RPT-Fitch: Help-to-Buy Positive for UK RMBS, Risks Need Monitoring
Oct 11 (Reuters) - (The following statement was released by the rating agency)
The mortgage guarantee component of the UK government's Help-To-Buy scheme should be positive for existing RMBS transactions via its short-term impact on house prices and mortgage funding conditions, Fitch Ratings says. Over the longer-term, an unsustainable rise in house prices and an increase in riskier lending could damage UK mortgage performance, and these risks need to be monitored. But a number of provisions in the scheme, combined with generally improved underwriting standards since the financial crisis, will help offset these risks.
If it succeeds in getting a range of lenders comfortable with high loan to value (LTV) lending, the scheme could increase prepayment rates in UK RMBS transactions as it becomes cheaper to refinance existing high LTV borrowing with another lender.
Data from Fitch-rated UK RMBS transactions show that annual prepayment rates fell to 5%-15% in 2009-2010, and remain below the range of about 20%-40% before the financial crisis. However, while they might increase, we would not expect prepayment rates to recover to pre-crisis levels, as total exposure of RMBS pools to high LTV loans would probably be relatively low, due to the presence of seasoned loans.
Rising house prices and increased turnover in the property market would also be modestly positive for existing UK RMBS transactions. The Royal Institution of Chartered Surveyors (RICS) said Tuesday that the balance of surveyors reporting an increase in house prices last month had hit its highest level since June 2002.
Borrowers who struggled to make payments would be more inclined to try and resume repayments if they were not in negative equity, and could potentially sell their house to repay their loan. The post-crisis rise in UK mortgage arrears stabilised in 2010 when house prices bottomed out, suggesting a connection between prices and arrears levels.
Similarly, banks selling repossessed properties would recover more of their original advance in a rising and busier market, not just because prices are higher but because forced sale discounts would be lower.
By increasing the availability and lowering the cost of high LTV lending, the government mortgage guarantee scheme arguably poses risks to the longer-term performance of the UK mortgage market, by encouraging riskier lending.
However, we think these risks are mitigated by certain provisions in the scheme. These include affordability tests, the limited duration of the scheme, which will last for three years, and the fact that lenders are still exposed to some losses, and that once a lender provides a guaranteed mortgage product at a particular LTV, all of its lending at that LTV has to be guaranteed, limiting adverse selection. Nor can borrowers use the guarantee to re-mortgage with the same lender or to finance second homes or buy-to-let properties. In addition, the scheme is going to be monitored by the Financial Policy Committee at the Bank of England for its potential of raising systemic risk.
The UK government has announced that part 2 of Help-To-Buy will start this week, earlier than the original plan of January 2014. Part 1, where the government provides an equity loan worth up to 20% of the value of a new build home, repayable when that home is sold, has been in operation since April.