Fitch Places HomeSide Lending, Inc. On Rtg Watch Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--July 6, 2001

Fitch has placed HomeSide Lending, Inc.'s (HomeSide) `AA-' senior debt and `F1+' commercial paper rating on Rating Watch Negative following the company's announcement that it will take a $450 million pretax provision to write-down the value of its capitalized mortgage servicing rights (CMSRs) during the quarter ended June 30, 2001. In addition, HomeSide International's, HomeSide's direct parent, `A+' senior secured second priority notes are also placed on Rating Watch Negative. Fitch affirmed the outstanding long-term rating of `AA' and short-term rating of `F1+' of National Australia Bank (NAB), HomeSide's ultimate parent, on July 5, 2001. Approximately $1.9 billion of term debt and $1.5 billion of commercial paper are affected by this action.

HomeSide's action is a result of exceptionally high mortgage refinance volume which lowers the value of the CMSR, combined with a more challenging capital markets environment in which to hedge interest rate risk. Furthermore, the CMSR has been impacted by both consolidation within the mortgage servicing market, reducing liquidity and resulting in fewer observable prices, along with the adoption of FAS 133 requiring HomeSide to measure and record the effectiveness of its hedging activities. The net effect of this write-down will reduce the CMSR by approximately $450 million or 10% of the current book value of the CMSR.

Fitch's actions reflect the magnitude of the charge and the more challenging macroeconomic and industry environment that HomeSide operates in. Fitch's rating of HomeSide is largely supported through its ownership by NAB, the largest bank in Australia. NAB has demonstrated financial support to HomeSide via a $2 billion intercompany note. However, in Fitch's view, HomeSide's strategic importance to NAB remains uncertain as Fitch does not believe that strong synergies have been realized. Moreover, Fitch remains concerned with the fact that HomeSide's equity base is compromised by the high level of goodwill on the company's balance sheet totaling $580 million, or 44% of total equity at March 31, 2001 and limited loan origination capabilities. Fitch's review will focus on the company's risk management practices and NAB's commitment to HomeSide and U.S. mortgage banking. Fitch expects to meet with HomeSide management shortly and will resolve the Rating Watch status shortly thereafter.