Moody’s Investors Service cautioned that with the U.K. economy in recession and unemployment, personal insolvencies and house possessions all rising sharply, the performance of prime mortgages will probably continue deteriorate.

"Transaction activity in the housing market is low and consumer confidence is depressed, pointing towards continued falls in house prices," says Nitesh Shah, a Moody's economist.

Key performance indicators for the U.K. prime RMBS market reveal that  delinquencies continued increasing in 2Q09, but at the same time, repossessions decreased marginally, Moody’s said.

Delinquencies reached 1.80%, a 121 basis point increase since 4Q07 and an 18.3 basis point increase during the quarter.

Meanwhile, outstanding repossessions decreased to 6.6 basis points on average and cumulative losses continued to trend upwards.

The rating agency said that several factors are influencing the worsening performance in the sector.

"Before the economic downturn borrowers were able to refinance their way out of arrears problems or sell their property," said Daron Kularatnam, a Moody's senior associate. "The combination of increasing unemployment and lack of financing options if borrowers are experiencing mortgage problems has led to worsening performance as borrowers that are forced to revert to the lender's Standard Variable Rate (SVR) may suffer a payment shock."

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