British Housing Stabilizing, Slowly and Surely

The British housing market is showing signs of stabilization, though monetary policy and master trust performances remain key areas of caution. The Bank of England’s Monetary Policy Committee voted to keep the official bank interest rate at 0.5%. While very low, the committee could have reduced it even further to promote lending but deemed it unnecessary. The committee also voted to increase its commitment to the asset purchasing program with the financing of an additional £50bn (US$83.8bn) in central bank reserves, bringing the new total investment to £175bn. At the same time, the Royal Institution of Chartered Surveyors (RICS) changed its housing price forecast that home prices will fall 10% in 2009. RICS now believes Q409 prices will be slightly higher than in Q408, but warned slow activity will keep the housing market at low levels. While still below 2008 levels, UK mortgage lender Halifax reported housing prices increased 1.1% in July. Moody’s Investors Services also threw its hat in the cautious optimism ring, after conducting a sector review of 13 UK residential mortgage-backed securities (RMBS) master trusts and concluding that while assets are not performing at peak levels, the trusts are “resilient.” The 13 master trusts are British banks’ repositories for £244bn in prime mortgage assets, about 20% of the UK’s total mortgage debt. A RMBS master trust is tied to large financial institutions and any loses, especially to double and/or triple-A would likely have monumental negative market impact. Two master trusts in particular are expected to deliver the poorest performance: Granite by (now nationalized) Northern Rock and Aire Valley by Bradford & Bingley a specialist lender in the buy-to-rent space. “If the number of repossessions is in line with that observed in the early 1990s and the loss severities remain at the levels seen so far this  year, the result would be a weighted-average loss of 1.24% across the master trust sector,” says Jonathan Livingstone, a Moody’s analyst and co-author of the report. Nonetheless the WAL varies significantly from 0.65% for the Gracechurch master trust containing  mortgages originated by Barclays to 2.02% for Granite. “All investment grade notes would require asset losses at twice this level before incurring any loss. Furthermore, increasing Moody’s expected loss to early 1990s stress levels would not in itself result in a rating impact on the UK RMBS master trust sector,” explains Anthony Parry, a Moody’s analyst and co-author of the report. The recession in the British economy in the early 1990s is often used as a benchmark to model how bad housing may get, just as the United States often refers to conditions during the Great Depression. Moody’s expects foreclosures to decrease the value of the Master Trust sector by 1.24%, but declined to downgrade the trusts from their coveted triple-A status. Write to Austin Kilgore.

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