FSA ban on self-cert and fast-track will benefit RMBS, claims Moody's
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The Mortgage Market Review will have a positive effect on residential mortgage-backed securities, claims Moody’s.
The Financial Services Autho-rity’s paper on responsible lending proposes a ban on self-cert and fast-track loans as well as greater affordability checks.
The ratings agency says the measures will boost the credit quality of bank and building society portfolios in the longer term as new loans will have to undergo stricter underwriting than the existing mortgages in their portfolios.
In its Weekly Credit Outlook Re-port last week, it says: “The revol-ving nature of master trusts means that the credit quality of trusts’ assets would likely improve over the long term as older mortgages with less stringent underwriting repay and mortgages subject to the new regulations enter.”
The mortgages currently held in master trusts, which account for around 20% of total UK mortgage debt, are predominately prime deals but over a quarter of all mortgages in the sector do not include verified income, while around half are on an interest-only basis.
Moody’s adds: “Although some existing borrowers will be unable to refinance under the more stringent tests we see the lack of refinancing options introducing only relatively minor incremental credit risks such as borrowers reverting to higher interest rates at the end of initial teaser or fixed rate periods.”
It says that although its outlook for the next 12 to 18 months for the UK prime RMBS sector is negative as a result of fiscal tightening, the proposal to strengthen mortgage underwriting is a positive development for the master trust sector.
But Fitch says the self-cert and fast-track ban is unlikely to affect RMBS ratings.
Alastair Bigley, head of UK RMBS at Fitch, says: “We have made low prepayment assumptions for transactions featuring both self-cert and fast-track loans and therefore the proposed ban on these deals does not necessitate a change in our analysis.”
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