CML pins hopes on ratings

The Council of Mortgage Lenders says it hopes positive news from Fitch Ratings about the long-term outlook for UK sub-prime securitisations will boost confidence in the sector.

The ratings agency published a report last week claiming it was confident adverse residential mortgage- backed securities market can weather the ongoing economic storm affecting the financial industry.

Fitch says it tested outstanding UK securities against several scenarios, ranging from increasing defaults to falling house prices.

It examined 876 collateralised tranches in 107 adverse transactions from 2003 to 2007 with ratings outstanding as of December 31 2007. It says it found the securities could withstand significant stress.

Gregg Kohansky, senior director and head of Europe, Middle East and Africa RMBS at Fitch, says: “Challenging conditions in the mortgage market will result in stretched affordability and payment shocks for many borrowers during 2008, especially in the sub-prime sector.

“But our tests showed that most of the ratings are stable in all scenarios. Widespread rating migration is only likely when a severe scenario is applied that envisages 25% house price falls in the next year, far in excess of market expectations.”

Fitch warns that if the housing market is exposed to a sharper downturn, ratings may dip more extensively.

But it says most commentators predict a flat to 10% decline in house prices during the year.

A spokesman for the CML says: “This is encouraging. It helps to reinforce the differences between The US and UK sub-prime markets.

“We hope that this news will serve to underpin confidence in the RMBS market.”