U.K. nonconforming lenders take into consideration different factors when assessing the impact of interest rates, the borrowers' other debt payments and their income. These different components could ultimately affect the way non-conforming RMBS deals are rated going forward, said Fitch Ratings in a report on the sector last week.
In underwriting loans, many lenders have turned away from the simple income multiple towards a more involved calculation of monthly debt payments as a percentage of net income. The major driver for this market-wide development has been regulation.
"The [Financial Services Authority s] initiative for responsible lending has triggered the use of more complex and precise measurement of borrowers' affordability," said Gregg Kohansky, a director in Fitch's U.K. RMBS team. "On the back of this, underwriting processes and risk management have been improved not only to meet regulatory requirements but also to gain an advantage in the highly competitive mortgage market."
All nonconforming lenders surveyed by Fitch currently utilize a debt-to-income (DTI) measure either as a primary or secondary measure of assessing affordability, which is analyzed in two ways: by increasing the interest rate if the mortgage rate is initially discounted; and treating interest-only loans as full repayment loans.
Many lenders are still in the process of setting up appropriate systems that would allow them to track the borrowers' debts and incomes more thoroughly than in the past.
"A market standard has yet to emerge," says Tansies Mitropoulos, associate director in Fitch's RMBS team. "Lenders use various definitions of affordability. As a result, a 40% debt-to-income ratio can mean very different things to different lenders. Risk departments face a difficult challenge in finding lending limits corresponding to the new measures."
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