Fitch Downgrades BHN III & IV, BACS I.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 31, 2001

Fitch has downgraded the ratings of three Argentine RMBS transactions.

Ratings affected:

-- BHN III Mortgage Trust Series 1997-2 class 1 and A2 downgraded to 'B' from
'BB-', removed from Rating Watch Negative;

-- BHN IV Mortgage Trust Series 2000-1 class AF and AV downgraded to 'BBB-'
from 'A-', remains on Rating Watch Negative;

-- BACS I Mortgage Trust Series 2001-1 class AF and AV downgraded to 'BBB-'
from 'A-', remains on Rating Watch Negative;

The rating revisions are related to the recent downgrade of Argentina's sovereign ratings as well as conclusions drawn from recent due diligence efforts. Argentina's long-term foreign and local currency ratings were downgraded on Oct. 12, 2001 to 'CCC-' from 'B-' and remain on Rating Outlook Negative. While Argentina-related risks have increased considerably, the transactions are rated above the sovereign rating which indicates a lower probability of default. Despite the deteriorating economic situation in Argentina, all three transactions have been performing well. None of the transactions have suffered any losses to date. Furthermore, credit enhancement levels continue to grow and are sufficient to support the ratings.

When rating an emerging market securitization, Fitch evaluates the impact of potential sovereign risks on the collateral and structure with respect to prevailing sovereign rating levels. In the case of the BHN and BACS transactions, macroeconomic conditions and event risks such as sovereign interference and devaluation affect performance. While Fitch is not able to predict event risk, Fitch does assess the likelihood of such risks occurring and the impact they may have on the transactions. Although there are scenarios that may evolve that would not impact the performance of the transactions, there are some, including a devaluation, that may have an impact. These include a severe devaluation or a devaluation coupled with an indexing of dollar debt to pesos. As the rating for Argentina has fallen to 'CCC-', the likelihood of such risks occurring has increased considerably since our initial ratings on the transactions. The downgrades reflect this increased level of risk.

Fitch considered devaluation risk when assigning the original ratings. Some devaluation scenarios will have minimal negative impact on transaction performance. Fitch expects current credit enhancement levels to support devaluation levels to a certain extent. However, a severe devaluation or a change in contract terms will negatively impact performance. While the risk of a sovereign default remains higher than the risk of devaluation, there is a material likelihood that Argentina will abandon convertibility and devalue the peso in an attempt to jumpstart economic growth. Given the high level of dollar- denominated debts in Argentina the risks to growth of a devaluation are not negligible. In addition, Argentina's sovereign ceiling, which reflects the likelihood of sovereign-imposed currency controls, is 'CCC+'.

The increased risk and severity of devaluation impacts a borrower's default probability. When determining default probabilities, Fitch analyzes debt-to-income ratios which indicate the ability of a borrower to repay debt. All of the mortgages in the BHN and BACS transactions are denominated in U.S. dollars. However, borrowers typically earn wages in pesos. Devaluation will increase the debt-to-income ratio expressed in dollar terms. The low level of debt-to-income at origination in these transactions (BHN III: 16.63%, BHN IV: 16.33% and BACS I: 17.19%) permits them to absorb a certain level of devaluation and still have sufficient disposable income to pay their dollar- denominated mortgage payments.

The BHN IV and BACS I transactions have political risk insurance policies and liquidity reserves to mitigate 36 and 18 months, respectively, of transfer and convertibility (i.e. currency) controls. The BHN III transaction has a three-month liquidity reserve available to cover transfer and convertibility controls. These levels are consistent with the revised ratings.

Fitch recently reviewed the servicing operations of Banco Hipotecario S.A. (BHSA), the master servicer. Fitch found that due to the current economic crisis, the foreclosure process, in some cases, is taking longer than usual. As such, Fitch is increasing its assumption to 36 months for the foreclosure timeframe as it relates to loss severity. However, it should be noted that several guaranteed loans have successfully completed the foreclosure process with no losses passed through to investors. In addition, a significant number of loans have moved out of the foreclosure category due to prepayments, paydowns of delinquent balances and servicer repurchases.

BHSA, as master servicer, is required to advance on delinquent loans. As the macroeconomic conditions in Argentina worsen, delinquency levels are expected to rise. Recent delinquency levels, however, are within Fitch's expectations. BHSA's ability to meet its financial obligations has also declined to the 'CCC-' level. While the advancing needs on all three transactions have been met, future requirements may increase considerably.

Fitch will continue to monitor economic and political developments in Argentina. As conditions in Argentina improve, the transactions will have the opportunity to be upgraded assuming that performance remains stable.