Mortgage review could push up borrowing costs, says Fitch
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Fitch Ratings has warned the FSA’s proposed reforms to the mortgage market could mean greater use of manual underwriting, pushing up costs for the lender which in turn are likely to be passed on to the borrower.
Fitch says that, while the FSA’s mortgage market review is expected to improve underwriting practices, these are likely to be more manual and therefore time-consuming and costly.
The agency says this cost is likely to be passed on to borrowers and may lead to higher standard variable rates for mortgage lenders.
It says there is a possibility that the increased cost may tip the balance for some borrowers to a loan becoming unaffordable.
Fitch European structured finance operational risk group director Robbie Sargent says: “The assessment of borrowing capacity, and disposable income, along with the verification of income for all applications, will require a detailed methodology, and in all likelihood, the provision of some form of manual underwriting for all loan applications.
“This will almost inevitably lengthen the mortgage application process and push up costs for the lender, which may in turn be passed on to the borrowers in the form of higher interest rates and/or product fees.”
“This will almost inevitably lengthen the mortgage application process and push up costs for the lender, which may in turn be passed on to the borrowers in the form of higher interest rates and/or product fees.”
Fitch European structured finance operational risk group director Robbie Sargent
In its mortgage market review discussion paper, the FSA also confirmed its intention to ban the continued application of a monthly arrears administration charge where a customer is adhering to an arrangement to repay arrears.
Fitch says that as the costs of arrears management, particularly in the sub-prime sector, are considerably higher than those of performing loans, the ban may lead to servicers and lenders charging higher interest rates and/or standard servicing fees within RMBS.
As the additional income generated from the higher interest rate would pass through to bondholders, and not the lender or servicer, in RMBS transactions, servicing fees are likely to rise within new transactions.
There is also the possibility that lenders and servicers may cut back their arrears management activities to reduce costs including less frequent calls to borrowers and a reduction in collections staff.
While Fitch believes such a drastic move is unlikely, if it were to happen it could impact the performance of loans especially in RMBS deals with a significant proportion of sub-prime borrowers.
This is because quick and continuous customer contact is important to managing delinquencies and minimising losses.
The MMR also proposed a list of tools that lenders and servicers must employ to help borrowers in arrears, which will include the Government schemes recently put in place.
However, documenting a list of proposed strategies for handling arrears may limit a servicer’s ability to review loans on an individual basis and take away flexibility in managing mortgage defaults, warns Fitch.
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