June 22 - Fitch Ratings has downgraded both the class C1b notes and currency swap and also
withdrawn the class A1 short-term ratings of Paragon Mortgages 15 and affirmed all tranches of
Paragon Mortgages 7, 8, 10, 11, 12, 13, 14, 16, Edgbaston RMBS 2010-1 Plc, Deva Financing Plc
and Hawthorn Finance Limited Series 2008-A. Fitch has also revised the Rating
Outlook on Deva Financing to Negative from Stable. A full list of rating actions is available at
www.fitchratings.com or by clicking on the link above.
The mortgage loans in the Paragon series were originated by Paragon Mortgage Limited and
Mortgage Trust Limited, both subsidiaries of The Paragon Group. West Bromwich Building Society
was the originator of the collateral for Hawthorn, while both Deva and Edgbaston were originated
by Bank of Scotland, although under different brand names; the former by The
Mortgage Business and the latter by Birmingham Midshires.
Each of the 12 transactions comprise predominantly buy-to-let (BTL) loans, ranging between
85% and 100% of the outstanding pool balance, with the exception of the Deva Financing
collateral, which constitutes a lower portion of BTL loans at 44%. The majority of borrowers are
on floating mortgage rates, which are highly affordable in the prevailing environment of low
interest rates, particularly when compared to rental yields. The affirmations reflect the
stability in the performance of the majority of transactions over the past year. This stability
is also seen in BTL loans in the wider market for loans that were originated prior to the
crisis, but also in more recent times, as borrowers take advantage of the buoyant market for
residential rental property in many regions of the UK.
The volume of three months plus arrears ranging from 0.3% (Hawthorn) to 0.9% (Paragon 15) is
relatively low when compared to levels seen in the owner-occupied mortgage sector. This excludes
Deva, the only transaction where arrears are currently continuing to rise and stood at 6.8% in
May 2012. The inferior performance of The Mortgage Business pool, with its focus on origination
of loans reliant on self-certified income, forms the basis for the revision of the Outlook on
the class A notes to Negative from Stable.
The pace at which properties have been repossessed and sold has remained fairly stable in
the past year. Adequate excess spread generated within each of the transactions has meant that
relatively low losses associated with the sale of repossessed assets have been comfortably
cleared without the need to draw on their respective reserve funds.
Moreover, whilst the majority of transactions have a weighted average loss severity since
close in the region of 20%-30%, a number of transactions, in particular the Paragon series, have
fluctuated about 50% and concerns about future loss severities contributed to the downgrade of
the class C notes to 'BBBsf' from 'Asf'. This rating action is further supported by the fact
that Paragon 15 has the highest level of three months plus arrears across the Paragon series
The Short-term ratings on the class A1 notes of Paragon 15 have also been withdrawn.
Short-term ratings of remarketable notes are linked to the conditional note purchaser. Following
the purchase of the remarketable notes by J.P. Morgan & Chase, and the subsequent termination of
the notes' remarketing activities, Paragon 15's Short-term ratings are no longer applicable and
thus have been withdrawn by the agency.
Separately, note amortisation in Deva and Hawthorn commenced in January 2012 and March 2012
respectively, following the conclusion of their revolving periods. While this will contribute
towards a build-up in credit enhancement levels, future amortisation across all of the
transactions is expected to be relatively slow, considering that interest rates for new BTL
loans are uncompetitive compared to the rates on loans in these pools and the high proportion of
interest-only loans (89% for Deva and 92% for Edgbaston).
Link to Fitch Ratings' Report: Fitch Ratings Affirms 72 UK BTL Tranches, Downgrades 2