The finalized details of the U.K. government's Homeowner Mortgage Support Scheme (HMSS) remove some of the uncertainty around RMBS deals, Fitch Ratings analysts said.
However, entry into the scheme is voluntary for lenders and borrowers. The finalized details leave a significant level of discretion to lenders as to how they will interpret and implement the scheme.
"There are a number of exclusions and conditions that make it difficult to assess the likely take up of such a scheme and its likely impact on RMBS transactions, although we now know that products such as BTL and charges totaling over £400,000 ($ 565,000) will be excluded and second charges included, other questions remain unclear," says Alastair Bigley, a director in Fitch's RMBS department.
Under the finalized HMSS, borrowers who have suffered a temporary loss of household income and have been making payments (although not necessary full payments) under an agreement with their lender for at least five months will be eligible to be considered for the scheme. The finalized details also limits the government guarantee of the interest at 80% of the interest deferred by the underlying borrower.
The scheme does not cover any loss of capital the lender might suffer from extending the foreclosure. The scheme will run for two years, with the deferral period initially being a year, at which point a review will be conducted.
The lenders will have four years from when the borrower leaves the scheme to claim against the guarantee. Additionally, there is a rate cap of 8% after which the government will not guarantee interest. Fitch understands that the rate will be set 'appropriately' to the Bank of England's base rate. Furthermore, the exposure that the government has to each lender will initially be capped.
"Viewed positively the scheme has the potential to significantly help 'can't pay' borrowers and reduce foreclosures and therefore losses, however there needs to be adequate safeguards for ensuring 'won't pay' do not negate the advantages the scheme may have," Bigley said. "In a falling market ultimately if the borrower does default the loss severity will be higher than it would otherwise have been."
