Moody's: Northern Non-Conforming UK Borrowers Are Almost Twice Likely to be Caught In a Mortgage Debt Trap

Moody's analysis reveals that the north-south divide persists in the UK's non-conforming mortgage market, as borrowers in the North are 1.9 times as likely to be mortgage prisoners than borrowers in other regions, says Moody's Investors Service in a sector comment published today. About 75% of non-conforming borrowers in north England and in Northern Ireland (together, the North) who took out interest-only loans when the market peaked in 2007 are mortgage prisoners.

Mortgage prisoners are borrowers who are unable to refinance to a better deal or move house because they fall outside lending criteria.

"The north-south divide remains firmly entrenched in the sector due to the North's weaker housing market and slower economic recovery," observes Emily Rombeau, a Moody's Analyst and author of the report. "At 54%, over half of northern non-conforming borrowers are mortgage prisoners, compared with 32% of non-conforming borrowers in the rest of the country."

Our research shows that about 40% of non-conforming borrowers are mortgage prisoners across the country. Our assessment corresponds to the share of borrowers who (1) have a mortgage with an indexed LTV ratio above 85%; or (2) are more than 30 days in arrears on their payments. An inability to keep up with monthly payments is the main reason for being a mortgage prisoner, accounting for 68% of trapped borrowers.

In southern England, non-conforming borrowers benefit from at least 9.4% increase in equity in their house on average. Southern England's housing market recovery has outpaced the rest of the country, with property prices rising above pre-crisis peaks in London and south east England.

We expect that the overall level of mortgage prisoners will continue to moderately decrease over the next 12 months. House price increases will reduce indexed loan-to-value (LTV) ratios, thereby enhancing borrowers' ability to refinance. The LTV ratio is a key driver of defaults in the UK non-conforming residential mortgage-backed securities (RMBS) sector: loans with LTV ratios above 80% have a 2.2x greater likelihood of being repossessed.

In our base-case scenario, we have not taken borrowers' affordability into consideration when assessing their ability to refinance under current market conditions. We have also assumed that self-certified borrowers did not overstate their income at origination. For example, if we apply a 10% haircut to self-certified borrowers' income and consider that homeowners with a loan-to-income ratio above 3.5x cannot remortgage, the proportion of mortgage prisoners increases to 59% from 38%.

Moreover, if we assume lower indexed LTV ratio cut-off points for interest-only loans, a significantly larger proportion of borrowers would be trapped in their current mortgages. The share of mortgage prisoners rises to 74% from 38% if we assume that interest-only borrowers with an indexed LTV ratio above 50% cannot refinance.

Moody's report, titled "Northern Non-Conforming UK Borrowers are Almost Twice as Likely to be Mortgage Prisoners," is available on www.moodys.com.

Moody's subscribers can access this report via this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1003269