Non-conforming RMBS arrears remain static
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The performance of UK non-conforming residential mortgage-backed securities remained largely stable over a three-month period ending in May 2011, according to Moody’s Investors Service.
In May 2011, the 90+ day delinquency index for UK non-conforming RMBS was 17.2%, below the 21.0% peak reached in June 2009.
Since August 2010, outstanding repossessions have remained around 0.9% of the current outstanding balance, which is substantially below the peak of 3.6% reached in February 2009.
Cumulative losses increased further, though at a slower pace, reaching 2.0% of the original balance in May 2011.
Moody’s says the average loss severity is currently below its peak of around 33.2% seen in June 2010. Whilst performance has stabilised in many UK non-conforming RMBS transactions, high delinquency levels remain a concern.
Furthermore, low redemption rates, which were 5.4% in May 2011, are far below the pre-2009 levels of 20%-40%. This Moody’s says indicates that the portfolios will remain outstanding for a longer period of time,exacerbating future performance uncertainty.
The reserve funds in 14 transactions are currently below their target levels. This compares with 36 transactions in May 2010. Three transactions have drawn on their reserve funds during the previous quarter, while eleven transactions have recorded increasing reserve levels, building-up cushions for possible future stresses.
The total current outstanding pool balance of all 84 transactions rated by Moody’s in the UK non-conforming RMBS market decreased to £22.6bn in May 2011 from a high of £35.6bn in November 2007.
Its outlook for UK non-conforming RMBS remains negative. It says although it expects the broader economic recovery to continue, rising interest rates will impair non-conforming borrower performance more than their prime counterparts.
Moody’s says many non-conforming borrowers are paying interest-only on their mortgages, indicating poor affordability even with the current low interest rates.
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