Former sub-prime lenders facing arrears time bomb
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Former sub-prime lenders have up to 30% of their book in arrears, sparking fears they are sitting on a ticking time bomb once interest rates rise.
Last week Fitch Ratings affirmed the servicer rating for 54 tranches of non-conforming loans originated by former lender Southern Pacific Mortgages Limited.
As of March 2011, the volume of loans in arrears by more than three months ranged between 24% and 29.5% for one tranche.
Although arrears levels have remained stable over the past year Fitch says this has been driven by low interest rates.
Moody’s says the industry average for non-conforming residential mortgage-backed securities being in arrears of 90 days or more is 17.3%.
Last week Moody’s downgraded eight out of a total of 11 tranches worth £363m of RMBS originated by GMAC-RFC. It noted that arrears of more than 90 days amounted to 23.9% of the book, increasing from 10% in September 2008. Around 9.4% of the portfolio is in arrears of more than 360 days.
Fitch recently upgraded the servicer rating of Acenden, formerly Capstone.
It services £5.3bn of RMBS transactions, including those of SPML and Preferred Mortgages. Around 18.6% of its non-conforming book is in arrears of 90 days or more.
Acenden did not want to comment.
Brian Pitt, managing director of Rockstead, says: “If interest rates rise to 0.5% it will be enough to act as a catalyst for repossession. It’s a ticking time bomb and I can’t see anything but bad news regarding arrears and repossessions.”
He says the sub-prime sector has been particularly badly hit partially because of bad underwriting decisions but also due to a drop in lending standards.
Not all sub-prime lenders are experiencing arrears increases. GE Money Home Lending released its 2010 financial results last week which show it reduced arrears by 4% in 2010.
Loans of more than 90 days in arrears make up 11% of its book, down from 15% in December 2009. The accounts also reveal it made a pre-tax profit of £214m, compared to £44.4m in 2009.
A spokesman for GEMHL says: “We have provided customers in financial difficulties with a range of tailored solutions.
“This, coupled with the low interest rate environment and range of forbearance measures offered by us and the government, has reduced arrears levels and helped more customers stay on track.”
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