Up to a fifth of mortgage borrowers with patchy credit histories have fallen badly behind in their loan payments – almost twice the proportion of two years ago when Britain was sliding into recession, according to research.
The study, from Standard & Poor’s, the credit rating agency, reached this conclusion after studying individual loan-level reports of mortgage-backed securities backed by roughly 80,000 subprime mortgage loans. Many loans were found to be improving, however.
The rating agency said it believed that its sample group represented about a fifth of all outstanding subprime loans.
In 2008, just over 10 per cent of subprime borrowers were overdue on payments by 90 days or more. The performance of mortgage loans and their impact on bank balance sheets has become slightly more significant now that house prices appear to be falling again.
The study found that the overall picture for subprime mortgages was improving in some important respects: the number of borrowers falling into arrears for the first time was dropping sharply, and the rate at which borrowers were catching up with missed payments was rising.
“However, there is a large core of borrowers who remain in severe arrears, despite lower scheduled payments,” said S&P.
Andy South, senior director in the asset-backed securities division of S&P, said the findings offered pointers to the possible performance of mortgage loans in the future.
Data over the past year have pointed to falling arrears and repossession rates for all borrowers, prime and subprime, while foreclosure and mortgage loss rates for lenders have been much lower than had been expected.
“What this highlights is the fact that the improvement is happening among those who weren’t doing too badly in the first place,” said Mr South, adding that those who were struggling were facing worsening conditions.
“Any stress in the form of higher interest rates or a rise in unemployment could lead to an uptick in repossessions,” he said.
The study found that in the two years to the third quarter of 2010, the balance of loans in arrears by less than 90 days fell by more than 30 per cent, while the stock of repossessions declined by more than twice that level.
However, over the same period, outstanding loans in arrears for 90 days or more rose by about 70 per cent.
While it is estimated that the number of “non-conforming” home loans was roughly 20 per cent of the total before the financial crisis hit in 2007, almost no new loans of this sort are being made today, data from the Financial Services Authority show.
The category includes not only loans made to borrowers with poor credit, but also some of those made to buy-to-let buyers and those who added a second mortgage on top of their existing loan.
Mr South noted that because most of these borrowers had loans linked to either the Bank of England rate or Libor (the London Interbank Offered Rate), they had been the full immediate beneficiaries of the fall in interest rates.
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