Loan modifications have had little impact on the U.K. mortgage market despite the backing mods have received from the government, according to a Fitch Ratings study.
Formalized loan modification programs were first seen in U.K. RMBS in January 2008.
"The Fitch study suggests that borrowers in distress, currently enjoying low lender standard variable rates and the historically low Bank of England base rate, have nowhere left to run," said Robbie Sargent, a director in Fitch's European structured finance operational risk group. "Interest rates are so low that downward interest rate adjustment would be so negligible as to have no material impact on monthly mortgage payments, whilst high loan-to-value ratios limit the ability of servicers to offer other modification facilities."
The limited data received also suggests that almost half of all loans reviewed for potential modification are deemed to be 'unsuitable' for modification by the servicer.
Fitch believes that loan modifications have the potential to alter the speed and timing of prepayments in an RMBS transaction.
Fitch noted that loan modifications might provide some benefit to U.K. RMBS transactions specially given the current economic climate, which is characterized by falling house prices, negative equity and rising unemployment.
However, concerns remain, specifically around potential redefaults whereby modifications are simply delaying an inevitable default, and therefore, storing up losses for the future.
"Loan modifications cannot be viewed as universally good or bad for a transaction," said Alastair Bigley, head of U.K. RMBS at Fitch. "Whether they are beneficial or not to investors depends how the operational risk inherent within a loan modification is managed and the position of an investor within the capital structure."