Home mort­gage ar­rears drop in US, plum­met in Spain

Financial Mirror (Cyprus) - - FRONT PAGE -

US eco­nomic growth has low­ered ar­rears in res­i­den­tial mort­gaged-backed se­cu­ri­ties (RMBS), Moody’s In­vestors Ser­vice said in a sec­tor com­ment. The rat­ing agency con­sid­ers that GDP growth and ser­vicers’ loss mit­i­ga­tion ac­tiv­i­ties will also sup­port the per­for­mance of le­gacy sub­prime RMBS in 2015.

In Europe, sta­bil­is­ing un­em­ploy­ment - al­beit at high lev­els in some coun­tries - will help to steady col­lat­eral per­for­mance, as prime RMBS have seen dou­ble-digit de­creases in se­vere ar­rears of more than 90 days.

Se­vere ar­rears in this sec­tor have plunged by over onethird (34.4%) in Spain year-on-year, by 18.8% in the UK, 10.7% in Ger­many and 16.1% in Por­tu­gal.

The rat­ing agency’s re­search shows that the US (Aaa, sta­ble) strength­en­ing econ­omy will im­prove the per­for­mance of le­gacy pri­vate-la­bel RMBS in 2015. The credit qual­ity of new pri­vate-la­bel RMBS will re­main strong, and the risk of oc­ca­sional cash flow dis­rup­tions will be lower than in 2014. In Moody’s opin­ion, the credit per­for­mance of prime jumbo, sub­prime and Al­ter­na­tive-A RMBS will slightly im­prove.

In Europe, sta­ble un­em­ploy­ment, low in­ter­est rates and ris­ing house prices will un­der­pin per­for­mance in 2015. In the euro area, Moody’s fore­cast GDP will rise by 1.0% in 2015 and 1.5% in 2016, re­spec­tively, from 0.8% in 2014. The rat­ing agency an­tic­i­pates that a strong eco­nomic re­cov­ery and low in­ter­est rates will boost UK RMBS per­for­mance, in­clud­ing that of non-con­form­ing deals. In­creas­ing em­ploy­ment will strengthen the fi­nan­cial po­si­tion of some bor­row­ers in the UK (Aa1, sta­ble), the Nether­lands (Aaa, sta­ble) and Ger­many (Aaa, sta­ble). In Spain, un­em­ploy­ment will de­crease, but from a very high level. Span­ish col­lat­eral per­for­mance is sta­bil­is­ing and ar­rears will con­tinue to de­crease.

Euro­pean reg­u­la­tors are fo­cus­ing on bor­rower af­ford­abil­ity and lead­ing lenders to main­tain un­der­writ­ing cri­te­ria.

Reg­u­la­tors are re­strict­ing the por­tion of “risky” as­sets on banks’ bal­ance sheets in the UK and Ire­land. In the US, reg­u­la­tory guide­lines and scru­tiny will help ser­vicers to im­prove their pro­cesses re­gard­ing loan mod­i­fi­ca­tions and re­lated bor­rower con­tact, in Moody’s view.

Un­der­writ­ing stan­dards in the UK and the Nether­lands are tighter than pre-cri­sis lev­els, which will im­prove as­set qual­ity. In the US, ser­vicers’ loss mit­i­ga­tion ac­tiv­i­ties will sup­port le­gacy sub­prime RMBS.

The credit qual­ity of new US pri­vate-la­bel RMBS will re­main strong, sup­ported by im­proved un­der­writ­ing stan­dards. The credit qual­ity of 2015-vin­tage US RMBS will also con­tinue to ben­e­fit from thor­ough third-party re­views and from risk re­ten­tion rules that will come into ef­fect in late Oc­to­ber 2015.

In Australia (Aaa, sta­ble), the credit qual­ity of new RMBS col­lat­eral will slip, as the un­der­ly­ing loans are be­ing un­der­writ­ten at his­tor­i­cally low in­ter­est rates dur­ing a pe­riod of rapidly ris­ing house prices. How­ever, over­all per­for­mance will stay strong with low delin­quency rates, but per­sis­tent un­der­em­ploy­ment jeop­ar­dises per­for­mance.

RMBS per­for­mance in Ja­pan (A1, sta­ble) also re­mained steady thanks to low un­em­ploy­ment and tight lend­ing cri­te­ria. In Moody’s view, de­faults will re­main low, fol­low­ing the mod­est eco­nomic re­cov­ery. Moody’s ex­pects house prices to rise in 2015 and be­yond. The labour mar­ket is quite strong and the un­em­ploy­ment rate will re­main low at 3.0% to 4.0% in 2015. The com­bi­na­tion of th­ese fac­tors will sup­port col­lat­eral per­for­mance.

Com­pe­ti­tion among lenders will keep in­ter­est rates low, es­pe­cially with the Bank of Ja­pan’s ag­gres­sive quan­ti­ta­tive eas­ing. Strong bor­rower credit pro­files and tight lend­ing cri­te­ria are help­ing to cur­tail per­for­mance de­te­ri­o­ra­tion.

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