UK Banking Act is OK for Secondary Mortgage Finance

Moody’s Investors Service is putting to rest some fears about the recent passage of the UK Banking Act 2009 and the rating impact on the structured finance portfolios of those institutions licensed to conduct securitization business in the country. The agency, for its part, does not see a negative affect on these transactions. However, the rating agency does not discount that this opinion may change in the future, adding that it does not expect those in power to actively seek to administer regulation and reform to the detriment of residential and commercial-related mortgage finances. Some sections of the law alarmed market players, especially concerning a ‘Safeguard Order’ which allows for the modification or removal of the terms on which the bank holds property on trust for the ultimate benefit of investors. The fear lies in giving UK authorities broad discretion to modify or terminate trust arrangements, potentially to the detriment of investors exposed to securitizations and covered bonds. The report clarifies, mentioning two banks under government control: “The political will to  support covered bonds is clearly evidenced by past actions in respect of Northern Rock and Bradford & Bingley — in each case covered bonds were guaranteed by the government — and Moody’s expects they will not be left with a residual bank unless they are guaranteed.” Northern Rock, until its retail-side collapse, originated tremendous amounts of high LTV loans. Bradford & Bingley is a specialist lender catering to non-owner occupied-type rental borrowers. The Moody’s report should be well-received by investors in the aforementioned banks’ Master Trusts: Granite and Aire Valley, respectively. A structured finance report dated June 23 2009, from Fitch Ratings on underwater exposure to UK prime RMBS found that 22% of borrowers in B&B’s Aire Valley were in negative equity. That number was eclipsed only by Granite, with 38% of such borrowers underwater. Fitch did note in the report that prime borrowers are unlikely to default, even in negative equity. Write to Jacob Gaffney.