Moody’s Investors Service took several rating actions on UK mortgage lenders in 2008, the vast majority of them in a negative direction. In a new Special Comment, Moody’s says that further rating actions on these lenders in 2009 cannot be ruled out, especially in the event that the agency’s base case scenario for house price weakens towards what is currently the stress scenario.
“Amid challenging macroeconomic pressures in the UK, most of the country’s mortgage lenders have been facing rising residential mortgage arrears over the past year, particularly those with specialist lending portfolios,” says says Marjan Riggi, a Moody’s vice-president/senior credit officer and co-author of the report. “In addition, the substantial fall in commercial real estate values in 2008 is increasingly leading to pressure on this asset class. Moody’s expects that the performance of commercial real estate will deteriorate significantly in 2009, exerting additional pressure on those lenders that are also involved in this market.”
Reflecting these pressures, Moody’s has taken a number of rating actions on mortgage lenders in the UK, paying special attention to those that are more vulnerable in the current volatile environment, to ensure that the ratings are reflective of the heightened risks. Moody’s rating actions were to a large extent the result of various stress-tests that the rating agency carried out on the balance sheets, particularly the mortgage loan portfolios, and profit and loss accounts of the rated mortgage lenders, taking into consideration the weakening economic environment as well as other sources of pressure such as asset devaluations, funding and lower margins.
“At this point in time, we believe that our current ratings for the mortgage lenders in the UK incorporate the risks of the current environment including our ‘base case scenario’ of a peak-to-trough house price decline of 25%,” says Riggi. “Given the current fluid nature of housing and commercial property prices as well as the downside risks to the general economy as a whole, we do not rule out taking further rating actions in 2009, especially in the event that our stress scenario of a 50% peak-to-trough house price decline becomes more of a base case scenario.”
Going forward, Moody’s main concern remains the amount of capital available to absorb coming losses, especially those arising from commercial real estate loans, where concentration risk is high, as well as, in some cases, losses from structured portfolio write-downs. For the most part, however, Moody’s believes current levels of capitalisation remain adequate, especially in its base case scenario.
Moody’s Special Comment — entitled “UK Mortgage Lenders: Moody’s Reviews Rating Actions in 2008 and Comments on Key Credit Themes” — summarises the background to the recent rating actions on such institutions and the key drivers that prompted such actions, including pressures on asset quality, profitability, funding and liquidity, and capital levels.
In 2009, Moody’s will continue to develop its analytical tools and to monitor the rated mortgage lenders closely. It will pay particular attention to concentration risks and will thus be conducting a loan concentration survey over the coming months.
The principal methodologies used in rating mortgage lenders in the UK are the “Bank Financial Strength Ratings: Global Methodology” and “Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology”, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.
D.C.