UK RMBS Servicers Thinking Fast on Their Feet
Even though the UK property market is not seeing the same massive fall in house prices as the US, Fitch Ratings says today that the servicing strategies of UK non-conforming (the equivalent to subprime) lenders is evolving rapidly in the face of a nonetheless equally challenging market. Perhaps the greatest challenge to these lenders, according to a HousingWire source, is the current environment where LTV ratios remain punitive and new buyers typically need at least 20% down in order to be considered for a mortgage. With this lack of generation, such lenders become greatly exposed to the performance of current loans, the source pointed out. This is likely driving the quick-time change. According to the Fitch report, the typical UK residential mortgage foreclosure process is longer compared to this time last year; what used to happen in nine to 12 months now takes up to 15. This shift is especially marked considering that during the boom, if borrowers missed two payments, these lenders normally started the foreclosure paperwork immediately. In the case of such loans rolled into RMBS, this process isn't started until the borrower misses at least four payments, Fitch found. "Fitch rates a number of residential primary and special servicers across the UK, and has noted that the increased focus on "Treating Customers Fairly" and other regulatory and government initiatives over the past 12-18 months has led specialist lenders and servicers to amend their arrears and foreclosure strategies," says Robbie Sargent, Director, Fitch's European Structured Finance team. And certainly if these lenders didn't feel constricted before, they will now as the Financial Services Authority (FSA) recently announced an investigation into four such firms, alleging that foreclosures may be initiated without a proper consultation with the borrower or offering any logical alternatives. Nonetheless, asset mangers are performing a balancing act for RMBS programs, where the legal documentation allows, by pushing to make sure borrowers don't default while trying not to destabilize the cash flow into the RMBS platform. When the credit crises started to grip the UK, and it became painfully obvious that the US subprime knock-on would ripple across the Atlantic, ABS researchers often pointed out that the legal maturity dates of RMBS structures would prevent any massive tinkering. By doing so, they argued, legal protection may be lost and litigation could then be brought by any aggrieved party that may allege "this wasn't the deal," states the source, who is based at a French Investment Bank in the UK, said. But just as strategies changes, so do the times. "It is wrong to assume that because a loan has been securitized it is more likely to be pushed through to possession in the event that it falls into arrears," says Alastair Bigley, director of the Fitch European structured finance team. "It is in the interests of investors in RMBS that servicers adopt strategies that minimize ultimate losses." He adds: "Servicers are in the best position to judge whether loan modification is the best means of achieving this. Certainly with interest rates at their current low levels, a servicer's flexibility to make this decision is greater than in the early 1990s recession." Write to Jacob Gaffney.