The agency expects that to increase to 34% if house prices fall in line with Fitch's expectations of a 30% house price decline peak to trough, which would mean a further 14% fall from today's values.
Northampton, Nottingham and Derby are the worst affected cities. Fitch's analysis shows that the East Midlands has the highest proportion of loans in negative equity (21.8% by value and 15.1% by number of borrowers) and Scotland has the lowest (5.4% by value and 3.6% by number of borrowers).
"Amongst the loans in our analysis, which constitute nearly 25% of all outstanding UK prime mortgages, approximately 270,000 borrowers are in negative equity," says Alastair Bigley, Head of RMBS for UK and Ireland at Fitch. "Of the 2.7 million prime mortgage loans totalling £263bn securitised through RMBS, more than £39bn of loans are in negative equity and this figure will rise further as house prices continue to fall."
Such an increase in isolation is unlikely to result in negative rating action, since a 30% peak to trough house price decline is already factored into current Fitch RMBS ratings.
"While prime borrowers are unlikely to default solely because the value of their house is less than the outstanding balance of their mortgage, Fitch expects default rates to be higher for borrowers in negative equity," says Ketan Thaker, Director in Fitch's European RMBS team. "Borrowers with equity in the property have options available to them in case of financial distress that borrowers in negative equity do not, for example sale of property, remortgaging, better availability and pricing of products, and the withdrawal of equity to fund temporary cash shortage, which could help avoid foreclosure."
Amongst the master trust programmes, there is a wide variation of exposure to negative equity. Up to the end of April 2009, using the Nationwide Building Society (NBS) House Price Index, Fitch estimates that Northern Rock's master trust RMBS programme, Granite, with 32% of loans (by value) in negative equity, has the highest proportion and Barclay's Gracechurch pool, with only 2% of loans in negative equity, has the lowest proportion. These significant relative differences will persist if house prices fall further.
"Even assuming that house prices see a modest recovery from their lowest levels, most RMBS transactions are likely to have a sizeable proportion of borrowers in negative equity for some time to come," says Mr. Bigley.
Andrew Montlake, director, independent mortgage broker, Coreco, comments:- "While on first glance the Fitch report will make grim reading for many homeowners across the country, the key is not to panic. Firstly, the current negative equity predicament is not the unmitigated disaster it could have been if interest rates were still at 2008 levels. Also, negative equity is only an immediate problem if you have to move or remortgage, and for many homeowners, they are not in this position and can hopefully ride out the storm and wait for prices to rise again.
"The blow of falling prices has been lessened by many people also seeing their mortgage payments fall dramatically in the last nine months. Homeowners can still take advantage of low rates and try and pay off a large chunk of their mortgage while payments are so affordable. It also means any negative equity positions won't be as pronounced if capital is being paid off.
"If people are on interest only mortgages, they should see if it's possible to convert to a repayment mortgage in the short term, making sure that their lender will let them switch back to an interest only mortgage if rates start to rise quickly."
Lee Bramzell, Chief Executive of portal PropertyIndex.com, comments:“Negative equity is only affecting 10% of borrowers and won’t deter the greater majority from moving if they need to. Anyone coming to the market now is more financially savvy than ever before. Lenders’ tightened criteria have meant that homebuyers are very much more aware of how much they can borrow and positive signs of house price growth, driven by a shortage of property for sale, has given a boost to the market with an increase in buyer activity.”
Nick Hopkinson, Director of Property Portfolio Rescue (PPR), says: “Today’s report should act as a wake up call around one third of all UK mortgages are likely to be in negative equity by next year. Anyone worried about their job or ability to continue paying their mortgage in the near future should be acting now, selling their property fast, getting specialist debt or mortgage advice and certainly reigning in their spending wherever possible before it’s too late.
“Unemployment is continuing to surge and re-mortgage criteria are getting harder by the day, as shown by the virtual collapse of re-mortgage lending over the last few months. Also, inflation is still above the Government’s two percent target, which inevitably means loan costs can only increase from today’s historic low.
“Many homeowners are sleep walking into a nightmare combination of reduced household income, negative equity and higher mortgage costs. With house prices expected to fall a further 10 percent from today, anyone at risk of negative equity could be in serious trouble if they delay in selling or addressing their situation any longer.”
