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UK RMBS can tough out market downturn, says Fitch

Fitch Ratings says it’s confident most investment-grade UK sub-prime residential mortgage backed securities ratings can withstand significant stress.

The ratings agency says it’s stress tested UK sub-prime RMBS against a number of different scenarios such as declining house prices and increasing defaults.

The study encompassed all of Fitch’s rated UK sub-prime RMBS transactions with ratings outstanding as on December 31 2007.

Gregg Kohansky, senior director and head of Europe, Middle East and Africa RMBS at Fitch, says: “Challenging conditions in the mortgage market will undoubtedly result in stretched affordability and payment shocks for many borrowers during 2008, especially in the non-conforming segment. This is likely to push many more borrowers into defaults or delinquencies.

“Our tests showed that the majority of ratings are stable in all scenarios. Widespread rating migration is only likely when a ‘Severe’ scenario was applied. That scenario envisages 25% house price declines in the next 12 months, far in excess of market expectations.”

Fitch stress-tested the ratings of 876 collateralised tranches in 107 UK non-conforming transactions, rated from 2003 – 2007 vintages.

The testing found that highly seasoned 2003 to 2005 vintage ratings are very well positioned to withstand even high levels of stress. Less seasoned 2006-2007 vintage ratings are likely to remain stable if house price declines remain within the current expected range of most market participants.

However, Fitch says ratings may migrate more extensively at lower rating levels if the housing market is exposed to a much sharper downturn than currently expected.

The agency says the majority of market commentators predict a flat to 10% decline in house prices during 2008.

In Fitch’s view, the recent trend of moderate negative monthly declines to house prices is likely to continue given ongoing funding difficulties for lenders and a slump in prospective buyers’ confidence.

The report “Ratings Stress Test: Impact of UK Housing Market Downturn Scenarios on UK Non-Conforming RMBS Ratings” is the first in a series of stress test reports that will be published in the coming weeks looking at different European structured finance jurisdictions and asset classes.

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