As the shockwaves of the subprime debacle continue to ripple through the European structured finance market, U.K. subprime lenders are already applying a lesson learned by reining in their lending criteria.
But will it be enough to stave off future problems from these risky loans?
Moody's Investors Service conducted a recent survey of mortgage servicers and found that, on average, subprime loan servicers have only recently begun to undertake material loan modifications related to interest-rate resets and concluded that such change in activity remains low.
The survey, according to Moody's, showed that most servicers had modified only about 1% of loans that reset in the months of January, April and July 2007.
"These trends can be a cause for some concern," said Nicolas Weill, Moody's chief credit officer in the structured finance group. "Based on these survey results, the number of future loan modifications by subprime servicers on loans facing reset may be lower than needed to mitigate losses meaningfully. In light of the current trend and the collateral performance, further rating downgrades on subprime RMBS issued in late 2005 and 2006 could be necessary."
U.K. lenders are among those servicers that have begun to scale back on lending. Market reports indicate that several lenders have exited the bottom end of the market. Societe Generale analysts also said that the most affected will be borrowers who have recently been through an insolvency process or missed several mortgage payments. "Historically, lenders would refinance borrowers within a repossession process. However, we understand these loans are now much harder to obtain," SocGen analysts said.
Kensington Mortgages, the specialist lending company recently acquired by Investec, announced last week that it changed its underwriting criteria for both its prime and nonconforming products. The company had already announced withdrawal from second-charge lending earlier this month. Now it plans to ease its aggressive lending for the short term while repositioning its prime product in response to institutional investor demand. Underwriting of nonconforming product is now capped at a maximum LTV of 75%, while pricing has been simultaneously raised. The company cut the rate on its two- and three-year products that target prime borrowers with high LTVs.
According to market reports, Money Partners, which is also a subsidiary of Investec, intends to continue funding subprime mortgages, but Investec-owned Unity Homeloans and Infinity Mortgages withdrew their nonconforming products. Infinity is, however, expected to relaunch its product line at a later date.
Other mortgage lenders have also been scaling back in the sector. "Over the past several weeks, a number of changes have occurred within the U.K. residential mortgage markets," Royal Bank of Scotland analysts said. "Lenders have scaled back their LTV maximums, raised rates and, in some cases, exited the markets."
Before filing for administration on Sept. 10, Victoria Mortgage raised its rates from 1.25% to 2.5% for near prime to its heavy adverse products. Two transactions include Victoria Mortgage-originated collateral in conduit transactions: 4% of the pool in the GBP909 million ($1.83 billion) ResLoC UK 2007-1 in May and 100% in the GBP196 million EuroMASTR 2007-1V. According to analysts at Societe Generale, the EuroMASTR transaction will require a new special servicer. However, the ResLoC deal is unlikely to suffer any significant impact because the servicing had already been outsourced to Homeloan Management and special servicing to Morgan Stanley.
According to press reports, Lehman Brothers closed its London Mortgage Co. and its Southern Pacific Personal Loans subsidiaries late last week and was said to have withdrawn from second-charge lending.
Meanwhile, GMAC ended its Unlimited applications and its Mainstream rate, Extended criteria, Redemption swap, Creative solution or MERC product. According to market reports, GMAC designed its MERC range as a solution that reduced early redemption fees in order to offset the recent rate increases. Northern Rock has increased its subprime fixed rates by as much as 1.25% since Aug. 29. The lender will also withdraw all subprime trackers until further notice and will reduce procuration fees in its niche prime and light-adverse product categories to 0.75%. And Deutsche Bank subsidiary db mortgages relaunched its products at substantially wider spreads.
A number of U.K. lenders are adjusting downward acceptable LTV by product, but the reduction is generally from 95% to 90%, especially at the riskier end of the spectrum, Royal Bank of Scotland analysts said. "Our guess is that more bad news out of the U.S. and other markets will pressure spreads wider for the next several weeks," they said. "However, even if U.K. subprime losses double from current levels, they'd still be little more than 1% on average - not bad considering where they have been historically (up to 4.5%) and how sturdy the structures were built to absorb losses."
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