Arrears rates in both prime and subprime U.K. RMBS transactions will increase over the coming months.
This is a result of the change in the rates used to calculate Support for Mortgage Interest (SMI) and the impact on borrowers' abilities to make contractual repayments on their mortgages, said Fitch Ratings.
SMI, formerly known as Income Support for Mortgage Interest (ISMI), is a benefit paid by the U.K. government directly to lenders on behalf of mortgage borrowers who receive income support.
Fitch analysts expect a number of borrowers affected by the change to fall into arrears immediately, with the full arrears impact on U.K. RMBS taking several months to emerge.
The total number of borrowers expected to be impacted is modest relative to the size of the number of UK. According to the rating agency, about 230,000 households receive SMI. This comprises around 2% of U.K. mortgage holders.
To the extent a transaction has a concentration of borrowers receiving SMI, then performance has the potential to deteriorate beyond initial expectations and rating action may ensue.
"If the new rate results in a monthly payment that is less than the interest amount due, borrowers will be required to cover the shortfall; otherwise, the borrower will fall into arrears," said Mark Wilder, associate director in Fitch's structured finance operational risk group.
Fitch does not expect any rating actions as a result of this change given that affordability is already stressed within its ratings analysis.