Moody’s latest Credit Insight report says residential mortgage backed securities transacted between 2006 and 07 contain the highest number of mortgage prisoners because older transactions benefited from house price increases, which lowered the level of indexed LTVs.
It is warning that transactions with a larger share of mortgage prisoners will have high losses.
Moody’s classes a mortgage prisoner as a borrower who is either behind on their payments and has an LTV ratio exceeding 85% or pays their mortgage on time but has an interest-only loan with an LTV ratio exceeding 100%.
However, it 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.
And 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.”