A quarter of the UK’s 200,000 sub-prime borrowers are unable to refinance their mortgage, with ’mortgage prisoners’ accounting for up to 30% of some lenders’ residential mortgage backed securities.
Moody’s Credit Insight report last week warned that RMBS transacted between 2006 and 2007 contain the highest number of mortgage prisoners because older transactions benefited from house price increases, which lowered the level of indexed LTVs.
It warns that transactions with a larger share of mortgage prisoners will have high losses.
Moody’s classes a mortgage prisoner as a borrower who is behind on their payments and has an LTV exceeding 85%, or pays their mortgage on time but has an interest-only loan with an LTV of over 100%.
It has based its findings on 33 RMBS transactions and estimated what percentage of the individual transactions are made up of those with payment issues and LTVs exceeding 85%, and those with no payment issues but with interest-only loans with LTVs exceeding 100%.
Mortgage prisoners account for around 29% of one RMBS – the 2007 Great Hall Mortgages No 1 Plc Series 2007-02 – which contains loans originated by Platform Home Loans. Up to 18% of its deals have payment issues and LTVs exceeding 85%. A further 10% of its book has no payment issues but interest-only loans with LTVs exceeding 100%.
The RMBS was sold to JP Morgan by Britannia prior to its merger with The Co-operative Bank.
Other RMBS with a high number of mortgage prisoners include securities with loans originated through Money Partners and Lehman Brothers.
However, Moody’s says the bulk of interest-only loans are not due for refinancing until 2025 and the majority of non-conforming borrowers enjoy low margins compared to current lending margins.
There is currently no pattern of high arrears among mortgage prisoners in existing transactions because of low interest rates.
Lyudmila Udot, an analyst at Moody’s, says: “The majority of non-conforming mortgages are not based on SVRs, which can be reset by a lender experiencing funding difficulties, as happened recently with a number of high street banks.
“Around 80% of non-conforming mortgages track the sterling LIBOR the remaining 20% the Bank of England base rate.”