However, Fitch has observed that entry into the scheme is voluntary for both the lender and the borrower and the finalised details leave a significant level of discretion to the lender as to how they will interpret and implement the scheme.
"There are a number of exclusions and conditions that make it difficult to assess the likely take up of such a scheme and its likely impact on RMBS transactions, although we now know that products such as BTL and charges totalling over £400,000 will be excluded and second charges included, other questions remain unclear," says Alastair Bigley, Director in Fitch's RMBS Department.
The scheme does not appear to cover any loss of capital the lender might suffer as a result of extending the foreclosure timing. The scheme will run for two years, with the deferral period initially running for one year at which point a review will be conducted. The lenders will have four years from when the borrower leaves the scheme to claim against the guarantee. Additionally, there is a rate cap of 8% after which the government will not guarantee interest. Fitch understands that the rate will be set 'appropriately' to the Bank of England Base Rate. Furthermore, the exposure that the government has to each lender will initially be capped.
Whilst there are qualifying criteria that give guidance as to which borrowers will be eligible, it is at the discretion of the borrower as to whether they want to enter the scheme and similarly it is at the discretion of the lender as to whether they allow a borrower to utilise the scheme. It remains difficult to predict which borrowers will utilise the scheme, consequently it remains difficult to predict the impact on underlying existing and new RMBS transactions.
"Viewed positively the scheme has the potential to significantly help 'can't pay' borrowers and reduce foreclosures and therefore losses, however there needs to be adequate safeguards for ensuring 'won't pay' do not negate the advantages the scheme may have. In a falling market ultimately if the borrower does default the loss severity will be higher than it would otherwise have been," added Bigley.
