Fitch Ratings said that the servicing strategies of U.K. nonconforming lenders have developed rapidly since the onset of the recession, adding that these practices continue to evolve to reflect the changing economic environment.
The foreclosure timeline of a typical U.K. mortgage has extended versus rates from just a year ago, rising to 12-15 months between default and possession from 2008s nine to12 months.
Nonconforming RMBS are also beginning to see foreclosures beginning after three to four months of missed payments, instead of starting immediately after a missed second payment.
"Fitch rates a number of residential primary and special servicers across the U.K., and has noted that the increased focus on Treating Customers Fairly and other regulatory and government initiatives over the past 12-18 months has led specialist lenders and servicers to amend their arrears and foreclosure strategies," said Robbie Sargent, co-director of Fitch's European structured finance team.
The rating agency believes that the increased patience of lenders and servicers is the reason behind the deduction of almost 10,000 from the projected possessions forecast by the Council of Mortgage Lenders (CML), dropping the number to 65,000.
When allowed by the RMBS, servicers are implementing special programs that seek to prevent borrowers from falling into default and losing properties while maintaining the maximum cash flow possible from the RMBS. This is achieved via the thorough understanding and knowledge of a borrowers finances, and personalized loan plans that make changes from extension of loan maturities to the changes in payment methods to deferral of payments.
"It is wrong to assume that because a loan has been securitized it is more likely to be pushed through to possession in the event that it falls into arrears," said Fitch Co-Director Alastair Bigley. "It is in the interests of investors in RMBS that servicers adopt strategies that minimize ultimate losses. Servicers are in the best position to judge whether loan modification is the best means of achieving this. Certainly with interest rates at their current low levels, a servicer's flexibility to make this decision is greater than in the early 1990s recession."
By contrast to the current numbers from the market as a whole, the Financial Services Authority is investigating four firms in relation to their arrears handling techniques, on the basis that they focus too strongly on the arrears recovery rather then the ability of the borrower to make the necessary payments. It is unclear whether these are third party administrators or specialist lenders who are acting as the named servicer on the RMBS.
While it is too early for re-default rates for modified U.K. loans, the U.S. model of nearly 70% re-defaulting shows the difficulty in successfully implementing these programs. In some cases, prolonging inevitable repossession results in a larger loss on the home sale, and a larger long-term debt for the borrower.
U.K. servicers continue to contact borrowers and attempt to remedy missed payments, encouraging borrowers to make more realistic arrangements to pay.
"Clearly mortgage defaults will continue to be prevalent during the recession. However, servicers are more geared up than before to tackle rising arrears, Sargent said. A continued investment in staffing and training, along with more emphasis on Treating Customers Fairly, should help to mitigate increasing possessions."