agreement

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Servicing File The servicing documents and other information maintained by Servicer in respect of a Residential Loan

Servicing Guidelines The guidelines set forth in Schedule B attached to the Servicing Agreement, as such guidelines might be amended or modified from time to time with the prior written approval of the Issuer

Servicing Officers Any officer of Servicer involved in, or responsible for, the administration and servicing of the Residential Loan, whose name and specimen signature appears on a list of servicing officers furnished to the Issuer by Servicer, as such list may from time to time be amended

Shortfall Provided that no Event of Default has occurred, in respect of any Monthly Allocation Date, the amount equivalent to the items that have not been satisfied from the Application of Payment, with or without the occurrence of an Event of Default

SPT Bank LBP-TBG, with principal office at 21st floor, LandBank Plaza, Land Bank of the Philippines, 1598 M.H. del Pilar corner J. Quintos Street, Malate, Manila 1004 , a banking corporation duly registered and qualified to perform trust functions under the General Banking Laws and as such with the BSP.

SPT Collection Account The Philippine Peso-denominated bank accounts of the Issuer established with the relevant Account Bank

SPT Tax Payable (a) in respect of a completed fiscal year of the Issuer:

i. the Issuer’s income tax liability assessed by the relevant tax authority in respect of such fiscal year or, in the absence of such tax assessment, the Estimated Tax Payable in respect of such fiscal year,

ii. less all amounts paid by the Issuer in respect thereof prior to the date on which the determination is being made,

(b) in respect of any Monthly Allocation Date in the current fiscal year of the Issuer:

i. the Estimated Tax Payable in respect of such Monthly Allocation Date,

ii. less all amounts paid by the Issuer in

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respect thereof prior to such Monthly Allocation Date; and

(c) final withholding tax, if applicable, on the yield on the Senior Notes,

Substituted Residential Loan Any loan substituted by Servicer pursuant to the LSPA.

Tax Payment Shortfall The amount that cannot be satisfied from the Income Collection Account for the SPT Tax Payable

Tax Provision In respect of any Monthly Allocation Date, the higher of

(a) zero; and

(b) the resulting sum of:

a. the Aggregate SPT Tax Payable; less

b. the amount standing to the credit of the Tax Reserve Account immediately preceding such Monthly Allocation Date.

Tax Reserve Account The account opened under the Issuer’s name, maintained and operated by the Account Bank, containing the amounts for payments of the SPT Tax. On Issue date, the account shall be credited with the amount equivalent to the total documentary stamp tax on the issuance of the Notes, and the provision for the withholding tax on Senior Notes coupon payments which is refundable to the Seller upon issuance by the BIR of written confirmation that the coupon payments on the Notes are tax exempt.

Terms and Conditions of the Notes Collectively, the Terms and Conditions of the Senior Notes and the Terms and Conditions of the Subordinated Notes

Timeline for Reporting and Collections As illustrated in Schedule B of this MDA

Timeline for Service Provider Claims As illustrated in Schedule D of this MDA

Transaction Documents (a) Loan Sale and Purchase Agreement

(b) Notes Facility Agreement

(c) Servicing Agreement

(d) Trustee Agreement

(e) Guaranty Agreement

(f) Registrar and Paying Agency Agreement

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(g) Master Definition Agreement

(h) Underwriting agreement,

(i) Market Maker agreement,

(j) SPT Agreement,

(k) Application to Purchase

Trust Agreement The agreement executed between the Issuer, Trustee and Seller

Trustee Development Bank of the Philippines-Trust Services, a government financial institution duly authorized by the BSP to perform trust functions under the General Banking Law.

The Trustee is not related directly or indirectly to the Seller.

Trustee Expenses The out of pocket expenses of the Trustee as approved by the Issuer.

VAT Value Added Tax

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MDA SCHEDULE A - CLEAN UP CALL TIMELINE

TIMELINE FOR CLEAN-UP CALL

BD - Business DayCD - Calendar DayCP - Collection PeriodCPED - Collection Period End DateIPD - Interest Payment DateMAD - Monthly Allocation Transfer DateMCTD - Monthly Collection Transfer DateMTRD - Monthly Trustee Report DateNote: This illustration has not taken holidays into consideration. In actual computations of time, holidays will have to be factored in.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T

MSRD Last day for service providers to claimMCTD (Trustee notices + 5BD)

MTRD Trustee sends notices(Clean-Up Call Exercise + 1BD)

Clean-Up Call Exercise(MTRD + 5BD)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S

Trustee transfers income from investments to Income Collection Account(MTRD / Final Trustee Report + 1BD)

MTRD / Final Trustee ReportMCTD

MSRD

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28M T W T F S S M T W T F S S M T W T F S S M T W T F S S

Last IPDPayment date of Clean-Up Call Claims

December 2020 (Collection Period A)

February 2021 (Collection Period C)

January 2021 (Collection Period B)

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MDA SCHEDULE B - COLLECTION PERIOD TIMELINE

TIMELINE FOR REPORTING AND COLLECTIONS


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M

CPED for CP#1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T

CPED for CP#2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S

CPED for CP#3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T

CPED for CP#4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F

CPED for CP#5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S

MSRD for CP#2 CPED for CP#6MCTD for CP#2 MAD for CP#2

MTRD for CP#2Eligible Instruments should be available for allocation

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W

MSRD for CP#3 CPED for CP#7MCTD for CP#3 MAD for CP#3


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W

MSRD for CP#4 First IPD CPED for CP#8MCTD for CP#4 MAD for CP#4


October 2012 (Collection Period #7)

November 2012 (Collection Period #8)

April 2012 (Collection Period #1)

May 2012 (Collection Period #2)

June 2012 (Collection Period #3)

July 2012 (Collection Period #4)

August 2012 (Collection Period #5)

September 2012 (Collection Period #6)

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MDA SCHEDULE C - ELIGIBILITY CRITERIA

1. Residential Loan has been generated by the Seller by, under or pursuant to, a Residential Loan Document;

2. Seller has not, in relation to such Residential Loan, received written notice of, and is not otherwise aware of, having made due enquiries, any bankruptcy, insolvency, reorganization or liquidation of the Obligor of such Residential Loan;

3. Seller is the legal, absolute and beneficial owner of each Residential Loan, and has good and valid title and rights to, and benefit and interest in each Residential Loan. It has not sold, transferred, pledged, mortgaged, encumbered, assigned, conveyed or otherwise disposed of, or granted any right of participation in, or agreed to sell and assign, or otherwise dispose of or grant a right of participation in any Residential Loan;

4. There is no adverse claim or any pending or threatened litigation involving the property subject of the Mortgage, whether in court or in any administrative office;

5. Residential Loan Document relating to the Residential Loan has been duly authorized, is in full force and effect and constitutes legal, valid and binding obligations of the Obligor thereunder, enforceable against such Obligor in accordance with the terms thereof, subject (in the case of enforceability) to applicable insolvency laws;

6. There has not been any dispute which is continuing, whether with respect to any amount expressed to be payable under or in respect of the Residential Loan or the timing or manner of payment of any such amount or otherwise, between the Seller and the Obligor and no claim which is continuing has been made or, as far as the Seller is aware, threatened by the Obligor that such Residential Loan or the relevant Residential Loan Document is invalid, voidable, unenforceable, or terminable;

7. Residential Loan and all transaction documents, including but not limited to the Residential Loan Document has been transferred to the Seller from the originating institution and the Seller has therefore full and sole perfected title to and ownership in the Residential Loan which is the subject of the Residential Loan Document relating thereto and neither such Residential Loan Document, or Residential Loan is subject to any Encumbrance;

8. Transfer of the Residential Loan is not prohibited for any reason and does not, by the terms of the relevant Residential Loan Document, require prior notice to, or consent from, the Obligor, and has not violated and will not violate any law, decree or material agreement by which the Seller is bound;

9. Residential Loan Document with respect to the Residential Loan constitutes the entire agreement between the Seller and the Obligor in respect of such Residential Loan;

10. Neither the Residential Loan, nor any part thereof, is included in any other pool of Residential Loans for the purpose of any other securitization transaction, nor has such Residential Loan been sold, transferred or assigned or in any other way disposed of to any third party;

11. No lawsuit is currently instituted by any third party with respect to the Residential Loan or to property mortgaged under the Residential Loan;

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12. Residential Mortgage Agreement related to the Residential Loan provides for repayments of principal and interest in equal monthly installments in an amount sufficient to fully amortize the principal balance of that Residential Loan by the Legal Final Maturity Date;

13. Neither the Residential Loan nor any installment or part thereof is more than 3 installments past due and has never been classified as more than 6 installments past due in the preceding 24 months prior to the Cut-Off Date (in each case, after the lapse of any applicable grace period which shall not be longer than 15 days);

14. Residential loan has fixed interest rate throughout the life of the loan with minimum interest rate of 9%;

15. The original term of the Residential Mortgage Agreement relating to the Residential Loan shall not be more than 25 years and the remaining term does not exceed 15 years;

16. The remaining term of the Residential Mortgage Agreement shall not be less than 12 months;

17. The amounts payable by the Obligor in respect of the Residential Loan are denominated in Philippine Pesos only, and the maximum original balance of a residential Loan is Php400,000 and the minimum outstanding balance of a Residential Loan is Php10,000;

18. The Obligor of such Residential Loan is an individual who is a citizen of the Philippines;

19. The property mortgaged under the Residential Loan includes the parcel of land and all improvements thereon and no ongoing construction of any mortgaged property is ongoing; and

20. The initial Loan-to-Value ratio does not exceed 100%.

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MDA SCHEDULE D - TIMELINE FOR SERVICE PROVIDER CLAIMS

TIMELINE FOR SERVICE PROVIDER CLAIMS


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S Claim period for expenses incurred in CP#5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W Claim period for expenses incurred in CP#6

MSRD for CP#3MCTD for CP#3 MAD for CP#3

Allocation of Claims made for CP#5MTRD for CP#3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W Claim period for expenses incurred in CP#7

First IPDMSRD for CP#4 Payment of Claims made for CP#6

MCTD for CP#4 MAD for CP#4Allocation of Claims made for CP#6

MTRD for CP#4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M

MSRD for CP#5MCTD for CP#5 MAD for CP#5

Allocation of Claims made for CP#7MTRD for CP#5

August 2012 (Collection Period #5)

September 2012 (Collection Period #6)

October 2012 (Collection Period #7)

November 2012 (Collection Period #8)

December 2012 (Collection Period #9)

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MDA SCHEDULE E – APPLICATION OF FUNDS

(j) On each Monthly Collection Transfer Date, the amount of Collections received or deemed to have been received by the Servicer in respect of the immediately preceding Collection Period (for the avoidance of doubt, including any Deemed Collections in respect of that preceding Collection Period) will be transferred from the Servicer’s Collection Accounts to the SPT Collection Account less the Insurance Payments to be paid to the insurance companies by the Servicer under the Servicing Agreement. Provided, that the Collections received or deemed to have been received by the Servicer in respect of the first Collection Period, less the Insurance Payments, shall be transferred by Servicer to the Seller Restricted Account on or before the first Monthly Collection Transfer Date.

(k) Application of Funds During the Controlled Amortization Period

(i) On each Monthly Allocation Date during the Controlled Amortization Period, the balances of the SPT Collection Account shall be distributed by the Trustee into the Income Collection Account and into the Principal Collection Account. Two Business Days after the Monthly Servicer Report Date, the Trustee shall cause the transfer of any income earned on investments in Eligible Instruments into the Principal Collection Account. The amounts to be distributed into the Income Collection Account and the Principal Collection Account shall be based on the Monthly Trustee Report.

(ii) On each Monthly Allocation Date, the Trustee shall apply the amounts in the Income Collection Account and Principal Collection Account in the following order of priority and as indicated in the Application of Funds attached as Schedule E of the Master Definition Agreement. On each Interest Payment Date, the Trustee shall transfer the appropriate amounts to: [a] the account of the Paying Agent for Class A Senior Notes; and [b] the account of the Class B Senior Noteholders (excluding the amounts to be transferred into the Tax Reserve Account, Liquidity Reserve Account, Commingled Reserve Account, and Seller Restricted Account, and also excluding any amounts that are to be paid to the Service Providers by the Trustee), and cause or instruct the Paying Agent to cause, as applicable, the payments/distributions to be made:



(xi) second, the Senior Expenses, ranking pari passu, except for the Servicer Fee. Provided that if Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;


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(xiv) fifth, such amount as would be sufficient to replenish the reserve up to the Required Liquidity Reserve Amount and Required Commingled Reserve Amount for the next Interest Period shall be transferred to the Liquidity Reserve Account and Commingled Reserve Account;

(xv) sixth, the Junior Expenses ranking pari passu and pro rata among the Service Providers; and

(xvi) finally, any remaining balance shall be transferred to the Seller Restricted Account.

Senior Expenses and Junior Expenses incurred within a particular Collection Period must be filed with the Trustee on or before the Collection Period End Date of the Collection Period immediately succeeding the Collection Period in which the expense was incurred. Claims for expenses that are filed shall be included by the Trustee in the Monthly Trustee Report for the month immediately succeeding the date of approval of such claim, and the allocation of payments therefor shall be made in the immediately succeeding Monthly Allocation Date. Such expenses shall be paid to the Service Providers by the Trustee on the immediately succeeding Interest Payment Date. The claim and payment period for Junior Expenses and Senior Expenses is illustrated in Schedule D of the Master Definition Agreement.


(xvii) first, in the event that the amounts available under the Income Collection Account are insufficient for the purpose of replenishing the Liquidity Reserve Account and Commingled Reserve Account for the next Collection Period, such amount as would be necessary to replenish the reserve up to Required Liquidity Reserve Amount and Required Commingled Reserve Amount for the next Collection Period shall be transferred to the Liquidity Reserve Account and Required Commingled Reserve Amount;

(xviii) second, repayment of the principal amount on the Senior Notes due shall be made in accordance with the Repayment Schedule; and

(xix) finally, payment of the Subordinated Notes shall be made but only after the Senior Notes have been repaid in full.



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For purposes of paying the SPT Tax Payable, Trustee shall prepare the relevant tax return/s on behalf of the Issuer.




(xxiii) on each Monthly Allocation Date, the Trustee shall apply to the Principal Collection Account an amount equal to the Shortfall (if any) in respect of such Monthly Allocation Date;

(xxiv) on each Monthly Allocation Date, the Trustee shall transfer to the Principal Collection Account any amount equal to the Excess Liquidity Reserve Amount (if any) in respect of such Monthly Allocation Date. Such amount shall be included in the Monthly Trustee Report;


Provided that the amount in the Commingled Reserve Account is higher than the Required Commingled Reserve Amount, on each Monthly Allocation Date, the Trustee shall transfer the amount calculated to the Principal Collection Account. Such calculation and amount shall be included in the Monthly Trustee Report. The order of priority for the payments/distributions from the Income Collection Account under items (b)(ii)(iv), (b)(ii)(v), and the Principal Collection Account under items (b)(ii)(viii), (b)(ii)(viii), shall only apply for so long as there is available cash in the appropriate account. If the balance in the Income Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall carry forward any outstanding balance for inclusion in the next Monthly Allocation Date. If the balance of the Principal Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section (excluding a deficit in the Commingled Reserve Account an/or the Liquidity Reserve Account, which shall be covered by the Principal Collection Account), then the Trustee shall transfer to the Principal Collection Account from the Seller Restricted Account an amount equal to such Shortfall.

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(l) Application of Funds During the Accelerated Amortization Period (upon the occurrence of an Early Amortization Event)

(i) On each Monthly Collection Transfer Date during the Accelerated Amortization Period, without the occurrence of an Event of Default, the balances of the SPT Collection Account, including any cash received from the HGC in the event of an exercise of the HGC Guaranty, shall be distributed by the Trustee into the Income Collection Account and into the Principal Collection Account. Two Business Days after the Monthly Servicer Report Date, the Trustee shall cause the transfer of any income earned on investments in Eligible Instruments into the Principal Collection Account. The amounts to be distributed to the Income Collection Account and the Principal Collection Account shall be based on the Monthly Servicer Report

(ii) On each Monthly Allocation Date, the Trustee shall apply the amounts in the Income Collection Account and Principal Collection Account in the following order of priority and as indicated in the Application of Funds attached as Schedule E to the Master Definition Agreement. On each Interest Payment Date, the Trustee shall transfer the appropriate amounts to: [a] the account of the Paying Agent; and [b] the account of the Class B Senior Noteholders (excluding the amounts to be transferred into the Tax Reserve Account, Liquidity Reserve Account, Commingled Reserve Account, and Seller Restricted Account, and also excluding any amounts that are to be paid to the Service Providers by the Trustee) and instruct the Paying Agent to cause the payments/distributions to be made:



(xi) second, the Senior Expenses, ranking pari passu among the Service Providers, except for the Servicer Fee. Provided that if Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;



(xiv) fifth, the remaining available cash shall be transferred to the Principal Collection Account in order to repay the Senior Notes, until all Senior Notes are repaid;

(xv) sixth, the Junior Expenses ranking pari passu and pro rata among the Service Providers, provided they are approved by the Trustee, save for Trustee Junior Expenses that must be approved by the Issuer; and

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(xvi) finally, after all Senior Notes have been repaid, any remaining balance shall be used to pay other obligations of the Seller.

For purposes of the Senior Expenses and Junior Expenses, but except for the fees of the Service Providers that must be paid when they fall due, without need of any claim or notice from the Service Provider, Senior Expenses and Junior Expenses incurred within a particular Collection Period must be filed with the Trustee on or before the Collection Period End Date of the Collection Period immediately succeeding the Collection Period in which the expense was incurred. Claims for expenses that are filed shall be included by the Trustee in the Monthly Trustee Report for the month immediately succeeding the date of approval of such claim, and the allocation of payments therefor shall be made in the immediately succeeding Monthly Allocation Date. Such expenses shall be paid to the Service Providers by the Trustee on the immediately succeeding Interest Payment Date. The claim and payment period for Junior Expenses and Senior Expenses is illustrated in Schedule D of the Master Definition Agreement.


(xvii) first, such amount as would be necessary to replenish the Commingled Reserve and Liquidity Reserve up to the Required Commingled Reserve Amount and Required Liquidity Reserve Amount for the next Collection Period shall be transferred to the Liquidity Reserve Account; provided, that if an HGC Guaranty Trigger Event has occurred, only the Commingled Reserve Account shall be replenished; and if a Servicer Termination Event has occurred, only the Liquidity Reserve Account shall be replenished;

(xviii) second, payment of the principal amount on the Senior Notes due shall be made in accordance with the Repayment Schedule; and

(xix) finally, when the Senior Notes have been repaid in full, any remaining balance shall be used to pay other obligations of the Seller.





For purposes of paying the SPT Tax Payable, Trustee shall prepare the relevant tax return/s on behalf of SPT.

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(xxiii) on each Monthly Allocation Date, the Trustee shall apply to the Income Collection Account an amount equal to the Shortfall (if any) in respect of such Monthly Allocation Date;

(xxiv) on each Monthly Allocation Date, the Trustee shall transfer to the Principal Collection Account any amount equal to the Excess Liquidity Reserve Amount (if any) in respect of such Monthly Allocation Date. Such amount shall be included in the Monthly Trustee Report.


Provided that the amount in the Commingled Reserve Account is higher than the Required Commingled Reserve Amount, on each Monthly Allocation Date, the Trustee will transfer the amount calculated by the Trustee to the Principal Collection Account. Such calculation and amount shall be included in the Monthly Trustee Report.

If a Servicer Termination Event occurs, on the day of the occurrence of that Servicer Termination Event, the Trustee shall transfer all amounts in the Commingled Reserve Account to the Income Collection Account and Principal Collection Account to cover any Collections that have not been transferred from the Servicer’s Collection Accounts to the SPT Collection Accounts. In the event that no Back-Up Servicer has been appointed, the Trustee shall assume the role of Servicer, and the amounts to be transferred to the Income Collection Account and Principal Collection Account shall be calculated by the Trustee by using as basis, the latest Monthly Servicer Report. Once transferred to the Income Collection Account and Principal Collection Account, the Collections shall be applied, when appropriate, in accordance with the provisions of Sections (b) and (c).

(iii) The order of priority for the payments/distributions from the Income Collection Account under items (b)(ii)(iv), (b)(ii)(v), and the Principal Collection Account under items (b)(ii)(viii), (b)(ii)(ix), shall only apply for so long as there is available cash in the appropriate account. If the balance in the Income Collection Account is not sufficient to satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall carry forward any outstanding balance for inclusion in the next Monthly Allocation Date. If the balance of the Principal Collection Account is not sufficient to

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satisfy all the steps in the order of payment prescribed in the preceding section, then the Trustee shall apply to the Seller Restricted Account an amount equal to such Shortfall.

(m) Application of Funds During the Accelerated Amortization Period (upon the occurrence of a Non-Payment Default)

(i) Following the occurrence of a Non-Payment Default, the Trustee shall automatically cause the transfer of all amounts standing to the credit of the SPT Collection Account, the Liquidity Reserve Account, the Commingled Reserve Account, the Income Collection Account, and the Seller Restricted Account into the Principal Collection Account and apply the amounts in the following order of priority:


(xi) second, the Senior Expenses, ranking pari passu among the Service Providers, except for the Servicer Fee. Provided that if the Seller is no longer the Servicer, the Servicer Fee will be paid with the other Senior Expenses and shall rank pari passu among the Service Providers;

(xii) third, the coupons for the Class A Senior Notes shall be paid;

(xiii) fourth, the principal of Class A Senior Notes shall be paid;

(xiv) fifth, the coupons for the Class B Senior Notes shall be paid;

(xv) sixth, the principal of Class B Senior Notes shall be paid;

(xvi) seventh, the Servicer Fee (only when Seller is the Servicer);

(xvii) eighth, the Junior Expenses ranking pari passu and pro rata among the Service Providers, provided they are approved by the Trustee, save for Trustee Junior Expenses that must be approved by the Issuer; and

(xviii) finally, any remaining balance shall be used to pay other obligations of the Seller.

In the event that the amounts in the Accounts are not sufficient to fully satisfy the obligations above, the Trustee will sell all the remaining Residential Loans and any other asset of the Issuer, and use all the proceeds from such sale(s) to satisfy the remaining obligations in the order of priority as stated in Sections (d)(i)(x) to (d)(i)(xviii).

(n) For the avoidance of doubt, the Trustee shall have no obligation to credit amounts to the Principal Collection Account and/or the Income Collection Account unless the Servicer has informed the Trustee through the Monthly Servicer Report as to

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whether the amounts deposited in the SPT Collection Account represent Principal Collection Account Collections and/or Interest Collections, as the case may be.

(o) Unless a Non-Payment Default has occurred, on the date on which all the Issuer’s obligations to make any payment under the Transaction Documents have been fully discharged, the Trustee shall directly release to the Seller all amounts standing to the credit of the SPT Collection Account, Income Collection Account, Principal Collection Account, Liquidity Reserve Account, Tax Reserve Account, Commingled Reserve Account, and Seller Restricted Account by remitting the same to the Seller Bank Account.

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MDA SCHEDULE F – PRINCIPAL REPAYMENT SCHEDULE

Class A Senior Notes – 17 August 2017 Class B Senior Notes – see table below

Period Principal Repayment Class B Senior Notes Balance 17-Nov-12 - 120,000,000 17-Feb-13 - 120,000,000 17-May-13 - 120,000,000 17-Aug-13 - 120,000,000 17-Nov-13 - 120,000,000 17-Feb-14 - 120,000,000 17-May-14 - 120,000,000 17-Aug-14 - 120,000,000 17-Nov-14 - 120,000,000 17-Feb-15 - 120,000,000 17-May-15 - 120,000,000 17-Aug-15 - 120,000,000 17-Nov-15 - 120,000,000 17-Feb-16 - 120,000,000 17-May-16 - 120,000,000 17-Aug-16 - 120,000,000 17-Nov-16 - 120,000,000 17-Feb-17 - 120,000,000 17-May-17 - 120,000,000 17-Aug-17 - 120,000,000 17-Nov-17 6,000,000 114,000,000 17-Feb-18 6,000,000 108,000,000 17-May-18 6,000,000 102,000,000 17-Aug-18 6,000,000 96,000,000 17-Nov-18 6,000,000 90,000,000 17-Feb-19 6,000,000 84,000,000 17-May-19 6,000,000 78,000,000 17-Aug-19 6,000,000 72,000,000 17-Nov-19 6,000,000 66,000,000 17-Feb-20 6,000,000 60,000,000 17-May-20 6,000,000 54,000,000 17-Aug-20 6,000,000 48,000,000 17-Nov-20 6,000,000 42,000,000 17-Feb-21 6,000,000 36,000,000 17-May-21 6,000,000 30,000,000 17-Aug-21 6,000,000 24,000,000 17-Nov-21 6,000,000 18,000,000 17-Feb-22 6,000,000 12,000,000 17-May-22 6,000,000 6,000,000 17-Aug-22 6,000,000 -

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The Issuer

BAHAYBONDS 2 SPECIAL PURPOSE TRUST (Trust Account # 45756TA 01)

SPT Bank LAND BANK OF THE PHILIPPINES-TRUST BANKING GROUP

Arranger and Underwriter

LAND BANK OF THE PHILIPPINES

Originator/Seller/Servicer

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Guarantor

HOME GUARANTY CORPORATION

Trustee

DEVELOPMENT BANK OF THE PHILIPPINES

Registrar and Paying Agent

PHILIPPINE DEPOSITORY & TRUST CORP.

Portfolio Auditor

PRICEWATERHOUSECOOPERS

Rating Agency

PHILRATINGS

Transaction Counsel and Tax Advisor

ROMULO MABANTA BUENAVENTURA SAYOC & DE LOS ANGELES

P603,744,442.46 RESIDENTIAL MORTGAGE-BACKED … · RESIDENTIAL MORTGAGE-BACKED SECURITIZATION OF...

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Transcript of P603,744,442.46 RESIDENTIAL MORTGAGE-BACKED … · RESIDENTIAL MORTGAGE-BACKED SECURITIZATION OF...