Fitch Ratings said that the Financial Services Authority's (FSA) proposed ban on self-certified and fast-tracked mortgages is unlikely to affect the agency's U.K. RMBS ratings.
The FSA announced yesterday that income should be verified in all cases. This will prevent the origination of both self-certified and fast-track mortgages.
"Fitch has made stressed low prepayment assumptions for transactions featuring both self-certified and fast-tracked loans and therefore the proposed ban does not necessitate a change in the agency's analysis," says Alastair Bigley, head of U.K. RMBS at rating firm.
Recently Fitch modestly increased its default probability assumption for self-certified loans. However, generally, the underlying performance of existing self-certified and fast-tracked mortgages is in line with the agency's initial expectations.
Fitch said that fast-track loans originated with robust underwriting procedures do not really show higher credit risk compared with identical loans that have had their income verified. This is why the rating agency will still apply its current criteria to such loans.
"The mortgage market responded to concerns regarding self certified lending in 2008 when almost all lenders ceased originating the product, " Bigley said. "Consequently, the FSA ban on self-certified lending effectively prevents its return to the market,"
The restriction on self-certified lending means that self-certified borrowers that cannot provide proof of income will be unable to re-finance elsewhere. This will lead to a higher weighted average life for RMBS transactions that have significant exposure to self-certified lending.
In contrast, most prime lenders continue to lend on a "fast-track" basis. Fast-track tends to be reserved for borrowers with a low LTV and high credit score. The benefit of a high credit score is that income data is typically not requested, and if it is, only on a random, sample basis.
Eliminating fast-track loans practically speaking should not have a direct impact on RMBS deals since all borrowers should be able to prove their income. But, certain fast-track schemes publish the eligibility criteria for fast-track. This creates the possibility that such schemes are being manipulated and that certain borrowers who have been underwritten as fast-track will be not be able to prove their income. Despite this, Fitch does not anticipate any rating action.
Fast-track lending provides mortgage lenders more operational efficiency. Its ban will likely result in higher origination costs. This burden will probably be passed on to the consumer through higher mortgage fees or mortgage rates, which would add a modest affordability stress. Fitch will continue to monitor this aspect of the fast-track ban.
