Moody’s latest investor report said it expected Bradford and Bingley’s master trust, Aire Valley, to see losses double from 1.75% to 3.5%, while Northern Rock’s Granite is expected to see losses rise from 1.75% to 2.5%.
Both trusts’ performances have been adversely affected by their high delinquency rates and slow repayment rates, making them more sensitive to deteriorating economic conditions and increasing interest rates.
Nevertheless, the overall performance of UK master trusts has improved with one-month arrears for the sector falling to 3.49% from 4% a year ago and average severities down to 20% from 25% in December 2008.
Moody’s said UK trust ratings were “very resilient” against the slower-than-expected economic recovery. Actual losses in the trusts, including Aire Valley and Granite, would need to increase to at least 10% before the Aaa-rated paper experienced a loss, it said.
However, average repossessions over the last 12 months have increased to 0.25% from 0.18%.
This was mainly due to the increase in repossessions in the Northern Rock Granite master trust, which almost doubled from 0.65% in the 12 months to the end of December 2008 to 1.25% for the year ending September 2010.
Nevertheless, outstanding repossessions for this trust have remained fairly constant over the last year with a current level of 0.54%, as properties repossessed earlier in the crisis have been sold.
Aire Valley, which is primarily made up of interest-only buy-to-let and self-cert mortgages, recorded the second highest rate of repossessions out of all trusts at 0.43% for the 12 months to September 2010.
In addition, 84.8% of the loans in Aire Valley are tracker deals making them subject to payment shock when interest rates move and increasing the chance of losses.
Arrears of three months and over are also significantly higher than the master trust average of 1.69%, at 3.8% in Aire Valley (although this is down from 5.61% in July 2009) and 5.76% in Granite, up from 4.67% in July 2009.
The average LTV of UK trusts has improved in the last year from 72.2% to 66.8%, which has helped reduce the number of borrowers in negative equity to 6% from 16.1% year-on-year.
Moody’s said the performance of master trusts containing prime mortgages will be relatively stable or have marginal deterioration in 2011.
Those with a high level of non-conforming mortgages, such as Aire Valley or the Bank of Scotland’s Mound and Pendeford, or with prime deals with risky characteristics, like Granite, will deteriorate in performance because of the limited refinancing options on offer to borrowers in these trusts.
