Standard & Poor's placed on 101 tranches of notes issued by Northern Rock’s U.K. RMBS master trust, Granite, on negative watch.

The ratings action is a result of declines in U.K. house prices over the past two years and generally rising arrears and losses have seen the perceived credit quality of U.K. mortgages deteriorate.

In the particular case of the portfolio backing the Granite trust, long-term arrears have risen to 4.67% from 0.44% since the last issuance in September 2007, while house prices have fallen by approximately 13% over this period, according to market indices.

Given the high loan-to-value (LTV) ratios of many of the mortgages in the underlying portfolio (78.33% unindexed and 86.34% indexed) and loan origination policies that have attracted borrowers with affordability metrics lower than the long-term average, we believe that a significant proportion of the underlying pool may come under increasing payment pressure, ultimately leading to increased realized losses.   

Deutsche Bank analysts said last month the trust saw record losses of 5bps and loss severities of 35%, which may have been the triggering factors.

“Granite bonds have traded up strongly of late - particularly seniors which rallied 10 points to 82 in the past month alone,” analysts said. “The threat of downgrade (even though limited to junior bonds) may well have a cooling effect on bids.”


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