As U.K. master trust issuance climbs to unprecedented levels, market analysts are taking a closer look at the structure and how it has evolved over the last year. Several firms have been issuing analytical notes that look at the changing nature of assets included in master trust portfolios (see ASR 12/9/03)

Commerzbank puts master trust issuance levels at 69% of U.K. residential mortgage risk securitized in 2003, an increase of 36% over levels recorded the prior year.

The main concern that has been brewing is, "What constitutes a prime mortgage?" Analysts argue that, as the market has evolved, the parameters that dictate what type of loans can be included in these deal structures has evolved as well. One point of contention, however, is that it has become more difficult to distinguish between prime and non-prime pools, as the introduction of buy-to-let and self-certified mortgage products by prime lenders has blurred the distinguishing line.

"[Royal Bank of Scotland] and Northern Rock are now the seventh and 10th largest lenders of buy-to-let loans, respectively, and Halifax estimates that 70% of the new loans that they originate are self-certified," reported analysts at BNP Paribas. "These all are prime' master trust originators."

Analysts at the RBS noted that from the beginning of the year, pricing levels have come in by four to five basis points for five-year, triple-A paper offered in U.S. dollars. However, the blurring of lines has led to a higher level of delinquencies than is typically expected from a prime mortgage portfolio. With interest rates on the rise, risks associated with self-certified loans are becoming more of a market concern.

"Going forward, investors need to decide whether a prime/subprime premium is really necessary given that most of the previously `prime' master trusts now contain non-conforming loans, which should probably price somewhere between real prime and subprime," explained analysts at BNP. "The prime U.K. RMBS market looks set to disappear into the nonconforming category if the exposure of the pools to these loans increases further."

Analysts at Commerzbank argue that while some master trusts prove to be of higher quality than others, the lack of transparency and nonconformity of these pools, combined with the tighter spreads, could limit future appeal of the market. Analysts note the converging spread levels between the two products over the past year.

Over the past week, RMBS deals have begun to experience a small measure of widening - up to one basis point. "Market sentiment has turned slightly sour, with triple-A rated spreads tightening lightly on the back foot, and dealers appear wary of holding large quantities of inventory, ahead of the burgeoning calendar," reported RBS.

Nonetheless, the appetite for this paper still runs strong. Last week, the Permanent Financing Master trust structure filed with the SEC for the Permanent Finance No.5 issue. HBOs will be issuing a GBP3.5 billion (US$6.4 billion) RMBS via Credit Suisse First Boston, JPMorgan Securities and UBS with $750 million in 2a7 eligible dollar-denominated tranches. It will also include longer-dated, dollar, euro and sterling pieces. Analysts at Commerzbank noted that among the master trust structures Permanent proved to be the least transparent with low credit enhancement based on the quality of the pool.

Price guidance for the Greek Themeleion deal that began marketing at the end of May saw talk on the Class B piece revised to the 38 to 40 basis point range from 45 basis points. Its triple-B piece tightened to 78 to 80 basis points from 85 basis points, tighter than Granite 2004-2's pricing spreads, said market sources.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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