The performance of many asset classes in the Europe, Middle East and Africa (EMEA) securitization sector will continue to deteriorate throughout the rest of the year and into 2011 as factors such as rising unemployment continue to test the market, said market analysts.
Moody's Investors Service said in a new special report that it expects performance volatility and uncertainty to decline in the coming months, although it cautions that a drop is predicated on achieving some level of economic moderation if not slight improvement, combined with the seasoning of securitized loan portfolios.
Both Fitch Ratings and Moody's believe that GDP growth is expected to turn positive in many countries in EMEA later this year or in early 2010, but employment and home prices will continue to deteriorate well into 2010, which will lead to securitized loan losses remaining at elevated levels throughout 2011 and 2012.
"While there appears to be a glimmer of light at the end of the tunnel, it is still too early to interpret improvement or slowed deterioration in a particular sector as a sign of recovery," said Frederic Drevon, Moody's head of EMEA securitization. "When the securitization markets do recover, it is uncertain what the level of receptivity will be and therefore what issuance volumes may be."
Fitch analysts cautioned that the rising unemployment and low wage inflation has yet to be reflected in house prices."Unemployment will peak next year and remain close to that high into 2011; this will inevitably weigh on house prices," said Alastair Bigley, head of U.K. RMBS at Fitch.
Fitch predicts that U.K. house prices will fall approximately 30 percent overall from the October 2007 peak. Prices are currently 13% down from that peak, having dipped as low as 19% down in Q109.
"The UK's average house price to income ratio remains significantly higher than the long term average," says Brian Coulton, head of global economics and EMEA sovereigns at Fitch. "A 30% fall from the peak of October 2007 would bring this ratio back in line with the long term average. In comparison, the house price declines in the recession of the early 1990's saw the average house price to income ratio fall below the long term trend."
And the recent easing in credit availability may also prove to be temporary as Fitch expects lending appetite to be pro-cyclical with the performance of house prices and the credit performance of the underlying borrowers.
The deep interest rate cuts of late 2008 have eased affordability for a large proportion of mortgage borrowers. This has in turn led to a stabilization in major performance indices such as 3-months plus arrears and foreclosure rates.
Although Fitch expects the UK base rate to remain at its current low level of 0.5% throughout 2010, rising unemployment could trigger deterioration in these performance indices. It is likely that mortgage lenders would respond by further tightening lending criteria.
"Despite the fact that a global economic recovery is underway, the economic fundamentals do not auger well for a sustained strong recovery in the UK housing market,” said Bigley. “Although households are reducing debt and increasing savings, the upfront cost of house purchase for first time buyers is likely to stifle housing demand."