The Bank of England unveiled a surprise 25 basis point rate rise last week that could leave consumers scrambling to make ends meet. However, on the securitization end, the market can draw comfort from the high level of fixed-rate mortgage debt originated over the past 18 months, Morgan Stanley analysts said.
"Between autumn 2004 and spring 2006, the average U.K. mortgage rate fell for existing debt," Morgan Stanley analysts reported. "In addition, we have seen a significant drop in the relative price of new fixed-rate mortgage deals versus variable-rate deals. As a result, the mix of mortgages sold has changed. The proportion of fixed-rate mortgages originated rose from 39% to 71%." They added that the high levels of recently originated RMBS fixed-rate mortgages pools should help maintain borrower affordability in these deals for the short-to-medium term.
At the moment, market fundamentals look fit to withstand the rate hike. U.K. data released showed house prices continuing to grow at a solid pace while mortgage repossessions remain very low. House price growth was 8.8% (year-over-year) in July, according to HBOS last week. This represents a modest fall from 9.4% last month, but the monthly increase was 0.2%, up from -0.2% in June. In addition, the U.K. Land Registry reported house prices up 7.7% (year-over-year) in 2Q06, representing a significant increase on the 5.1% reported for 1Q06.
But the rise in personal insolvencies paints another picture. According to market reports, U.K. personal insolvencies have risen by 10% over the past quarter, and some market participants suspect that the surprise hike might stretch some households beyond where they could cope. "Trading statements from U.K. banks at the beginning of August reported sharply higher bad debt charges on unsecured lending books, without exception," Deutsche Bank analysts said. "By contrast, mortgage impairments remain very low, declining in many cases. This bifurcation in credit performance, explained by over-indebtedness in pockets of the non-home owning economy and the more relaxed bankruptcy regime, is manifest in U.K. securitizations as well if we were to compare prime RMBS to credit card ABS."
Analysts at the Deutsche Bank said they expected a further 25 basis point rise in U.K. rates before the end of 2006.
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