The rating agency downgraded 10 of the top 11 mutuals in the UK – Britannia, Chelsea, Coventry, Nationwide, Newcastle, Norwich & Peterborough, Principality, Skipton, West Bromwich and Yorkshire. It says the downturn in the UK economy and housing market has destabilised the assets held by the building societies.
The downgrade action also included Alliance & Leicester, Abbey and Standard Life Bank.
Moody’s says: “The rating actions include the results derived from the analysis of various stress scenarios and compared this to banks’ exposure to different asset classes – prime, sub-prime, buy to let, self-certified and second charge.”
It expects the lenders’ commercial loan portfolios’ performance to worsen significantly over the next couple of years.
Exact managing director Alan Cleary says the move is an overreaction based more on the fact that rating agencies now have something to prove than on the credit quality of building societies.
He says: “Some mutuals have undoubtedly fallen on hard times in the past 18 months but just as many are fighting fit. The rating agency methods are still opaque.Building societies must perform their own granular due diligence, which would help them understand the credit risk they have got sitting on their books.”
A former FSA supervisor has accused the regulator of “apathy and compla- cency” in its regulation of building societies before the credit crunch.
The whistleblower, who worked in the retail firms division, claims the FSA ignored a warning in 2006 that self-cert loans had been bundled up and sold to building societies that thought they were buying conventional mortgages. The FSA denies the claims.
For most of this decade, many societies acquired whole loan books with adverse lenders in an attempt to keep up with demutualised lenders like Bradford & Bingley and Northern Rock, which were swallowing up market share. Instead of cutting and splicing loan books through securitisation, whole loan sales involve buying up intact books of loans, usually comprising specialist mortgages.
During the boom time, this made business sense. Mortgages from the likes of GMAC-RFC, Kensington and Amber Homeloans, three of the main sellers of books, were making healthy profits. But now those loans, with many at a high loan to value, may not be quite so healthy.
The failure of Dunfermline, taken over by Nationwide, has been attributed to its rapid book expansion, up from £414m in 2006 to £772m in 2007. Its book, made up of a large number of specialist and commercial loans, inc-luded as much as £150m from GMAC-RFC. In the wake of the failure of B&B, Moody’s partly attributed the bank’s failure to its £1.7bn of GMAC-RFC loans. GMAC-RFC denied the accusation, claiming it was not responsible for B&B’s business performance.
The trail of acquired specialist loans does not stop with Dunfermline and B&B. A Britannia spokes-woman says: “The mort-gage books we acquired are bought to generate a return and these are performing in line with expectations. Our comm-ercial investment property portfolio also remains strong despite the difficult environment.”
Stroud & Swindon also bought up mortgage books, as did Newcastle and West Bromwich, which bought whole loan books over the past nine years. Cheshire and Derbyshire, which were both rescued by Nationwide earlier this year, also took on mortgage books.
S&S sales and marketing director Linda Will says that there is a wide variation in the quality of acquired books across – different building societies.
She says: “Some building societies got quite good at buying up certain books and they were the ones who got out of the market quickly. But some building societies got so desperate they would buy whatever they were offered. But anyone accusing mutuals of buying what they did not understand should remember that all financial institutions in the mortgage market are guilty of the same crime.”
Building Societies Association director General Adrian Coles warns it is dangerous to assume that mutuals with a similar investment profile to Dunfermline and B&B will suffer a similar fate.
He says: “Just because Dunfermline bought books and got into trouble does not automatically mean any other society that bought books will also get into difficulty.”
Coles says everything depends on the management of the books and the quality of the books.
Moneysupermarket.com head of banking Kevin Mountford says: “Building societies can no longer claim the moral high ground over banks. Banks have faced fierce criticism regarding exposure to toxic debt and overleveraging but it seems building societies are not the safe bet they were once thought to be.
“Many people will understandably worry about the safety of their cash if it is held in the downgraded building societies but they should not panic. Moody’s, along with other rating systems, is going through a realignment process to ensure the current state of the financial system is thoroughly accounted for in their ratings. The down- grading of these building societies can be seen as part of this process.”
Email Mortgages managing director Michael White says he would be surprised to see any more building societies fail because of their loan book acquisitions. However, he warns: “The best brains and the best lenders have fallen foul recently, so it is a concern.”