MMR may push up mortgage costs, says Fitch

28 October 2009 | By Natalie Holt

While Fitch welcomes proposals in the MMR which would improve underwriting practices, it says that putting more stringent underwriting criteria in place could mean a significant change to current practices for some lenders.

In turn, this may lead to applications costing more, as well as being more manual and time consuming.

Robbie Sargent, director in Fitch’s European structured finance operational risk group, says that ultimately the MMR is likely to result in manual underwriting for all mortgages.

He says: “The assessment of borrowing capacity and disposable income, along with the verification of income for all applications, will require a detailed methodology, and in all likelihood, the provision of some form of manual underwriting for all loan applications.

“This will almost inevitably lengthen the mortgage application process and push up costs for the lender, which may in turn be passed on to the borrowers in the form of higher interest rates and/or product fees.”

Fitch warns that the increased cost may also be passed onto lender SVRs, pushing them higher.

The ratings agency says there is a possibility that this increased cost may tip the balance for some borrowers to a loan being unaffordable.

It has also expressed concerns over the FSA’s mooted plans to cancel regular arrears charges applied by lenders where borrowers are sticking to arrears repayment plans.

Fitch notes that as the costs of arrears management, particularly in the sub-prime sector, are considerably higher than those of performing loans, the ban may lead to servicers and lenders charging higher interest rates and/or standard servicing fees.

The ratings agency says that there is also a possibility, albeit remote, that lenders and servicers may elect to curtail their arrears management activities to reduce costs including less frequent calling campaigns and reduced collections staff.

The MMR also proposes a non-exhaustive list of tools that lenders and servicers must employ to help borrowers in arrears, which will include the government schemes recently put in place.

But Fitch says a list of proposed strategies for handling arrears may have the unintended effect of limiting a servicer’s ability to review loans on an individual basis and take away the flexibility in managing arrears.