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12 Jan 2011
UK Non-Conforming RMBS Indices - November 2010
Frankfurt am Main, January 12, 2011 -- The performance of the UK non-conforming residential mortgage-backed
securities (RMBS) market continued to improve over the past year,
according to the latest indices published by Moody's Investors Service
for this sector.
In November 2010, the 90+ day delinquency index for UK non-conforming
RMBS was 17.7%, below the 21.0% peak
reached in June 2009. The outstanding repossessions trend continued
its decline, falling to 0.9% of the current outstanding
balance in November 2010. Cumulative losses increased further and
reached 1.8% of the original balance in November 2010,
with some transactions recording losses of up to 4.6% of
their original portfolio balance. Loss severities averaged around
24%, although there was substantial volatility across different
vintages and series. The average loss severity is currently below
its peak of around 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 RMBS transactions,
high delinquency levels remain a concern. Furthermore, low
redemption rates, which were 7% in November 2010, are
far below the pre-2009 levels of 20% to 40%.
This indicates that the portfolios will remain outstanding for a longer
period of time, thus adding to future performance uncertainty.
Due to the termination of Leek 16, the 2005 vintage is showing a
rise in the number of delinquencies and repossessions. At the time
of termination, Leek 16 with a pool balance of GBP322 million constituted
13% of the total balance of the 2005 vintage. Moreover,
its 90+ day delinquencies were 11.8%, while the
weighted average of the 2005 vintage was 23.0%.
The reserve fund in 20 transactions is currently below its target level.
There are four transactions issued by Eurosail and Mansard in which the
reserve fund is fully depleted. All other transactions, where
the reserve fund was not at target, have recorded increasing reserve
levels, thus building up cushions for possible future stresses.
In December 2010, Moody's has reviewed five UK non-conforming
transactions exposed to foreign exchange risk and taken action on 19 classes
of notes issued in four of these transactions. All five mortgage
portfolios have been performing worse than previously assumed by Moody's.
This has been the main driver of the downgrade of the junior and mezzanine
notes. Moreover, the absence of an effective liquidity facility,
following the refusal by the liquidity facility provider Danske Bank A/S
to renew its commitment or advance a stand-by drawing, in
the context of worse than expected collateral performance and foreign
exchange exposure, has also impacted the ratings of three senior
classes of notes in two transactions.
The low interest rates environment has helped to contain delinquencies
and reduce repossessions over the past year by keeping mortgage repayment
instalments relatively low. Moody's expects the UK economy to have
grown by 1.6% in 2010. The rating agency also expects
the UK economy to continue to grow by 2.3% in 2011.
This level of economic growth is unlikely to support a broad improvement
in non-conforming 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 approximately
20% from the H2 2007 to H1 2009, house prices rebounded 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 transactions rated by
Moody's in the UK non-conforming RMBS market decreased to
GBP23.7 billion in November 2010 from a high of GBP35.6
in November 2007. The rating agency 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
Moody's outlook for UK non-conforming RMBS is negative (see the
report "EMEA ABS & RMBS: 2011 Outlook and 2010 Review ",
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.
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Moody's Deutschland GmbH
Moody's: UK Non-Conforming RMBS Performance Improved In November 2010
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