More than a fifth of UK homebuyers who have a chequered credit history have fallen behind on their mortgage payments and even those with top-quality ratings have seen a statistically significant rise in delinquencies in the first three months of this year.
New data from Standard & Poor’s provides the first glimpse into how mortgages are performing this year. It is based on the behaviour of homebuyers whose loans have been packed into mortgage-backed securities – which accounts for 80 per cent of the £43bn subprime mortgage market.
Of all loans to borrowers with poor or no credit history, total delinquencies – defined as arrears of more than 30 days – made up 21.73 per cent at the end of March while those seriously delinquent by 90 days or more, including some already in foreclosure, edged into double digits at 10.60 per cent.
The figures show that more than £7bn worth of loans are at risk of default unless lenders agree to modify the loan terms. S&P believes that the loans backing the securities it rates are a representative sample of the market as a whole. The rise in subprime arrears threatens further problems not only for the economy but also for those financial institutions that bought securities backed by the loans.
Potentially more worrying is the small but notable increase in delinquency rates among prime mortgage-holders.
In a report on the performance of securities in this vastly larger market, S&P calculated mortgage delinquency rates for the first quarter of 2008 were 2.41 per cent while payments 90 days or more overdue were 0.79 per cent. S&P said this represented a “sharp” rise from the previous quarter when the figures were 2.11 per cent 0.62 per cent respectively.
S&P stressed that the numbers remained very small and Sean Hannigan, a director and credit analyst at S&P said: “We have seen numbers like this two years ago.” However, he added: “The difference today is that borrowers are not being helped by rising house prices as they have been in recent years,” he said. “In previous years, homebuyers in difficulty could find another lender to refinance the mortgage. It could mean that now more homes wind up in repossession.”
The fact that a rise is occurring while employment is strong and interest rates low suggests that it may not only be macroeconomic factors making it hard for homeowners to pay their debts.
Roughly 80 per cent of all subprime mortgages have been securitised, as have about 20 per cent of all prime mortgages. Data from the Council of Mortgage Lenders is more comprehensive but will not be produced until the summer.
Because S&P provides credit ratings on the debt, it must closely watch the underlying loans where payments from homeowners provide the interest and principal on the bonds.