Moody's says MMR may reduce lending and house prices
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The tighter lending proposals outlined in the FSA’s Mortgage Market Review could lead to a fall in house prices and reduced lending volumes and margins, according to Moody’s weekly credit outlook.
Last week the regulator proposed a raft of measures which aim to improve lending practices, including mandatory income verification, stricter affordability tests and better protection for customers with lower disposable income and poor credit history.
The report says: “In the short run, a reduced supply of credit to the housing market may exert negative pressure on house prices and simultaneously compress both lending volumes and margins.”
However, Moody’s says, while mortgages will be more difficult to obtain in the short-term, the improving the quality of loans will positively impact the market in the future.
The report says: “We see a two-fold impact stemming from the FSA proposals on the mortgage market: (1) reduced loan generation and borrowing activity in the short to medium term and (2) improved quality of new origination and eventually a positive impact on mortgage losses in the longer term.”
Moody’s says the measures will have a positive effect on RMBS issued by master trusts, because new loans added to the trusts will have to undergo stricter underwriting.
The report says: “ The revolving nature of master trusts means that the credit quality of the trust’s assets would likely improve over the long term as older mortgages with less-stringent underwriting repay and new mortgages subject to the new regulations enter the trust.
“The mortgages currently held in the master trusts, which account for around 20 per cent of total UK mortgage debt, are predominately prime mortgages, but over a quarter of all mortgages in the sector do not have verified income, and around half are interest only.”
It adds: “Although some existing borrowers will be unable to refinance under the more stringent tests, we see the lack of refinancing options introducing only relatively minor incremental credit risks, such as borrowers reverting to higher interest rates at the end of initial teaser or fixed rate periods.”
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