The U.K. government is planning on introducing a system where it endorses the best-quality U.K. covered bond and RMBS pools. This move is aimed at increasing transparency and improving investor confidence, thereby boosting lender liquidity.
Given the financial turbulence in the global markets, Chancellor of the Exchequer Alistair Darling said at last Wednesday's annual budget address that the current conditions in these mortgage funding markets are extremely difficult. He said it was imperative that lenders have access to stable and low-cost funding to enable mortgage rates to decline.
"We will bring together investors and lenders with the treasury, the Bank and the Financial Services Authority to find market-led solutions to strengthen these funding markets further," he added.
This gold standard for MBS and covered bonds is designed to restore confidence in quality mortgages, although market experts are not so sure it will do the trick because the current problems and concerns are more a result of the lack of liquidity rather than underlying collateral performance.
"We see little benefit for RMBS investors in a new standard, with good stratification tables available already," Societe Generale analysts said. "The likely impact is that many loans already securitized would fall outside the gold-standard guidelines. We expect a two-tier market would evolve, suggesting that investors may demand wider margins going forward."
By devising a grading system, the concern is that better-rate customers would have access to cheaper products while riskier customers could find it even more expensive to finance a home going forward.
But the move could be the key that adds a needed degree of order to this chaotic market. "We welcome the U.K. government's plan of creating a gold standard' for wholesale mortgage bonds, if only because it brings government branding' to a distressed and directionless market, while being an official acknowledgement that securitization has become a crucial funding channel for U.K. mortgage lenders," Deutsche Bank analysts said.
The reported policy aim of differentiating good credit quality assets is just rhetoric in today's market. "The value of such branding is more crucial in resurrecting liquidity in the choicest segment of the RMBS market, which could then create a benchmark for other non-gold-standard' RMBS," they said.
Deutsche Bank said that concerns over a two-tier market situation are misplaced, adding that the "kitemark" could realign the current divide between prime and nonconforming, which is notably based on the issuer instead of the collateral, as is the case in some master trusts that at times include non-gold-standard collateral.
The U.K. government said it would not be endorsing a government-sponsored guaranty of the U.S. agency sort. It plans to carry out a swift consultation with banks with a view to introducing the new seal of approval in the autumn.
"Given the government's previously stated plan to increase the availability of longer-term fixed mortgages, it is possible that the proposals may tie in with this aim," Deutsche Bank analysts said. "We believe one of the key drivers of this plan is the observation that the German and French covered bond markets - which are explicitly regulated under the respective countries' laws - have fared much better in the current stressed environment than, for example, U.K. covered bonds." The analysts added that by providing an institutional framework for these bonds, the government is trying to bring some of these qualities to the U.K.
The U.K. prime RMBS outstanding is currently at GBP154 billion ($304 billion), or around 13% of mortgage outstandings.
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