TEXT-Fitch updates UK Mortgage loss assumptions; no rating impact expected

Aug 09 - Fitch Ratings has updated its criteria assumptions for assessing credit risk in UK residential mortgage loan pools. The updated criteria assumptions are not expected to result in changes to the ratings of RMBS, covered bond and SME transactions that are backed by UK residential mortgage loans. Fitch's foreclosure frequency (FF) assumptions and house price decline (HPD) assumptions remain unchanged, as do adjustments applied to FF for borrower, loan or product characteristics.

Mortgage arrears have remained stable since the last criteria review. However, the delay in economic recovery and the potential of rate rises when they occur on variable rate borrowers is still a concern. Fitch's base case assumes approximately 3.5% of the mortgages in a typical prime portfolio to default and 9.0% for non-prime. This is consistent with the agency's previous base case assumptions.

Fitch has retained its assumption that house prices will fall by 20% compared to their peak in 2007. Currently prices are on average around 10.4% below the peak level. In a stressed scenario, equivalent to a 'AAAsf' rating level, foreclosures are expected to reach 13.5% and house prices fall by 52% from peak levels.

Over the past four years there has been a sharp drop in prepayment rates in the UK. The prepayment rates assumed in the agency's high prepayment scenario have been lowered from 25% to 15% at 'Bsf' to reflect this. The UK prepayment stresses are now also more closely aligned to those in other EMEA countries.

Fitch has also detailed its approach to modelling of margins for SVR products. Whereas previously Fitch applied a cap to SVR spreads of 2.0% over GBP Libor given concerns over potential margin compression in a rising interest rate environment, and also due to concerns of potential replaceability of SVR-Libor swaps at higher margins, the agency now assumes a range for such cap of 2.0%-2.5%. In order to apply a margin above 2.0%, Fitch would need to be satisfied that historical analysis of SVR rates charged by the lender shows a proven track record of higher margin SVR settings.

Fitch also will not apply margin compression to account for product switches and further advances unless it feels that a particular transaction may be subject to abnormally high levels of further advance and product switch activity. To date, instances of product switches and further advances have been limited.

The published criteria assumptions will be used for rating new and existing RMBS transactions and covered bond programmes and for maintaining covered bond ratings. In addition, the MVD assumptions will apply to SME CLOs secured by residential real estate.

Link to Fitch Ratings' Report: EMEA Criteria Addendum - United Kingdom - Mortgage and Cashflow Assumptions