The U.K. government has finally succumbed to calls for it to step in and ease the growing repossession rates.
Last week a new initiative was launched aimed at helping borrowers who are working to avoid default on their loans. This move could also have liquidity and credit implications for U.K. RMBS transactions, market players said.
"We are determined to do everything possible to ensure that hard-working households have the option to stay in their homes, if they suffer a loss of income during the downturn," said Margaret Beckett, the U.K. housing minister. "This scheme will give households the breathing space to get back on their feet again and help ensure they do not face or fear repossession. It shares the risk of home ownership at this difficult time across all the partners - the government, the lenders and the borrowers. We want to see all lenders signing up to this scheme as part of their efforts to ensure that repossession is always an absolute last resort."
The government said eight U.K. lenders, which comprise 70% of the country's mortgage market, had signed up to the £1 billion ($1.48 billion) Homeowner Mortgage Support Scheme. This program was intended to ease strains on borrowers who are suffering a temporary loss of income by deferring their mortgage payments for up to two years on mortgages loans up to £400,000 and where the owner has less than £16,000 in savings.
The government will guaranty the deferred interests payments in return for banks' participation in the scheme. The deferred interest will be rolled up and added to the outstanding mortgage balance. At the end of the deferral period the borrower will resume affordable monthly payments by extending the term of the mortgage. The details of how this scheme will work and, more importantly, whether it will be mandatory or voluntary, remain unclear.
But the move could lead to a mortgage payment slowdown. And according to Royal Bank of Scotland research, this could add further pressure on the already slowing CPRs, which have slowed by 31% since June to average 24.8% in October for the prime master trust programs. RBS also highlighted that as the deferred interest will be guaranteed by the government, a delay in sales when house prices are falling could result in higher loss severities for defaulted mortgages.
"It is unclear how this scheme will be implemented and how U.K. RMBS transactions will be affected, but there are possible liquidity and credit implications," Moody's Investors Service analysts said. "However, any rating actions will ultimately depend on the actual details that are approved, such as eligibility criteria, the proportion of interest deferral and the treatment of principal payments, among others, as well as how each transaction structurally caters for the changes."
The rating agency said the scheme could lead to liquidity shortfalls in some transactions by effectively increasing the amounts of delinquent loans and said that house prices might fail to improve or even worsen. This would result in a lower recovery value, thereby increasing the ultimate credit loss to the transaction. Moody's also added that from a transaction-reporting viewpoint, the impact on performance based triggers needs to be clear, as there is uncertainty as to how banks will classify borrowers subject to the scheme.
"If a significant number of eligible borrowers in a transaction choose to exercise this option, and they are reported as delinquent, delinquency triggers might be breached earlier," analysts said. "Some of the consequences of a trigger breach in U.K. RMBS include the prevention of future substitutions, further advances, loan conversions and reserve fund amortization, and [breaches] typically result in sequential allocation of cash flows in the transaction."
Fitch Ratings said that if the scheme is not targeted at borrowers who have a reasonable chance of recovery, then the effect of extending the time until repossession could merely be delaying the inevitable and this would only serve to increase loss.
If the proposal only delays an inevitable repossession for two years, then the impact could be an increased loss on the ultimate repossession. This is because U.K. house prices are expected to continue to decline in the coming months, and are unlikely to recover to current levels after two years.
"Lenders who have signed up for the scheme so far face the potentially difficult dilemma of reconciling their commitment to the deferral scheme with the interests of investors in their RMBS programs," added Gregg Kohansky, senior director and head of EMEA RMBS at Fitch.
The government said it intends to work with lenders over the coming days to develop the scheme in detail, expecting it to become available to customers early in the New Year.
"The government's recognition that it needs to offer increased support to help keep more people in their homes is welcome, and we will work with Ministers to make sure the suggested scheme will help in practice," said Michael Coogan, the Council of Mortgage Lenders director general. "I emphasize our preference for changes to widen ISMI (income support for mortgage interest) and wider ranging mortgage rescue proposals. We await further information on the proposed guarantee, as the devil will be in the detail."
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