Moody's Drafts Drivers of Default in UK Mortgages
In a report published today, Moody's Investors Service describes the degrees to which individual loan characteristics, such as LTV, income verification, occupancy type, etc., can act as drivers of loan default. These results are based on the analysis of the performance data of several UK master trust and stand alone prime transactions – overall about £259bn ($429bn) of mortgages originated in or before beginning of 2008 were analysed. The rating agency observes that while the performance of the “benchmark” loan, i.e. a loan without adverse credit characteristics, is so far significantly better than the default rate assumed in the loan-by-loan model used to analyze UK RMBS portfolios (the MILAN model), some adverse loan characteristics may lead to a significantly higher probability of default for the associated loans. “In particular, these include high LTV loans, loans to self-employed borrowers, self-certified products or loans without full income verification due to the fast track process, buy-to-let loans, interest only loans, and remortgages,” says Jonathan Livingstone, a London-based analyst, and co-author of the report. “The performance of loans with these adverse characteristics will continue to be closely assessed to ensure that the adjustments assumed in the rating analysis reflect the credit risk of these loans.” Moody’s also notes that loans displaying other adverse characteristics, such as borrowers close to retirement age and loans on high value properties or properties without a full internal valuation have marginally higher rates of default than loans without these characteristics. However, the effect of such factors may increase if the economic downturn continues. Furthermore, loans with certain characteristics (first-time buyers, high income multiples, loans on newly built properties, and large loans) currently show no significant difference in the rates of default compared to similar loans without these characteristics. However, this is also subject to some limitations, and it should also be noted that many of these characteristics might be expected to impact the severity of loss following foreclosure rather than the frequency of default. Write to Jacob Gaffney.