U.K charities have called on the Treasury to put pressure on Northern Rock to change its approach to property repossession. The charities said that the nationalized bank has been aggressive toward repossessions when borrowers fall behind with their mortgage repayments, because of its eagerness to repay the government.
Credit Action, a U.K. debt charity; Action for Debt, a debt advice service in Durham; and Shelter, a U.K. charity for the homeless, are all looking for newly nationalized banks to stop repossession unless absolutely necessary.
According to figures reported by Shelter's ROOF magazine, Northern Rock repossessed 0.29 % of its borrowers homes in the second half of 2007 and 0.56 % in the first half of this year. Of the 19,000 homes repossessed in the first half of this year in the U.K., 4,000 were seized by Northern Rock.
The government is considering how it might limit the level of repossessions, according to Deutsche Bank analysts. The response could come in the form of various soft initiatives, but the ultimate government action could very well be radical and include legislation that incentivizes or forces lenders to modify loans and restore borrower affordability.
"Whether or not mortgage repossession leniency is consistent with securitization depends on the degree of reform," analysts said. "Any 'soft' recommendation would generally be allowable under the terms of U.K. securitization indentures as far as we can tell. However a more radical government approach to force lenders via legislation into changing loan terms to, say, explicitly forgive a portion of the principal balance ("cram-downs") may be more challenging to enforce, in our view."
U.K. RMBS servicing agreements and warranties are typically versatile and allow the originator/servicer the discretion to deal with delinquent securitized borrowers in the same way that balance sheet loans are managed, according to Deutsche Bank analyst. Deal documents normally only call for the servicer to act prudently, with language often designed to expressly allow for different approaches to arrears management, whether out of business practice or because of legislation.
However, RMBS deal documentation and servicing agreements normally do not allow for changes in arrears management that are deemed to be "materially prejudicial" to investors. Any breach on this level would trigger a servicing termination event.
"In terms of RMBS, bondholders will experience cash flow extension under any plan to make arrears management more borrower-friendly," Deutsche Bank analysts said.
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