Moody’s believes these borrowers will be unable to refinance if they cannot pass the more stringent affordability and income verification tests proposed.
It says: “As a result, when interest rates start to increase and borrowers’ capacity to make their existing mortgage payments becomes endangered, their inability to remortgage could potentially lead to an increase in arrears levels, higher defaults and an increase in back-ended losses in non-conforming securitisations.”
Moody’s believes the proposals will have less of an impact on the prime market than on the non-conforming market, as the majority of non-income verified lending in this segment is through the fast-track product, where the borrower is not requesting a self-certified product.
Additionally, although the refinancing market has tightened for prime borrowers, it is not as challenging as the non-conforming market.
From a credit perspective, Moody’s is of the view that, once adopted, these proposals should benefit new UK RMBS securitisations as well as master trusts with revolving pools, as theincome verification processes and stressed affordability tests will be more conservative for the mortgage loans included in the transactions.
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