**As filed with the Securities and ExchangeCommission on June 30, 2005**

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 20-F**

 

**(Mark One)**

 

**o****                      ****Registration statement pursuantto Section 12(b) or 12(g) of the Securities Exchange Act of 1934**

 

**or**

 

**ý****                      ****Annual report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31,2004**

 

**or**

 

**o****                      ****Transition report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from                        to                        **

 

**Commissionfile number:****      333-119202**

 

**PERMANENT FINANCING (NO. 6) PLC**

(Exact Name of Registrant 1 as specified inits charter)

 

**United Kingdom**

(Jurisdiction of Incorporation or Organization)

 

**35 Great St. Helen’s, London, EC3A 6AP,United Kingdom, (011 44 20) 7398 6300**

(Address of Principal Executive Offices)

 

**PERMANENT FUNDING (NO. 1) LIMITED**

(Exact Name of Registrant 2 as specified inits charter)

 

**United Kingdom**

(Jurisdiction of Incorporation orOrganization)

 

**35 Great St. Helen’s, London, EC3A 6AP,United Kingdom, (011 44 20) 7398 6300**

(Address of Principal Executive Offices)

 

**PERMANENT MORTGAGES TRUSTEE LIMITED**

(Exact Name of Registrant 3 as specified inits charter)

 

**Jersey, Channel Islands**

(Jurisdiction of Incorporation orOrganization)

 

**47 Esplanade, St. Helier, Jersey JE1 0BD,(011 44 1534) 510 924**

(Address of Principal Executive Offices)

 

Securities registered or to be registeredpursuant to Section 12(b) of the Act:                          **None**.

 

Securities registered or to be registeredpursuant to Section 12(g) of the Act:                          **None**.

 

Securities for which there is a reportingobligation pursuant to Section 15(d) of the Act:

 

Title of each class

 

$1,000,000,000 series 1 class A notes due September 2005

 

$35,800,000 series 1 class B notes due June 2042

 

$34,700,000 series 1 class C notes due June 2042

 

$1,000,000,000 series 2 class A notes due December 2011

 

$35,800,000 series 2 class B notes due June 2042

 

$34,700,000 series 2 class C notes due June 2042

 

Series 1 term AAA advance(1)

 

Series 1 term AA advance(1)

 

Series 1 term BBB advance(1)

 

Series 2 term AAA advance(1)

 

Series 2 term AA advance(1)

 

Series 2 term BBB advance(1)

 

Funding 1 interest in the mortgages trust(1)

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

 

Not applicable.

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes ý No o

 

Indicate by check mark which financial statement item the registranthas elected to follow.

 

Not applicable.

 

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(1)           Theseitems have not been offered directly to investors. Permanent Mortgages TrusteeLimited is the registrant for the Funding 1 interest in the mortgages trust andis holding the Funding interest in the mortgages trust on behalf of PermanentFunding (No. 1) Limited. The Funding 1 interest in the mortgages trust isthe primary source of payments on the term advances listed. Permanent Funding (No. 1)Limited is the registrant for the term advances and has issued the termadvances to Permanent Financing (No. 6) PLC. The term advances are theprimary source of payments on the series 1 notes and the series 2 notes.Permanent Financing (No. 6) PLC is the registrant for the series 1 notesand the series 2 notes.

 

 

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** **

**PRESENTATION OF INFORMATION**

 

This annual report on Form 20-F relates to Permanent Financing (No. 6)PLC (the “issuer”) and the following securities (the “issuer notes”), whichwere issued pursuant to a trust deed dated November 18, 2004 (the “issuertrust deed”), between the issuer and The Bank of New York, as note trustee (the“note trustee”):

 

•                  $1,000,000,000series 1 class A notes due September 2005

•                  $35,800,000series 1 class B notes due June 2042

•                  $34,700,000series 1 class C notes due June 2042

•                  $1,000,000,000series 2 class A notes due December 2011

•                  $35,800,000series 2 class B notes due June 2042

•                  $34,700,000series 2 class C notes due June 2042

 

This annual report on Form 20-F also relates to the followingadvances made pursuant to the intercompany loan agreement dated November 18,2004 (the “issuer intercompany loan agreement”), between the issuer, PermanentFunding (No. 1) Limited (“Funding 1”), The Bank of New York, as securitytrustee (the “security trustee”) and Citibank, N.A., as agent bank:

 

•                  £541,711,000series 1 term AAA advance

•                  £19,394,000series 1 term AA advance

•                  £18,798,000series 1 term BBB advance

•                  £541,712,000series 2 term AAA advance

•                  £19,394,000series 2 term AA advance

•                  £18,798,000series 2 term BBB advance

 

This annual report on Form 20-F further relates to Funding 1’sinterest in the mortgages trust, comprising, among other things, the initialportfolio of loans and their related security assigned to Permanent MortgagesTrustee Limited (the “mortgages trustee”) by Halifax plc (the “seller”) on June 14,2002, and on several subsequent dates any new loans and their new relatedsecurity assigned to the mortgages trustee by the seller after November 18,2004 (the “closing date”), any increase in the outstanding principal balance ofa loan due to the borrower taking payment holidays or making underpaymentsunder a loan or a borrower making a drawing under any flexible loan, anyinterest, principal and other amounts (excluding third party amounts) paid byborrowers on their loans and their related security, the rights under theinsurance policies that are assigned to the mortgages trustee or of which themortgages trustee has the benefit, and amounts on deposit and interest earnedon the mortgages trustee guaranteed investment contract. The mortgages trusteeguaranteed investment contract, or GIC, account is the bank account in whichthe mortgages trustee holds any cash that is part of the trust property untilit is distributed to the beneficiaries. Any actual losses in relation to theloans, any actual reductions occurring in respect of the loans anddistributions of principal made from time to time to the beneficiaries or themortgages trust will be deducted from the trust property. The composition ofthe trust property will fluctuate as drawings under flexible loans and newloans are added and as the loans that were previously part of the trustproperty are repaid, mature, default or are repurchased by the seller.-

 

Certain terms used herein and not defined have the same meaningascribed to such terms in the Registration Statement filed on Form S-11(the “Registration Statement”) relating to the securities (file number 333-119202).

 

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Certain items in Form 20-F are not applicable to annual reportsfiled on Form 20-F. Therefore, as used in this filing, “Not applicable toannual reports filed on Form 20-F” means that the response to thereferenced item is omitted in reliance on the instructions to Form 20-Fpublished by the United States Securities and Exchange Commission (the “SEC”)as of the date of this annual report that specifically state that the item isinapplicable to annual reports filed on Form 20-F.

 

Certain items in Form 20-F are not applicable to the issuer,Funding 1 or the mortgages trustee. Therefore, as used in this filing, “Notapplicable” means the response to the reference item is omitted in reliance onthe procedures outlined in numerous no-action letters issued by the staff ofthe SEC with respect to issuers of substantially similar asset-backedsecurities that file annual reports on Form 10-K, or that the referenceditem is otherwise not applicable.

 

**FORWARD-LOOKING STATEMENTS**

 

This annual report includes forward-looking statements including, butnot limited to, statements made under the “Risk Factors” section. Theseforward-looking statements can be identified by the use of forward-lookingterminology, such as the words “believes”, “expects”, “may”, “intends”, “should”or “anticipates”, or the negative or other variations of those terms. Thesestatements involve known and unknown risks, uncertainties and other importantfactors that could cause the actual results and performance of the issuernotes, the seller or the UK residential mortgage industry to differ materiallyfrom any future results or performance expressed or implied in theforward-looking statements. These risks, uncertainties and other factorsinclude, among others: general economic and business conditions in the UK;currency exchange and interest fluctuations; government, statutory, regulatoryor administrative initiatives affecting the seller, changes in businessstrategy, lending practices or customer relationships and other factors thatmay be referred to in this annual report.

 

Some of the most significant of these risks, uncertainties and otherfactors are discussed in the section of this annual report entitled “RiskFactors”. Investors are encouraged to carefully consider those factors prior tomaking an investment decision regarding the issuer notes.

 

**INCORPORATION OF CERTAIN DOCUMENTS BYREFERENCE**

 

Each of the issuer, Funding 1 and the mortgages trustee incorporates byreference its periodic filings on Form 6-K, which contain all financialinformation relating to the securities relevant to the holders of the issuernotes.

 

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** **

**PART I**

 

**Item 1.  Identity of Directors,Senior Management and Advisers**

 

Not applicable to annual reports filed on Form 20-F.

 

**Item 2.  Offer Statistics andExpected Timetable**

 

Not applicable to annual reports filed on Form 20-F.

 

**Item 3.  Key Information**

 

A.*            Selected FinancialData*

 

Each of the issuer, Funding 1 and the mortgages trustee incorporates byreference and attaches hereto as exhibits the following reports, filed on Form 6-K,which include all financial information relating to the securities that isrelevant to holders of the issuer notes:

 

•                  Investor’sReport for the month of November 2004

•                  Investor’s Reportfor the month of December 2004

 

B.*            Capitalization andIndebtedness*

 

Not applicable to annual reports filed on Form 20-F.

 

C.*            Reasons for the Offerand Use of Proceeds*

 

Not applicable to annual reports filed on Form 20-F.

 

D*.**            RiskFactors*

 

*This section describes the principalrisk factors associated with an investment in the issuer notes. Investorsconsidering purchasing the issuer notes should carefully read and think aboutall the information contained in this document, including the risk factors setout here, prior to making any investment decision.*

 

**Noteholders cannot rely on any person other than the issuer to makepayments on the issuer notes**

 

The issuer notes will not represent an obligation and are not theresponsibility of any of Halifax plc or any of its affiliates, the managers,the underwriters, the mortgages trustee, the note trustee or any other party tothe transaction other than the issuer.

 

**The issuer has a limited set of resources available to it to makepayments on the issuer notes**

 

The issuer’s ability to make payments of principal and interest on theissuer notes and to pay it’s operating and administrative expenses will dependprimarily on the funds being received under the issuer intercompany loan. Inaddition, the issuer will rely on the issuer dollar currency swaps and theissuer euro currency swaps to provide payments on the issuer notes denominatedin US dollars and euro, respectively.

 

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Funding 1 has entered into the Funding 1 liquidity facility, which isavailable (subject to satisfying certain conditions precedent) to pay certainamounts due and payable on the term advances made by the issuer and theprevious issuers. In the event that the seller suffers certain ratings downgrades,Funding 1 will be required to fund the liquidity reserve fund, though there canbe no assurance that Funding 1 will have sufficient resources to do so at suchtime, and Funding 1 may draw money from the liquidity reserve fund, to theextent it has been funded, to pay amounts due to the issuer.

 

The issuer will not have any other significant sources of fundsavailable to meet its obligations under the issuer notes and /or any otherpayments ranking in priority to the issuer notes.

 

**Funding 1 is not obliged to make payments on the issuer term advancesif it does not have enough money to do so, which could adversely affectpayments on the issuer notes**

 

Funding 1’s ability to pay amounts due on the issuer term advances willdepend upon:

 

•                  Funding 1receiving enough funds from its entitlement to the trust property on or beforeeach Funding 1 interest payment date;

 

•                  Funding 1receiving the required funds from the Funding 1 swap provider;

 

•                  the amount offunds credited to the general reserve fund;

 

•                  the amount offunds credited to the liquidity reserve fund; and

 

•                  the allocationof funds between the issuer term advances, the previous term advances and anynew term advances.

 

According to the terms of the mortgages trust deed, the mortgagestrustee is obliged to pay to Funding 1 the Funding 1 share percentage ofrevenue receipts on the loans by crediting those amounts to the Funding 1 GICaccount on each distribution date. The mortgages trustee is obliged to pay toFunding 1 principal receipts on the loans by crediting those amounts to theFunding 1 GIC account as and when required pursuant to the terms of themortgages trust deed.

 

Funding 1 will be obliged to pay revenue receipts due to the issuerunder the issuer intercompany loan only to the extent that it has revenuereceipts left over after making payments ranking in priority to the issuer,such as payments of certain fees and expenses of Funding 1 and payments oncertain higher ranking term advances under any intercompany loan agreements.

 

Funding 1 will be obliged to pay principal receipts due to the issuerunder the issuer intercompany loan only to the extent that it has principalreceipts available for that purpose after repaying amounts ranking in priorityto the issuer (including repaying any higher ranking previous term advances ornew term advances).

 

If there is a shortfall between the amounts payable by Funding 1 to theissuer under the issuer intercompany loan agreement and the amounts payable bythe issuer on the issuer notes, the noteholders may, depending on what othersources of funds are available to the issuer and to Funding 1, not receive thefull amount of interest and/or principal which would otherwise be due andpayable on the issuer notes.

 

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**Failure by Funding 1 to meet its obligations under the issuerintercompany loan agreement would adversely affect payments on the issuer notes**

 

If Funding 1 does not make payments due and payable on the issuerintercompany loan, then the issuer may not have enough money to make paymentson the issuer notes, and in addition the issuer will have only limited recourseto the assets of Funding 1. If Funding 1 does not pay amounts under the issuerintercompany loan because it does not have enough money available, thoseamounts will be deemed not to be due and payable, so there will not be an eventof default under the issuer intercompany loan, and the issuer will not haverecourse to the assets of Funding 1 in that instance.

 

**On the final repayment date of the issuer intercompany loan anyoutstanding amounts in respect of the issuer term AA advances and the issuerterm BBB advances will be extinguished, which would cause a loss on any class Bissuer notes and any class C issuer notes still outstanding**

 

The transaction has been structured in the expectation that on thefinal repayment date of the issuer intercompany loan in June 2042, theinterest and principal due and payable on the issuer term AA advances and theissuer term BBB advances will be in an amount equal to the sum available to payall outstanding interest and/or principal (including interest and/or principaldeferred and unpaid) on the issuer term AA advances and the issuer term BBBadvances (after paying amounts of a higher order of priority as required by theFunding 1 priority of payments).

 

If there is a shortfall between the amount available to pay theinterest and/or principal and the amount required to pay all outstandinginterest and/or principal on the issuer term AA advances and the issuer termBBB advances, then the shortfall will be deemed to be not due and payable underthe issuer intercompany loan agreement and the issuer will not have any claimagainst Funding 1 for the shortfall.

 

If there is such a shortfall in interest and/or principal paymentsunder the issuer intercompany loan agreement, the noteholders may not receivethe full amount of interest and/or principal which would otherwise be due andpayable on the class B issuer notes or the class C issuer notes outstanding.

 

**Enforcement of the issuer security is the only remedy for a default inthe issuer’s obligations, and the proceeds of that enforcement may not beenough to make payments on the issuer notes**

 

The only remedy for recovering amounts on the issuer notes is throughthe enforcement of the issuer security. The issuer has no recourse to theassets of Funding 1 unless Funding 1 has also defaulted on its obligationsunder the issuer intercompany loan and the Funding 1 security has beenenforced.

 

If the security created as required by the issuer deed of charge isenforced, the proceeds of enforcement may be insufficient to pay all principaland interest due on the issuer notes.

 

**The transaction has been structured in the expectation that the series1 issuer notes will be redeemed before the series 2 issuer notes and so on**

 

The transaction has been structured in the expectation that:

 

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•                  the series 1issuer notes will be redeemed in full prior to the redemption of the series 2issuer notes, the series 3 issuer notes, the series 4 issuer notes and theseries 5 issuer notes;

 

•                  the series 2issuer notes will be redeemed in full prior to the redemption of the series 3issuer notes, the series 4 issuer notes and the series 5 issuer notes;

 

•                  the series 3issuer notes will be redeemed in full prior to the redemption of the series 4issuer notes and the series 5 issuer notes; and

 

•                  the series 4issuer notes will be redeemed in full prior to the redemption of the series 5issuer notes.

 

This means, among other things, that the series 1 class B issuer notesand the series 1 class C issuer notes are expected to be redeemed before theseries 2 class A issuer notes, the series 3 class A issuer notes, the series 4class A issuer notes and the series 5 class A issuer notes, even though theseries 2 class A issuer notes, the series 3 class A issuer notes, the series 4class A issuer notes and the series 5 class A issuer notes have a higher ratingthan the series 1 class B issuer notes and the series 1 class C issuer notes.Similarly, the series 2 class B issuer notes and the series 2 class C issuernotes are expected to be redeemed before the series 3 class A issuer notes, theseries 4 class A issuer notes and the series 5 class A issuer notes, and so onfor each series of issuer notes.

 

However, there is no assurance that the series 1 issuer notes will beredeemed in full before the series 2 issuer notes, the series 3 issuer notes,the series 4 issuer notes and the series 5 issuer notes or that the series 2issuer notes will be redeemed in full before the series 3 issuer notes, theseries 4 issuer notes and the series 5 issuer notes or that the series 3 issuernotes will be redeemed in full before the series 4 issuer notes and the series5 issuer notes or that the series 4 issuer notes will be redeemed in fullbefore the series 5 issuer notes. In each case, redemption of the issuer notesis ultimately dependent on, among other things, repayment and redemptions onthe loans and on the term advance rating of the issuer term advances.

 

Further, if on any interest payment date, amounts are due and payablein respect of the class A issuer notes of any series and amounts are due andpayable in respect of the class B issuer notes of any series and/or the class Cissuer notes of any series, then payments of principal will be made on theclass A issuer notes in priority to payments of principal on the class B issuernotes and the class C issuer notes. Similarly, if on any interest payment date,amounts are payable in respect of the class B issuer notes of any series andthe class C issuer notes of any series, then payments of principal will be madeon the class B issuer notes in priority to payments of principal on the class Cissuer notes.

 

**There may be conflicts between the noteholders’ interests and theinterests of any of the issuer’s other secured creditors, and the interests ofthose secured creditors may prevail over the noteholders’ interests**

 

The issuer deed of charge requires the security trustee to consider theinterests of each of the issuer secured creditors in the exercise of all of itspowers, trusts, authorities, duties and discretions, but requires the securitytrustee, in the event of a conflict between the noteholders’ interests and theinterests of any of the other issuer secured creditors, to consider only the

 

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noteholders’ interests. Incertain circumstances, the security trustee can make amendments to thedocuments without the noteholders’ prior consent.

 

**The security trustee may agree modifications to the issuer transactiondocuments without the noteholders’ prior consent, which may adversely affectthe noteholders’ interests**

 

Pursuant to the terms of the Funding 1 deed of charge and the issuer deedof charge, the security trustee may, without the consent or sanction of Funding1’s secured creditors or the issuer’s secured creditors, concur with any personin making or sanctioning any modifications to the transaction documents:

 

•                  which in the opinionof the security trustee it may be expedient to make, provided that the securitytrustee is of the opinion that such modification will not be materiallyprejudicial to the interests of the secured creditors or, if it is not of thatopinion in relation to any secured creditor, the secured creditor has given itswritten consent to such modification; or

 

•                  which in theopinion of the security trustee is made to correct a manifest error or an errorestablished as such to the satisfaction of the security trustee or is of aformal, minor or technical nature.

 

The security trustee will be entitled to assume that the exercise ofits discretions will not be materially prejudicial to the noteholders’interests if each of the rating agencies has confirmed that the then currentrating by it of the notes would not be adversely affected by such exercise.

 

In addition, the security trustee will give its consent to anymodifications to the mortgage sale agreement, the servicing agreement, the cashmanagement agreement, the Funding 1 deed of charge, the Funding 1 liquidityfacility agreement, the Funding 1 swap agreement, the intercompany loan termsand conditions, the bank account agreement and the master definitions andconstruction schedule, that are requested by Funding 1 or the cash manager,provided that Funding 1 or the cash manager certifies to the security trusteein writing that such modifications are required in order to accommodate:

 

i)                 the entry by Funding 1 into newintercompany loan agreements and/or the issue of new types of notes by newissuers and/or the addition of other relevant creditors to the transaction;

 

ii)              the inclusion of Permanent Funding (No. 2)PLC (“Funding 2”) as a beneficiary of the mortgages trust;

 

iii)           the issue of new notes by Funding 2;

 

iv)          the sale of new types of loans to themortgages trustee;

 

v)             changes to be made to the general reservefund required amount, the liquidity reserve fund required amount and/or themanner in which the reserve funds are funded;

 

vi)          changes to be made to the definitions ofasset trigger event and non-asset trigger event; and

 

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vii)       the inclusion of an additional Funding 1liquidity facility;

 

and provided further that:

 

•                  in respect ofthe matters listed in paragraphs (i) to (iv), the relevant conditionsprecedent have been satisfied; and

 

•                  in respect ofthe matters listed in paragraphs (i) to (vii), the security trustee hasreceived written confirmation from each of the rating agencies that therelevant modifications will not adversely affect the then current ratings ofthe notes.

 

The modifications required to give effect to the matters listed inparagraphs (i) to (vii) above may include, amongst other matters,amendments to the provisions of the Funding 1 deed of charge relating to theapplication of monies. Accordingly, there can be no assurance that the effectof the modifications to the transaction documents will not ultimately adverselyaffect noteholders’ interests. Any modifications to the documents describedabove will require the actual consent of the Funding 1 liquidity facilityprovider, the Funding 1 swap provider and each of the issuer swap providers (inrespect of each document to which they are a party), as applicable, suchconsent not to be unreasonably withheld and to be deemed given if no writtenresponse (affirmative or negative) is given within 10 business days after thewritten request for consent is sent to each such party.

 

**There may be a conflict between the interests of the holders of class Aissuer notes, the holders of class B issuer notes and the holders of class Cissuer notes, and the interests of one class of noteholders may prevail overthe interests of other classes of noteholders**

 

The issuer trust deed and the terms of the issuer notes will providethat the note trustee is to have regard to the interests of the holders of allthe classes of issuer notes. There may be circumstances, however, where theinterests of one class of the noteholders conflict with the interests of anotherclass or classes of the noteholders. The issuer trust deed and the terms of theissuer notes will provide that where, in the sole opinion of the note trusteethere is such a conflict, then:

 

•                  the note trusteeis to have regard only to the interests of the class A noteholders in the eventof a conflict between the interests of the class A noteholders on the one handand the class B noteholders and/or the class C noteholders on the other hand;and

 

•                  the note trusteeis to have regard only to the interests of the class B noteholders in the eventof a conflict between the interests of the class B noteholders on the one handand the class C noteholders on the other hand.

 

**There may be a conflict between the interests of the holders of eachseries of the class A issuer notes, the holders of each series of the class Bissuer notes and the holders of each series of the class C issuer notes, andthe interests of one series of noteholders may prevail over the interests ofother series of noteholders**

 

There may also be circumstances where the interests of the class Anoteholders of one series of the issuer notes conflict with the interests ofthe class A noteholders of another series of the issuer notes. Similarly, theremay be circumstances where the interests of the class B noteholders of oneseries of the issuer notes conflict with the interests of the class Bnoteholders

 

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of another series of the issuernotes or the interests of the class C noteholders of one series of the issuernotes conflict with the interests of the class C noteholders of another seriesof the issuer notes.

 

The issuer trust deed and the terms of the issuer notes will providethat where, in the sole opinion of the note trustee there is such a conflict,then a resolution directing the note trustee to take any action must be passedat separate meetings of the holders of each series of the class A issuer notes,or, as applicable, each series of the class B issuer notes or each series ofthe class C issuer notes. A resolution may only be passed at a single meetingof the noteholders of each series of the relevant class if the note trustee is,in its absolute discretion, satisfied that there is no conflict between them.

 

Similar provisions will apply in relation to requests in writing fromholders of a specified percentage of the principal amount outstanding of theissuer notes of each class within each series (the principal amount outstandingbeing converted into sterling for the purposes of making the calculation).Noteholders should note that, as a result of repayments of principal first tothe series 1 issuer notes, then to the series 2 issuer notes, then to theseries 3 issuer notes, then to the series 4 issuer notes and then to the series5 issuer notes, the principal amount outstanding of each series of the issuernotes will change after the closing date.

 

**Permanent Holdings Limited (“Holdings”) has established anothercompany, Funding 2, which may become an additional beneficiary under the mortgagestrust**

 

Holdings has established a separate entity, Funding 2, which may issuenotes from time to time and use the proceeds to pay for a direct interest inthe trust property rather than lending the proceeds to Funding 1.Simultaneously with the acquisition by Funding 2 of an interest in the trustproperty, the seller and Funding 1, as existing beneficiaries of the mortgagestrust, would be required to agree to a decrease in their beneficial interestsin the trust property (which would require a partial release of security byFunding 1 over its share in the trust property).

 

The seller, Funding 1 and Funding 2 would each have a joint andundivided interest in the trust property but their entitlement to the proceedsfrom the trust property would be in proportion to their respective shares ofthe trust property. On each distribution date the mortgages trustee woulddistribute interest and principal receipts to one, two or all threebeneficiaries, depending on the terms of the mortgages trust.

 

It is anticipated that Funding 2 will issue notes directly orindirectly to investors from time to time backed by its share of the trustproperty. Noteholders would not have a direct or indirect interest in Funding 2’sshare of the trust property.

 

Amendments would be made to a number of the issuer transactiondocuments as a result of the inclusion of Funding 2 as a beneficiary of themortgages trust. In particular (but without limitation), amendments would bemade to:

 

•                  the mortgagesale agreement to enable the purchase by Funding 2 of interests in the trustproperty;

 

•                  the mortgagestrust deed (i) to establish Funding 2 as a beneficiary of the trust, (ii) toenable the acquisition by Funding 2 of an interest in the trust property fromtime to time and (iii) to regulate the distribution of interest andprincipal receipts in the trust property to Funding 2 and the otherbeneficiaries;

 

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•                  the cashmanagement agreement to regulate the application of monies to Funding 2;

 

•                  the servicingagreement to ensure that Funding 2 receives the benefit of the servicers dutiesunder that agreement; and

 

•                  the masterdefinitions and construction agreement.

 

In addition, Funding 1, Funding 2 and the seller may enter into newagreements to regulate the making of decisions between them.

 

There may be conflicts of interest between Funding 1 and Funding 2, inwhich case it is expected that the mortgages trustee will follow the directionsgiven by the relevant beneficiary (excluding the seller) that has the largestshare of the trust property at that time. The interests of Funding 1 may notprevail, which may adversely affect the noteholders’ interests.

 

Noteholders’ prior consent to the inclusion of Funding 2 as abeneficiary of the mortgages trust and the subsequent amendments to thedocuments and/or release of security by Funding 1 will not be required. Beforebecoming a beneficiary of the mortgages trust, however, Funding 2 will berequired to satisfy a number of conditions, including:

 

•                  obtaining awritten confirmation from each of the rating agencies that the then currentratings of the notes outstanding at that time will not be adversely affected asa result of Funding 2 becoming a beneficiary of the mortgages trust;

 

•                  providing writtencertification to the security trustee that no event of default under any ofFunding 1’s intercompany loan agreements outstanding at that time has occurredwhich has not been remedied or waived and no event of default will occur as aresult of Funding 2 becoming a beneficiary of the mortgages trust; and

 

•                  providingwritten certification to the security trustee that no principal deficiency isrecorded on the principal deficiency ledger in relation to Funding 1’s termadvances that are outstanding at that time.

 

There can be no assurance that the inclusion of Funding 2 as abeneficiary of the mortgages trust would not affect cashflows available to payamounts due on the noteholders’ issuer notes and therefore adversely affect thenoteholders’ interests.

 

**If Funding 1 enters into new intercompany loan agreements, then the newterm advances may rank ahead of issuer term advances as to payment, andaccordingly new notes may rank ahead of issuer notes as to payment**

 

It is likely that Holdings will establish new issuers to issue newnotes to investors. The proceeds of each new issue will be used by the newissuer to make a new intercompany loan to Funding 1. Funding 1 will use theproceeds of the new intercompany loan to:

 

•                  pay the sellerin relation to the initial consideration for new loans and their relatedsecurity to be sold to the mortgages trustee;

 

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•                  pay the sellerfor a portion of the seller share of the trust property, which will result inan increase in Funding 1’s share of the trust property;

 

•                  refinance inwhole or in part an intercompany loan or intercompany loans outstanding at thattime (and if the issuer’s intercompany loan to Funding 1 is refinanced,noteholders could be repaid early); and/or

 

•                  deposit some ofthose proceeds in the general reserve fund.

 

The payment and security priorities of the issuer notes relative toeach other as set out in the issuer deed of charge and the issuer cashmanagement agreement will not be affected as a result of an issue of new notesby a new issuer, because the new issue will be separately documented. However,Funding 1 may be required to pay to a new issuer amounts owing under a new termadvance ahead of or in the same order of priority as amounts owing to theissuer on the issuer term advances, depending on the term advance rating, thescheduled repayment date of that new term advance and other rules regardingthe payment of interest and the repayment of principal by Funding 1. If this isthe case, then the relevant new noteholders will be paid before thenoteholders.

 

If Holdings establishes new issuers to make new intercompany loans toFunding 1, the noteholders will not have any right of prior review or consentwith respect to those new intercompany loans or the corresponding issuance bynew issuers of new notes. Similarly, the terms of the Funding 1 transactiondocuments (including the mortgage sale agreement, the mortgages trust deed, theFunding 1 deed of charge, the definitions of the trigger events, the criteriafor the sale of new loans to the mortgages trustee and the amount available tobe drawn under the Funding 1 liquidity facility) may be amended to reflect thenew issue. Noteholders’ consent to these changes will not be required. Therecan be no assurance that these changes will not affect the cashflows availableto pay amounts due on the issuer notes.

 

 However, before issuing newnotes, a new issuer will be required to satisfy a number of conditions,including:

 

•                  obtaining awritten confirmation from each of the rating agencies that the then currentratings of the notes outstanding at that time will not be adversely affectedbecause of the new issue;

 

•                  providingwritten certification to the security trustee that no event of default underany of the intercompany loan agreements outstanding at that time has occurredwhich has not been remedied or waived and no event of default will occur as aresult of the issue of the new notes; and

 

•                  providingwritten certification to the security trustee that no principal deficiency isrecorded on the principal deficiency ledger in relation to the term advancesoutstanding at that time.

 

**Funding 1 has entered into the other intercompany loan agreements withother issuers, and some of the term advances in other intercompany loans rankahead of some of the issuer term advances in the issuer intercompany loan as topayment, and accordingly some of the notes issued by the previous issuers rankahead of some of the issuer notes as to payment**

 

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The other issuers issued notes to investors, the equivalent net issueproceeds of which were used by the other issuers to make intercompany loans toFunding 1. Funding 1 used most of the proceeds of these intercompany loans fromPermanent Financing (No. 1) PLC to pay the seller for the initial loans(together with their related security) sold to the mortgages trustee on theinitial closing date which comprised Funding 1’s original share of the trustproperty. Funding 1 used most of the proceeds of each other issuers’intercompany loan to pay the seller for loans (together with their relatedsecurity) sold to the mortgages trustee or to pay consideration to the sellerfor an increase in Funding 1’s share in the mortgages trust.

 

The payment and security priorities of the issuer notes relative toeach other as set out in the issuer deed of charge and the issuer cashmanagement agreement are not affected as a result of the issue of the notes bythe other issuers, because the other issues were separately documented.However, Funding 1 may be required to pay to the previous issuers amounts whichare owing under one or more previous term advances ahead of or in the sameorder of priority as amounts owing to the issuer on the issuer term advances,depending on the term advance rating, the scheduled repayment date of thatprevious term advance and other rules regarding the payment of interestand the repayment of principal by Funding 1. If this is the case, then theother noteholders will be paid before the holders of the issuer notes.

 

**Other creditors will share in the same security granted by Funding 1 tothe security trustee, and this may adversely affect payments on the issuernotes**

 

If Funding 1 enters into a new intercompany loan agreement, then ifrequired it will also enter into a new start-up loan agreement with a newstart-up loan provider and the security trustee.

 

If required by the rating agencies, Funding 1 will use part of theproceeds of the new start-up loan to fund further the general reserve fund.Similarly, if necessary, Funding 1 will also enter into a new Funding 1 swapwith either the Funding 1 swap provider or a new Funding 1 swap provider andthe security trustee.

 

The new issuer, any new start-up loan provider and any new Funding 1swap provider will become party to the Funding 1 deed of charge and will beentitled to share in the security granted by Funding 1 for our benefit (and thebenefit of the other Funding 1 secured creditors) under the Funding 1 deed ofcharge. In addition, the liabilities owed to the Funding 1 liquidity facilityprovider and the Funding 1 swap provider which are secured by the Funding 1deed of charge may increase each time that Funding 1 enters into a newintercompany loan agreement. These factors could ultimately cause a reductionin the payments noteholders receive on the issuer notes. Noteholders consent tothe requisite changes to the transaction documents will not be required.

 

**There may be conflicts between the issuer and any new issuers, and theissuer’s interests may not prevail, which may adversely affect payments on theissuer notes**

 

The security trustee will exercise its rights under the Funding 1 deedof charge only in accordance with directions given by the issuers (which couldbe the issuer, any previous issuer or, if Funding 1 enters into newintercompany loans, any new issuer) that have the highest-ranking outstandingterm advances at that time, provided that the security trustee is indemnifiedand/or secured to its satisfaction.

 

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If the security trustee receives conflicting directions, it will followthe directions given by the relevant issuers representing the largest principalamount outstanding of relevant term advances. If the issuer is not in the grouprepresenting that largest principal amount, then its interests may not prevail.This could ultimately cause a reduction in the payments the noteholders receiveon the issuer notes.

 

**As new loans are sold to the mortgages trustee, the characteristics ofthe trust property may change from those existing at the closing date, andthose changes may adversely affect payments on the issuer notes**

 

There is no guarantee that any new loans sold to the mortgages trusteewill have the same characteristics as the loans in the portfolio as of theclosing date. In particular, new loans may have different paymentcharacteristics than the loans in the initial portfolio. The ultimate effect ofthis could be to delay or reduce the payments the noteholders receive on theissuer notes.

 

**The yield to maturity of the issuer notes may be adversely affected byprepayments or redemptions on the loans**

 

The yield to maturity of the issuer notes of each class will dependmostly on (a) the amount and timing of payment of principal on the loansand (b) the price paid by the noteholders of each class of issuer notes.The yield to maturity of the issuer notes of each class may be adverselyaffected by a higher or lower than anticipated rate of prepayments on the loans.

 

No assurance can be given that Funding 1 will accumulate sufficientfunds during the cash accumulation period relating to the issuer series 1 termAAA advance, each scheduled amortization installment under the issuer series 2term AAA advance, each scheduled amortization installment under the issuerseries 3 term AAA advance and/or each scheduled amortization installment underthe issuer series 4 term AAA advance to enable it to repay these issuer termadvances to the issuer so that the corresponding classes of issuer notes willbe redeemed in their entirety on their scheduled redemption dates.

 

During the cash accumulation period for the issuer term advances andscheduled amortization installments, repayments of principal will only be madeon the issuer series 5 term AAA advances, the issuer term AA advances or theissuer term BBB advances that are due and payable if the quarterly CPR of theloans in the trust property is greater than 15 per cent. And certain otherconditions are met. This means that there may be no corresponding repayments ofprincipal on the series 5 class A issuer notes, the class B issuer notes or theclass C issuer notes.

 

The extent to which sufficient funds are saved by Funding 1 during acash accumulation period or received by it from its share in the mortgagestrust for application on a scheduled repayment date will depend on whether theactual principal prepayment rate of the loans is the same as the assumedprincipal prepayment rate. If Funding 1 is not able to save enough money duringa cash accumulation period or does not receive enough money from its share inthe mortgages trust for application on a scheduled repayment date to repay therelevant issuer term AAA advance (and, if it is unable to make a drawing on thereserve funds to make good the shortfall) so that the issuer can redeem theclass A issuer notes of the corresponding series on their respective scheduledredemption date(s), then Funding 1 will be required to pay to the issuer onthose scheduled redemption dates only the amount that it has actually saved orreceived. Any shortfall will be deferred and paid on subsequent Funding 1interest payment dates when Funding 1 has money available to make the payment.In these circumstances, there will be a variation in the yield to maturity ofthe relevant class of issuer notes.

 

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**The issuers’ ability to redeem the series 1 class A issuer notes and/orthe series 2 class A issuer notes and/or the series 3 class A issuer notes and/orthe series 4 class A issuer notes on their scheduled redemption dates isaffected by the rate of prepayment on the loans**

 

The rate of prepayment of loans is influenced by a wide variety ofeconomic, social and other factors, including prevailing mortgage marketinterest rates, the availability of alternative financing programs, local andregional economic conditions and homeowner mobility. For instance, prepaymentson the loans may be due to borrowers refinancing their loans and sales ofproperties by borrowers (either voluntarily or as a result of enforcementaction taken). In addition, if the seller is required to repurchase a loan orloans under a mortgage account and their related security because, for example,one of the loans does not comply with the representations and warranties in themortgage sale agreement, then the payment received by the mortgages trusteewill have the same effect as a prepayment of all of the loans under thatmortgage account. Because these factors are not within our control or thecontrol of Funding 1 or the mortgages trustee, the issuer cannot give anyassurances as to the level of prepayments that the portfolio may experience.

 

Variation in the rate of prepayments of principal on the loans mayaffect each class of issuer notes differently depending upon amounts alreadyrepaid by Funding 1 to the issuer under the issuer intercompany loan andwhether a trigger event has occurred, or a loan is subject to a product switchor a further advance or the security granted by the issuer under the issuerdeed of charge has been enforced. If prepayments on the loans occur lessfrequently than anticipated, then there may not be sufficient funds availableto redeem the series 1 class A issuer notes and/or the series 2 class A issuernotes and/or the series 3 class A issuer notes and/or the series 4 class Aissuer notes in full on their respective scheduled redemption dates.

 

**The seller may change the lending criteria relating to loans that aresubsequently sold to the mortgages trustee, which could affect thecharacteristics of the trust property and which may adversely affect paymentson the issuer notes**

 

Each of the loans was originated in accordance with the seller’slending criteria at the time of origination. These lending criteria consider avariety of factors such as a potential borrower’s credit history, employmenthistory and status and repayment ability, as well as the value of the propertyto be mortgaged. In the event of the sale of any new loans and new relatedsecurity to the mortgages trustee, the seller will warrant that those new loansand new related security were originated in accordance with the seller’slending criteria at the time of their origination. However, the seller retainsthe right to revise its lending criteria as determined from time to time, andso the lending criteria applicable to any loan at the time of its originationmay not be or have been the same as those when other loans were originated.

 

If new loans that have been originated under revised lending criteriaare sold to the mortgages trustee, the characteristics of the trust propertycould change. This could lead to a delay or a reduction in the paymentsreceived on the issuer notes.

 

**The seller has adopted procedures relating to investigations and searchesfor remortgages which could affect the characteristics of the trust propertyand which may adversely affect payments on the issuer notes**

 

The seller does not require a solicitor, licensed conveyancer or (inScotland) qualified conveyancer to conduct a full investigation of the title toa property in all cases. Where the

 

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borrower is remortgaging therewill be a limited investigation to carry out some but not all of the searchesand investigations which would normally be carried out by a solicitorconducting a full investigation of the title to a property. Properties whichhave undergone such a limited investigation may be subject to matters whichwould have been revealed by a full investigation of title and which may havebeen remedied or, if incapable of remedy, may have resulted in the propertiesnot being accepted as security for a loan had such matters been revealed,though to mitigate against this risk search indemnity insurance is obtained inrespect of such properties. The introduction of loans secured by suchproperties into the trust property could result in a change of thecharacteristics of the trust property. This could lead to a delay or areduction in the payments received on the issuer notes.

 

**The timing and amount of payments on the loans could be affected byvarious factors which may adversely affect payments on the issuer notes**

 

The loans are affected by credit, liquidity and interest rate risks.Various factors influence mortgage delinquency rates, prepayment rates,repossession frequency and the ultimate payment of interest and principal, suchas changes in the national or international economic climate, regional economicor housing conditions, changes in tax laws, interest rates, inflation, theavailability of financing, yields on alternative investments, politicaldevelopments and government policies. Other factors in borrowers’ individual,personal or financial circumstances may affect the ability of borrowers torepay loans. Loss of earnings, illness, divorce and other similar factors maylead to an increase in delinquencies by and bankruptcies of borrowers, andcould ultimately have an adverse impact on the ability of borrowers to repayloans.

 

In addition, the ability of a borrower to sell a property given assecurity for a loan at a price sufficient to repay the amounts outstandingunder the loan will depend upon a number of factors, including the availabilityof buyers for that property, the value of that property and property values ingeneral at the time.

 

Further, the mortgage loan industry in the United Kingdom is highlycompetitive. This competitive environment may affect the rate at which theseller originates new loans and may also affect the level of attrition of theseller’s existing borrowers.

 

The principal source of income for repayment of the issuer notes by theissuer is the issuer intercompany loan. The principal source of income forrepayment by Funding 1 of the issuer intercompany loan is its interest in theloans held on trust by the mortgages trustee for Funding 1 and the seller. Ifthe timing and payment of the loans is adversely affected by any of the risksdescribed in this section, then the payments on the issuer notes could bereduced or delayed.

 

**The occurrence of trigger events and enforcement of the issuer securitymay adversely affect the scheduled redemption dates of the series 1 class Aissuer notes, series 2 class A issuer notes, series 3 class A issuer notesand/or series 4 class A issuer notes**

 

If no trigger event has occurred and the issuer security has not beenenforced in accordance with the terms of the issuer deed of charge, thenpayments of principal will not occur on the series 1 class A issuer notes,series 2 class A issuer notes, series 3 class A issuer notes and/or series 4class A issuer notes before their respective scheduled redemption dates.

 

If a trigger event occurs or the issuer security is enforced inaccordance with the issuer deed of charge prior to the scheduled redemptiondates for the series 1 class A issuer notes, series

 

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2 class A issuer notes, series3 class A issuer notes and/or series 4 class A issuer notes, then the relevantclasses of issuer notes outstanding will not be repaid on their scheduledredemption dates but will be repaid on each interest payment date from moniesreceived from Funding 1 on the issuer term AAA advances of the correspondingseries as described in the following three risk factors.

 

**If an asset trigger event occurs, any series 1 class A issuer notes,series 2 class A issuer notes, series 3 class A issuer notes and/or series 4class A issuer notes then outstanding will not be repaid on their scheduledredemption dates**

 

When an asset trigger event has occurred, the mortgages trustee willdistribute principal receipts on the loans to Funding 1 and the sellerproportionally and equally based on their percentage shares of the trustproperty (that is, the Funding 1 share percentage and the seller share percentage).When an asset trigger event has occurred, after making requisite payments tothe Funding 1 liquidity facility provider and replenishing the reserve funds,Funding 1 will repay:

 

*first*, the term AAAadvances in respect of the issuer intercompany loan, the previous intercompanyloans and any new intercompany loans, until each of those term AAA advances isfully repaid;

 

*then*, the term AAadvances in respect of the issuer intercompany loan, the previous intercompanyloans and any new intercompany loans, until each of those term AA advances isfully repaid;

 

*then*, the term Aadvances in respect of the previous intercompany loans and any new intercompanyloans, until each of those term A advances is fully repaid; and

 

*finally*, the termBBB advances in respect of the issuer intercompany loan, the previousintercompany loans and any new intercompany loans, until each of those term BBBadvances is fully repaid.

 

If an asset trigger event occurs, any series 1 class A issuer notesand/or series 2 class A issuer notes and/or series 3 class A issuer notesand/or series 4 class A issuer notes then outstanding will not be repaid ontheir scheduled redemption dates, and there is also a risk that they will notbe repaid by their final maturity dates.

 

**If a non-asset trigger event occurs, any series 1 class A issuer notes,series 2 class A issuer notes, series 3 class A issuer notes and/or series 4class A issuer notes then outstanding will not be repaid on their scheduledredemption dates**

 

If a non-asset trigger event has occurred but an asset trigger eventhas not occurred, the mortgages trustee will distribute all principal receiptsto Funding 1 until the Funding 1 share percentage of the trust property iszero. When a non-asset trigger event has occurred, after making requisitepayments to the Funding 1 liquidity facility provider and to replenish thereserve funds, Funding 1 will repay:

 

*first*, the term AAAadvance with the earliest final repayment date, then to repay the term AAAadvance with the next earliest final repayment date, and so on until the termAAA advances in respect of the issuer intercompany loan, the previousintercompany loans and any new intercompany loans are fully repaid;

 

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*then*, the term AAadvances in respect of the issuer intercompany loan, the previous issuerintercompany loans and any new intercompany loans, until each of those term AAadvances is fully repaid;

 

*then*, the term Aadvances in respect of the previous issuer intercompany loans and any newintercompany loans, until each of those term A advances is fully repaid; and

 

*finally*, the termBBB advances in respect of the issuer intercompany loan, the previous issuerintercompany loans and any new intercompany loans, until each of those term BBBadvances is fully repaid.

 

If a non-asset trigger event occurs, any series 1 class A issuer notes,series 2 class A issuer notes, series 3 class A issuer notes and/or series 4class A issuer notes then outstanding will not be repaid on their scheduled redemptiondates.

 

**If the issuer security is enforced, any series 1 class A issuer notes,series 2 class A issuer notes, series 3 class A issuer notes and/or series 4class A issuer notes then outstanding will not be repaid on their scheduledredemption dates**

 

If the issuer security is enforced, then the mortgages trustee willdistribute funds as required under the terms of the transaction agreements. Inthese circumstances, any series 1 class A issuer notes, series 2 class A issuernotes, series 3 class A issuer notes and/or series 4 class A issuer notes thenoutstanding will not be repaid on their scheduled redemption dates and there isalso a risk that those class A issuer notes may not be repaid by their finalmaturity dates.

 

**Loans subject to further advances will be repurchased by the sellerfrom the mortgages trustee, which will affect the prepayment rate of the loans,and this may affect the yield to maturity of the issuer notes**

 

If the servicer at its discretion decides to grant a borrower a furtheradvance under a loan which has been sold to the mortgages trustee, then theseller will be required to repurchase that loan under the relevant mortgageaccount and its related security from the mortgages trustee save for any loanin arrears at a price equal to the outstanding principal balance of those loanstogether with any accrued and unpaid interest and expenses to the date ofpurchase. The yield to maturity of the issuer notes may be affected by therepurchase of loans subject to further advances.

 

**In limited circumstances, loans subject to product switches will berepurchased by the seller from the mortgages trustee, which will affect theprepayment rate of the loans, and this may affect the yield to maturity of theissuer notes**

 

Loans subject to product switches will not be repurchased unless on anydistribution date, the seller is in breach of the conditions precedent to thesale of new loans to the mortgages trustee. From and including that date to butexcluding the date when those conditions precedent have been satisfied, theseller will be required to repurchase any loans and their related security thatare subject to product switches. The seller will be required to repurchase therelevant loan or loans under the relevant mortgage account and their relatedsecurity from the mortgages trustee at a price equal to the outstandingprincipal balance of those loans together with accrued and unpaid interest andexpenses to the date of purchase.

 

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A loan will be subject to a product switch if the borrower and theseller agree on or the servicer offers a variation in the financial terms andconditions applicable to the relevant borrower’s loan, other than:

 

•                  any variationagreed with a borrower to control or manage arrears on the loan;

 

•                  any variation tothe interest rate as a result of a borrower being linked to HVR 2;

 

•                  any variation inthe maturity date of the loan unless, while the issuer intercompany loan isoutstanding, it is extended beyond June 2040;

 

•                  any variationimposed by statute;

 

•                  any variation ofthe rate of interest payable in respect of the loan where that rate is offeredto the borrowers of more than 10 per cent. by outstanding principal amount ofloans comprised in the trust property in any interest period; or

 

•                  any variation inthe frequency with which the interest payable in respect of the loan ischarged.

 

The yield to maturity of the issuer notes may be affected by therepurchase of loans subject to product switches.

 

**Ratings assigned to the issuer notes may be lowered or withdrawn afterthe noteholders purchase the issuer notes, which may lower the market value ofthe issuer notes**

 

The ratings assigned to each class of issuer notes address thelikelihood of full and timely payment to the noteholders of all payments ofinterest on each interest payment date under those classes of issuer notes. Theratings also address the likelihood of “ultimate” payment of principal on thefinal maturity date of each class of issuer notes. Any rating agency may lowerits rating or withdraw its rating if, in the sole judgment of the ratingagency, the credit quality of the issuer notes has declined or is in question.If any rating assigned to the issuer notes is lowered or withdrawn, the marketvalue of the issuer notes may be reduced. A change to the ratings assigned toeach class of issuer notes will not affect the term advance ratings assigned toeach issuer term advance in the intercompany loans.

 

**Subordination of other note classes may not protect noteholders fromall risk of loss**

 

The class B issuer notes and the class C issuer notes are subordinatedin right of payment of interest to the class A issuer notes. The class C issuernotes are subordinated in right of payment of interest to the class B issuernotes. However, the transaction has been structured in the expectation that theseries 1 issuer notes will be repaid in full prior to the redemption of theseries 2 class A issuer notes, the series 3 class A issuer notes, the series 4class A issuer notes and the series 5 class A issuer notes and so on for eachclass of each series of issuer notes.

 

Accordingly, there is no assurance that these subordination rules willprotect the holders of class A issuer notes or the holders of class B issuernotes from all risk of loss.

 

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**Principal payments onthe original pass-through term advances will be deferred in some circumstances**

 

Principal repayments on the issuer term AA advances and/or the issuerterm BBB advances will be deferred in the following circumstances:

 

If on a Funding 1 interest payment date:

 

•                  there is a debitbalance on the BBB principal deficiency sub-ledger, the A principal deficiencysub-ledger or the AA principal deficiency sub-ledger after application of theFunding 1 available revenue receipts on that Funding 1 interest payment date;or

 

•                  the adjustedgeneral reserve fund level is less than the general reserve fund threshold; or

 

•                  the aggregateoutstanding principal balance of loans in the mortgages trust, in respect towhich the aggregate amount in arrears is more than three times the monthlypayment then due, is more than 5 per cent. of the aggregate outstandingprincipal balance of loans in the mortgages trust;

 

then to the extent that any term AAA advance remains outstanding(whether or not such term AAA advance is then due and payable) after theallocation of principal on that Funding 1 interest payment date to those termadvances, the issuer term AA advances and issuer term BBB advances will not beentitled to principal repayments until the relevant circumstance as describedabove has been remedied or otherwise ceases to exist. In addition, if any termAA advance remains outstanding (whether or not such term AA advance is then dueand payable) after the allocation of principal on that Funding 1 interest paymentdate to those term advances, the issuer term BBB advances will not be entitledto principal repayments until the relevant circumstances as described abovehave been remedied or otherwise cease to exist and if any term A advanceremains outstanding (whether or not such term A advance is then due andpayable) after the allocation of principal on that Funding 1 interest paymentdate to those term advances, the issuer term BBB advance will not be entitledto principal repayments until the relevant circumstances as described abovehave been remedied or otherwise cease to exist. This means that payments ofprincipal on the class C issuer notes of all series and, as applicable, theclass B issuer notes of all series will be deferred until the earlier of the timewhen the relevant circumstance described in this risk factor has been remedied(if ever) and the final maturity date of the relevant issuer notes.

 

Furthermore, if, on a Funding 1 interest payment date prior to theissuer step-up date:

 

•                  one or more bulletterm advances and/or scheduled amortization installments are then in a cashaccumulation period;

 

•                  the quarterlyCPR is less than 15 per cent.; and

 

•                  there is a cashaccumulation shortfall at that time;

 

then, on or before their step-up dates, the issuer term advances whichare original pass-through term advances will be entitled to principalrepayments only to the extent permitted under the pass-through repaymentrestrictions.

 

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**Series 2 issuer notes, series 3 issuer notes, series 4 issuernotes and series 5 issuer notes may be subject to risk if the trust propertydeteriorates after repayment of previous series of the issuer notes**

 

If the loans comprising the trust property do not perform as expectedat any time after the repayment in full of the serious 2 issuer notes, then theseries 3 issuer notes and/or the series 4 issuer notes and/or the series 5issuer notes may not be repaid in full.

 

**Noteholders may be subject to exchange rate risks on the issuer notes**

 

Repayments of principal and payments of interest on the series 1 issuernotes and the series 2 class A issuer notes will be made in US dollars and onthe series 4 issuer notes will be made in euro, but the issuer term advancesmade by the issuer to Funding 1 and repayments of principal and payments ofinterest by Funding 1 to the issuer under the issuer intercompany loan will bein sterling.

 

To hedge its currency exchange rate exposure, including the interestrate exposure connected with that currency exposure, the issuer has enteredinto the issuer dollar currency swaps for the series 1 and series 2 issuernotes with the issuer dollar currency swap providers and the issuer eurocurrency swaps for the series 4 issuer notes with the issuer euro currency swapprovider.

 

If the issuer fails to make timely payments of amounts due under anissuer swap, then the issuer will have defaulted under that issuer swap. Eachissuer swap provider is obliged only to make payments under an issuer swap ifand for so long as the issuer make payments under the same. If an issuer swapprovider is not obliged to make payments, or if it exercises any right toterminate that it may have under the relevant issuer swap, or if it defaults inits obligations to make payments of amounts in US dollars or euro, asapplicable, equal to the full amount to be paid by it on the payment datesunder the relevant issuer swap (which are the same dates as the interestpayment dates in respect of the issuer notes), the issuer will be exposed tochanges in US dollar/sterling or euro/sterling currency exchange rates and inthe associated interest rates on these currencies. Unless a replacement issuerswap is entered into, as a result of any adverse movements in the relevant spotexchange rates, the issuer may have insufficient funds to make payments due onthe issuer notes of any class and any series that are then outstanding.

 

Each issuer swap provider will be obliged to gross up payments made byit to the issuer if withholding taxes are imposed on payments under therelevant issuer swap and the AIG issuer swap guarantor will be obliged to grossup payments made by it to the issuer if withholding taxes are imposed onpayments under the AIG issuer swap guarantee. However, if such a gross up isrequired, the relevant issuer swap provider may, subject to obtaining theconsent of the security trustee, terminate the relevant issuer swap. If it doesterminate the relevant issuer swap, the issuer will be exposed to changes incurrency exchange rates and in the associated interest rates on thesecurrencies. Unless a replacement issuer swap is entered into, the issuer mayhave insufficient funds to make payments due on the issuer notes of any classand any series that are then outstanding.

 

**There may be a delay in payment of interest on series 1 class A issuernotes on the occurrence of a trigger event or enforcement of the issuersecurity**

 

After the occurrence of a trigger event or enforcement of the issuersecurity, the interest payments on the series 1 class A issuer notes will nolonger be payable monthly, but will be

 

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payable quarterly. In thesecircumstances a noteholder will not receive interest under the series 1 class Aissuer notes on the expected payment dates.

 

**The mortgages trustee GIC provider or the Funding 1 GIC provider maycease to satisfy certain criteria to provide the mortgages trustee GIC accountor the Funding 1 GIC account**

 

The mortgages trustee GIC provider and the Funding 1 GIC provider arerequired to satisfy certain criteria (including certain criteria and/orpermissions set or required by the Financial Services Authority (the “FSA”)from time to time) in order to continue to receive deposits in the mortgagestrustee GIC account and the Funding 1 GIC account respectively. If either themortgages trustee GIC provider or the Funding 1 GIC provider ceases to satisfythose criteria then the relevant account may be transferred to another entitythat does satisfy those criteria. In these circumstances the new GIC providermay not offer a GIC on terms as favorable as those provided by the mortgagestrustee GIC provider or the Funding 1 GIC provider.

 

The criteria referred to above include a requirement that theshort-term, unguaranteed and unsecured ratings of the mortgages trustee GICprovider or the Funding 1 GIC provider, as the case may be, are at least A-1+by Standard & Poor’s, F1+ by Fitch and P-1 by Moody’s, unless eachrating agency confirms that its then current rating of the notes would not beadversely affected as a result of such ratings falling below these minimumratings.

 

**Termination payments on the issuer swaps may adversely affect the fundsavailable to make payments on the issuer notes**

 

If any of the issuer swaps terminate, the issuer may as a result beobliged to make a termination payment to the relevant issuer swap provider. Theamount of the termination payment will be based on the cost of entering into areplacement issuer swap. Under the issuer intercompany loan agreement, Funding1 will be required to pay the issuer an amount equal to any termination paymentdue by the issuer to the relevant issuer swap provider. Funding 1 will also beobliged to pay the issuer any extra amounts which it may be required to pay toenter into a replacement swap.

 

The issuer cannot give noteholders any assurance that Funding 1 willhave the funds available to make that payment or that the issuer will havesufficient funds available to make any termination payment under any of its issuerswaps or to make subsequent payments to noteholders in respect of the relevantseries and class of issuer notes. Nor can the issuer give noteholders anyassurance that it will be able to enter into a replacement issuer swap or, ifone is entered into, that the credit rating of the replacement issuer swapprovider will be sufficiently high to prevent a downgrading of the then currentratings of the issuer notes by the rating agencies.

 

Except where the relevant issuer swap provider has caused the relevantissuer swap to terminate by its own default, any termination payment due by theissuer will rank equally not only with payments due to the holders of theseries and class of issuer notes which rank equally with the series and classof issuer notes to which the relevant issuer swap relates but also withpayments due to the holders of any other series and class of issuer notes whichrank equally with the series and class of issuer notes to which the relevantissuer swap relates. Any additional amounts required to be paid by the issuerfollowing termination of the relevant issuer swap (including any extra costsincurred (for example, from entering into “spot” currency transactions orinterest rate swaps) if the issuer cannot immediately enter into a replacementswap) will also

 

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rank equally not only withpayments due to the holders of the series and class of issuer notes to whichthe relevant issuer swap relates but also with payments due to the holder of anyother series and class of issuer notes which rank equally with the series andclass of issuer notes to which the relevant issuer swap relates. Furthermore,any termination payment or additional payment or additional amounts required tobe paid by the issuer following termination of an issuer swap will rank aheadof payments due to the holders of any series and class of issuer notes whichranks below the series and class of issuer notes to which the relevant issuerswap relates. Therefore, if the issuer is obliged to make a termination paymentto the relevant issuer swap provider or to pay any other additional amount as aresult of the termination of the relevant issuer swap, this may affect thefunds which the issuer has available to make payments on the issuer notes ofany class and any series.

 

**Risks associated with the Funding 1 swap**

 

To provide a hedge against (a) the mortgages trustee variable baserate payable on the variable rate loans, the rates of interest payable on thetracker rate loans and the fixed rates of interest payable on the fixed rateloans; and (b) the rate of interest payable by Funding 1 on theintercompany loans, Funding 1 has entered into the Funding 1 swap agreement. IfFunding 1 fails to make timely payments under the Funding 1 swap, it will havedefaulted under the Funding 1 swap. The Funding 1 swap provider is obliged onlyto make payments under the Funding 1 swap if and for so long as Funding 1 makespayments under the same. If the Funding 1 swap provider is not obliged to makepayments, or if it exercises any right to terminate that it may have under theFunding 1 swap, or if it defaults in its obligation to make payments under theFunding 1 swap, Funding 1 will be exposed to the variance between the rates ofinterest payable on the loans and the rate of interest payable by it under theintercompany loans unless a replacement Funding 1 swap is entered into. If theFunding 1 swap terminates, Funding 1 may as a result be obliged to make atermination payment to the Funding 1 swap provider. Any variance between therates of interest payable on the loans and the rate of interest payable byFunding 1 under the intercompany loans and any termination payment payable byit to the Funding 1 swap provider may adversely affect the ability of Funding 1to meet its obligations under the issuer intercompany loan agreement.

 

Funding 1 will receive interest on the variable rate loans, which isbased on HVR 1 or HVR 2. The payment obligations of Funding 1 under the Funding1 swap will, among other things, be based on the average of the standardvariable mortgage rates or their equivalent charged to existing borrowers onresidential mortgage loans as published from time to time, after excluding thehighest and the lowest rate, of Abbey National plc, HSBC Bank plc, Cheltenham &Gloucester plc, Nationwide Building Society, Northern Rock plc, NationalWestminster Bank Plc, and Woolwich plc (and where those banks have more thanone standard variable rate, the highest of those rates). While it is anticipatedthat such average rate will broadly track both HVR 1 and HVR 2, the variancebetween such average rate and HVR 1 and HVR 2, respectively, may affect theability of Funding 1 to meet its payment obligations under the Funding 1 swapagreement.

 

**The issuer relies on third parties to perform services in relation tothe issuer notes, and the noteholders may be adversely affected if they fail toperform their obligations**

 

The issuer is a party to contracts with a number of other third partiesthat have agreed to perform services in relation to the issuer notes. Forexample, the issuer swap providers have agreed to provide their respectiveissuer swaps, the corporate services provider has agreed to provide corporateservices and the paying agents and the agent bank have agreed to provide

 

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payment and calculationservices in connection with the issuer notes. In the event that any of theseparties were to fail to perform their obligations under the respective agreementsto which they are a party, the noteholders may be adversely affected.

 

**The issuer may be unable to pay, in full or at all, interest due on theissuer notes if there is an income or principal deficiency**

 

If, on any Funding 1 interest payment date, revenue receipts availableto Funding 1 (including the reserve funds) are insufficient to enable Funding 1to pay interest on the issuer term advances, previous term advances and any newterm advances and other expenses of Funding 1 ranking higher in seniority tointerest due on these term advances, then Funding 1 may use principal receiptson the loans received by it in the mortgages trust to make up the shortfall.

 

Funding 1 will use principal receipts that would have been applied torepay the term advances with the lowest term advance rating to pay interest onthose other term advances and senior expenses described in the precedingparagraph where there is a shortfall of monies to pay those amounts. At theclosing date, the relevant term advances with the lowest term advance ratinginclude the issuer term BBB advances. If Funding 1 uses principal to repayinterest and senior expenses in this manner, there will be less principalavailable to repay the issuer term BBB advances.

 

Funding 1 will be obliged to keep a ledger that records any principalapplied to pay interest and senior expenses (as well as any losses on the loanscausing a principal deficiency). When the amount recorded on the ledger isequal to the principal amount outstanding of the term BBB advances, thenFunding 1 will use principal receipts that would have been applied to repay theterm advance with the next lowest ranking term advance rating to pay intereston the term advances and senior expenses where there is a shortfall of money topay those amounts. When the amount recorded on the principal deficiency ledgerexceeds the principal amount outstanding on the term A advances, Funding 1 willuse principal receipts that would have been applied to repay the term AAadvances to pay those amounts. When the amount recorded on the principaldeficiency ledger exceeds the principal amount outstanding on the term AAadvances, Funding 1 will use principal receipts that would have been applied torepay the term AAA advances to pay those amounts.

 

During the term of the transaction, however, it is expected that anyprincipal deficiencies of this sort will be recouped from subsequent excessrevenue receipts and amounts standing to the credit of the reserve funds. Therevenue receipts will be applied first to cover any principal deficiency inrespect of the term advances with the highest term advance rating, and then theterm advances with the next highest-ranking term advance rating, and so on downto the term advances with the lowest term advance rating.

 

If there are insufficient funds available because of income orprincipal deficiencies, then one or more of the following consequences mayoccur:

 

•                  the interest andother net income of Funding 1 may not be sufficient, after making the paymentsto be made in priority, to pay, in full or at all, interest due on the issuerterm BBB advances and the issuer term AA advances;

 

•                  there may beinsufficient funds to repay the principal due and payable on any of the issuerterm BBB advances and the issuer term AA advances prior to their finalrepayment dates unless the other net income of Funding 1 is sufficient, aftermaking

 

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other prior ranking payments, to reduce any principal deficiency inrespect of the term BBB advances, term A advances and term AA advances;

 

•                  if the amount ofprincipal deficiencies exceeds the principal amount outstanding of any of theterm advances (and the principal deficiencies cannot be covered by the otherincome of Funding 1), then the issuer may not receive the full principal amountof any or all of the issuer term advances and, accordingly, noteholders may notreceive the full face value of the class C issuer notes, the class B issuernotes and the class A issuer notes, as the case may be; and/or

 

•                  the issuer maybe unable to pay, in full or at all, interest due on the issuer notes.

 

**The seller share of the trust property does not provide creditenhancement for the issuer notes**

 

Any losses from loans included in the trust property will be allocatedto Funding 1 and the seller proportionally on each distribution date inaccordance with the Funding 1 share percentage and the seller share percentageof the trust property. The seller’s share of the trust property therefore doesnot provide credit enhancement for the Funding 1 share of the trust property orthe issuer notes. Losses on the loans in the trust property are allocatedproportionately between the seller and Funding 1 depending on their respectiveshares in the trust property.

 

**The issuer will only have recourse to the seller if there is a breachof warranty by the seller, but otherwise the seller’s assets will not beavailable to the issuer as a source of funds to make payments on the issuernotes**

 

After an issuer intercompany loan acceleration notice under the issuerintercompany loan is given, the security trustee may, but shall not be obligedto, sell the Funding 1 share of the trust property. There is no assurance thata buyer would be found or that a sale would realize enough money to repayamounts due and payable under the issuer intercompany loan agreement.

 

The issuer, Funding 1 and the mortgages trustee will not have anyrecourse to the seller of the loans, other than in respect of a breach ofwarranty under the mortgage sale agreement.

 

The issuer, Funding 1, the mortgages trustee, and the security trusteewill not undertake any investigations, searches or other actions on any loan orits related security and each of them will rely instead on the warranties givenin the mortgage sale agreement by the seller.

 

If any of the warranties made by the seller (a) in the case ofeach loan in the portfolio, was materially untrue on the date that new loan wasassigned to the mortgages trustee or (b) in the case of each new loan, ismaterially untrue on the date that new loan is assigned to the mortgagestrustee, then the seller will be required to remedy the breach within 20 Londonbusiness days of the seller becoming aware of the same or of receipt by it of anotice from the mortgages trustee.

 

If the seller fails to remedy the breach within 20 London businessdays, then the seller will be required to repurchase the loan or loans underthe relevant mortgage account and their related security at their outstandingprincipal balance as of the date of repurchase together with any arrears ofinterest and accrued and unpaid interest and expenses. There can be noassurance that the seller will have the financial resources to repurchase theloan or loans under the relevant mortgage account and their related security.However, if the seller does not repurchase those loans and their relatedsecurity when required, then the seller’s share of the trust property will be

 

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deemed to be reduced by anamount equal to the principal amount outstanding of those loans together withany arrears of interest and accrued and unpaid interest and expenses.

 

Other than as described here, neither the noteholders nor the issuerwill have any recourse to the assets of the seller.

 

**There can be no assurance that a borrower will repay principal at theend of the term on an interest-only loan, which may adversely affect repaymentson the issuer notes**

 

Each loan in the portfolio is repayable either on a principal repaymentbasis or an interest-only basis. Of the loans in the portfolio as January 1,2005, approximately 33.27 per cent., were interest-only loans. Forinterest-only loans, because the principal is repaid in a lump sum at thematurity of the loan, the borrower is recommended to have some repaymentmechanism such as an investment plan in place which is intended to providefunds to repay the principal at the end of the term. However, the seller doesnot ensure that a repayment mechanism is in place in all cases and does nottake security over these repayment mechanisms. The borrower is also recommendedto take out a life insurance policy in relation to the loan but, as withrepayment mechanisms, the seller does not take security over these lifeinsurance policies.

 

The ability of a borrower to repay the principal on an interest-onlyloan at maturity depends on the borrower’s responsibility to ensure thatsufficient funds are available from an investment plan or another source, suchas ISAs, pension policies, personal equity plans or endowment policies, as wellas the financial condition of the borrower, tax laws and general economicconditions at the time.

 

There can be no assurance that the borrower will have the fundsrequired to repay the principal at the end of the term. If a borrower cannotrepay the loan and a loss occurs on the loan, then this may affect repaymentsof principal on the issuer notes if that loss cannot be cured by application ofexcess Funding 1 available revenue receipts.

 

**There may be risks associated with the fact that the mortgages trusteehas no legal title to the loans and their related security, which may adverselyaffect payments on the issuer notes**

 

The sale by the seller to the mortgages trustee of the Englishmortgages will take effect in equity only. The sale by the seller to themortgages trustee of the Scottish mortgages has been given effect by a Scottishdeclaration of trust by the seller (and any sale of Scottish mortgages in thefuture will be given effect by further Scottish declarations of trust) by whichthe beneficial interest in the Scottish mortgages has been or will betransferred to the mortgages trustee. In each case this means that legal titleto the loans in the trust property remains with the seller, but the mortgagestrustee has all the other rights and benefits relating to ownership of eachloan and its related security (which rights and benefits are subject to thetrust in favor of the beneficiaries). The mortgages trustee has the right todemand that the seller give it legal title to the loans and the relatedsecurity in the circumstances and until then the mortgages trustee will notgive notice of the sale of the English Mortgages to any borrower or apply tothe Land Registry or the Central Land Charges Registry to register or recordits equitable interest in the English mortgages or take any steps to completeor perfect its title to the Scottish mortgages. Because the mortgages trusteehas not obtained legal title to the loans or their related security, there arerisks, as follows:

 

•                  first, if theseller wrongly sold a loan which has already been assigned to the mortgagestrustee to another person, and that person acted in good faith and did not

 

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have notice of the interests of the mortgages trustee or thebeneficiaries in the loan, then she or he might obtain good title to the loan,free from the interests of the mortgages trustee and the beneficiaries. If thisoccurred then the mortgages trustee would not have good title to the affectedloan and its related security and it would not be entitled to payments by aborrower in respect of that loan. This may affect the ability of the issuer torepay the issuer notes; and

 

•                  second, therights of the mortgages trustee and the beneficiaries may be subject to therights of the borrowers against the seller, such as the rights of set-off whichoccur in relation to transactions or deposits made between some borrowers andthe seller and the rights of borrowers to redeem their mortgages by repayingthe loan directly to the seller. If these rights were exercised, the mortgagestrustee may receive less money than anticipated from the loans, which mayaffect the ability of the issuer to repay the issuer notes.

 

However, if a borrower exercises any set-off rights, then an amountequal to the amount set off will reduce the total amount of the seller share ofthe trust property only, and the minimum seller share has been sized in anamount expected to cover this risk, although there is no assurance that itwill. If the minimum seller share is exhausted, then the amount of any set-offswould be applied to reduce the Funding 1 share of the trust property.

 

Once notice has been given to borrowers of the transfer of the loansand their related security to the mortgages trustee, independent set-off rightswhich a borrower has against the seller will crystallize (such as, for example,set-off rights associated with borrowers holding deposits with the seller) andfurther rights of independent set-off would cease to accrue from that date andno new rights of independent set-off could be asserted following that notice.Set-off rights arising under transaction set-off (which are set-off claimsarising out of a transaction connected with the loan) will not be affected bythat notice.

 

**Set-off risks in relation to flexible loans and delayed cashbacks mayadversely affect the funds available to the issuer to repay the issuer notes**

 

The seller has made, and in the future may make, an equitableassignment of the relevant loans and their related security, or in the case ofScottish loans a transfer of the beneficial interest in the relevant loans andtheir related security, to the mortgages trustee, with legal title beingretained by the seller. Therefore, the rights of the mortgages trustee may besubject to the direct rights of the borrowers against the seller, includingrights of set-off existing prior to notification to the borrowers of the saleof the mortgages. Although the mortgages trust does not currently includeflexible loans or delayed cashbacks, those loans may be added to the mortgagestrust in the future. Set-off rights (including analogous rights in Scotland)may occur if the seller fails to advance to a borrower a drawing or permit theborrower to make an underpayment or take a payment holiday under a flexibleloan when the borrower is entitled to draw additional amounts or make anunderpayment or take a payment holiday under a flexible loan or if the sellerfails to pay to a borrower any delayed cashback which the seller had agreed topay to that borrower after completion of the relevant loan.

 

If the seller fails to advance the drawing or permit the borrower tomake an underpayment or take a payment holiday or pay the delayed cashback,then the relevant borrower may set off any damages claim (or exercise analogousrights in Scotland) arising from the seller’s breach of contract against theseller’s (and, as assignee or holder of the beneficial interest in the loansand their related security, the mortgages trustee’s) claim for payment ofprincipal and/or

 

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interest under the loan as andwhen it becomes due. These set-off claims will constitute transaction set-offas described in the immediately preceding risk factor.

 

The amount of the claim in respect of a drawing will, in many cases, bethe cost to the borrower of finding an alternative source of finance although,in the case of flexible loans or delayed cashbacks which are Scottish, it ispossible that the borrower’s right of set-off could extend to the full amountof the relevant drawing: the borrower may obtain a loan elsewhere, in whichcase the damages would be equal to any difference in the borrowing coststogether with any consequential losses, namely the associated costs ofobtaining alternative funds (for example, legal fees and survey fees). If theborrower is unable to obtain an alternative loan, he or she may have a claim inrespect of other losses arising from the seller’s breach of contract wherethere are special circumstances communicated by the borrower to the seller atthe time the mortgage was taken out or which otherwise were reasonablyforeseeable. In either case, the damages claim will be limited by general legalprinciples concerning remoteness of loss and mitigation. These include (i) theprinciple that something, which is a real possibility but would only occur in asmall minority of cases, will not usually fall within the contractual measureof damages, and (ii) the borrower’s duty to mitigate his loss.

 

In respect of a delayed cashback, underpayment or payment holiday, theclaim is likely to be in an amount equal to the amount due under the delayedcashback together with interest and expenses and consequential losses (if any).

 

A borrower may also attempt to set-off against his or her mortgagepayments an amount greater than the amount of his or her damages claim (orexercise analogous rights in Scotland). In that case, the servicer will beentitled to take enforcement proceedings against the borrower although theperiod of non-payment by the borrower is likely to continue until a judgment isobtained.

 

The exercise of set-off rights by borrowers would reduce the incomingcashflow to the mortgages trustee during the exercise. However, the amountsset-off will be applied to reduce the seller share of the trust property only.

 

Further there may be circumstances in which certain drawings may rankbehind security created by a borrower after the date upon which the borrowerentered into its mortgage with the seller.

 

The minimum seller share has been sized in an amount expected to coverthis risk, although there is no assurance that it will. If the minimum sellershare is not sufficient in this respect then there is a risk that noteholdersmay not receive all amounts due on the issuer notes or that payments may not bemade when due.

 

**If the servicer is removed, there is no guarantee that a substituteservicer would be found, which could delay collection of payments on the loansand ultimately could adversely affect payments on the issuer notes**

 

The seller has been appointed by the mortgages trustee and thebeneficiaries as servicer to service the loans. If the servicer breaches theterms of the servicing agreement, then the mortgages trustee, Funding 1 and/orthe security trustee will be entitled to terminate the appointment of theservicer and appoint a new servicer in its place.

 

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There can be no assurance that a substitute servicer with sufficientexperience of administering mortgages of residential properties would be foundwho would be willing and able to service the loans on the terms of theservicing agreement. In addition, as described below, any substitute servicermay be required to be authorized under FSMA (as defined below) in order toadminister loans that constitute regulated mortgage contracts. The ability of asubstitute servicer fully to perform the required services would depend, amongother things, on the information, software and records available at the time ofthe appointment. Any delay or inability to appoint a substitute servicer mayaffect payments on the loans and hence our ability to make payments when due onthe issuer notes.

 

The noteholders should note that the servicer has no obligation itselfto advance payments that borrowers fail to make in a timely fashion.

 

**Funding 1 may not receive the benefit of any claims made on thebuildings insurance which could adversely affect payments on the issuer notes**

 

No assurance can be given that Funding 1 will always receive thebenefit of any claims made under any applicable insurance contracts. This couldreduce the principal receipts received by Funding 1 according to the Funding 1share percentage and could adversely affect the issuer’s ability to redeem theissuer notes. The noteholders should note that buildings insurance is renewedannually.

 

**Regulatory changes by the Office of Fair Trading, the FinancialServices Authority and other regulatory authorities may have an impact on theseller, the issuer, the servicer, the mortgages trustee, Funding 1, Funding 2and/or the loans and may adversely affect the issuer’s ability to make paymentswhen due on the issuer notes**

 

In the United Kingdom, the Office of Fair Trading (the “OFT”) isresponsible for the issue of licenses under, and the superintendence of theworking and the enforcement of the Consumer Credit Act (the “CCA”), relatedconsumer credit regulations and other consumer protection legislation. The OFTmay review businesses and operations, provide guidelines to follow and takeactions when necessary with regard to the mortgage market in the UnitedKingdom.

 

Currently, a credit agreement is regulated by the CCA where: (a) theborrower is or includes an individual; (b) the amount of “credit” asdefined in the CCA does not exceed the financial limit, which is £25,000 forcredit agreements made on or after May 1, 1998, or lower amounts forcredit agreements made before that date; and (c) the credit agreement isnot an exempt agreement under the CCA, for example, a regulated mortgagecontract under the FSMA (as defined below).

 

Any credit agreement that is wholly or partly regulated by the CCA orto be treated as such has to comply with requirements under the CCA as tolicensing of lenders and brokers, documentation and procedures of creditagreements, and (in so far as will be applicable) pre-contract disclosure. Ifit does not comply with those requirements, then to the extent that the creditagreement is regulated by the CCA or to be treated as such, it is unenforceableagainst the borrower: (a) without an order of the OFT, if the lender orany broker does not hold the required license at the relevant time; (b) totally,if the form to be signed by the borrower is not signed by the borrowerpersonally or omits or mis-states a ‘‘prescribed term’’; or (c) without acourt order in other cases and, in exercising its discretion whether to makethe order, the court would take into account any prejudice suffered by theborrower and any culpability of the lender.

 

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Any credit agreement for a loan or further advance might be wholly orpartly regulated by the CCA or treated as such because of technical rules on:(a) determining whether any credit under the CCA arises, or whether thefinancial limit of the CCA is exceeded; (b) determining whether the creditagreement is an exempt agreement under the CCA; and (c) changes to creditagreements.

 

A court order under section 126 of the CCA is necessary to enforcea land mortgage securing a credit agreement to the extent that the creditagreement is regulated by the CCA or to be treated as such. In dealing withsuch application, the court has the power, if it appears just to do so, toamend the credit agreement or to impose conditions upon its performance or tomake a time order (for example, giving extra time for arrears to be cleared).

 

Under section 75 of the CCA in certain circumstances: (a) thelender is liable to the borrower in relation to misrepresentation and breach ofcontract by a supplier in a transaction financed by the lender, where therelated credit agreement is or is treated as entered into under pre-existingarrangements, or in contemplation of future arrangements, between the lenderand the supplier; and (b) the lender has an indemnity from the supplieragainst such liability, subject to any agreement between the lender and thesupplier.

 

In November 2002, the UK Department of Trade and Industry (the “DTI”)announced its intention that a credit agreement will be regulated by the CCAwhere, for credit agreements made after this change is implemented: (a) theborrower is or includes an individual, save for partnerships of four or morepartners; (b) irrespective of the amount of credit (although in July 2003,the DTI announced its intention that the financial limit will remain forcertain business-to-business lending); and (c) the credit agreement is notan exempt agreement. In December 2003, the DTI published a White paperproposing amendments to the CCA and to secondary legislation made under it.

 

In June 2004, secondary legislation was made on: (a) amendingrequirements as to documentation of credit agreements, coming into force on May 31,2005, or August 31, 2005 for agreements given to the borrower forsignature but not made before 31 May 2005; (b) pre-contractdisclosure, coming into force on May 31, 2005; and (c) replacing theformula for calculating the maximum amount payable on early settlement with aformula more favorable to the borrower, coming into force on May 31, 2005for new agreements or on May 31, 2007 or May 31, 2010 (depending onthe term of the agreement) for agreements existing before May 31, 2005.

 

In December 2004, the UK Parliament published a consumer CreditBill proposing to amend the CCA by, among other things: (a) changing thedefinition of a credit agreement regulated by the CCA to that announced by theDTI as described above; and (b) repealing the rule that, to theextent that a credit agreement is regulated by the CCA or treated as such, itmay be unenforceable totally. If these changes are enacted, then any creditagreement made or changed such that a new contract is entered into after thistime, other than a regulated mortgage contract under the FSMA or other exemptagreement under the CCA, will be regulated by the CCA. Such credit agreementwill have to comply with requirements as described above and, if it does notcomply, it will be unenforceable without an order of the OFT or without a courtorder as described above.

 

This consumer Credit Bill also proposes to amend the CCA by: (a) strengtheningthe licensing regime; (b) reforming the law on extortionate credit, withthe retrospective effect on

 

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existing agreements; and (c) extendingthe jurisdiction of the Ombudsman (as described below) to license holders underthe CCA. Further proposals to amend the CCA and secondary legislation madeunder it are expected at an unspecified time.

 

The seller has interpreted certain technical rules under the CCAin a way common with many other lenders in the mortgage market. If such aninterpretation were held to be incorrect by a court or the Ombudsman, then acredit agreement, to the extent that it is regulated by the CCA or treated assuch, would be unenforceable as described above. If such interpretation werechallenged by a significant number of borrowers, then this could lead tosignificant disruption and shortfall in income of the mortgages trustee. Courtdecisions have been made on technical rules under the CCA against certainmortgage lenders, but such decisions are very few and are generally countycourt decisions not binding on other courts.

 

The seller has given or, as applicable, will give warranties to themortgages trustee in the mortgage sale agreement that, among other things, eachloan and its related security is enforceable (subject to certain exemptions).If a loan or its related security does not comply with these warranties, and ifthe default cannot be or is not cured within 20 London business days, then theseller will be required to repurchase the loans under the relevant mortgageaccount and their related security from the mortgages trustee.

 

In the United Kingdom, regulation of residential mortgage business bythe FSA under the Financial Services and Markets Act 2000 (the “FSMA”) cameinto force on October 31, 2004, the date known as “N(M)”. Entering into,arranging, advising on and administering regulated mortgage contracts, andagreeing to do any of these things, are (subject to applicable exemptions)regulated activities under the FSMA.

 

A credit agreement is a regulated mortgage contract under the FSMA if,at the time it is entered into on or after N(M): (a) the borrower is anindividual or trustee; (b) the contract provides for the obligation of theborrower to repay to be secured by a first legal mortgage or, in Scotland, afirst ranking standard security on land (other than timeshare accommodation) inthe UK; and (c) at least 40 per cent. of that land is used, or is intendedto be used, as or in connection with a dwelling by the borrower or (in case ofcredit provided to trustees) by an individual who is a beneficiary of thetrust, or by a related person.

 

The main effects are that, unless an exclusion or exemption applies: (a) eachentity carrying on a regulated mortgage activity has to hold authorization andpermission from the FSA to carry on that activity; and (b) generally, eachfinancial promotion in respect of an agreement relating to a qualifying credithas to be issued or approved by a person holding authorization and permissionfrom the FSA. If requirements as to authorization and permission of lenders andbrokers or as to issue and approval of financial promotions are not compliedwith, a regulated mortgage contract will be unenforceable against the borrowerexcept with the approval of a court. An unauthorized person who administers aregulated mortgage contract entered into on or after N(M) may commit a criminaloffence, but this will not render the contract unenforceable against theborrower.

 

Any credit agreement intended to be a regulated mortgage contract underthe FSMA might instead be wholly or partly regulated by the CCA or treated assuch, or unregulated, because of technical rules on: (a) determiningwhether the credit agreement falls within the definition of “regulated mortgagecontract”; and (b) changes to credit agreements.

 

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The seller is required to hold authorization and permission to enterinto and to administer and, where applicable, to advise on regulated mortgagecontracts. Subject to any exemption, brokers will be required to holdauthorization and permission to arrange and, where applicable, to advise onregulated mortgage contracts.

 

The issuer and mortgages trustee are not and do not propose to beauthorized persons under the FSMA. The issuer and mortgages trustee will notrequire authorization in order to acquire legal or beneficial title to aregulated mortgage contract. The issuer and mortgages trustee do not carry onthe regulated activity of administering in relation to regulated mortgagecontracts by having them administered pursuant to an administration agreementby an entity having the required FSA authorization and permission. If suchadministration agreement terminates, however, the issuer and mortgages trusteewill have a period of not more than one month in which to arrange for mortgageadministration to be carried out by a replacement administrator having the requiredFSA authorization and permission. In addition, from N(M) no variation has beenor will be made to the loans and no further advance has been or will be made toa loan, where it will result in the issuer, Funding 1, Funding 2 or themortgages trustee arranging, advising on, administering or entering into aregulated mortgage contract or agreeing to carry on any of these activities, ifthe issuer Funding 1, Funding 2 or the mortgages trustee would be required tobe authorized under the FSMA to do so.

 

The FSA Mortgages: Conduct of Business Sourcebook (“MCOB”), which setsout its rules for regulated mortgage activities, came into force on October 31,2004. These rules cover, *inter**alia*, certain pre-originationmatters, such as financial promotion and pre-application illustrations,pre-contract and start of contract and post-contract disclosure, contractchanges, charges, arrears and repossessions. FSA rules for prudential andauthorization requirements for mortgage firms and insurance intermediaries, andfor extending the appointed representatives regime came into force on October 31,2004 for mortgages and on January 14, 2005 for general insurance.

 

A borrower who is a private person is entitled to claim damages forloss suffered as a result of any contravention by an authorized person of anFSA rule, and may set-off the amount of the claim against the amount owing bythe borrower under the loan or any other loan that the borrower has taken (orexercise analogous rights in Scotland). Any such set-off may adversely affectthe issuer’s ability to make payments on the issuer notes.

 

So as to avoid dual regulation it is intended that regulated mortgagecontracts will not be regulated by the CCA. This exemption only affects creditagreements made on or after N(M), and credit agreements made before N(M) butsubsequently changed such that a anew contract is entered into on or after N(M)and constitutes a regulated mortgage contract. A court order under section 126of the CCA is, however, necessary to enforce a land mortgage securing aregulated mortgage contract that would, apart from this exemption, be regulatedby the CCA or be treated as such.

 

No assurance can be given that additional regulations from the OFT, theFSA or any other regulatory authority will not arise with regard to themortgage market in the United Kingdom generally, the seller’s particular sectorin that market or specifically in relation to the seller. Any such action ordevelopments or compliance costs may have a material adverse effect on the seller,the issuer and/or the servicer and their respective businesses and operations.This may adversely affect our ability to make payments in full on the issuernotes when due.

 

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Prior to M(N), in the United Kingdom, self-regulation of mortgagebusiness existed under the Mortgage Code (the “CML Code”) issued by the Councilof Mortgage Lenders (the “CML”). Halifax subscribed to the CML Code and on andfrom N(M), as an authorized person, has been subject to the FSA requirements inMCOB. Membership of the CML and compliance with the CML Code were voluntary.The CML Code sets out minimum standards of good mortgage business practice,from marketing to lending procedures and dealing with borrowers experiencing financialdifficulties. Since April 30, 1998 lender-subscribers to the CML Code maynot accept mortgage business introduced by intermediaries who were notregistered with (before November 1, 2000) the Mortgage Code Register ofIntermediaries or (on and after November 1, 2000 until October 31,2004) the Mortgage Code Compliance Board.

 

In September 2002, the European Commission published a proposalfor a directive of the European Parliament and of the Council on theharmonization of the laws, regulations and administrative provisions of themember states concerning credit for consumers and surety agreements enteredinto by consumers. In its original form, the proposal does not include afinancial limit for regulated agreements (unlike the existing Directive 87/102/EEC,as amended, which provides that (subject to certain exceptions) loans notexceeding euro 20,000 are regulated by such Directive) and requires specifiedrequirements to be met in respect of certain mortgage loan products (includingnew credit agreements for further drawings under certain flexible mortgages andfor further advances and amortization tables for repayment mortgages). If theproposal comes into force in its original form, mortgage loans which do notcomply with these requirements may be unenforceable. Significantly, in itsoriginal form, the proposal provides that it does not apply retrospectively(subject to certain exceptions including in respect of new drawings or furtheradvances made in respect of existing agreements) and does not apply toresidential mortgage loans except those which include an equity releasecomponent.

 

There has been significant opposition from the European Parliament tothe original form of the proposed directive. On February 13, 2004, theCommittee of Legal Affairs and the Internal Market published the EuropeanParliament’s amendments to the proposed draft. These amendments provide that(subject to certain exceptions) loans not exceeding euro 100,000 will beregulated, but that the proposed directive will not apply to any loan securedby a land mortgage or, in Scotland, a standard security, and will not apply toany credit agreement or surety agreement made before national implementinglegislation comes into force. In October 2004, the European Commissionpublished an amended form of the proposed directive. In this amended form, theproposed directive provides that (subject to certain exceptions) loans notexceeding euro 100,000 will be regulated, and that it will indeed apply to anyloan secured by a land mortgage or, in Scotland a standard security thatincludes an equity release component, but it is unclear whether it will applyto any credit agreement or surety agreement made before national implementinglegislation comes into force. There are differences in opinion as to the extentto which mortgage loans should be included in the scope of the proposeddirective, which may be substantially further amended before it is ultimatelybrought into effect.

 

The proposal is unlikely to come into force before 2006 as theco-decision procedure of the European Parliament and of the Council, from thepublication of the proposal to the coming into force of the new consumer creditdirective, is likely to take at least two years and member states will thenhave a further two years in which to bring national implementing legislationinto force. The DTI has consulted with consumer and industry organizations inrelation to this proposal and in February 2005 published a consultationpaper on the form of the proposed directive published by the EuropeanCommission in October 2004.

 

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Until the final text of the directive is decided and the details of theUnited Kingdom implementing legislation are published, it is not certain whateffect the adoption and implementation of the directive would have on theseller, the issuer, the servicer, the mortgages trustee, Funding1, Funding 2and their respective businesses and operations. This may adversely affect theissuer’s ability to make payments in full on the issuer notes when due.

 

**Regulations in the United Kingdom could lead to some terms of the loansbeing unenforceable, which may adversely affect payments on the issuer notes**

 

In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations1999 as amended (the “1999 Regulations”), which, together with (in so far asapplicable) the Unfair Terms in Consumer Contracts Regulations 1994 (togetherwith the 1999 Regulations, the “UTCCR”), apply to agreements made on or after1st July, 1995 and affect all or almost all of the loans, provide that:

 

•                  a consumer maychallenge a standard term in an agreement on the basis that it is “unfair”within the UTCCR and therefore not binding on the consumer; and

 

•                  the OFT and any “qualifyingbody” within the UTCCR (such as the FSA) may seek to enjoin (or in Scotlandinterdict) a business from relying on unfair terms.

 

The UTCCR will not generally affect “core terms” which define the mainsubject matter of the contract, such as the borrower’s obligation to repay theprincipal, but may affect terms that are not considered to be core terms, suchas the lender’s power to vary the interest rate.

 

For example, if a term permitting the lender to vary the interest rate(as the seller is permitted to do) is found to be unfair, the borrower will notbe liable to pay the increased rate or, to the extent that she or he has paidit, will be able, as against the lender, or any assignee such as the mortgagestrustee, to claim repayment of the extra interest amounts paid or to set-offthe amount of the claim against the amount owing by the borrower under the loanor any other loan that the borrower has taken. Any such non-recovery, claim orset-off may adversely affect the issuer’s ability to make payments on theissuer notes.

 

In February 2000, the OFT issued a guidance note on what the OFTconsiders to be fair terms and unfair terms for interest variation in mortgagecontracts. Where the interest variation term does not provide for precise andimmediate tracking of an external rate outside the lender’s control, and if theborrower is locked in, for example by an early repayment charge that isconsidered to be a penalty, the term is likely to be regarded as unfair underthe UTCCR unless the lender (i) notifies the affected borrower in writingat least 30 days before the rate change and (ii) permits the affectedborrower to repay the whole loan during the next three months after the ratechange, without paying the early repayment charge. The seller has reviewed theguidance note and has concluded that its compliance with it will have nomaterial adverse effect on the loans or its business. The guidance note hasbeen withdrawn from the OFT website and is currently under review by the OFTand FSA. The FSA has agreed with the OFT to take responsibility for theenforcement of the UTCCR in mortgage agreements. It is expected that the FSAwill issue guidance on interest variation terms shortly.

 

In August 2002, the Law Commission for England and Wales and theScottish Law Commission issued a joint consultation LCCP No. 166/SLCDP 119on proposals to rationalize the UK’s Unfair Contract Terms Act 1977 and the1999 Regulations into a single piece of legislation and a final report,together with a bill on unfair terms, was published in February

 

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2005. The Law Commissions havea duty under section 3 of the UK’s Law Commissions Act 1965 to keep thelaw under review for a number of purposes, including its simplification. Theproposals are primarily to simplify the legislation on unfair terms. It is notproposed that there should be any significant increase in the extent ofcontrols over terms in consumer contracts. Some changes are proposed, however,such as that (a) a consumer may also challenge a negotiated term inagreement on the basis that it is “unfair” and “unreasonable” within thelegislation and therefore not binding on the consumer; and (b) in anychallenge by a consumer (but not by the OFT or a qualifying body) of a standardterm or a negotiated term, the burden of proof lies on the business to showthat the term is fair and reasonable. It is too early to tell how theproposals, if enacted, would affect the loans.

 

No assurance can be given that changes in the UTCCR, if enacted, orchanges to guidance on interest variation terms, if adopted, will not have amaterial adverse effect on the seller, the issuer, the servicer, the mortgagestrustee, Funding 1, Funding 2 and their respective businesses and operations.This may adversely affect the issuer’s ability to make payments in full on theissuer notes when due.

 

**Decisions of the Ombudsman could lead to some terms of the loans beingvaried, which may adversely affect payments on the issuer notes**

 

Under FSMA, the Financial Ombudsman Service is required to makedecisions on, among other things, complaints relating to activities andtransactions under its jurisdiction on the basis of what, in the Ombudsman’sopinion, would be fair and reasonable in all circumstances of the case, takinginto account, among other things, law and guidance. Complaints brought beforethe Financial Ombudsman Service for consideration must be decided on acase-by-case basis, with reference to the particular facts of any individualcase. Each case would first be adjudicated by an adjudicator. Either party tothe case may appeal against the adjudication. In the event of an appeal, thecase proceeds to a final decision by the Ombudsman.

 

In January 2002, the Ombudsman made a determination on the seller’sappeal to an earlier decision by an adjudicator at the Financial OmbudsmanService concerning a case involving HVR 1 and HVR 2. In March 2001, twojoint borrowers with a capped rate loan originated when Halifax offered only asingle standard variable base rate contacted Halifax and requested that theirloan be linked to HVR 2. Halifax informed the borrowers that, because they werestill in their product period, they could either transfer to HVR 2 when theirproduct period expired or transfer to HVR 2 immediately and pay the applicableearly repayment fee. The borrowers complained to the Financial OmbudsmanService and, on January 29, 2002, on appeal by Halifax, the Ombudsmandetermined in the borrowers’ favor and recommended that Halifax recalculate theborrowers’ mortgage by reference to HVR 2 from the date when the seller shouldhave granted their request in March 2001, refund any overpayments and pay£150 for any inconvenience caused. HVR 2 was withdrawn and ceased to beavailable to new borrowers with effect from February 1, 2002.

 

The Ombudsman’s decision only applies to the two borrowers and theirparticular circumstances, though other borrowers may also complain to theOmbudsman. In March 2002, the seller announced that borrowers under loanswho were in similar circumstances and who had asked to be transferred to HVR 2when it was available would be invited to make a product switch to HVR 2 and toobtain a refund for all overpayments of interest since the date they had askedto be transferred. For each of those loans, the borrowers would also receive£150 for any inconvenience caused. The borrowers under loans who requested tobe transferred after HVR 2 was withdrawn and before the announcement in March 2002were not offered a switch or a

 

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refund, though the seller hasgiven or will give each of these customers an ex gratia payment of £100.

 

Since then, further decisions by the Ombudsman in similar cases haveconfirmed that affected borrowers were only entitled to a refund ofoverpayments of interest from the date when they asked to be transferred to HVR2 and not from the date when HVR 2 first became available, and also thataffected borrowers were not entitled to apply to be transferred to HVR 2 afterit was withdrawn.

 

The seller does not believe that any Ombudsman’s decision to date orany other decision by any competent authority in the future (in respect of theseller’s two variable base rates, HVR 1 and HVR 2) would affect the yield onthe loans in such a way as to have a material adverse effect on our ability tomeet our obligations on the issuer notes.

 

As regards other borrowers, in the event that a decision (in respect ofthe seller’s variable base rate) by the Ombudsman or any other competentauthority finds that a borrower’s loan should be linked to HVR 2, then thatborrower may set-off the overpaid sum against the amount owing under his or herloan if the seller does not reimburse that borrower. Any such non-recovery,claim or set-off ultimately may adversely affect the issuer’s ability to makepayments on the issuer notes.

 

As the Financial Ombudsman Service is required to make decisions on thebasis of, among other things, the principles of fairness, it is not possible topredict how any future decision of the Financial Ombudsman Service would affectthe ability of the issuer to repay the issuer notes.

 

**Tax payable by Funding 1 or the issuer may adversely affect the issuer’sability to make payments on the issuer notes**

 

Funding 1 and the issuer will generally be subject to UK corporationtax, currently at a rate of 30 per cent., on the profit reflected in theirrespective profit and loss accounts as increased by the amount of anynon-deductible expenses or losses. If the tax payable by Funding 1 or the issueris greater than expected because, for example, non-deductible expenses orlosses are greater than expected, the funds available to make payments on thenoteholders’ issuer notes will be reduced and this may adversely affect theissuer’s ability to make payments on the issuer notes.

 

The UK corporation tax position of the issuer and Funding 1, however,also depends to a significant extent on the accounting treatment applicable toit. From January 1, 2005, the accounts of the issuer are required tocomply with International Financial Reporting Standards (“IFRS”) or with new UKFinancial Reporting Standards reflecting IFRS (“new UK GAAP”). Funding 1 mayalso choose to comply with IFRS. There is concern that companies such as theissuer and Funding 1 might, under either IFRS or new UK GAAP, suffer timingdifferences that could result in profits or losses for accounting purposes(unless tax legislation provides otherwise), and accordingly for tax purposes,which bear little or no relationship to the company’s cash position. However,the Finance Act 2005 requires “securitisation companies” to prepare taxcomputations for accounting periods beginning on or after January 1, 2005and ending before January 1, 2007 on the basis of UK GAAP as applicable upto December 31, 2004, notwithstanding the requirement to prepare statutoryaccounts under IFRS or new UK GAAP. The issuer and Funding 1 will each be a “securitisationcompany” for these purposes.

 

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The stated policy of H.M. Revenue & Customs is that the taxneutrality of securitisation special purpose companies in general should not bedisrupted as a result of the transition to IFRS or new UK GAAP and that theyare working with participants in the securitisation industry to identifyappropriate means of preventing any such disruption. The Finance Act 2005enables regulations to be made to establish such a regime. However, if measuresare not introduced by H.M. Revenue & Customs to deal with thecorporation tax position of such companies in respect of accounting periodsending on or after January 1, 2007, then profits or losses could arise inthe issuer and/or Funding 1 as a result of the application of IFRS or new UKGAAP which could have tax effects not contemplated in the cashflows for thetransaction and as such adversely affect the issuer and/or Funding 1 andtherefore payments on the issuer notes.

 

**Noteholders’ interests may be adversely affected by a change of law inrelation to withholding tax**

 

In the event that amounts due under the issuer notes are subject towithholding tax, the issuer will not be obliged to pay additional amounts inrelation thereto. The issuer may, in certain circumstances, redeem the issuernotes.

 

**Noteholders’ interests may be adversely affected if the United Kingdomjoins the European Monetary Union**

 

If the United Kingdom joins the European Monetary Union prior to thematurity of the issuer notes, investors cannot be assured that this would notadversely affect payments on their issuer notes.

 

It is possible that prior to the maturity of the issuer notes theUnited Kingdom may become a participating member state in the European economicand monetary union and that the euro may become the lawful currency of theUnited Kingdom. In that event, (a) all amounts payable in respect of anyissuer notes denominated in sterling may become payable in euro; (b) applicableprovisions of law may allow or require the issuer to re-denominate such issuernotes into euro and take additional measures in respect of such issuer notes;and (c) the introduction of the euro as the lawful currency of the UnitedKingdom may result in the disappearance of published or displayed rates fordeposits in pounds sterling used to determine the rates of interest on suchissuer notes or changes in the way those rates are calculated, quoted andpublished or displayed. The introduction of the euro could also be accompaniedby a volatile interest rate environment, which could adversely affect aborrower’s ability to repay its loan as well as adversely affect investors. Itcannot be said with certainty what effect, if any, adoption of the euro by theUnited Kingdom will have on investors in the issuer notes.

 

**Changes of law may adversely affect noteholders’ interests**

 

The structure of the issue of the issuer notes and the ratings whichare assigned to them are based on English law and (in relation to the Scottishloans) Scots law in effect as at the date of this prospectus. The issuer cannotprovide assurance as to the impact of any possible change to English or Scotslaw or administrative practice in the United Kingdom after the date of this Form 20-F.

 

*Insolvency Act 2000*.Significant changes to the UK insolvency regime have been enacted in pastyears, including the Insolvency Act 2000. The Insolvency Act 2000 allowscertain “small” companies to seek protection from their creditors for a periodof 28 days, for the purposes of putting together a company voluntaryarrangement, with the option for creditors to extend the

 

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moratorium for a further twomonths. A “small” company is defined as one which satisfies, in any financialyear, two or more of the following criteria: (i) its turnover is not morethan £5.6 million, (ii) its balance sheet total is not more than £2.8million and (iii) the number of employees is not more than 50. Whether ornot a company is a “small” company may change from period to period andconsequently no assurance can be given that the issuer, the mortgages trusteeor Funding 1 will not, at any given time, be determined to be a “small”company. The Secretary of State for Trade and Industry may by regulation modifythe eligibility requirements for “small” companies and can make differentprovisions for different cases. No assurance can be given that any suchmodification or different provisions will not be detrimental to the interestsof the noteholders.

 

Secondary legislation has now been enacted which excludes certainspecial purpose companies in relation to capital markets transactions from theoptional moratorium provisions. Such exceptions include (amongst other matters)(i) a company which is a party to an agreement which is or forms part of acapital market arrangement (as defined in the secondary legislation) under which(a) a party has incurred or when the agreement was entered into wasexpected to incur a debt of at least £10 million under the arrangement and (b) thearrangement involves the issue of a capital markets investment (also defined,but generally a rated, listed or traded bond) and (ii) a company which atthe date of filing for a moratorium has incurred a liability (including apresent, future or contingent liability) of at least £10 million. While theissuer, the mortgages trustee and Funding 1 should fall within the exceptions,there is no guidance as to how the legislation will be interpreted and theSecretary of State for Trade and Industry may by regulation modify theexception. No assurance may be given that any modification of the eligibilityrequirements for “small” companies and/or the exceptions will not bedetrimental to the interests of the noteholders.

 

If the issuer and/or the mortgages trustee and/or Funding 1 isdetermined to be a “small” company and determined not to fall within one of theexceptions (by reason of modification of the exceptions or otherwise), then theenforcement of the issuer security by the security trustee may, for a period,be prohibited by the imposition of a moratorium.

 

*Enterprise Act 2002*.On 15th September, 2003, the corporate insolvency provisions of the EnterpriseAct 2002 came into force, amending certain provisions of the Insolvency Act1986 (as amended, the “Insolvency Act”). These provisions introducedsignificant reforms to corporate insolvency law. In particular the reformsrestrict the right of the holder of a floating charge created after September 15,2003 to appoint an administrative receiver (unless an exception applies) andinstead gives primacy to collective insolvency procedures (in particular,administration).

 

The holder of a floating charge created before September 15, 2003over the whole or substantially the whole of the assets of a company (such asthe security trustee under the Funding 1 deed of charge) retains the ability toblock the appointment of an administrator by appointing an administrativereceiver, who will primarily act in the interests of the floating chargeholder.

 

The Insolvency Act contains provisions that continue to allow for theappointment of an administrative receiver in relation to certain transactionsin the capital markets. The relevant exception provides that the right toappoint an administrative receiver is retained for certain types of security(such as the issuer security) that form part of a capital markets arrangement (asdefined in the Insolvency Act) that involves indebtedness of at least £50million (or, when the relevant security document was entered into (being inrespect of the transactions described in the prospectus, relating to the issuernotes and the issued deed of charge), a party to the relevant transaction (suchas the issuer) was expected to incur a debt of at least £50 million) and theissue

 

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of a capital markets investment(also defined, but generally a rated, listed or traded bond). The Secretary ofState for Trade and Industry may, by secondary legislation, modify the capitalmarket exception and/or provide that the exception shall cease to have effect.No assurance can be given that any such modification or provision in respect ofthe capital market exception, or its ceasing to be applicable to thetransactions described in this document will not adversely affect payments onthe issuer notes. In addition, as the provisions of the Enterprise Act have neverbeen considered judicially, no assurance can be given as to whether theEnterprise Act could have a detrimental effect on the interests of thenoteholders.

 

The Insolvency Act also contains a new out-of-court route intoadministration for a qualifying floating charge holder, the directors or thecompany itself. The relevant provisions provide for a notice period duringwhich the holder of the floating charge can either agree to the administratorproposed by the directors of the company or appoint an alternativeadministrator, although the moratorium will take effect immediately afternotice is given. If the qualifying floating charge holder does not respond tothe directors’ notice of intention to appoint, the directors’, or as the casemay be, the company’s appointee will automatically take office after the noticeperiod has elapsed. Where the holder of a qualifying floating charge within thecontext of a capital market transaction retains the power to appoint anadministrative receiver, such holder may prevent the appointment of anadministrator (either by the new out-of-court route or by the court basedprocedure), by appointing an administrative receiver prior to the appointmentof the administrator being completed.

 

The new administration provisions of the Insolvency Act give primaryemphasis to the rescue of the company as a going concern. The purpose ofrealizing property to make a distribution to one or more secured creditors issubordinated to the primary purposes of rescuing the company as a going concernor achieving a better result for the creditors as a whole than would be likelyif the company were wound up. No assurances can be given that the primarypurposes of the new provisions will not conflict with the interests ofnoteholders were the issuer ever subject to administration.

 

In addition to the introduction of a prohibition on the appointment ofan administrative receiver as set out above, section 176A of theInsolvency Act provides that in relation to floating charges created after September 15,2003 any receiver (including an administrative receiver), liquidator oradministrator of a company is required to make a “prescribed part” of thecompany’s “net property” available for the satisfaction of unsecured debts inpriority to the claims of the floating charge holder. The company’s “netproperty” is defined as the amount of the chargor’s property which would beavailable for satisfaction of debts due to the holder(s) of any debenturessecured by a floating charge and so refers to any floating charge realizationsless any amounts payable to the preferential creditors or in respect of theexpenses of the liquidation or administration. The “prescribed part” is definedin The Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097) to be anamount equal to 50 per cent. of the first £10,000 of floating chargerealizations plus 20 per cent. of the floating charge realizations thereafter,provided that such amount may not exceed £600,000.

 

This obligation does not apply if the net property is less than aprescribed minimum and the relevant officeholder is of the view that the costof making a distribution to unsecured creditors would be disproportionate tothe benefits. The relevant officeholder may also apply to court for an orderthat the provisions of section 176A of the Insolvency Act should not applyon the basis that the cost of making a distribution would be disproportionateto the benefits.

 

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Floatingcharge realizations upon the enforcement of the issuer security and thesecurity created by the second supplemental Funding 1 deed of charge may bereduced by the operation of these “ring fencing” provisions.

 

**The noteholders will not receive issuer notes in physical form, whichmay cause delays in distributions and hamper the noteholders’ ability to pledgeor resell the issuer notes**

 

Unlessthe global issuer notes are exchanged for definitive issuer notes, which willonly occur under a limited set of circumstances, the noteholders’ beneficialownership of the issuer notes will only be recorded in book-entry form withDTC, Euroclear or Clearstream, Luxembourg. The lack of issuer notes in physicalform could, among other things:

 

•                  resultin payment delays on the issuer notes because the issuer will be sendingdistributions on the issuer notes to DTC, Euroclear or Clearstream, Luxembourginstead of directly to the noteholders;

 

•                  makeit difficult for the noteholders to pledge the issuer notes if issuer notes inphysical form are required by the party demanding the pledge; and

 

•                  hinderthe noteholders’ ability to resell the issuer notes because some investors maybe unwilling to buy issuer notes that are not in physical form.

 

**If the noteholders have a claim against the issuer it may be necessaryfor the noteholders to bring suit against the issuer in England to enforce thenoteholders’ rights**

 

Theissuer has agreed to submit to the non-exclusive jurisdiction of the courts ofEngland, and it may be necessary for noteholders to bring a suit in England toenforce their rights against the issuer.

 

**Implementation of the Basel II risk-weighted asset framework may resultin changes to the risk-weighting of the issuer notes**

 

TheBasel Committee on Banking Supervision published the text of the new frameworkon June 26, 2004 under the title “Basel II: International Convergence ofCapital Measurement and Capital Standards: a Revised Framework”. This newframework (the “Framework”), which places enhanced emphasis on marketdiscipline and sensitivity to risk, will serve as the basis for nationalrule-making and approval processes to continue and for banking organizations tocomplete their preparations for implementation of the Framework. The Committeeconfirmed that it is currently intended that the various approaches under theFramework will be implemented in stages, some from year-end 2006, the mostadvanced at year-end 2007. As and when implemented (including through the EUCapital Requirements Directive), the Framework could affect the risk—weightingof the issuer notes in respect of certain investors if those investors aresubject to the Framework following its implementation. Consequently, investorsshould consult their own advisers as to the consequences to and effect on themof the proposed implementation of the Framework. No predictions can be made asto the precise effects of potential changes which might result upon theimplementation of the Framework.

 

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Theissuer may, under certain circumstances relating to implementation of the NewBasel Capital Accord in the United Kingdom, require investors to sell theirissuer notes or redeem their issuer notes.

 

**Item4.  Information on the Company**

 

A.*            History and Development of the Company*

 

Notapplicable.

 

B.*            Business Overview*

 

Notapplicable.

 

C.*            Organizational Structure*

 

Notapplicable.

 

D.*            Property, Plants and Equipment*

 

The issuer

 

Theproperty of the issuer consists primarily of its right to receive payments ofinterest and principal from Funding 1 on the various term advances made underthe issuer intercompany loan agreement.

 

Funding 1

 

Theproperty of Funding 1 consists primarily of its interest in the trust propertyheld by the mortgages trustee (which entitles Funding 1 to receive certainpayments of principal and interest from the trust property according to theterms of the mortgages trust deed) and amounts available under a reserve fund.

 

The mortgages trustee

 

Thetrust property includes the portfolio of loans and their related securityassigned to the mortgages trustee by the seller on June 14, 2002, and onseveral subsequent dates, any new loans and their new related security assignedto the mortgages trustee by the seller after the closing date, any increase inthe outstanding principal balance of a loan due to the borrower taking paymentholidays or making underpayments under a loan or a borrower making a drawingunder any flexible loan, any interest, principal and other amounts (excluding thirdparty amounts) paid by borrowers on their loans and their related security, therights under the insurance policies that are assigned to the mortgages trusteeor of which the mortgages trustee has the benefit, and amounts on deposit andinterest earned on the mortgages trustee guaranteed investment contract. Anyactual losses in relation to the loans, any actual reductions occurring inrespect of the loans and distributions of principal made from time to time tothe beneficiaries or the mortgages trust will be deducted from the trustproperty. The composition of the trust property will fluctuate as drawingsunder flexible loans and new loans are added, as borrowers take paymentholidays or make underpayments under a loan and as the loans that were previouslypart of the trust property are repaid, mature, default or are repurchased bythe seller.

 

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**Item5.  Operating and Financial Review andProspects**

 

A.*            Operating Results*

 

Notapplicable.

 

B.*            Liquidity and Capital Resources*

 

Notapplicable.

 

C.*            Research and Development, Patents and Licenses, etc.*

 

Notapplicable.

 

D*.            Trend Information*

 

Notapplicable.

 

E.*             Off-balance Sheet Arrangements*

 

Notapplicable.

 

F.*             Tabular Disclosure of Contractual Obligations*

 

Notapplicable.

 

G*.            Safe Harbor*

 

Notapplicable.

 

**Item6.  Directors, Senior Management andEmployees**

 

A.*            Directors and Senior Management*

 

Thefollowing sets out the names, business addresses and business occupations ofthe directors of the issuer, Funding 1 and the mortgages trustee. Because eachof the issuer, Funding 1 and the mortgages trustee is organized as a specialpurpose company and will be largely passive, it is expected that the directorsof each entity in that capacity will manage its operations to the extentnecessary.

 

The issuer

 
| **Name**                       | ** ** | **Business Address**       | ** ** | **Business Occupation**            |
|--------------------------------|------------|----------------------------|------------|------------------------------------|
| SFM  Directors Limited         |       | 35  Great St. Helen’s |       | Provision  of directors to special |
|                           |       | London                     |       | purpose  companies                 |
|                           |       | EC3A  6AP                  |       |                               |
|                           |       |                       |       |                               |
| SFM  Directors (No. 2) Limited |       | 35  Great St. Helen’s |       | Provision  of directors to special |
|                           |       | London                     |       | purpose  companies                 |
|                           |       | EC3A  6AP                  |       |                               |

 

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| David  Balai |   | HBOS  Treasury Services plc |   | Head  of Mortgage           |
|--------------|--------|-----------------------------|--------|-----------------------------|
|         |   | 33  Old Broad Street        |   | Securitisation  and Covered |
|         |   | London  EC2N 1HZ            |   | Bonds                       |

 

Funding1

 
| **Name**                       | ** ** | **Business Address**        | ** ** | **Business Occupation**            |
|--------------------------------|------------|-----------------------------|------------|------------------------------------|
| SFM  Directors Limited         |       | 35  Great St. Helen’s  |       | Provision  of directors to special |
|                           |       | London                      |       | purpose  companies                 |
|                           |       | EC3A  6AP                   |       |                               |
|                           |       |                        |       |                               |
| SFM  Directors (No. 2) Limited |       | 35  Great St. Helen’s  |       | Provision  of directors to special |
|                           |       | London                      |       | purpose  companies                 |
|                           |       | EC3A  6AP                   |       |                               |
|                           |       |                        |       |                               |
| David  Balai                   |       | HBOS  Treasury Services plc |       | Head  of Mortgage                  |
|                           |       | 33  Old Broad Street        |       | Securitisation  and Covered        |
|                           |       | London  EC2N 1HZ            |       | Bonds                              |

 

Themortgages trustee

 
| **Name**               | ** ** | **Business Address**        | ** ** | **Business Occupation**     |
|------------------------|------------|-----------------------------|------------|-----------------------------|
| Michael  George Best   |       | 47  Esplanade               |       | Trust  Company Director     |
|                   |       | St.  Helier                 |       |                        |
|                   |       | Jersey  JE1 0BD             |       |                        |
|                   |       |                        |       |                        |
| Peter  John Richardson |       | 47  Esplanade               |       | Trust  Company Director     |
|                   |       | St.  Helier                 |       |                        |
|                   |       | Jersey  JE1 0BD             |       |                        |
|                   |       |                        |       |                        |
| David  Balai           |       | HBOS  Treasury Services plc |       | Head  of Mortgage           |
|                   |       | 33  Old Broad Street        |       | Securitisation  and Covered |
|                   |       | London  EC2N 1HZ            |       | Bonds                       |

 

DavidBalai is an employee of a company in the same group of companies as the seller.

 

B.*            Compensation*

 

The issuer

 

Inaccordance with the issuer corporate services agreement entered into betweenthe issuer, the seller, the security trustee, the note trustee, Holdings andStructured Finance Management Limited (“SFM”), the seller and SFM will eachprovide directors and other corporate services for the issuer in considerationfor a payment of a separate fee payable by the issuer to SFM. No otherremuneration is paid to any director or officer in connection with suchdirector’s or officer’s activities on behalf of the issuer.

 

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Funding 1

 

Inaccordance with the Funding 1 corporate services agreement entered into betweenFunding 1, the seller, the security trustee, the note trustee, Holdings,Permanent PECOH Limited, SFM, and SFM Corporate Services Limited (“SFMCorporate”), the seller and SFM will each provide directors and SFM willprovide other corporate services for Funding 1 in consideration for a paymentof a separate fee payable by Funding 1 to SFM. No other remuneration is paid toany director or officer in connection with such director’s or officer’sactivities on behalf of Funding 1.

 

The mortgages trustee

 

Inaccordance with the mortgages trustee corporate services agreement entered intobetween the mortgages trustee, the security trustee, the note trustee and SFMOffshore Limited (“SFM Offshore”), the seller and SFM Offshore will eachprovide directors and SFM Offshore will provide other corporate services forthe mortgages trustee in consideration for a payment of a separate fee payableby the mortgages trustee to SFM Offshore. No other remuneration is paid to anydirector or officer in connection with such director’s or officer’s activitieson behalf of the mortgages trustee.

 

C.            *Board Practices*

 

Notapplicable.

 

D.            *Employees*

 

Noneof the issuer, Funding 1 or the mortgages trustee has any employees.

 

E.             *Share Ownership*

 

Notapplicable.

 

**Item7.  Major Shareholders and Related PartyTransactions**

 

A.            *Major Shareholders*

 

The issuer and Funding 1 are wholly owned by Permanent HoldingsLimited, a company incorporated under the laws of England and Wales. SFMCorporate holds all of the beneficial interest in the issued shares of Holdingson a discretionary trust for the benefit of The National Society for thePrevention of Cruelty to Children in the United Kingdom and for othercharitable purposes.

 

SFMOffshore holds all of the issued shares of the mortgages trustee in trust forcharitable purposes.

 

NeitherSFM Corporate nor SFM Offshore is affiliated with Halifax plc.

 

B.            *Related Party Transactions*

 

None,other than with respect to the making of payments in respect to the securitiesas described in the Registration Statement and “Item 3.D — Risk Factors”.

 

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C.            *Interests of Experts and Counsel*

 

Notapplicable to annual reports filed on Form 20-F.

 

**Item8.  Financial Information**

 

Fora discussion of the available financial information, see “Item 3.A — SelectedFinancial Information”.

 

Theissuer, Funding 1 and the mortgages trustee know of no material legal orarbitration proceedings involving their respective companies that may havesignificant effects on the registrants’ financial position or profitability,including governmental proceedings pending or known to be contemplated and anymaterial proceeding in which any director or affiliate is either a partyadverse to a registrant or has a material interest adverse to a registrant.

 

**Item9.  The Offer and Listing**

 

A.*           Offer and ListingDetails*

 

Notapplicable.

 

B.*            Plan of Distribution*

 

Notapplicable to annual reports filed on Form 20-F.

 

C.*            Markets*

 

Theprincipal trading market for each class of the issuer notes is the London StockExchange. The issuer notes have been listed on the London Stock Exchange sinceNovember 18, 2004.

 

D.*            Selling Shareholders*

 

Notapplicable to annual reports filed on Form 20-F.

 

E.*             Dilution*

 

Notapplicable to annual reports filed on Form 20-F.

 

F.*             Expenses of the Issue*

 

Notapplicable to annual reports filed on Form 20-F.

 

**Item10.  Additional Information**

 

A.*            Share Capital*

 

Notapplicable to annual reports filed on Form 20-F.

 

B.*            Memorandum and Articles of Association*

 

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Thememorandum and articles of association for each of the issuer, Funding 1 andthe mortgages trustee are incorporated by reference from the RegistrationStatement. Please also see the description of the issuer, Funding 1 and themortgages trustee set forth in the Registration Statement.

 

C.            *Material Contracts*

 

Notapplicable other than with respect to contracts relating to the issuer notes,which were described in the Registration Statement.

 

D.*            Exchange Controls*

 

None.

 

E.*             Taxation*

 

**United Kingdom Taxation**

 

Thefollowing section summarizes the material UK tax consequences of the purchase,ownership and disposition of the issuer notes based on current law and practicein the UK. The summary assumes that the profit in Funding 1’s profit and lossaccount will not exceed 0.01 per cent. of the Funding 1 available revenuereceipts and that the profit in the issuer’s profit and loss account will notexceed 0.01 per cent. of the interest on the issuer term advances underthe issuer intercompany loan and any interest earned by the issuer on its ShareCapital proceeds are correct. It further assumes that all payments madepursuant to the final documentation are calculated on arm’s length terms. Thesummary does not purport to be a complete analysis of all tax considerations ofthe purchase, ownership and disposition of the issuer notes. It relates to theposition of persons who are the absolute beneficial owners of issuer notes andmay not apply to certain classes of persons such as dealers or personsconnected with the issuer. Noteholders who may be subject to tax in a jurisdictionother than the UK or who may be unsure as to their tax position should seektheir own professional advice.

 

**Taxation of US residents**

 

Asdiscussed in more detail below, no UK withholding tax will be required inrelation to interest payments on the issuer notes provided that the issuernotes are listed on a “recognised stock exchange”, which includes the LondonStock Exchange. If the issuer notes cease to be listed on a “recognised stockexchange”, an amount must be withheld on account of UK income tax at the lowerrate (currently 20 per cent.), subject to any direction to the contrary fromH.M. Revenue & Customs in respect of such relief as may be availablepursuant to the provisions of an applicable double taxation treaty.

 

Residentsof the US are generally not subject to tax in the UK on payments on the issuernotes under the terms of the double taxation treaty between the US and the UK(the “Treaty”), subject to completion of administrative formalities, exceptwhere the issuer notes are effectively connected with a permanent establishmentor a fixed base of the noteholder situated in the UK or where the amounts paidon the issuer notes not exceed the return on comparable debt instruments, inwhich event the UK may tax the excess in accordance with UK domestic law.

 

Subjectto the opinions set out in the preceding paragraphs, as discussed in moredetail under “-Direct assessment of non-UK resident holders of the issuer notesto UK tax on interest”

 

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below, a noteholderwho is resident in the US for US tax purposes and who is not resident in the UKfor UK tax purposes will not be subject to UK tax in respect of any payments onthe issuer notes unless they are held by or for a trade, profession or vocationcarried on by him through a branch or agency (or, in the case of a noteholderthat is a company, through a permanent establishment) in the UK.

 

US resident noteholders will not be liable to UK taxin respect of a disposal of the issuer notes provided they are not within thecharge to UK corporation tax and (i) are not resident or ordinarily resident inthe UK, and (ii) do not carry on a trade, profession or vocation carried on byhim through a branch or agency in connection with which interest is received orto which the issuer notes are attributable.

 

Funding 1 and the issuer will generally be subjectto UK corporation tax, currently at a rate of 30 per cent., on the profitreflected in their respective profit and loss accounts as increased by theamounts of any non-deductible expenses or losses.

 

The mortgages trustee will have no liability to UKtax in relation to amounts which it receives on behalf of Funding 1 or theseller under the mortgages trust.

 

**Withholding tax**

 

Therewill be no UK withholding tax in relation to interest payments on the issuernotes provided that, so far as concerns deduction by the issuer or its payingagents, the issuer notes are listed on a “recognised stock exchange”, asdefined in Section 841 of the Income and Corporation Taxes Act 1988(“ICTA”). The London Stock Exchange is currently a recognised stock exchangefor this purpose. If the issuer notes cease to be listed on a “recognised stockexchange”, an amount must be withheld on account of UK income tax at the lowerrate (currently 20 per cent.) from interest paid on them, subject to anydirection to the contrary by H.M. Revenue & Customs in respect of suchrelief as may be available pursuant to the provisions of an applicable doubletaxation treaty or to the interest being paid to persons (including companieswithin the charge to UK corporation tax) and in circumstances specified inSection 349A to 349D of the ICTA.

 

Noteholderswho are individuals may wish to note that H.M. Revenue & Customs has powerto obtain information (including the name and address of the beneficial ownerof the interest) from any person in the UK who either pays interest to, orreceives interest for the benefit of, an individual. Information so obtainedmay, in certain circumstances, be exchanged by H.M. Revenue & Customs withthe tax authorities of other jurisdictions.

 

**Direct assessment of non-UK resident holders of the issuer notes to UKtax on interest**

 

Intereston the issuer notes has a UK source. Accordingly, payments of interest on theissuer notes will in principle be within the charge to UK tax even if paidwithout withholding or deduction. However, other than where the provisions ofthe Treaty apply to allow certain interest paid to residents of the US to betaxed in the UK, such payments will not be chargeable to UK tax in the hands ofa noteholder who is not resident for tax purposes in the UK unless suchnoteholder carries on a trade, profession or vocation through a branch oragency (or, in the case of a noteholder which is a company which carries on atrade through a permanent establishment) in the UK in connection with which thepayments are received or to which the issuer notes are attributable, in whichcase (subject to exemptions for interest received by certain categories of

 

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agent such as some brokers and investmentmanagers) tax may be levied on the UK branch or agency or permanentestablishment.

 

**Taxation of returns: companies within the charge to UK corporation tax**

 

Ingeneral, noteholders who are within the charge to UK corporation tax (otherthan authorized unit trusts) will normally be subject to tax on all profits andgains, including interest and profit and gains attributable to currencyregulations, arising on or in connection with the issuer notes under the loanrelationship rules. Any such profits and gains will generally fall to becalculated in accordance with the statutory accounting treatment of the issuernotes in the hands of the relevant noteholder, and will generally be charged totax as income in respect of each accounting period to which they are allocated,in accordance with that accounting treatment. Relief may be available inrespect of losses or for related expenses on a similar basis.

 

**Taxation of returns: other noteholders**

 

Noteholderswho are not within the charge to UK corporation tax and who are resident orordinarily resident in the UK for tax purposes or who carry on a trade,profession or vocation in the UK through a branch or agency in connection withwhich interest on the issuer notes is received or to which the issuer notes areattributable will generally be liable to UK tax on the amount of any interestreceived in respect of the issuer notes. As the series 1 issuer notes andseries 2 issuer notes are denominated in US dollars and the series 4 issuernotes are denominated in euro, they will not constitute “qualifying corporatebonds” within the meaning of Section 117 of the Taxation of Chargeable GainsAct 1992. Accordingly, a disposal of any of these issuer notes may give rise toa chargeable gain or an allowable loss for the purpose of the UK taxation ofchargeable gains.

 

Itis expected that the series 3 and the series 5 issuer notes will be regarded byH.M. Revenue & Customs as constituting “qualifying corporate bonds” withinthe meaning of Section 117 of the Taxation of Chargeable Gains Act 1992.Accordingly, a disposal of any of these issuer notes is not expected to giverise to a chargeable gain or an allowable loss for the purpose of the UK taxationof chargeable gains.

 

Adisposal of the issuer notes by such noteholders as described above may alsogive rise to a charge to tax on income in respect of an amount representinginterest accrued on the issuer notes since the preceding payment date. For theissuer notes which constitute variable rate securities, taxation in respect ofsuch a disposal will be computed on the basis that such amount as H.M. Revenue& Customs considers to be just and reasonable will be treated as accruedincome. However, the transferee of a variable rate security will not beentitled to any relief on such amount. All of the issuer notes will constitutevariable rate issuer notes for this purpose.

 

**Stamp duty and stamp duty reserve tax**

 

NoUK stamp duty or stamp duty reserve tax is payable on the issue or transfer ofthe offered global issuer notes or on the issue or transfer of definitiveissuer notes.

 

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**UK taxation of Funding 1 and the issuer**

 

Funding1 and the issuer will generally be subject to UK corporation tax, currently ata rate of 30 per cent. on the profit reflected in their respective profitand loss accounts as increased by the amounts of any non-deductible expenses orlosses. In respect of Funding 1, the profit in the profit and loss account willnot exceed 0.01 per cent. of the Funding 1 available revenue receipts. Inrespect of the issuer, the profit in the profit and loss account will notexceed 0.01 per cent. of the interest on the issuer term advances underthe issuer intercompany loan and any interest earned by the issuer on its sharecapital proceeds.

 

**UK taxation of the mortgages trustee**

 

Themortgages trustee will have no liability to UK tax in respect of any income,profit or gain arising under these arrangements. Accordingly, the mortgagestrustee will have no liability to UK tax in relation to amounts that itreceives on behalf of Funding 1 or the seller under the mortgages trust.

 

**EU Savings Directive**

 

OnJune 3, 2003, the European Union (“EU”) Council of Economics and FinanceMinisters adopted a directive on the taxation of savings income in the form ofinterest payments (the “EU Savings Tax Directive”). It is proposed that,subject to a number of important conditions being met, each EU Member Statewill, from July 1, 2005, be required to provide to the tax authorities ofanother EU Member State details of payments of interest (or other similarincome) paid by a person within its jurisdiction to or for the benefit anindividual resident in that other EU Member State. However, Austria, Belgiumand Luxembourg will instead (unless during that period they elect otherwise)apply a withholding system for a transitional period in relation to suchpayments (the ending of such transitional period being dependent upon theconclusion of certain other agreements relating to information exchange withcertain other countries).

 

Jerseyis not a member of the EU and therefore is not required to implement the EUSavings Tax Directive. However, the Policy & Resources Committee of theStates of Jersey has announced that, in keeping with Jersey’s policy ofconstructive international engagement, Jersey, in line with steps proposed byother relevant third countries, proposes to introduce a retention tax system inrespect of payments of interest, or other similar income, made to an individualbeneficial owner resident in an EU Member State by a paying agent situated inJersey (the terms “beneficial owner” and “paying agent” for this purpose are asdefined in the EU savings tax directive). The retention tax system would applyfor a transitional period prior to the implementation of a system of automaticcommunication to EU Member States of information regarding such payments.During this transitional period, such an individual beneficial owner residentin an EU Member State would be entitled to request a paying agent not to retaintax from such payments but instead to apply a system by which the details ofsuch payments are communicated to the tax authorities of the EU Member State inwhich the beneficial owner is resident.

 

**United States Federal Income Taxation**

 

Thefollowing section summarizes the material US federal income tax consequences ofthe purchase, ownership and disposition of the issuer notes (the “US notes”).In general, the summary assumes that a holder acquires the US notes atoriginal issuance and holds the US notes as capital assets. It does not purportto be a comprehensive description of all the tax considerations thatmay be relevant to a decision to purchase the US notes. In particular, itdoes not discuss special tax considerations that may apply to certaintypes of taxpayers, including,

 

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without limitation, the following: (i)financial institutions; (ii) insurance companies; (iii) dealers or traders instocks, securities, notional principal contracts or currencies; (iv) tax-exemptentities; (v) regulated investment companies; (vi) persons that will hold theUS notes as part of a “hedging” or “conversion” transaction or as a position ina “straddle” for US federal income tax purposes; (vii) persons that own (or aredeemed to own) 10 per cent. or more of the voting shares of the issuer; (viii)persons who hold US notes through partnerships or other pass-through entities;and (ix) persons that have a “functional currency” other than the US dollar. Inaddition, this summary does not address alternative minimum tax consequences,nor does it describe any tax consequences arising under the laws of any taxingjurisdiction other than the US federal government.

 

Thissummary is based on the US Internal Revenue Code of 1986, as amended (the“Code”), US Treasury regulations and judicial and administrativeinterpretations thereof, in each case as in effect or available on the date offiling of this Form 20-F. All of the foregoing are subject to change, and anychange may apply retroactively and could affect the tax consequences describedbelow.

 

**Investors should consult their own tax advisors as to the US federalincome tax consequences of the purchase, ownership and disposition of the USnotes, including the possible application of state, local, non-US or other taxlaws, and other US tax issues affecting the transaction.**

 

As usedin this section, the term “United States holder” means a beneficial owner of USnotes that is for US federal income tax purposes: (i) a citizenor resident of the United States; (ii) a corporation (or other entitytreated as a corporation) or partnership, created or organized in or under thelaws of the United States or any state thereof (including the District ofColumbia); (iii) any estate the income of which is subject to US federal incometax regardless of the source of its income; or (iv) any trust if a court withinthe United States is able to exercise primary supervision over theadministration of the trust and one or more United States persons have theauthority to control all substantial decisions of the trust. If a partnershipholds US notes, the tax treatment of a partner will generally depend upon the statusof the partner and upon the activities of the partnership. Partners ofpartnerships holding US notes should consult their own tax advisers. A“Non-United States holder” is a beneficial owner of US notes that is not aUnited States holder.

 

**Tax status of the issuer, Funding 1, the mortgages trustee and themortgages trust**

 

Eachof the issuer, Funding 1 and the mortgages trustee acting it its capacity astrustee of the mortgages trust covenants not to engage in any activities in theUnited States (directly or through agents), not to derive any income fromsources within the United States as determined under US federal income taxprinciples, and not to hold any property if doing so would cause it to beengaged or deemed to be engaged in a trade or business within the United Statesas determined under US federal income tax principles. Assuming compliance withthese covenants, none of the issuer, Funding 1 or the mortgages trustee actingin its capacity as trustee of the mortgages trust will be subject to US federalincome tax. No election will be made to treat the issuer, Funding 1 or themortgages trustee or any of their assets as a REMIC (a type of securitizationvehicle having a special tax status under the Code).

 

**Characterization of the US notes**

 

Althoughthere is no authority regarding the treatment of instruments that aresubstantially similar to the US notes, and while it is not free from doubt, theissuer believes that

 

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the US notes will be treated as debt for USfederal income tax purposes. The issuer intends to treat the US notes asindebtedness of the issuer for all purposes, including US tax purposes. Thediscussion in the next section assumes this result.

 

TheUS notes will not be qualifying real property loans in the hands of domesticsavings and loan associations, real estate investment trusts, or REMICs undersections 7701(a)(19)(C), 856(c) or 860G(a)(3) of the Code, respectively.

 

**Taxation of United States holders of the US notes**

 

*Qualified Stated Interest and Original Issue Discount.*The issuer intends to treat interest on theUS notes (other than interest on the series 1 class A issuer notes) as“qualified stated interest” under US Treasury regulations relating to originalissue discount (hereafter the “OID regulations”). As a consequence, discount onthe US notes (other than discount on the series 1 class A issuer notes) arisingfrom an issuance at less than par will only be required to be accrued under theOID regulations if such discount exceeds a statutorily defined *de minimis* amount. Qualified stated interest, whichgenerally must be unconditionally payable at least annually, is taxed under aholder’s normal method of accounting as ordinary interest income. *De minimis* original issue discount (“OID”)is included in income on a *pro rata* basisas principal payments are made on the US notes.

 

Itis possible that interest on the US notes that are class B and class C issuernotes could be treated as OID because such interest is subject to deferral incertain limited circumstances. A United States holder of a US note (other thana series 1 class A issuer note) issued with OID must include OID in income overthe term of such US note under a constant yield method that takes into accountthe compounding of interest. Under the Code, OID is calculated and accruedusing prepayment assumptions where payments on a debt instrument may beaccelerated by reason of prepayments of other obligations securing such debtinstrument. Moreover, the legislative history to the provisions provide thatthe same prepayment assumptions used to price a debt instrument be used tocalculate OID, as well as to accrue market discount and amortize premium. Here,prepayment of the mortgage loans is not expected to alter the scheduledprincipal payments on the US notes that are class B and class C issuer notesand, accordingly, the issuer intends to assume that such US notes will havetheir principal repaid according to the schedule for purposes of accruing anyOID. No representation is made that the mortgage loans will pay on the basis ofsuch prepayment assumption or in accordance with any other prepayment scenario.

 

Ingeneral, United States holders who report income for US federal income taxpurposes under the accrual method are required to accrue OID on short-termobligations, such as the series 1 class A issuer notes, on a straight-linebasis unless an election is made to accrue the OID under a constant yieldmethod (based on daily compounding). A United States holder who is anindividual or other cash method holder is not required to accrue such OIDunless such holder elects to do so. If such an election is not made, any gainrecognized by such holder on the sale, exchange or maturity of the series 1class A issuer notes will be ordinary income to the extent of the holder’srateable share of OID accrued on a straight-line basis, or upon election underthe constant yield method (based on daily compounding), through the date of thesale, exchange or maturity.

 

Asan alternative to the above treatments, United States holders may elect toinclude in gross income all interest with respect to the US notes, includingstated interest, acquisition discount, OID, *de minimis* OID,market discount, *de minimis* market discount, andunstated

 

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interest, as adjusted by any amortizable bondpremium or acquisition premium, using the constant yield method describedabove.

 

Interestincome on the US notes will be treated as foreign source income for US federalincome tax purposes, which may be relevant in calculating a United Statesholder’s foreign tax credit limitation for US federal income tax purposes. Thelimitation on foreign taxes eligible for the US foreign tax credit iscalculated separately with respect to specific classes of income. The foreigntax credit rules are complex, and United States holders should consult theirown tax advisers regarding the availability of a foreign tax credit and theapplication of the limitation in their particular circumstances.

 

*Sales and Retirement.* In general, a United States holder of a US note will have a tax basisin such US note equal to the cost of the US note to such holder, and reduced byany payments thereon other than payments of stated interest. Upon a sale orexchange of the US note, a United States holder will generally recognize gainor loss equal to the difference between the amount realized (less any accruedinterest, which would be taxable as such) and the holder’s tax basis in the USnote. Such gain or loss will be long-term capital gain or loss if the UnitedStates holder has held the US note for more than one year at the time ofdisposition. **Investors should consult their own taxadvisors with respect to the treatment of capital gains (which may be taxed atlower rates than ordinary income for taxpayers who are individuals, trusts orestates that hold the US notes for more than one year) and capital losses (thedeductibility of which is subject to limitations).**

 

**Taxation of Non-United States holders of the US Notes**

 

Subjectto the backup withholding rules discussed below, a Non-United States holdergenerally should not be subject to US federal income or withholding tax on anypayments on a US note and gain from the sale, redemption or other dispositionof a US note unless: (i) that payment and/or gain is effectively connected withthe conduct by that Non-United States holder of a trade or business in theUnited States; (ii) in the case of any gain realized on the sale or exchange ofa US note by an individual Non-United States holder, that holder is present inthe United States for 183 days or more in the taxable year of the sale,exchange or retirement and certain other conditions are met; or (iii) theNon-United States holder is subject to tax pursuant to provisions of the Codeapplicable to certain expatriates. **Non-United States holdersshould consult their own tax advisors regarding the US federal income and othertax consequences of owning US notes.**

 

**Alternative characterization of the US notes**

 

Theproper characterization of the arrangement involving the issuer and the holdersof the US notes is not clear because there is no authority on transactionscomparable to that contemplated herein. The issuer intends to treat the USnotes as debt for all US federal income tax purposes. Investors should consulttheir own tax advisors with respect to the potential impact of an alternativecharacterization of the US notes for US tax purposes.

 

Onepossible alternative characterization is that the US Internal Revenue Service(“IRS”) could assert that the class C or any other class of US notes should betreated as equity in the issuer for US federal income tax purposes. If theclass C or any other class of US notes were treated as equity, United Statesholders of such notes would be treated as owning equity in a passive foreigninvestment company (“PFIC”) which, depending on the level of ownership of suchUnited States holder and certain other factors, might also constitute aninterest in a

 

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controlled foreign corporation for suchUnited States holder. This would have certain timing and character consequencesfor United States holders and could require certain elections and disclosuresthat would need to be made shortly after acquisition to avoid potentiallyadverse US tax consequences.

 

Ifa United States holder were treated as owning an equity interest in a PFIC,unless a United States holder makes a “QEF election” or “mark to marketelection”, a United States holder will be subject to a special tax regime (i)in respect of gains realized on the sale or other disposition of the relevantnotes, and (ii) in respect of distributions on the relevant notes held for morethan one taxable year to the extent those distributions constitute “excessdistributions”. Although not free from doubt, the PFIC rules should not applyto gain realized in respect of any notes disposed of during the same taxableyear in which such notes are acquired. An excess distribution generally includesdividends or other distributions received from a PFIC in any taxable year tothe extent the amount of such distributions exceeds 125 per cent. of theaverage distributions for the three preceding years (or, if shorter, theinvestor’s holding period). Because the US notes pay interest at a floatingrate, it is possible that a US holder will receive “excess distributions” as aresult of fluctuations in the rate of USD-LIBOR over the term of the US notes.In general, under the PFIC rules, a United States holder will be required toallocate such excess distributions and any gain realized on a sale of its notesto each day during the United States holder’s holding period for the notes, andwill be taxable at the highest rate of taxation applicable to the notes for theyear to which the excess distribution or gain is allocable (without regard tothe United States holder’s other items of income and loss for such taxableyear) (the “deferred tax”). The deferred tax (other than the tax on amountsallocable to the year of disposition or receipt of the distribution) will thenbe increased by an interest charge computed by reference to the rate generallyapplicable to underpayments of tax (which interest charge generally will benon-deductible interest expense for individual taxpayers).

 

**Backup withholding and information reporting**

 

Backup withholding and information reportingrequirements may apply to certain payments on the US notes and proceeds of thesale or redemption of the US notes to United States holders. The issuer, its agent, a broker, or anypaying agent, as the case may be, may be required to withhold tax from anypayment that is subject to backup withholding if the United States holder failsto furnish the United States holder’s taxpayer identification number (usuallyon IRS Form W-9), to certify that such United States holder is not subject tobackup withholding, or to otherwise comply with the applicable requirements ofthe backup withholding rules. CertainUnited States holders (including, among others, corporations) are not subjectto the backup withholding and information reporting requirements. Non-UnitedStates holders may be required to comply with applicable certificationprocedures (usually on IRS Form W-8BEN) to establish that they are not UnitedStates holders in order to avoid the application of such information reportingrequirements and backup withholding.

 

Paymentsof principal or interest made to or through a foreign office of a custodian,nominee or other agent acting on behalf of a beneficial owner of a US notegenerally will not be subject to backup withholding. However, if suchcustodian, nominee or other agent is (i) a United States person (as defined insection 7701(a)(30) of the Code), (ii) a controlled foreign corporation (as definedin section 957(a) of the Code), (iii) a foreign person 50 per cent. or more ofwhose gross income is effectively connected with a US trade or business for aspecified three-year period, or (iv) a foreign partnership if (A) at any timeduring its tax year, one or more of its partners are United States persons (asdefined in applicable Treasury regulations) who in the aggregate hold more than50 per cent. of the income or capital interest in the partnership or (B) at

 

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any time during its taxable year, it isengaged in a US trade or business (each of (i) through (iv), a “US ConnectedHolder”), such custodian, nominee or other agent may be subject to certaininformation reporting requirements with respect to such payment unless it hasin its records documentary evidence that the beneficial owner is not a UnitedStates holder and certain conditions are met or the beneficial owner otherwiseestablishes an exemption. Principal and interest paid by the US office of acustodian, nominee or agent will be subject to both backup withholding andinformation reporting unless the beneficial owner certifies its non-US statusunder penalties of perjury or otherwise establishes an exemption. Payments ofproceeds on the sale of a US note made to or through a foreign office of abroker will not be subject to backup withholding. However, if such broker is aUS Connected Holder, information reporting will be required unless the brokerhas in its records documentary evidence that the beneficial owner is not aUnited States holder and certain conditions are met or the beneficial ownerotherwise establishes an exemption. Payments of proceeds on the sale of a USnote made to or through the US office of a broker will be subject to backupwithholding and information reporting unless the beneficial owner certifies,under penalties of perjury, that it is not a US holder or otherwise establishesan exemption.

 

Backupwithholding is not an additional tax. Any amounts withheld under the backupwithholding rules will be refunded or credited against the United Statesholder’s US federal income tax liability, provided that the requiredinformation is furnished to the IRS. **Holders of US notes shouldconsult their tax advisors as to their qualification for exemption from backupwithholding and the procedure for obtaining an exemption.**

 

**Material Jersey (Channel Islands) Tax Considerations**

 

Themortgages trustee is resident in Jersey for taxation purposes and will beliable to income tax in Jersey at a rate of 20 per cent. in respect of theprofits it makes from acting as trustee of the mortgages trust. The mortgagestrustee will not be liable for any income tax in Jersey in respect of anyincome it receives in its capacity as mortgages trustee on behalf of thebeneficiaries of the mortgages trust.

 

F.            *Dividendsand Paying Agents*

 

Notapplicable to annual reports filed on Form 20-F.

 

G.           *Statement byExperts*

 

Notapplicable to annual reports filed on Form 20-F.

 

H.            *Documents on Display*

 

Theissuer, Funding 1 and the mortgages trustee are subject to the informationrequirements of the U.S. Securities Exchange Act of 1934, as amended, and aretherefore required to file reports, including annual reports on Form 20-F, andother information with the SEC. These materials, including this annual reportand the exhibits thereto, may be inspected and copied at the SEC’s publicreference rooms in Washington, DC, New York, NY and Chicago, IL. Please callthe SEC at +1-800-732-0330 for further information on the public referencerooms. Any filings made by the issuer, Funding 1 or the mortgages trustee willbe made available to the public over the Internet at the SEC’s web site athttp://www.sec.gov.

 

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I.             *SubsidiaryInformation*

 

Notapplicable to annual reports filed on Form 20-F.

 

**Item11.  Quantitative and QualitativeDisclosures About Market Risk**

 

Funding1 has entered into the Funding 1 swap agreement with Halifax plc as the Funding1 swap provider and the security trustee. The issuer has entered into issuerswaps with the issuer swap providers and the security trustee. In general, theswaps are designed to do the following:

 

•                  Funding1 swap: to hedge against the possible variance between the mortgages trustee variablebase rate payable on the variable rate loans, the rates of interest payable onthe tracker rate loans and the fixed rates of interest payable on the fixedrate loans and a LIBOR based rate for three-month sterling deposits;

 

•                  issuerdollar currency swaps: to protect the issuer against changes in the sterling toUS dollar exchange rate following the closing date and the possible variancebetween a LIBOR based rate for three-month sterling deposits and either (i) aLIBOR based rate for one-month dollar deposits applicable to the series 1 classA issuer notes, or (ii) a LIBOR based rate for three-month dollar deposits,applicable to the series 1 class B issuer notes, the series 1 class C issuernotes and the series 2 issuer notes, and to address the difference inperiodicity between the interest payment dates in respect of the intercompanyloans, which occur quarterly, and the interest payment dates in respect of theseries 1 class A issuer notes, which occur (i) monthly until the occurrence ofa trigger event or enforcement of the issuer security and (ii) quarterly on andfollowing the interest payment date occurring immediately thereafter; and

 

•                  issuereuro currency swaps: to protect the issuer against changes in the sterling toeuro exchange rate following the closing date and the possible variance betweena LIBOR based rate for three-month sterling deposits and a EURIBOR based ratefor three-month euro deposits applicable to the series 4 class A1 issuer notes,the series 4 class B issuer notes, the series 4 class C issuer notes.

 

**The Funding 1 swap**

 

Someof the loans in the portfolio pay a variable rate of interest for a period oftime which may either be linked to the mortgages trustee variable base rate orlinked to a variable interest rate other than the mortgages trustee variablebase rate, such as a rate set by the Bank of England. Other loans pay a fixedrate of interest for a period of time. However, the interest rate payable byFunding 1 with respect to the issuer term advances is calculated as a marginover LIBOR for three-month sterling deposits. To provide a hedge against thepossible variance between:

 

(1)                                  the mortgages trustee variable base ratepayable on the variable rate loans, the rates of interest payable on thetracker rate loans and the fixed rates of interest payable on the fixed rateloans; and

 

(2)           a LIBOR based rate for three-month sterling deposits,

 

Funding1, the Funding 1 swap provider and the security trustee have entered into theFunding 1 swap as amended and restated on June 22, 2005. The Funding 1 swap:

 

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•                  hasa notional amount that is sized to hedge against any potential interest ratemismatches in relation to the current issues; and

 

•                  providesfor the notional amount to be increased as appropriate to hedge against similarpotential interest rate mismatches in relation to any new issues.

 

Underthe Funding 1 swap, on each calculation date, the following amounts will becalculated:

 

•                  theamount produced by applying LIBOR for three-month sterling deposits (asdetermined in respect of the corresponding interest period under theintercompany loans) plus a spread for the relevant calculation period to thenotional amount of the Funding 1 swap as described later in this section (knownas the “calculation period swap provider amount”); and

 

•                  theamount produced by applying a rate equal to the weighted average of:

 

(i)                                     the average of the standard variable mortgagerates or their equivalent charged to existing borrowers on residential mortgageloans as published from time to time, after excluding the highest and thelowest rate, of Abbey National plc, HSBC Bank plc, Cheltenham & Gloucesterplc, National Westminster Bank Plc, Nationwide Building Society, Northern Rockplc and Woolwich plc (and where those banks have more than one standardvariable rate, the highest of those rates);

 

(ii)           therates of interest payable on the tracker rate loans; and

 

(iii)          therates of interest payable on the fixed rate loans,

 

forthe relevant calculation period to the notional amount of the Funding 1 swap(known as the “calculation period Funding 1 amount”). “Calculation date” isdefined as the first day (or if not a London Business Day, the next succeedingLondon Business Day) of each month and any other day on which Funding 1acquires a further interest in the trust property from and including thecalculation date immediately preceding the effective date. “London BusinessDay” is defined as a day (other than a Saturday or Sunday) on which banks are generallyopen for business in London.

 

Oneach Funding 1 interest payment date the following amounts will be calculated:

 

•                  thesum of each of the calculation period swap provider amounts calculated duringthe preceding interest period; and

 

•                  thesum of each of the calculation period Funding 1 amounts calculated during thepreceding interest period.

 

Afterthese two amounts are calculated in relation to a Funding 1 interest paymentdate, the following payments will be made on that Funding 1 interest paymentdate:

 

•                  ifthe first amount is greater than the second amount, then the Funding 1 swapprovider will pay the difference to Funding 1;

 

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•                  ifthe second amount is greater than the first amount, then Funding 1 will pay thedifference to the Funding 1 swap provider; and

 

•                  ifthe two amounts are equal, neither party will make a payment to the other.

 

Ifa payment is to be made by the Funding 1 swap provider, that payment will beincluded in the Funding 1 available revenue receipts and will be applied on therelevant Funding 1 interest payment date according to the relevant order ofpriority of payments of Funding 1. If a payment is to be made by Funding 1, itwill be made according to the relevant order of priority of payments of Funding 1.

 

Thenotional amount of the Funding 1 swap in respect of a calculation period willbe an amount in sterling equal to:

 

•                  theaggregate principal amount outstanding of all intercompany loans on the firstday of the relevant calculation period, less

 

•                  thebalance of the principal deficiency ledger attributable to all intercompanyloans on the first day of the relevant calculation period, less

 

•                  theamount of the principal receipts in the Funding 1 GIC account attributable toall intercompany loans on the first day of the relevant calculation period.

 

Inthe event that the Funding 1 swap is terminated prior to the service of anyissuer intercompany loan acceleration notice or final repayment of anyintercompany loan, Funding 1 shall enter into a replacement Funding 1 swap onterms acceptable to the rating agencies, with the security trustee and with aswap provider whom the rating agencies have previously confirmed in writing toFunding 1, the issuer and the security trustee will not cause the then currentratings of the issuer notes to be downgraded, withdrawn or qualified. IfFunding 1 is unable to enter into a new Funding 1 swap on terms acceptable tothe rating agencies, this may affect amounts available to pay interest on theintercompany loans.

 

**The issuer currency swaps**

 

Theissuer intercompany loan is denominated in sterling, and interest payable byFunding 1 to the issuer under the issuer term advances is calculated as amargin over LIBOR for three-month sterling deposits. However, some of theissuer notes are denominated in US dollars and accrue interest at either aLIBOR based rate for one-month US dollar deposits or a LIBOR based rate forthree-month US dollar deposits. In addition, the series 4 class A1 issuer notes,series 4 class B issuer notes, and series 4 class C issuer notes aredenominated in euro and accrue interest at a EURIBOR based rate for three-montheuro deposits. To deal with the potential interest rate and currency mismatchbetween (i) its receipts and liabilities in respect of the issuer intercompanyloan and (ii) its receipts and liabilities under the issuer notes, the issuerhas, pursuant to the terms of the issuer currency swaps, swapped its receiptsand liabilities in respect of all euro denominated issuer notes and all USdollar denominated issuer notes into sterling on terms that match the issuer’sobligations under the US dollar denominated issuer notes or the eurodenominated issuer notes, as applicable.

 

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Thecurrency amount of each issuer currency swap is the principal amountoutstanding under the issuer notes to which the relevant issuer currency swaprelates. Subject, in the case of the class B and C issuer swaps, to certaindeferral of interest provisions that will apply when payment of interest underthe corresponding offered issuer notes is deferred in accordance with the termsand conditions of such offered issuer notes, the issuer swap providers will payto the issuer amounts in US dollars or euro, as applicable that are equal tothe amounts of interest to be paid on each of the classes of the offered issuernotes and the issuer will pay to the issuer swap providers the sterlinginterest amounts received on the issuer term advances corresponding to theclasses of the offered issuer notes. In order to allow for the effectivecurrency amount of each issuer currency swap to amortize at the same rate asthe relevant class of issuer notes, each issuer currency swap agreementprovides that as and when the issuer notes amortize, a corresponding portion ofthe relevant issuer currency swap so terminated will be swapped from sterlinginto US dollars at the relevant dollar currency exchange rate or into euro atthe euro currency exchange rate, as applicable.

 

Thepayment obligations of the series 1 issuer swap provider under the relevantissuer currency swaps are guaranteed by the Swiss Re issuer swap guarantorpursuant to a guarantee (the “Swiss Re issuer swap guarantee”).

 

Thepayment obligations of the series 2 issuer swap provider under the relevantissuer currency swaps are guaranteed by the AIG issuer swap guarantor pursuantto a guarantee (the “AIG issuer swap guarantee”).

 

Inthe event that any issuer currency swap is terminated prior to the service ofan issuer note acceleration notice or the final redemption of the relevant USdollar denominated or euro denominated issuer notes, as applicable, the issuershall enter into a replacement issuer currency swap in respect of that classand series of issuer notes. Any replacement issuer currency swap must beentered into on terms acceptable to the rating agencies, the issuer and thesecurity trustee and with a replacement issuer currency swap provider whom therating agencies have previously confirmed in writing to the issuer and thesecurity trustee will not cause the then current ratings of the issuer notes tobe downgraded, withdrawn or qualified. If the issuer is unable to enter intoany replacement issuer currency swaps on terms acceptable to the ratingagencies, this may affect amounts available to pay amounts due under the issuernotes.

 

Ifan issuer currency swap agreement is terminated and the issuer is unable toenter into a replacement swap as described above, then any payments received bythe issuer from Funding 1 on each Funding 1 interest payment date shall bedeposited in the issuer bank account (or such other account opened for thispurpose) and applied by the issuer to repay the issuer notes on each interestpayment date after exchanging at the “spot” rate, the relevant proceeds fromsterling into US dollars or euros as required.

 

**Ratings downgrade of swap providers**

 

Undereach of the swap agreements, in the event that the relevant rating(s) of a swapprovider, or its respective guarantor, as applicable, is or are, as applicable,downgraded by a rating agency below the rating(s) specified in the relevantswap agreement (in accordance with the requirements of the rating agencies) forsuch swap provider, and, as a result of the downgrade, the then current ratingsof the current notes, in respect of the Funding 1 swap, or the issuer notescorresponding to the relevant issuer swap in respect of the relevant issuerswap, would or may, as applicable, be adversely affected, the relevant swap providerwill, in accordance with the Funding 1 swap or the relevant issuer swap, asapplicable, be required to take certain remedial measures,

 

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which may include providing collateral forits obligations under the relevant swap, arranging for its obligations underthe relevant swap to be transferred to an entity with rating(s) required by therelevant rating agency as specified in the relevant swap agreement (inaccordance with the requirements of the rating agency), procuring anotherentity with rating(s) required by the relevant rating agency as specified inthe relevant swap agreement (in accordance with the requirements of the ratingagency), to become co-obligor or guarantor as applicable, in respect of itsobligations under the relevant swap, or taking such other action as it mayagree with the relevant rating agency.

 

**Termination of the swaps**

 

The Funding 1 swap will terminate on the date on which the aggregateprincipal amount outstanding under all intercompany loans is reduced to zero.

 

Each issuer swap other than the series 1 class A issuer swap, theseries 2 class A issuer swap and the series 3 class A issuer swap, willterminate on the earlier of the interest payment date falling in June 2042 andthe date on which all of the relevant class and series of issuer notes areredeemed in full. The series 1 class A issuer swap will terminate on theearlier of the interest payment date falling in September 2005 and the date onwhich the series 1 class A issuer notes are redeemed in full. The series 2class A issuer swap will terminate on the earlier of the interest payment datefalling in December 2011 and the date on which the series 2 class A issuernotes are redeemed in full.

 

Anyswap may also be terminated in any of the following circumstances, eachreferred to as a “swap early termination event”:

 

•                  ifthere is a failure by a party to pay any amounts due under that swap and anyapplicable grace period has expired;

 

•                  inrespect of the issuer swaps, if an event of default under the relevant class ofissuer notes occurs and the security trustee serves an issuer note accelerationnotice;

 

•                  inrespect of the Funding 1 swap, if an event of default under any intercompanyloan occurs and the security trustee serves an intercompany loan accelerationnotice;

 

•                  inrespect of the issuer swaps, if a redemption or purchase of the relevant classof issuer notes occurs pursuant to number 5(F) Redemption or purchase followinga regulatory event;

 

•                  inrespect of the issuer swaps, at the option of the issuer, and in respect of theFunding 1 swap, at the option of Funding 1, if certain tax representations bythe relevant issuer swap provider prove to have been untrue or misleading inany material respect;

 

•                  inrespect of the issuer swaps, at the option of the relevant issuer swapprovider, and in respect of the Funding 1 swap, at the option of Funding 1, ifcertain insolvency events occur with respect to the issuer or Funding 1;

 

•                  inrespect of the issuer swaps, at the option of the issuer, and in respect of theFunding 1 swap, at the option of Funding 1, upon the occurrence of aninsolvency of the

 

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relevantswap provider, or its guarantor, as applicable, or the merger of the relevantswap provider without an assumption of the obligations under the relevant swapagreement, or if a material misrepresentation is made by the swap providerunder the relevant swap agreement or a default by the relevant swap providerunder an over-the-counter derivatives transaction under another agreementbetween the issuer and such swap provider; or if a breach of a provision of therelevant swap agreement by the swap provider is not remedied within theapplicable grace period, or, if applicable, the guarantor of the relevant swapprovider fails to comply with its obligations under the guarantee;

 

•                  ifa change in law resulting in the obligations of one of the parties becomingillegal;

 

•                  atthe option of the relevant issuer swap provider but subject to obtaining theconsent of the security trustee, if withholding taxes are imposed on paymentsmade by the issuer swap provider under the issuer swap or, as the case may be,by the AIG issuer swap guarantor under the AIG issuer swap guarantee; and

 

•                  ifthe relevant swap provider or its guarantor, as applicable, is downgraded andfails to comply with the requirements of the ratings downgrade provisioncontained in the relevant swap agreement.

 

Uponthe occurrence of a swap early termination event, the issuer or the relevantissuer swap provider may be liable to make a termination payment to the otherparty (in the case of an issuer swap) and/or Funding 1 or the Funding 1 swapprovider may be liable to make a termination payment to the other party (in thecase of the Funding 1 swap). This termination payment will be calculated andmade in sterling. The amount of any termination payment will be based on themarket value of the terminated swap as determined on the basis of quotationssought from leading dealers as to the cost of entering into a swap with thesame terms and conditions that would have the effect of preserving the economicequivalent of the respective full payment obligations of the parties (or basedupon a good faith determination of total losses and costs (or gains) if aninsufficient number of quotations can be obtained or if basing the valuation onquotations would not produce a commercially reasonable result). Any suchtermination payment could be substantial.

 

Ifany issuer swap is terminated early and a termination payment is due by theissuer to an issuer swap provider, then, pursuant to its obligations under theissuer intercompany loan, Funding 1 shall pay to the issuer an amount equal tothe termination payment due to the relevant issuer swap provider less anyamount received by the issuer under any replacement issuer swap agreement.These payments will be made by Funding 1 only after paying interest amounts dueon the issuer term advances and after providing for any debit balance on the principaldeficiency ledger. The issuer shall apply amounts received from Funding 1 underthe issuer intercompany loan in accordance with the issuer pre-enforcementrevenue priority of payments or, as the case may be, the issuerpost-enforcement priority of payments. The application by the issuer oftermination payments due to an issuer swap provider may affect the fundsavailable to pay amounts due to noteholders.

 

Ifthe issuer receives a termination payment from an issuer currency swapprovider, then the issuer shall use those funds towards meeting its costs ineffecting currency exchanges at the applicable spot rate of exchange until areplacement issuer currency swap is entered into and/or to acquire areplacement issuer currency swap.

 

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Noteholderswill not receive extra amounts (over and above interest and principal payableon the issuer notes) as a result of the issuer receiving a termination payment.

 

**Transfer of the swaps**

 

Eachissuer swap provider may, subject to certain conditions specified in therelevant issuer swap agreement, including (without limitation) the satisfactionof certain requirements of the rating agencies, transfer its obligations underany of the issuer swaps to another entity.

 

**Taxation**

 

NeitherFunding 1 nor the issuer is obliged under any of the swaps to gross up paymentsmade by them if withholding taxes are imposed on payments made under theFunding 1 swap or the issuer swaps.

 

Eachswap provider will generally be obliged to gross up payments made by it toFunding 1 or the issuer, as appropriate, if withholding taxes are imposed onpayments made under the Funding 1 swap or the issuer swaps. However, if anissuer swap provider is required to gross up a payment under the issuer swaps,the relevant issuer swap provider may, subject to the consent of the securitytrustee, terminate the relevant issuer swaps.

 

TheAIG issuer swap guarantor will be obliged to gross up payments made by it tothe issuer if withholding taxes are imposed on payments under the AIG issuerswap guarantee. However, if the AIG issuer swap guarantor is required to grossup a payment under the AIG issuer swap guarantee in respect of a relevantcurrency swap, the series AIG swap provider may, subject to the consent of thesecurity trustee, terminate the relevant issuer currency swap.

 

**Item12.  Description of Securities Other thanEquity Securities**

 

Notapplicable to annual reports filed on Form 20-F.

 

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**PART II**

 

**Item13.  Defaults, Dividend Arrearages andDelinquencies**

 

None.

 

**Item14.  Material Modifications to the Rightsof Security Holders and Use of Proceeds**

 

None.

 

**Item15.  Controls and Procedures**

 

Not applicable.

 

**Item16A.  Audit Committee Financial Expert**

 

Not applicable.

 

**Item16B.  Code of Ethics**

 

Not applicable.

 

**Item16C.  Principal Accountant Fees andServices**

 

Not applicable.

 

**Item16D.  Exemptions from the ListingStandards for Audit Committees**

 

Not applicable.

 

**Item16E.  Purchases of Equity Securities bythe Issuer and Affiliated Purchasers**

 

Not applicable.

 

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**PART III**

 

**Item17.  Financial Statements**

 

Notapplicable.

 

**Item18.  Financial Statements**

 

Not applicable.

 

**Item19.  Exhibits**

 

Thefollowing documents are filed as part of the Annual Report on Form 20-F:

 

Exhibit1: a copy of the Memorandum and Articles of Association of each of the issuer,Funding 1 and the mortgages trustee is incorporated by reference from theRegistration Statement.

 

Exhibit2: instruments defining the rights of the security holders as described in theRegistration Statement are incorporated by reference from the RegistrationStatement.

 

Exhibit12: Section 302 certification.

 

Exhibit15.1: Investor’s Report for the month of November 2004 (incorporated byreference from the Form 6-K previously filed on December 8, 2004).

 

Exhibit15.2: Investor’s Report for the month of December 2004(incorporated byreference from the Form 6-K previously filed on January 14, 2005 and revised January18, 2005).

 

Exhibit 15.3: Servicer compliance statement.

 

Exhibit15.4: Attestation report of independent accountants.

 

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**SIGNATURES**

 

Eachregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to signthis annual report on its behalf.

 
|                 | PERMANENT  FINANCING (NO. 6) PLC     |
|----------------------|--------------------------------------|
|                 |                                 |   |
|                 | By:                                  | /s/  David Balai |   |
|                 | Name:                                | David  Balai |   |
|                 | Title:                               | Director |   |
|                 |                                 |   |   |
|                 | PERMANENT  FUNDING (NO. 1) LIMITED   |
|                 |                                 |   |   |
|                 | By:                                  | /s/  David Balai |   |
|                 | Name:                                | David  Balai |   |
|                 | Title:                               | Director |   |
|                 |                                 |   |   |
|                 | PERMANENT  MORTGAGES TRUSTEE LIMITED |
|                 |                                 |   |   |
|                 | By:                                  | /s/  David Balai |   |
| Date:  June 30, 2005 | Name:                                | David  Balai |   |
|                 | Title:                               | Director |   |

 

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