European homeowners are missing fewer mortgage payments as the growth of arrears in European residential mortgage-backed securities (RMBS) is slowing, according to Standard & Poor’s Ratings Services. A report this week by S&P indicates the possible improvement of a trend that began with the onset of the financial market disruption in 2007, when European borrowers pressured by financial distress began missing payments at a significant rate. When high interest rates rose across Europe pushed mortgage payments higher in 2008, homeowners found their budgets squeezed even tighter, S&P said. “In our opinion, this was initially a major factor spurring higher arrears and, ultimately, defaults on mortgages,” the ratings agency said. “Furthermore, the disruption in capital markets raised banks’ funding costs and led to significantly restricted access to credit for many borrowers, especially those in financial difficulty looking to refinance.” Policy rate cuts by the Bank of England and the European Central Bank finally trickled down to borrowers, S&P said, moderating arrears among borrowers with floating-rate loans. As rates decrease, borrowers’ monthly payments decrease, improving affordability and narrowing the gain in arrears in European RMBS. This improvement in arrears growth also improves the prospects for credit ratings on outstanding European RMBS transactions. Unemployment, however, will continue to play a key role in determining borrower payment behavior, arrears growth and RMBS transaction outlooks. “Even though interest rates are currently low, unemployment generally continues to rise in most European countries,” S&P said. “Arrears could therefore start to climb again if employment deteriorates significantly.” Write to Diana Golobay.