Unemployment could impact on arrears and UK prime RMBS

Increasing unemployment in the UK may lead to more borrowers in arrears and further deterioration in UK prime residential mortgage-backed securities (RMBS) performance indices, according to a report by Fitch Ratings entitled "Around the Houses - Quarterly European RMBS Performance Update Q4 2009".

Master trust transactions dominate Fitch's UK prime arrears index and when Granite (a Northern Rock RMBS master trust) breached a non-asset trigger, preventing substitution of new assets into the pool, the index showed a rapid increase in arrears. In December 2009, loans with greater than three months arrears stood at 2.1% of the outstanding balance of mortgages, compared to 1.8% in September 2009.

The UK buy-to-let arrears index has increased significantly from 1% to 4% in the second half of 2009, although it has shown signs of stabilisation over the last two quarters. This is mainly due to improved affordability triggered by low interest rates.

Rahul Mathur, associate director in Fitch's RMBS team, said: "Although arrears levels tend to increase steadily as UK buy-to-let transactions become more seasoned, over the last two years, along with the deteriorating housing market and limited lending options, arrears levels have increased notably."

The report covers each major European jurisdiction, highlighting the main drivers of changes in residential mortgage arrears and principal payment rates. It also provides an overview of recent rating actions, current ratings and the outstanding balance of rated notes.

Take Spain for example, which has experienced more than two years of rapid increase in mortgage arrears in Spanish RMBS, but the volume of loans falling into arrears fell in the last quarter of 2009. Many of the loans that have been in arrears for an extended period have already been written off.

Santiago Isnardi, analyst in Fitch's RMBS team, commented: "It is unclear whether this decline will be sustained, as unemployment is expected to continue to increase and house prices are due to decline further. However, this is a positive change in the performance of Spanish RMBS transactions."