RMBS arrears hike is to be expected.
Posted on June 8th 2009
Recent reports that Prime RMBS has experienced a jump in arrears should come as no surprise; what were people expecting, an improvement in performance! There are three factors causing this deterioration none of which are going away anytime soon. Firstly, unemployment is rising and will continue to do so for at least another year. Second, because the supply of mortgage funds is so tight only prime borrowers with low LTVs stand a decent chance of refinancing. This stops people who are in arrears or are experiencing difficulties remortgaging their way out of trouble. Finally, monthly mortgage payments have come down as a result of base rate reductions and this means that when you divide the arrears by the monthly payment the number of months in arrears will have technically gone up.
Until we get mortgage funding moving again house prices will continue to slide and the knock on impact on jobs will continue this vicious circle.
The US has been much more aggressive in trying to stimulate new issuance of RMBS. In the UK we still haven’t made any inroads into getting investors interested. There were some ideas in the Crosby report but they have yet to materialise in full and don’t go far enough to make a real impact.
Securitisation still remains a good way to restore liquidity into the markets providing investors believe that the risks are transparent. Far too many clever bankers, traders and ratings agencies muddied the waters by layering risk on risk on risk and getting AAA ratings for asset that is now known to be anything but. This is where the government should focus its attention.
