S&P: Central Bank Funding Overshadows U.K. RMBS
The U.K. is one of the few countries in Europe where securitization remains a significant funding source for mortgage originators, but cheap central bank financing schemes and renewed economic deterioration can crowd out issuance and push up arrears, according to a Standard & Poor's report.
Investor-placed U.K. RMBS issuance reached about €22 billion ($28 billion) equivalent in the first three quarters of 2012, representing more than 40% of publicly-placed European securitization issuance, according to the report published today.
The variety of U.K. mortgage lenders returning to securitization post-crisis — or using it for the first time — along with the emergence of a sizable U.S. investor base, are considered longer-term positives for U.K. RMBS issuance growth.
Activity from specialized mortgage market segments, like the U.K. buy-to-let mortgage sector could also boost securitization issuance in the coming quarters.
But a contracting U.K. economy, weak mortgage lending growth, and cheaper funding alternatives for issuers — including the Bank of England's "Funding for Lending" scheme — could depress RMBS public placements in the short term, the report said.
"The U.K.'s renewed economic contraction since late 2011, sluggish property prices, and the tough lending environment are continuing credit negatives for mortgage loan performance, in our view," said S&P credit analyst Mark Boyce. "Secondary market RMBS spreads have tightened significantly in 2012, potentially keeping securitization on the table as a funding option for some mortgage lenders. Even so, competitive alternative funding sources--such as the Bank of England's "Funding for Lending" scheme--are likely to have a net negative effect on investor-placements, in our view."
S&P said that weak economic backdrop could also lead to a growth in arrears in U.K. RMBS. Boyce calculated the proportion of loans more than six months in arrears could rise by about 15%--to 1.2% in December 2013 from 1.1% in June 2012--under S&P's baseline forecast.