December 5, 2007 / 4:44 PM / 11 years ago

Fitch warns on UK non-conforming mortgage bonds

LONDON, Dec 5 (Reuters) - Fitch Ratings moved outlooks on 43 portions of bonds in 17 deals backed by UK non-conforming residential mortgages to negative on Wednesday due to the turmoil in the money markets.

Fitch said that the bonds — backed by loans to people with poor credit histories, second-charge loans or loans where there is little equity in the property — could be at risk of future downgrades due to the soaring level of sterling Libor, a key rate both for mortgage borrowing and for interest payments on many of the bonds.

The outlook revisions affect bonds from 17 transactions rated triple-B or lower, Fitch said.

Interbank sterling lending rates rose on Wednesday for the 19th consecutive day, with one-month sterling rates hitting their highest level in nine years.

The rise affects RMBS deals in two ways, Fitch noted.

In some cases, there are deals with underlying mortgages either with fixed rates or with rates linked to the Bank of England’s Base Rate, but which pay interest based on Libor. Surging Libor rates mean these deals may have to draw on their reserve funds — meaning less is available to mop up any credit losses that may occur on the underlying pool.

Secondly, “variable rate borrowers are facing affordability issues with general policy interest rate rises over recent months and, for those with rates linked to Libor, extra payment stress,” Fitch said.

Refinancing to avoid higher payments may no longer be an option for many borrowers, the agency warned, as lenders pull back from offering mortgages.

That echoes the problems occurring in the U.S. subprime market, where borrowers have seen mortgage rates reset at much higher levels than they expected after the U.S. Federal Reserve raised rates by 425 basis points between 2004 and 2006.

Analysts have said however that the UK nonconforming market does not face the same scale of problems as the U.S. subprime market, which has seen looser lending standards.

Fitch said there was no clear sign yet of deterioration in collateral backing the UK bonds, although it said that “unprecedented stresses presently exist in the sector.”

“Collateral and transaction performance trends can be expected to deteriorate more generally,” it said. (Editing by Elizabeth Fullerton)

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