Fiscal tightening could lead to a second wave of deterioration in U.K. prime and nonconforming RMBS collateral performance, said Standard & Poor's.

According to S&P, U.K. housing remains overvalued on a fundamental basis. As a result the rating agency said it remained cautious about the longevity of the bounce-back in U.K. house prices, according to second quarter index reports.

"We expect house price movements to remain uncertain in the near-term, and we note that a high percentage of nonconforming borrowers remain in severe arrears," credit analyst Neil Monro said. "Therefore, possible future increases in unemployment or interest rates may cause a further wave of repossessions."

The looming fiscal austerity package and the possibility of interest rates rising again could significantly test some borrowers' ability to make their mortgage payments, especially when considered in the context of still-severely curtailed refinancing options, due to lender-initiated tightening of their criteria, as well as potential future changes to regulation resulting from the Financial Services Authority's Mortgage Market Review.

Forward-looking survey data from Royal Institution of Chartered Surveyors (RICS) in July suggested that the proportion of respondents expecting prices to fall in the next three months exceeded by 28 percentage points the proportion expecting prices to rise.

"Thus, while macroeconomic factors have recently been positive, and repossession rates fallen, we remain cautious over future collateral performance," S&P analysts said.


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