A potential U.K. law threatens the £4 billion market for social housing securitizations, which could experience a wave of underlying defaults and downgrades if proposed legislation comes to fruition. A Department for Work and Pensions proposal would replace housing benefits paid directly to housing associations--which provide a substantial chunk of the receivables backing the securitizations--with an allowance that welfare recipients could spend at their own discretion. Market professionals fear empowering these low-income tenants could result in higher delinquencies in the pools backing the securities.
All U.K. social housing deals would be affected by the legislative change, including the most recent Harbour Funding, underwritten by RBC Capital Markets, as well as earlier deals such as U.K. Rents from 1995, underwritten by Greenwich NatWest (now Royal Bank of Scotland).
Phil Jenkins, v.p. in the infrastructure group at RBC in London, insisted the profitability of the housing associations would have to decline significantly before the transactions would be affected. "If there is a deterioration in rental income from the properties involved in the transaction, the association could still access alternative revenue streams or charge other security to meet its debt service and performance obligations under Harbour," he said.
Concern that delinquencies would rise is more than just speculation. A recent pilot scheme at London & Quadrant Housing Association, in which tenants were paid their housing benefit directly, saw a portion of their arrears quadruple. Currently 60-70% of securitized cashflows on U.K. social housing transactions come from tenants who receive a housing benefit.
The purpose of the housing allowance is to give tenants greater responsibility and choice over their housing and finances, according to Natalie Jones, spokeswoman for the DWP in London. "This is a fairer, easier way of giving help with housing costs, which will cut claims times and remove barriers to getting back into work," she said.
Paul Townsend, director in the property and leveraged finance securitization team at Royal Bank of Scotland, commented, "The government remains supportive toward the sector, but the concern is clearly the inevitable increase in arrears and arguably whether this increases the likelihood of them not being subsequently collected." He added social housing deals have performed well to date, and have, by and large, built up a further cash flow cushion that would help to withstand an increase in arrears. "In deals going forward, stresses may well be stricter or liquidity facilities increased," he predicted.
The real risk to the transactions lies not in a steady state higher default rate, but in the period of rising defaults, according to Sarah Wall, associate director in structured finance at Fitch Ratings in London. "A modest rise in arrears could be absorbed, but a significant drop in collections could lead Fitch to take rating action," said Wall.
Nine councils are testing the proposed Local Housing Allowance, and the pilot period is due to last until October 2005, when the DWP will evaluate the results.
