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Arrears data should help sustain funding market confidence


Published: 16 November 2011 | Author: Bernard Clarke

We hope that our recent data on mortgage arrears and possessions will help to reinforce the view taken by financial markets that UK mortgage assets have continued to perform well in the aftermath of the credit crunch, the subsequent recession – and now the European debt crisis.

Data we published last week showed that the number of properties taken into possession by lenders in the third quarter of this year totalled 9,200, virtually unchanged from the total of 9,100 in the preceding three months. The number of properties taken into possession equated to 0.08% of all mortgages, the same proportion as in five of the last six quarters, indicating that mortgage payment problems have been broadly stable despite the weakness of the economy.

So far this year, a total of 27,500 properties have been taken into possession – 4% fewer than in the equivalent period last year. It now appears likely that the total number of properties taken into possession over the course of the year will be lower than our forecast of 40,000.

Last week’s data also showed a slight fall in the number of households in mortgage arrears. At the end of September, the total number of mortgages with arrears of 2.5% or more of the outstanding balance fell to 161,600, down 2% from 165,200 in the preceding quarter and 8% lower than the 175,100 cases at the end of September 2010.

Overall, therefore, the data shows that UK mortgage assets have been continuing to perform well. This is largely because:

  • in the build-up to the financial crisis, the UK avoided over-building property on the scale seen in US, Spain and Ireland;
  • lending standards in the UK did not deteriorate as they did in the US; and
  • lower interest rates have helped underpin the mortgage market in the aftermath of the financial crisis.

The UK mortgage market now has a track record of performing well through an extended period of difficulty, with arrears currently running at less than half the levels seen during the last market downturn in the early 1990s. 

This has been a key factor in the solid credit performance of UK residential mortgage-backed securities (RMBS), with Chart One showing much lower levels of downgrading and default than has occurred in some other key bond markets, particularly the US RMBS market. In the US, nearly 45% of RMBS have been downgraded, and more than 5% have defaulted. In the UK, however, fewer than 5% have been downgraded and, according to the rating agencies, none have defaulted.

Chart One: Downgrades and defaults in different RMBS markets 

Source: Standard & Poor's

The performance of mortgage assets in the UK partly explains the renewed popularity of UK RMBS. Investor confidence appears to have been sustained by the performance of UK lending secured on property. Chart Two shows that, by contrast, the spread on senior unsecured bank debt has widened significantly since the summer, driven by concerns about the European debt crisis. 

The chart shows that the spread on covered bonds and senior prime RMBS has been affected to a much lesser extent. New issuance has held up well in these markets partly because banks have not been able to issue in the senior unsecured debt market.

Chart Two: Spreads across UK bank liability types

Source: RBS

There has been a considerable change in conditions in the market for UK RMBS, which virtually closed down in the aftermath of the credit crunch. It is now clear, however, that this was due to a lack of understanding among investors of key differences between RMBS based on UK and US mortgages.