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Barclays: Plan Could Reduce U.K. RMBS Loss Severities

MAR 22, 2013 3:44pm ET
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U.K. prime RMBS investors may see loss severities decrease in U.K. RMBS deals as house prices stabilize on the back of a new housing initiative announced recently, according to a Barclays report.

The U.K. government’s new initiative is also likely to improve the refinancing options for U.K. borrowers. This, said analysts in the Barclays report, should boost prepayment rates “due to a material increase in remortgage options (particularly at the high LTV levels) and the lower rates that should be on offer.”

Under the three-year mortgage initiative, which kicks off on April 1, 2013; borrowers can receive an equity loan of up to 20% of the value of a new home, which is payable once the home is sold. Barclays said that there is “no income cap constraint” for eligibility.  

The second part of the initiative aims to "increase mortgage availability to help combat the increased deposit requirements and falling equity values over the last few years."

Barclays explained that the scheme will motivate mortgage lenders to offer high LTV lending to credit worthy borrowers. Lenders will also have the option to purchase a government guarantee that will last for seven years, to compensate for portion of losses in the event of foreclosure. Lenders will take a 5% share of the net losses to ensure they are incentivized to originate good quality loans. The start date for this part of the plan is January 2014.

“Some near prime borrowers in the non-conforming sector may also benefit if they have improved their credit history over the last five to six years, but were simply unable to remortgage due to high LTV levels,” explained analysts at Barclays in the report.

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