Why some future mortgages probably just got a bit more expensive to deliver to market
Mark Davies (pictured) is managing director of Link Mortgage Services
In a recent note Fitch Ratings suggested that the take-up in mortgage payment holidays in the UK could see some investment-grade UK Residential Mortgage Backed Securities notes with limited liquidity protection (i.e. the money to pay out to investors) start to defer interest.
They were careful to point out that the most senior classes of notes of Fitch-rated UK RMBS transactions currently have sufficient liquidity coverage, but downgrades of second tier debt such as mezzanine and junior note ratings are possible.
This has been made entirely possible by the mortgage payment holidays introduced to mitigate the economic effects of the pandemic but it will have far reaching if unintended consequence for some lenders and investors.
The scale and ambition of the help that the government is issuing means there are ramifications for the markets down the line. One can entirely understand why the government should put the needs of voting home-owners before anonymous investors who can surely bear some of the communal pain.
The need for immediate effective action should mean relieving the stresses put upon people which includes paying for where they live. Protecting its citizens is the job of the state.
But the government realised it cannot write blank cheques too. It has gone to some lengths to reassure investors that they too will not lose out entirely.
The Financial Conduct Authority (FCA) guidance says lenders should grant holidays to borrowers experiencing or expecting to experience payment difficulties due to the impact of the coronavirus, unless the lender can demonstrate that it is reasonable, and in the borrower’s best interest, not to do so. Importantly, interest will continue to accrue during the payment holiday.
But this halfway house still impacts investors. My suspicion is that while this may work for debt that is already issued, this will have an unintended impact on the cost of debt going forward.
This sets a precedent and it is not unreasonable to suspect the cost of getting these securities into the market will increase to reflect the added risk that returns might be ‘delayed’ owing to further future risks.
The worst case is that appetite for these securities diminishes to the point of making other assets more attractive. We are not there but this course of action will give concerned investors cause for reflection.
The Bank of England base rate might be at historic lows but this holiday idea does not come without issues further down the line. Depending on a lender’s funding streams, future mortgage money may cost more rather than less as a result of this.