"As expected non-conforming borrowers are hardest hit in the current downturn. This has, and will continue to have, a direct affect on the ratings of UK non-conforming transactions," says Peter Dossett, Associate Director in Fitch's RMBS performance team.
When rating non-conforming transactions the agency uses higher default assumptions for non-conforming collateral than for prime loans. In addition the adverse credit history of the borrowers further increases the expected level of defaults.
"The higher stress assumed by Fitch means that UK non-conforming RMBS needs more credit enhancement to achieve the same rating as a transaction containing prime collateral," says Dossett.
Despite the harsher assumptions, the severity of the current downturn and the subsequent stress to RMBS transactions has resulted in the ratings of 285 tranches of UK non-conforming tranches being downgraded by Fitch in the last year. The agency expects that given current market conditions further downgrades are likely, reflected in the 204 non-conforming tranches currently assigned an Outlook Negative.
Fitch notes that although repossessions are increasing in the non-conforming sector, servicers and lenders are continuing to follow regulatory and legal guidance in such circumstances.
"The introduction of the Civil Justice Council mortgage arrears protocol in November 2008, and increased focus on the Financial Services Authority's 'Treating Customers Fairly' guidance, had initially raised fears among servicers that foreclosure may become a cumbersome process that impacted on its ability to take possession of an asset," says Robbie Sargent, Director, European Structured Finance. "However, early feedback from servicers since the implementation of the protocol suggests that this concern was unfounded. Repossession orders continue to be granted by District Judges where it has been proven that servicers and lenders have explored all alternative solutions to the problem and have only taken the borrowers to court as a last resort."
