Fitch says tightened criteria may affect RMBS

Fitch Ratings is warning that tightening lending criteria could have a negative impact on residential mortgage-backed securities.

The agency has stipulated however that the developments are not likely to have any immediate impact on UK RMBS ratings.

Fitch says the liquidity crisis is starting to have an impact on the mainstream mortgage market with conforming lenders tightening criteria at the riskier end of their product ranges, with LTVs slashed.

But it says the outlook for RMBS transactions remains unchanged.

Ratings are expected to remain stable for conforming, buy-to-let and most sub-prime RMBS, with the exception of more recent vintage sub-prime transactions, which have a general negative rating outlook.

Gregg Kohansky, senior director and head of the Europe, Middle East and Africa RMBS team at Fitch, says: “Existing UK RMBS with higher exposures to such mortgage types can be expected to see relatively lower prepayment rates and higher arrears levels.

“Nevertheless no downgrades of UK conforming RMBS are expected in the foreseeable future as a result of this.”

Fitch says due to current market conditions, mainstream lenders have been withdrawing and re-pricing many of their higher LTV mortgages.

The agency says reverse criteria creep has affected prospective first-time buyers who will not only need to fund more of their house purchase through equity deposits, but will also need to pay a larger rate premium for taking out such a product in the first place.

According to the Council of Mortgage Lenders, the average first-time buyer now needs to put down 12% in equity, versus 10% in December 2007.

Fitch says that products that allowed borrowers to take out a high LTV mortgage combined with unsecured borrowings have also largely disappeared from the market.

It says this has left those existing mainstream borrowers on high LTV mortgages and those who are coming off short ‘teaser’ rate periods looking to refinance in a more difficult environment to locate cheaper mortgage deals than before.

Staying with their existing borrower could result in a mortgage payment shock, given the much higher levels of lender standard variable rates.

Following recent increases in LIBOR some lenders apparently have not been passing on policy rate cuts to borrowers, as many mainstream lenders fund in the interbank lending market.