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Structured Finance
 
 www.fitchratings.com 18February2009
 
Special Report
European Structured FinanceRMBS Outlook — February 2009
 
Executive Summary 
This report updates Fitch’s Outlook for the European RMBS sector which waspublished on 29 October 2008.In December 2008, the agency revised its forecasts in regards to a number of keyeconomic and monetary variables in both the UK and euro area, as follows:
 ·
Forecasts for UK GDP growth were lowered from 0.6% in 2009 and 2.0% in 2010to ‐1.4% in 2009 and 1.0% in 2010. Forecasts for GDP growth in the euro areawere reduced from 1.7% in 2009 and 2% in 2010 to ‐0.6% in 2009 and 0.9% in2010.
 ·
Expectations for unemployment in the UK were increased from 5.9% in 2009 and6.3% in 2010 to 7.3% in 2009 and 7.9% in 2010. In the euro area, currentunemployment expectations are 8.8% in 2009 and 9.3% in 2010.
 ·
Forecasts for UK inflation were lowered from 2.8% in 2009 and 2.2% in 2010 to2.3% in 2009 and 1.5% in 2010. Inflation forecasts in the euro area were revisedfrom 2.7% in 2009 and 2.3% in 2010 to 2.6% in 2009 and 1.9% in 2010.The impact of these changes and other factors on the agency’s outlook for specificsub‐sectors is as follows:
 ·
The deterioration in the global economy and the intensification of the creditcrisis since the last quarter are set to put more negative pressure on the RMBSsector, notwithstanding the general reduction in interest rates. Assetperformance deterioration is expected to continue across the UK and the euroarea as a result of rising expectations on unemployment and further declines inthe prices of residential real estate assets. Ratings are likely to continue to beaffected, especially for the junior classes.
 ·
Further house price corrections are expected, especially in the UK, Spain andIreland, which will likely result in rising losses in terms of number and valuethroughout 2009.
 ·
Government measures have been announced in some European countries withthe aim of supporting mortgage borrowers having difficulty repaying theirmortgage loans and preventing repossessions. The details of many of these loanmodification programmes have yet to be fully disclosed; consequently theimplications for the ratings are still uncertain.
 ·
Fitch has introduced its expectations for house prices and residential mortgagedefault rates in a number of European countries (see table on page 2).
 ·
In spite of having revised its economic forecasts, Fitch has maintained itsoutlook on RMBS as the agency believes that at present the lower economic andmonetary estimates are already incorporated in its current outlook.The table below summarises Fitch’s expectations on peak‐to‐trough house prices aswell as average mortgage default rates for a number of European countries over anexpected recessionary period.
 
 Analysts
Gregg Kohansky+44 20 7682 7491gregg.kohansky@fitchratings.comLara Patrignani+44 20 7417 4262lara.patrignani@fitchratings.comAlastair Bigley+44 20 7417 6278alastair.bigley@fitchratings.comMichele Cuneo+39 2 879 087 230michele.cuneo@fitchratings.comRui Pereira+34 91 702 5774rui.pereira@fitchratings.comNatalia Bourin+33 1 44 29 91 76natalia.bourin@fitchratings.comSusanne Matern+49 69 7680 76237susanne.matern@fitchratings.com
 
 Amendment
This report, originally published on17 February 2009, is being republished tocorrect the average mortgage default ratefigures in the Fitch Expectations table onpage 2.
 
Structured Finance
European Structured Finance RMBS Outlook — February 2009February 2009
 
3
UKNon‐Conforming
 
 Asset Performance Outlook: DecliningRatings Outlook: Negative
 
There have been no public issuances of UK non‐conforming RMBS in the last quarterand none since July 2007. Arrears and defaults have risen, especially in the morerecent vintages, and a number of downgrades have already been made –particularly on notes backed by excess spread. The most significant downgradeshave been in the excess spread and collateralised junior notes.The outlook for the subprime sector in 2009 is negative. With the market all butclosed down for new lending, those lenders that remain in business areexperiencing funding constraints and/or exhibiting a reduced appetite for lending,meaning that funding options for borrowers have been significantly reduced. Thishas had two notable consequences. Firstly, borrowers who had previously been ableto refinance to another cheaper teaser rate following the end of their initial teaserare now being forced to pay the higher non‐discounted margin, leading to paymentshock and higher delinquencies. Secondly, borrowers who enter arrears on theircurrent mortgage are unlikely to be able to re‐mortgage away from repossessionand are more likely to be repossessed before they can re‐mortgage away.Delinquency and repossession rates continue to rise and, with negative eventsunfolding in the wider economy, further declines in these key metrics are expectedto continue well into 2009. Higher repossession rates are also being exacerbated byhigher loss severities on sold repossessions. Falling house prices are expected tofurther increase losses throughout 2009. As a result, continued discouragingperformance is expected to negatively affect ratings for the remainder of 2009 andinto 2010; particularly since UK house prices are expected to remain undersignificant pressure during this timeframe.However, Fitch’s non‐conforming index shows a wide array of performance andcontinued upgrades in the higher rating categories can still happen for transactionsthat have experienced significant deleveraging and where arrears and lossperformance is materially better than original expectations.
 
UK Prime
 
 Asset Performance Outlook: DecliningRatings Outlook: Stable/Negative
 
Fitch expects a peak‐to‐trough house price decline in nominal terms of around 30%.For further information on the agency’s expectations for the UK please refer to“
Impact of Expected Housing Market Deterioration on UK Prime RMBS Ratings
” and“
Ratings Stress Test: Impact of UK Housing Market Downturn Scenarios on UK Non‐Conforming RMBS Ratings
”, available at
www.fitchresearch.com
dated 27 January2009 and “
Ratings Stress Test: Impact of UK Housing Market Downturn Scenarios onUK Non‐Conforming RMBS Ratings
”, dated 8 July 2008, available atwww.fitchresearch.com.Depending on the index used, house prices have, to the end of January 2009, fallenapproximately 16‐18%. Both the Nationwide Building Society (NBS) and the HalifaxHouse Price Index showed month‐on‐month declines from October 2007 toDecember 2008. According to NBS, this downward trend was repeated in January2009; however, the Halifax Index reported an increase in house prices in January2009. Given the relatively low levels of mortgage originations each month, there ispotential that individual monthly figures may show reversals from the overall trend.Despite the recent lowering of interest rates, the availability of mortgage creditstill remains tight and with the real life implications of a recessionary economybeing felt in the form of higher unemployment and salary reductions, Fitch stillexpects house prices to fall throughout 2009 and into 2010.
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