Moody's Gets It Wrong Again
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After their complete failure prior to the credit crunch to properly do the job they are paid to do (by the issuers of those same mortgage backed securities they were rating) and spot where the risks were in these securities, a report by Moody’s today provides another classic example that they still have a lot to learn about the UK mortgage market.
The report helpfully points out some good news in that arrears levels on loans originated by Northern Rock are lower than the same period in 2008, although it points out they are still performing, along with loans originated by Bank of Scotland, worse than average.
It also says that the dearth of the remortgage market, together with the rise in unemployment, means that prime borrowers will find it increasingly difficult to meet their mortgage payments and that “Before the economic downturn borrowers were able to refinance their way out of arrears problems or sell their property.”
It adds that “The combination of increasing unemployment and lack of financing options if borrowers are experiencing mortgage problems has led to worsening performance as borrowers that are forced to revert to the lender’s SVR may suffer a payment shock.”
Increasing unemployment and the lack of financing options are clearly going to be an ongoing problem for some considerable time. However, Moody’s seems to have overlooked the rather important point that most people coming off fixed rates will revert to an SVR or tracker rate that is lower, and in some cases much lower, than the rate they were paying previously.
Moody’s calls this payment shock and I guess there is no reason why a sharp drop in payments after a fixed rate finishes shouldn’t be called a payment shock, just as a sharp increase might be. However, most borrowers would say please give me more shocks like this!
Although it is true that borrowers can no longer refinance their way out of arrears low interest rates mean that many less will actually get into arrears in the first place. Changes in the Government’s ISMI (Income Support for Mortgage Interest) scheme from 1 January this year will also mitigate the arrears problem for many who are made redundant.
It is correct to say that borrowers with a sub prime mortgage, assuming they are still sub prime, will not be able to refinance, but most sub prime mortgages revert to a tracker rate and thus even most sub prime borrowers will be reverting to a rate which is both lower than they were paying previously and low by historical standards for a prime borrower. In this respect they are in a similar position to prime borrowers – their mortgage becomes more affordable when their initial deal finishes.
Another misleading impression given by this report is the implication from the comment that “before the economic downturn borrowers were able to refinance their way out of arrears problems or sell their property” that selling their property is not currently a viable option. Maybe Moody’s are as behind the times in understanding the current state of the UK housing market as they were in realising the problems with some mortgage backed securities!
The latest house price index from Nationwide, out today, reports that after yet another monthly rise the fall in prices from its October 2007 peak is now down to 14.4% and since the market bottomed out in February prices have risen by over 8%. Obviously some properties will have performed worse than average but the number of borrowers who can’t sell their property as a way out of financial difficulties is steadily declining as prices increase.
Furthermore, although activity in the property market is still very low by normal standards it has picked up considerably from its nadir last winter and hence properties are generally selling much quicker than they were. Few sub prime mortgages were available above 85% LTV and so even most sub prime borrowers will now have equity in their property and thus be able to sell if they get into financial difficulties.
