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‘Deteriorating’: Ratings agency sounds alarm on prime mortgages

by Kate Aubrey10 minute read
‘Deteriorating’: Ratings agency sounds alarm on prime mortgages

Fitch Ratings has warned that mortgage arrears will rise in a key prime mortgage market as inflation and rate hikes burden borrowers.

On Thursday (29 September), Fitch Ratings announced that it expects mortgage arrears to increase across all UK RMBS sectors from the fourth quarter of 2022 as inflation leads to falling real wages while rising interest rates result in increased monthly instalments for borrowers.

Fitch has revised its asset performance outlook for the prime and buy-to-let sectors to deteriorating from stable, while the non-conforming sector outlook was updated to deteriorating earlier this year.

“Forbearance arrangements are likely to increase alongside arrears,” the ratings agency said.


“We anticipate servicers will be willing to engage with borrowers to assist with addressing short-term pressure with both formal arrangements and temporary concessions. Forbearance strategies, in the absence of a material reduction in home prices, are likely to be adopted more widely than repossession activity.

However, despite the use of mercy measures, Fitch warned that possession claims will inevitably increase as a recessionary period with rising unemployment will affect weaker borrowers, for whom no reasonable forbearance option may be available.

CNBC recently reported that hundreds of residential mortgage deal offers in the UK have been pulled after financial markets went into turmoil last week.

HSBC and Santander have reportedly paused their mortgage product offerings.

CNBC pointed to data from comparison site Moneyfacts, which showed 935 mortgage products were pulled from the market on Tuesday (27 September), according to data from money. The company said this was the largest daily drop on record.

The Bank of England has intervened by initiating an out-of-cycle bond-buying program at a time when most central banks are winding down their quantitative easing efforts.

Delivering a dinner speech in Belfast on Thursday (29 September), Bank of England chief economist Huw Pill said the UK’s Financial Policy Committee (FPC) had identified a market segment where “orderly re-pricing threatened to descend into market dysfunction”

“Specifically, the long-end of the gilt market — where government bonds with maturities above 20 years trade,” he said.

“While much effort has been made to deepen our understanding of and ability to respond to market dislocation since the global financial crisis, the emergence of these problems suggests the Bank and wider central banking community still have some work to do in throwing light on and building resilience in some of the shadow-ier parts of the non-bank financial sector, as emphasised by my colleagues on the FPC and internationally in the FSB.”

[Related: Mortgage defaults ‘low risk’, study reveals]

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