Standard & Poor's has commented on one of the key issues looming over the European housing market.
It remains unclear what will happen to RMBS given that it is also uncertain to what extent and when central bank support programs could wind down.
According to the rating agency, a resulting funding shortage and uncertainty for mortgage lenders could, in some countries, reduce availability and raise the price of mortgage credit in the absence of other funding sources (such as a viable public RMBS market). It is unclear how central bank funding could be replaced.
The agency mentioned that European mortgage lenders facing funding redemptions of central bank programs will have to raise corresponding new funds and/or shrink their assets in to compensate for a shrinking RMBS market.
Without investor-placed RMBS, new funding would have to come from other sources such as customer deposits or capital market borrowing through the unsecured debt or covered bond markets.
With the amount of investor-placed RMBS being small and placement being costly, other funding sources have also suffered heightened stress and this is why funding pressures could limit net lending.
S&P believes that RMBS will continue to play a role in helping European banks fund their mortgage portfolios.
However, whether this will become a leading role again or "a walk-on cameo", the rating agency said that it will probably depend on how central banks, investors, lenders, and financial regulators respond to the ongoing tightness in funding.