While such a decision could give distressed borrowers time to get back on their feet, borrowers who have reached this stage are unlikely to be able to recover in such a short window. Delaying repossession could create or increase the potential shortfall on the sale of a repossessed property, particularly in the current climate of rapidly decreasing property prices.
"In terms of how it may affect a specific deal, it is not as straightforward as saying that increasing the time to litigation will increase loss severity across the board. By increasing the time it takes to initiate repossession proceedings, servicers may be allowing borrowers who are in difficulties or have lost their jobs more time to get back on their feet, find alternative work and avoid the need for foreclosure" commented Alastair Bigley, Head of UK RMBS at Fitch.
"Depending on how such initiatives are implemented and how they are operationally managed, they could prove either positive or negative for the underlying transactions. If such schemes are not targeted at borrowers who have a reasonable chance of recovery, then the effect of extending the time to repossession could merely be delaying the inevitable. This would only serve to increase loss severities and is why we will be discussing precise details of such schemes with servicing parties" added Bigley.
Fitch also questions the impact for investors of the recent UK government announcement of a two- year interest deferral scheme for some distressed residential mortgage borrowers. The details of how this scheme will work and, more importantly, whether it will be mandatory or voluntary, remain unclear. However, in the absence of alternative liquidity arrangements, the scheme could create a cash flow stress to RMBS transactions in the short term. In the longer term, if the scheme were to prevent borrowers defaulting, it could prove to benefit such transactions. If the proposal only delays an inevitable repossession for two years, then the impact could be an increased loss on the ultimate repossession, as UK house prices are expected to continue to decline in the coming months and are unlikely to have recovered to current levels after two years.
"Lenders who have signed up for the scheme so far face the potentially difficult dilemma of reconciling their commitment to the deferral scheme with the interests of investors in their RMBS programmes," added Gregg Kohansky, Senior Director and Head of EMEA RMBS at Fitch.
As the servicing environment becomes more challenging, Fitch expects the range of tactics used by servicers in an attempt to mitigate loss severities suffered on residential mortgages to become ever more innovative. In the recession of the early 1990s,tactics included repurchasing property that secured defaulted mortgage loans onto the balance sheet of the originator, working with the borrower to sell the property with the borrower still living in it, to increase the sale price of the property and converting shortfalls on sale into unsecured loans with repayment holidays. Fitch expects such strategies, and others, to be increasingly common in 2009 and 2010.
