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Moody's: Mixed Performance Signs for UK Non-Conforming RMBS In September 2010

Global Credit Research - 12 Nov 2010

UK Non-Conforming RMBS Indices - September 2010

Frankfurt am Main, November 12, 2010 -- UK non-conforming RMBS displayed improving performance over the past year. The 90+ day delinquency index for UK non-conforming RMBS was 17.8% in September 2010, below the peak of 21.0% reached in June 2009, according to the latest indices published by Moody's Investors Service for this sector. The outstanding repossessions trend continued its steep decline, falling to 0.9% of the current outstanding balance in September 2010. Cumulative losses increased further and reached 1.8% of the original balance in September 2010, with some transactions recording losses up to 4.5% of their original portfolio balance. Loss severities averaged around 23%, although there was substantial volatility across different vintages and series. The average loss severity is currently below its peak values of about 31% seen in Q3 2009, but further improvements will be limited by sustained weak house prices. While performance has stabilised in many UK non-conforming transactions, the high levels of delinquencies are a concern. Furthermore, low redemption rates, which were 7% in September 2010 are far below the 20% to 40% before 2009. This indicates that the portfolios will remain outstanding for a longer period of time, thus adding to the future performance uncertainty.

The reserve fund in 23 transactions is currently below its target level, while there were 28 transactions for which this was the case on the previous interest payment date in each transaction. Only one transaction experienced a reserve fund draw since July 2010. There are four transactions in which the reserve fund is fully depleted and 36 tranches in 20 different transactions are currently rated Ca or C.

The low interest rates environment has helped to contain delinquencies and reduce repossessions over the past year by keeping mortgage repayment instalments relatively low. However, Moody's expects the UK economy to grow only 1.6% in 2010 followed by 2.3% in 2011, which is sluggish by historical standards and is unlikely to support a broad improvement in borrower performance. The government has engaged in a fiscal consolidation programme which involves tax increases as well as benefit cuts. These measures will dampen household disposable income growth and therefore lead to households facing increased difficulties in making their mortgage payments. Therefore, while the performance is improving, the downside risks remain substantial.

Unemployment, which averaged 7.6% in 2009, is expected to average 7.9% in 2010 and 8.0% in 2011. There is an adverse risk to this forecast due to civil service employees being subject to budgetary cutbacks, who may not then be able to find jobs in the private sector.

House prices rose for most of the past year but are expected to remain broadly flat over the next two years. After falling approximatly 20% from the H2 2007 to H1 2009, house prices rebouneded close to 10% in H1 2010. Now, both the Nationwide and Halifax indices point to continued weakness in house prices, as they are either falling or only rising very slowly. Moody's expects house prices to remain relatively flat over the next year as the pressure of high unemployment and increases in taxes weigh on households and temper demand. Continued tight credit conditions will discourage many potential property buyers from the market. On the supply side, new house building is likely to remain subdued.

The total current outstanding pool balance of all our rated transactions in the UK non-conforming RMBS market had decreased to GBP23.7 billion in September 2010 from a high of GBP35.6 in November 2007. Moody's has not rated any UK non-conforming RMBS transactions since January 2009.

Moody's indices are published mid-month and can be found on www.moodys.com in the Structured Finance sub-directory under the Research & Ratings tab, under the Structured Indices sub-category of Industry/Sector Research.

http://v3.moodys.com/viewresearchdoc.aspx?docid=PBS_SF225851

Moody's outlook for UK non-conforming RMBS is negative (see the report "EMEA ABS, CMBS & RMBS Asset Performance Outlooks", July 2010).

A detailed analysis of the drivers of loss severities and defaults in the UK is available in the reports: "What Drives Severity of Losses on UK Mortgages" published in April 2010 and "Drivers of Default for the UK Prime Mortgage Market" published in August 2009.

In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

* * * * *

NOTE TO JOURNALISTS ONLY: For more information please contact EMEA Press Information in London +44-20-7772-5456; New York Press Information +1-212-553-0376; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +33-1-5330-1020; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852 3758 1350; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Claassen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 237 9536; or visit our web site at www.moodys.com

London
Barbara Rismondo
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Georgij Ludmirskij
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
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SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Moody's: Mixed Performance Signs for UK Non-Conforming RMBS In September 2010
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