The future role of securitization in European mortgage funding is unclear, according to a report issued today by Standard & Poor’s.
The agency warned that mortgage credit could become limited and expensive as government and central bank programs begin to expire.
When financial markets stabilize and government-supported funding tapers off, long-term mortgage funding could face major difficulties. Private investors remain timid in regard to RMBS, S&P said.
The market for RMBS, which underpins a significant portion of European homeownership, has changed significantly in recent years. Traditional RMBS investors have abandoned the asset class while the European central banks filled the void by accepting RMBS as collateral for loans to the banking system.
The report also said that the maturity mismatch in European loans has intensified as government and the central banks have replaced private investors. S&P found that these banks are holding short - term RMBS borrowings, while the mortgage loans they finance are relatively long-term.
The agency said that European mortgage lenders that face funding redemptions from central banks would have to raise new corresponding funds or shrink their assets to compensate if the central banks were to shut down their RMBS lending.
If such a move does occur, S&P warned that European banks will struggle to find the volume to replace long-term funding. Mortgage portfolios financed by the new borrowings would likely face significant negative yields, the rating agency reported.
Lenders with greater funding restraints, S&P said, could choose to shrink their balance sheets if central banks withdraw support, rather than pay higher rates to fund in the wholesale market.
The credit rating agency expects securitization to return as a funding source for the institutions that had used it most astutely before the crisis took place. Those institutions, according to S&P, will be in the best position to make use of the funding channel post-crisis.
S&P reported a likely decline for European RMBS in the medium-term. Current obstacles to RMBS could, however, provide an opportunity for the industry to rebuild, albeit in a different form, according to the firm.
The future of European RMBS, S&P concluded, will depend on how central banks, investors, lenders, and financial regulators choose to deal with the current lack of funding sources.