The U.K. government last week announced measures intended to stem house price deflation and mortgage defaults. The measures would also ultimately boost the deteriorating performance in U.K. RMBS.
However, market observers said it's a case of too little, too late to change the course of plummeting house prices across the country in what is the worst housing slump to hit the U.K. economy since the early 1990s.
The support program unveiled last week aims to prevent the housing market from taking an even deeper dive, and thus keep the U.K. from entering a deep recession. However, the plan's impact on the housing market is expected to be nominal. U.K. house prices are unlikely to stabilize in the near future, market analysts said.
"Tighter lending criteria have clearly made it more difficult for first-time buyers to enter the market," said Michael Coogan, director general at the Council of Mortgage Lenders (CML). "The stamp duty and shared equity measures announced by the government last week will be helpful to those first-time buyers looking to enter now, but many may be waiting for house prices to stabilize. Restoring the flow of funding to the mortgage market is crucial to helping the housing market recovery."
Last week Halifax reported a 10.9% fall in house prices. According to the Royal Institution of Chartered Surveyors (RICS) U.K. housing market survey released last week, 81% of chartered surveyors reported a fall rather than rise in house prices in August 2008. Average sales for the last three months fell to a record low of 12.7 per respondent, pointing to the lack of liquidity still troubling the market.
The CML reported there were 47,400 house purchase loans worth £7.1 billion, unchanged from June; this represents a 51% fall by volume and 54% by value from the same month last year. The number of loans to first-time buyers declined to 17,300 in July, down 5% from June and 48% from July 2007. There were 30,100 loans to home movers in July, up 3% from June but 53% lower than July last year. Home movers typically borrowed 68% of the value of the property, down from 72% in June, and 2.85 times their income, down from 2.94 in June.
The government is hoping to stimulate the housing market by abolishing the stamp duty tax on properties valued at £175,000 ($307,000) or below. The threshold was raised from £125,000. The government has also introduced a shared equity scheme where £300 million will be distributed among 10,000 first-time buyers earning below £60,000, as shared equity in their house purchases. The equity loans will be interest-free for five years and will provide up to 30% of the house value.
The government has also planned support for up to 6,000 of the most vulnerable homeowners facing repossession. Help for these owners looking to remain in their homes will come through a £200 million mortgage rescue scheme. A further £100 million investment will be made by the U.K. to support mortgage interest reform, which could help prevent an additional 10,000 repossessions.
The government also plans to inject £400 million toward social-housing providers, including registered social landlords and councils that would deliver 5,500 more "social" houses over the next 18 months.
Reporting on the new measures, Ivan Pahlson-Moller, a securitization analyst at Deutsche Bank said, "In our view, the degree of support is likely to be negligible given that the current accelerated pace of house price declines quickly negates the nominal benefit of stamp duty relief." Pahlson-Moller explained that, at the current rate of price decline, the proposed stamp duty savings could be wiped out within a month, while the shared equity scheme targets only a very small percentage of the 18,000 first-time buyers per month who are looking for funding.
The initiative on repossessions will only benefit around 5% of homeowners facing repossession. Pahlson-Moller calculated that in the last 12-month period 149,000 repossession actions were initiated. As stated above, the government is aiming to help in only 6,000 of these cases.
"Considering that borrower default frequencies are likely to further accelerate going forward as loan rates reset, the 6,000 targeted by the government will look even more marginal in its benefit to the overall U.K. mortgage market," Pahlson-Moller explained.
In terms of the impact on outstanding RMBS, Pahlson-Moller sees the effect of the recent measures as unremarkable in terms of increasing prepayments as well as in reducing portfolio late-stage arrears and defaults. "We would make the observation that the pocket of borrower loans targeted by the recent measures is unlikely to have been heavily securitized," he said.
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