Lack of homes will result in stable prices and RMBS

Low housing supply will help keep property prices stable in the UK and therefore have a positive credit impact on residential mortgage-backed securities, says Moody’s.

A credit insight report from the ratings agency last week says higher prices will contain the loss severity on repossessed properties, thereby restraining losses in RMBS.

Moody’s says housing supply is already tight and building remains subdued. It believes that for supply to return to pre-financial crisis levels, the number of new-builds would have to rise significantly.

But it says demand for homes will be dampened by lower household income and credit supply.

The report adds that most UK non-conforming RMBS transactions would be able to withstand an increase in interest rates.

Moody’s says it forecasts the base rate to rise from its current level of 0.5% to 2% by the end of 2013.

It has stress-tested future expected losses in 78 UK non-conforming RMBS transactions and found that after applying the senior, mezzanine and junior ratings held due to the build-up of credit enhancement in the low interest rate environment over the past two and a half years.
It also estimates house prices are around 10% higher than the lows recorded in 2009.

As a result, the weighted-average loss severity on repossessed properties throughout the RMBS master trust sector has improved to 22.6% from 24.6%.

The ratings agency says low interest rates have allowed arrears levels to improve, so transactions have been able to to rebuild credit, putting them in a better position to withstand future interest rate rises.