FSA's mortgage reforms could push up arrears, warns Moody's
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Stricter underwriting standards following the FSA’s mortage market review could make it harder for non-prime borrowers to remortgage, leaving them stuck on escalating interest rates and more likely to fall into arrears, warns Moody’s.
Moody’s says that if the FSA’s proposals are adopted, these proposals they will lead to tighter underwriting standards through more thorough affordability tests, as well
as an end to self-certified, fast-track and mortgages with a combination of high risk factors like high loan-to-value and impaired credit.
The proposals also make lenders responsible for the affordability assessment.
Moody’s says the proposals could put rating pressure on existing residential mortgage backed securities, but could benefit the performance of future RMBS transactions. A
The ratings agency says the proposals proposals will primarily affect the non-conforming market, where the ability of borrowers with adverse credit to refinance has
already been significantly curtailed.
Moody’s says: “We are especially concerned for borrowers with one or more of the following characteristics: negative equity, adverse credit, self-certified income and interest-only loans.
“We believe these borrowers will be unable to refinance if they cannot pass the more stringent affordability and income verification tests proposed.
“As a result, when interest rates start to increase and borrowers’ capacity to make their existing mortgage payments becomes endangered, their inability to remortgage could potentially lead to an increase in arrears levels, higher defaults and an increase in back-ended losses in non-conforming securitisations.”
But Moody’s says that overall, once adopted, these proposals should benefit new UK RMBS securitisations, as the
income verification processes and stressed affordability tests will be more conservative for the mortgage loans included in the transactions.
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Readers' comments (1)
Julian Stevens | 2 Nov 2009 2:13 pm
The most important step to take is to forbid lenders from hiking their rates on fixed rate mortgages to obviously unmanageable levels at the end of an initial special deal period, knowing full well that the poor borrower won't be able to move his mortgage elsewhere. This is happening all over the place already.
Simple and obvious of course, but will the FSA actually do it or will they just have umpteen meetings about it?
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