S&P sees historic arrears levels in UK sub-prime RMBS
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The ratings agency says arrears have increased by 24% year-on-year as a result of house price declines, refinancing problems, and a lack of affordability.
S&P tracks the performance of around 350,000 UK sub-prime mortgages that have been securitized in its quarterly index.
The latest index report shows that total delinquencies for UK sub-prime mortgages increased in Q3 2008 to a record level of 25%, from 23.3% in Q2.
One year ago, total delinquencies were 20%, meaning that they have increased by 4.8% in absolute terms and 24% in relative terms.
The report also reveals that the current stock of repossession cases accounts for 2.8% of all outstanding sub-prime mortgage balances up from 2.2% in Q2 and 1.5% a year ago.
In addition, prepayments by mortgage borrowers dropped to 21.2% in Q3 from 24% in Q2 highlighting the fact that fewer people are refinancing their mortgages in the current constrained credit environment.
Mortgages taken out in 2005 and 2006 now have the highest 90+ day delinquency rates and these have been rising sharply.
Kate Livesey, credit analyst at S&P, says: "In our opinion, the uptick in delinquencies has, to date, primarily been driven by affordability issues, an inability to refinance, and by house price declines.
"Recent cuts in the Bank of England base rate should improve the affordability of mortgage payments for those borrowers who have a loan product linked to this benchmark.
"However, the worsening economic environment is likely to result in further increases in delinquencies, repossessions, and losses for the UK sub-prime sector in the coming months."
S&P expects the downward trend in prepayment rates to persist until mortgage credit becomes more widely available once again.
Current conditions in the housing market have reduced the number of prospective homebuyers and this is likely to lengthen the time between repossession and eventual sale of properties by lenders.
Based on the sample of repossession cases S&P has investigated the average time from repossession to sale for properties sold in the first half of 2008 was around five months.
It warns that the continued decline in house prices will lead to higher losses for lenders going forward, and this will be most significant for more recent mortgages, which have not benefited from house price appreciation before 2007.
S&P adds that it is important to note that even loans originated during a rising house price environment will not necessarily be sheltered from repossession and subsequent loss on sale.
