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Home Mortgage Losses On The Rise

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Losses are rising in Britain's residential mortgage market and pushing "non-conforming" mortgage-backed securities into a downward slide that is likely to get worse, Moody's Investors Service said on Wednesday.

"Non-conforming" is the classification used in Britain for higher-risk mortgages, encompassing subprime borrowers with poor credit histories and others who do not fit prime lending criteria for various reasons.

In the prime market, meanwhile, Standard & Poor's late on Tuesday put the ratings of 101 classes of notes in Northern Rock's Granite master trusts on watch for possible ratings cuts as losses mount.

The number of homes falling into repossession were lower in the second quarter than the first quarter, Moody's said. Also interest rates have reached historic lows, and some indexes show house prices have been rising for several months.

"Nevertheless, the delinquencies and losses continue to rise at a rapid pace as unemployment continues to rise," said Nitesh Shah, an economist and one of the authors of the report.

"Moody's expects further performance deterioration in the near future for non-conforming RMBS," he said.

Moody's said that in 54 non-conforming transactions, more than 20 percent of underlying loans were delinquent by more than 90 days, out of a total of 88 outstanding deals worth 27.3 billion pounds.

Six transactions fully depleted their reserve funds in the second quarter, Moody's said. When reserve funds are depleted, losses go the noteholders.


As for Northern Rock, S&P said the performance of mortgages underlying the Granite deals had been deteriorating for months, with long-term arrears reaching 4.67 percent from 0.44 percent in September 2007, when the last Granite deal was issued.

At the same time, repossession rates have risen to 0.87 percent, three times the level in the prime RMBS market, from 0.42 percent, while average losses per property have risen to more than 26,000 pounds from just under 15,000, S&P calculated.

"We believe that a significant proportion of the underlying pool may come under increasing payment pressure, ultimately leading to increased realised losses," S&P said, citing Granite's high ratio of loans to house values and less-demanding loan origination policies.

Fitch Ratings in a report on Tuesday also cited rising arrears in the non-conforming RMBS market and high realised losses when repossessed houses are sold.

Fitch said that despite indications over the past quarter, further declines in house prices were likely as the UK remains in recession.

It also expected the recent decline in repossessions to prove temporary as rising unemployment feeds through.

"The effects of recession are expected to take their toll on borrower behaviour, although affordability has improved due to low interest rates," the Fitch report said.

In addition, the agency said some non-conforming RMBS deals had been hurt because they lacked interest rate swaps to hedge against the difference between mortgage loans linked to the Bank of England base rate and ABS notes paying out Libor.

That differential has narrowed, but the deals "have already taken a significant hit from the absence of an effective hedge," it said.

(Editing by Will Waterman)

LONDON (Reuters)


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