(Bloomberg) — There is “significant uncertainty” about the ability of weaker UK home owners whose debt was bundled into residential mortgage-backed securities to repay the principle when the loans mature, according to Fitch Ratings.
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Sharp rises in mortgage rates have led to a spike in so-called nonconforming borrowers failing to make their full payments. In an index of those home loans tracked by the ratings agency, arrears of one month or more surged 11.1 percentage points to 24.2% from December 2021 through November 2024. Three-month plus shortfalls jumped 8.6 percentage points to 17.7% in the period.
“The lack of resilience to this interest rate shock underscores the weak financial position of these borrowers,” Fitch said in a report.
The nonconforming mortgages are loans originated before 2014 that were subject to relatively relaxed underwriting requirements compared with current lending. They often have features such as interest-only repayments, self-certified income or high loan-to-value ratios. The delinquencies could put pressure on cash flows to the bondholders in the future, the ratings company said, if the borrowers can’t pay off the debt when it falls due.
Some collateral pools are already yielding up to 20% less in revenue than implied by the weighted average yield, a metric used for valuations, the report found.
For now, servicers are being lenient with delinquent borrowers, only opting for repossession when borrowers refuse to engage. One reason for the increase in delinquencies is that there was a large amount of prepayments in 2022 and 2023, according to the report, “suggesting that borrowers able to refinance or repay have done so.” As a result, weaker home owners now make up a bigger part of the pools.
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