February saw the slowest growth in housing prices since October 2001, according to Nationwide, but market analysts have reiterated that a drop in prices doesn't necessarily equal a slowdown. Annual inflation is expected to remain at the current rate of 0.4%, compared with last year's average monthly rate of 2.5%.

Nonetheless, various doomsayer headlines regarding an inevitable drop in housing prices have caused a slight rift over what the long-term implications such an environment might have on U.K. MBS. "It really shouldn't matter in the long run," said one market analyst. "I think most market participants have expected a slowdown primarily in the high-end market properties that are not included in master trust structures. These deals primarily hold middle-tier housing properties, and those prices are not expected to decline in the short term."

RMBS is pretty safe for the time being, but more importantly, analysts note that the evolution of the housing market means that a repeat of the 1980's recession is less likely to happen. According to analysts at Schroder Salomon Smith Barney, there are now several new advantages to this maturing market.

For starters, the current market does not suffer from the inflated interest rates seen in the late 1980's. Rates are, in fact, at an all-time low, and are expected to grow only into the 3% to 7% range over the medium term. "This range is below the base rates we saw in the late 1980's and early 1990's," said the analysts. "Furthermore, the current regime would not have allowed such interest rate fluctuations as we saw in the late 1980s."

The current interest rate environment also means that housing affordability will not be overstretched. Housing prices in the late 1980's swelled to rates that consumers could not afford, but current household balance sheets show that incomes are not strained.

SSB reported that low unemployment rates and mortgage arrears are at their lowest levels in 20 years, adding further testament to the sustainability of current pricing.

"Overly aggressive underwriting criteria contributed to the extent of defaults during the early 1990s," said analysts at SSB. "Underwriting criteria have since tightened immensely. Most prime lenders have implemented credit scoring as part of the underwriting process since 1996. This gives lenders more information and a better feel for the consumer credit market. We have also seen more proactive arrears management procedures since the last house price recession."

And housing market concerns have done little to slow new RMBS issuance. In the past month, the market has been ripe with both prime master trust transaction as well as a number of large subprime deals. "The pricing of the triple-B tranches of the Permanent and Granite transactions reflects both increased consumer credit quality concerns as well as an increased degree of saturation for Master Trust names," reported Dresdner Kleinwort Wasserstein. The latest deal to emerge is Holmes Financing No.7 from Abbey National's master trust. It's the first time this structure will issue single-A notes instead of the typical triple-B tranches.

Investor concern regarding the impact of a drop in housing prices on subprime structures has started a wave of wrapped transactions, including two of the latest deals to price in the market. Analysts have long stood by the premise that seasoned deals and short tranches will likely have minimal exposure to a drop in housing prices.

"New deals are more exposed to a softening of property prices, and the fact the new deals come with wrapped tranches reflects these concerns," said one market source. "The market in general is certainly considering a number of factors, including property prices. In the [master trust transactions], different pools have different exposures to different areas in the U.K., different seasoning, different LTVs etc. These factors should influence pool and spread performance of different master trusts."

Copyright 2003 Thomson Media Inc. All Rights Reserved.


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