Fitch Warns of Further Downgrades of Some UK RMBS
Fitch Ratings warns that UK non-conforming residential mortgage-backed securities face increasing downside risk due to current declining performance trends and downward pressure on house prices.
According to Halifax, Britain’s biggest mortgage lender, house prices lost 13.2% of value for the year ended 30 September 2008, the biggest ever recorded loss for a one-year period.
“We are increasingly concerned over UK non-conforming RMBS performance, where 90-day delinquencies and current losses, in some cases, are exceeding 20%,” says Rodney Pelletier, Managing Director in Fitch’s Structured Finance team. However, the agency adds that although downgrades on UK non-conforming RMBS are possible, they are most probable in the lower- rated tranches and uncollateralised excess spread notes, while the highest rated ‘AAA’ notes are less exposed. The agency adds that the severity of any rating action will depend on several factors including vintage, original loan-to-value, prepayment history, excess spread availability, delinquency ratios, hedging and expected losses.
While conventional thought supports that recent vintages are most at risk, Fitch warns that potential negative action on older transactions cannot be ruled out.
“Generally speaking, older transactions with significant prepayments can be less affected, but they are not immune to potential downgrades on the lower-rated tranches, especially if significant negative selection has occurred and losses increase significantly,” adds Mr Pelletier.
Fitch is currently undertaking a supplementary study to set out its expected case of house price movements and mortgage defaults. UK non-conforming RMBS tranches potentially exposed under this expected case will be put ‘under special review’ for possible rating action. This study will supplement its initial report entitled “Ratings Stress Test: Impact of UK Housing Market Downturn Scenarios on UK Non-Conforming RMBS Ratings“, completed in March 2008.
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