The main proposals set out in the U.K. Financial Services Authority's (FSA) mortgage market review (MMR) include the use of a standardized approach to assessing consumers' ability to repay a mortgage. One of these is the verification of a borrower's income to qualify for a new mortgage.
Although prepayment rates of existing mortgages might be impacted by more robust underwriting techniques, Fitch Ratings said it does not expect existing RMBS ratings to be affected.
Fitch notes that while the MMR is expected to result in improved underwriting practices, its implementation for some lenders could mean a significant change to current practices which may lead to procedures being more manual, time consuming and costly.
"The assessment of borrowing capacity, and disposable income, along with the verification of income for all applications, will require a detailed methodology, and in all likelihood, the provision of some form of manual underwriting for all loan applications," said Robbie Sargent, director in Fitch's European structured finance operational risk group. "This will almost inevitably lengthen the mortgage application process and push up costs for the lender, which may in turn be passed on to the borrowers in the form of higher interest rates and/or product fees."
For existing transactions, this increased cost may lead through to higher standard variable rates for mortgage lenders. This could be positive for a transaction if there are low delinquencies as there may be more excess spread. But, there is a possibility that the increased cost might cause some loans to become unaffordable.
However, Fitch believes that this stress will not be significant enough to alter the result of its U.K. RMBS stress test that does not anticipate rating migration for the vast majority of 'AAA', 'AA' or 'A' rated notes.
Additionally, in the medium-term, a ban on certain product types could impact certain RMBS transactions where borrowers who self-certified their income look to re-mortgage and are only able to prove a lower income than the one previously declared for their original mortgage.
This would lead to an inability to re-mortgage until income is in line with the originally quoted amount. However, this is unlikely to affect existing RMBS ratings given Fitch's conservative assumptions.
The agency assumes ahigher probability of default assumptions where borrowers either have been fast-tracked (where the lender has decided to accept the borrower without independently checking their income, usually when the loan is deemed to be low risk) or have self-certified their income (where the borrower has elected not to provide their income.
The FSA has also indicated that buy-to-let (BTL) properties will be subject to regulation. How this will be achieved is yet to be finalized. However, there is a risk that regulation may prevent loans that were granted prior to BTL being regulated from being refinanced.
The FSA has announced that it intends its regime to be counter-cyclical and although it does not appear to be advocating limiting LTV limits currently, it indicates that this may be a possibility in the future. Making higher LTVs unavailable has the potential to leave borrowers who were granted such products before a ban unable to refinance.
"In not ruling out the introduction of LTV limits in the future, the FSA has to some degree given the U.K. Mortgage market some scope to become self-regulating," added Francesca Zwolinsky, director in U.K. RMBS team at Fitch. "It does so in the knowledge that if the excesses of 2005/2006 return, that it has the power to curtail this."