The European RMBS sector has continued its modest rebound in terms of performance and new issuance, according to a Standard & Poor's report.

The report showed that the credit performance of mortgage loans backing European RMBS deals has generally been stable or improving for more than a year now. The rating agency cited the fact that most European economies have posted some growth and unemployment has stabilized, while interest rates are low.

According to S&P, the slow recovery in European RMBS issuance volume is set to continue. This is barring wider market volatility, the rating firm said. 

U.K. prime and Dutch RMBS account for almost all placed transactions but buy-to-let and non-conforming sectors are also beginning to heat up, S&P reported.

Nevertheless, S&P stated that RMBS collateral is still vulnerable to economic weakness. Specifically, the European economic recovery remains fragile, as government budgets retrench and inflation is still eroding consumer purchasing power, S&P reported.

The elevated country risk and relatively weaker macroeconomic conditions could increase the downward pressure on RMBS ratings in peripheral countries, the report explained.

However, Barclays Capital analysts said that even with the double-dip recession concerns and continuing contagion risks, U.K. prime RMBS remains very secure from a credit perspective.

"U.K. prime RMBS is very strong fundamentally and remains at very little risk of principal loss," analysts said.  

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