Despite earlier concerns this year that a downturn in the economic cycle might lead to a downtrend in the residential mortgage sector, volumes recorded for first quarter 2002 demonstrate the European market is withstanding the prognosis.
According to Standard & Poor's, the European RMBS market ended volumes at $9.3 billion from $6.6 billion recorded during the same period last year. With a total of 16 transactions, the volume represents a 41.6% increase.
Albeit a small increase in volume, the U.K. maintains its lead in European volumes ending first-quarter activity at $5 billion. This is a positive note for the region, considering dire predictions that with falling unemployment rates, increasing interest rates and a decrease in consumer spending this year, the U.K. would be poised to weather dampened performance of mortgages going forward.
In response to the growing disparity between house price increases and average salaries in the London and South East regions, two U.K. mortgage lenders, Alliance and Leicester and Natwest, tightened their lending criteria earlier this year. Alliance and Leicester took the precaution by demanding a 10% deposit in these regions for properties worth over GBP100,000 as an effort to protect the borrower, reported Dresdner Kleinwort Wasserstein.
But with the improving consumer confidence in the market supported by the record volumes of gross mortgage lending in March, Alliance and Leicester have recently reconsidered the deposit and now require the 10% to be paid on properties worth more than GBP150,000.
Nonetheless, market sources say that within the next year the downturn is still likely to take its toll on the mortgage sector and worries continue to persist that a crash is unavoidable. "Market participants projected a 5% rise in house prices in 2002 and have now revised this figure to 10%," reported Dresdner. "Nationwide has released figures for April which showed a national 3.4% monthly increase in U.K. house price. This is the highest since mortgage lenders started monitoring figures in 1991."
However, first quarter 2002 volumes revealed that repeat issuance is becoming more prolific in Europe in general and indicates the market's growing maturity, said analysts at S&P. Along with experienced issuers, another positive note is the number of upgrades during this period, which totaled six.
"The present situation gives the borrower a greater opportunity to overstretch themselves against the backdrop of slowly rising interest rates and unemployment," reported Dresdner. Moreover, mortgage payment protection serves as a mitigant to possible borrower difficulties to repay mortgages. Although the percentage of mortgages taken out with such protection is on the rise, Dresdner cautions that is still a relatively new trend.
Further, many of the mortgage pools are covered by a mortgage indemnity guarantee. In the case of borrower default, this would ensure that the lender would be able to recover its loss on the portion in excess of the loan to value limit through the guarantee provider and would additionally benefit from the sales of the properties.