Riskier UK Mortgage Bonds Face Reckoning From Housing Turmoil – Yahoo Finance - 24line

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الجمعة، 7 أكتوبر 2022

Riskier UK Mortgage Bonds Face Reckoning From Housing Turmoil – Yahoo Finance

(Bloomberg) — One of the few parts of the mortgage-backed bond market that grew in the UK during the pandemic is now facing its moment of reckoning amid increasing economic turbulence.

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The business of riskier securitization is shrinking, with mortgage lenders including LendInvest Plc and Keystone Property Finance Ltd. having sold only about £6.75 billion ($7.6 billion) of debt from April through the end of September, according to data compiled by Bloomberg. Those include pools of loans originated for borrowers who cannot access lending from high street banks, as well as buy-to-let transactions.

That tally is less than half the amount sold during the first three months of the year, when consumers and real-estate companies sought to refinance mortgages or lock in better terms before Bank of England rate-hikes made payments more expensive.

Now some mortgages taken out during the pandemic, particularly two-year fixed-rate loans, are coming up for refinancing. As a result, non-bank lenders have become even more vulnerable, especially after UK Chancellor of the Exchequer Kwasi Kwarteng stirred up markets on Sept. 23 with a package of unfunded tax cuts.

That move pushed up yields on interest-rate swaps, which lenders use to price mortgage products. The government’s decision on Monday to roll back the planned abolition of a higher tax band following a backlash within the Tory party has so far failed to stop rates rising.

“Those non-prime borrowers will be facing a payment shock if they are not able to remortgage at a lower rate like they have been used to in the last few years,” said Barbara Rismondo, a senior vice president, structured finance group at Moody’s Investors Service. In her portfolio of outstanding transactions involving residential mortgage-backed securities, or RMBS, roughly 15% of borrowers would be “distressed,” meaning they would struggle to pay their mortgages in the case of a downside scenario, she said.

Riskier deals from non-bank or specialist lenders have dominated issuance during the pandemic amid a government-stoked housing-market boom. They filled a gap left by the safest securities in the sector — known as prime RMBS — as banks instead utilized central-bank stimulus programs to raise the money to back mortgage loans.

Now, the economic outlook has shifted. About 20% of outstanding UK mortgages are set to exit their fixed period by the end of 2023, Morgan Stanley strategist Vasundhara Goel wrote in a note to clients last week. The combination of rising rates and the end of the fixed periods will determine the landscape for mortgages going forward, she wrote.

“While we expect some deterioration in performance, such as increase in arrears and foreclosure, UK RMBS transactions are in general structured to withstand recessionary scenarios,” said Pauline Quirin, a portfolio manager at TwentyFour Asset Management in London.

Buy-to-Let

Among the specialist lenders, the buy-to-let sector is the one particularly showing signs of vulnerability. NatWest Group Plc has recently tightened its affordability tests on such mortgages to reflect growing vulnerability, meaning some British landlords might find it impossible to secure a loan. HSBC Holdings Plc’s buy-to-let mortgages are temporarily unavailable, while a spokesperson for Barclays Plc said the bank continually reviews its affordability and stress rate methodology.

Read more: NatWest Tightens Buy-to-Let Lending in Latest Mortgage Turmoil

Every region in the UK has seen annual and monthly rental costs rise, according to specialist lettings insurance company HomeLet. Average costs in September rose 9.2% on the same time last year and climbed 1.4% from August, the data show.

“Rents have increased, and overall in the UK we have experienced supply constraints on rented property, meaning that there is now a limited supply of properties available for rent as a result of increasing regulation in the sector,” Rismondo said. “The question is how long these increases are sustainable given the higher cost of living for renters.”

Elsewhere in credit markets:

EMEA

Credit Suisse Group AG is offering to buy back debt securities for cash worth approximately 3 billion Swiss francs, taking advantage of the slump in market prices while demonstrating financial muscle after a week in which some investors questioned its solidity.

  • The offer includes euro and pound sterling debt securities worth up to 1 billion euros ($981 million) and a separate offer for US dollar securities up to $2 billion, the Zurich-based bank said in a statement

  • Meanwhile, Europe’s primary market is quiet, with no live deals on offer

  • Measures of investment grade and high yield corporate credit default risk have crept back up in recent days, after falling from peaks not seen since 2012 and the euro debt crisis era levels

Asia

Issuance in Asia’s primary dollar bond market rose this week, boosted by a $2 billion three-part debt offering from the Philippines.

  • Bond sales so far this week total $2.1 billion versus $1.22 billion in the previous week, according to data compiled by Bloomberg

  • Meanwhile, yield premiums on Asia ex-Japan’s high-grade dollar bonds climbed on Friday, on course to widen for the first time in four days; they had climbed to an almost two-month high on Monday

  • Chinese markets were out on an extended holiday

Americas

Five borrowers combined to price $8.15 billion Thursday, pushing weekly volume to $13.55 billion and over dealer estimates.

  • Issuers, though, paid an eyebrow-raising 46 basis points in new issue concessions – nearly 4 times the year-to-date average – largely driven by Yankee utility Enel offering investors as much as 75 basis points for its $4 billion four-part sustainability-linked bond offering

  • Alternative credit shop CIFC Asset Management has tapped Carlyle Global Credit’s former head of investor relations to help lead its business development efforts, according to a statement seen by Bloomberg

(Updates with regional credit market news)

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©2022 Bloomberg L.P.

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