Numerous, sometimes contradictory, reports on the state of U.K. housing have created a general uncertainty as to the market's future. While frustrating, this has done little to quell the growth and performance of securitization in the sector.
For some time now, the securitization industry has maintained that borrower fundamentals, interest rates and unemployment have remained resilient to the global economic downturn. Even in the event of a worst-case scenario, analysts maintained that RMBS structures benefit from excess spread levels to mitigate losses. Nonetheless, a dramatic fall in interest rates combined with rising unemployment could add some pressure to these structures.
Rating analysts explained that a continued rise in consumer spending would be vulnerable to a sharp rise in interest rates that would in turn negatively affect the performance of a RMBS transaction. Recent indications have been that the next move for interest rates will be up. "The volume of personal indebtedness that consumers have now accumulated overall could see relatively modest rises in interest rates and have a significant impact on borrower's ability to service their debts," explained one analyst at Fitch Ratings. "This could feed through to rising arrears in general, especially if coupled with increased unemployment. Lenders could be adding to the dangers by offering an increasing array of self-certification of income products which could tempt borrowers to exaggerate income."
Although the augmenting U.K. household debt is vulnerable to a rise in interest rates, some industry sources maintain a significant spike would be needed to have a real impact. A greater debt load does not automatically equate to disaster for the economy, explained analysts at Morgan Stanley.
"Rising debt levels are a rational response to the demographic shifts, rising asset values and lower interest rates," said the analysts. "And unless interest rates rise very sharply or house prices tumble significantly, high debt levels are unlikely to cause an economic bust."
As a testament to the strong fundamentals of today's market, Fitch last week upgraded five and affirmed 17 U.K. prime and buy-to-let RMBS transactions and said the ratings action resulted from the positive general economic environment.