Barclays analysts downsized their forecast for issuance of residential mortgage-backed securities (RMBS) by U.K. banks for 2015.
The catalyst: the Bank of England’s decision on Dec. 2 to delay the end of its Funding for Lending (FLS) scheme by one year, to January 2016.
Before the extension, the analysts had predicted prime RMBS volumes in 2015 would total the equivalent of 15 billion to 20 billion.
Now they think it will only be in the range of 10 billion to 15 billion.
The Bank of England launched the FLS scheme in mid-2012. It allows banks and building societies in the U.K. to use certain pools of loans as collateral against borrowing Treasurys from the BoE.
The program had initially cannibalized RMBS issuance because it was a far cheaper funding option for U.K. banks — many would rather hold on to their mortgage loans and use them as FLS collateral then securitize the loans.
Since late 2013, FLS has focused the program on incentives for banks to make loans to small and medium companies. Banks with large small to medium lending businesses simply shifted more resources to this area. In this way, it still acts as a damper on RMBS issuance.
RMBS bounced back a bit in 2014 in the U.K. but still remained well below volumes before FLS was instituted. So far, U.K. lenders have issued the equivalent of 16.6 billion in bonds backed by prime residential mortgages into the public market and have privately placed 13.5-billion worth.
But even with the FLS extension, Barclays analyst see issuance going up as banks have regulatory incentives to get mortgages off their balance sheets. Mezzanine bonds will be a particularly good way to do that.