Concerns about the fluctuating housing market that plagued the first half of this year are doing little to squelch RMBS appetite. According to market reports, RMBS remains the sector of choice as investors continue to seek it out as a safe haven from economic uncertainties, such as the war in Iraq.
Europe saw more than 51 billion (US$58 billion) in mortgage-backed securities issued during the first half, almost double the amount issued in the same period last year. Analysts at Royal Bank of Scotland, who were a bit surprised by the massive volume, attributed it to investors taking advantage of a favorable market. First-half issuance in the U.K. was largely dominated master trusts, which accounted for GBP24.8 billion (US$28.2 billion) of the GBP31.9 billion (US$36.2 billion) issued in that country.
In early first-half activity, RMBS spreads widened, following housing market concerns fuelled by disparate and often pessimistic predictions about how the geopolitical situation might affect economic fundamentals going forward. Though losses have been trending up in some deals - particularly for German paper, due to rising unemployment in that country - the sentiment among investors is that RMBS fundamentals still remain a sound safe haven for the time being.
Last week triple-A subprime RMBS spreads tightened. To top this off, Moody's Investors Services upgraded a number of structures that include Irish RMBS, U.K. buy-to-let and U.K. subprime.
"There have been a lot of varying comments in the press about the significant growth in U.K. housing prices in the past four years and the resultant equity release that has fuelled the consumer boom," said Brian Kane, director at Standard & Poor's. "RMBS investors, though, need only look at the fundamentals, which show that from a borrower's perspective, interest rates and unemployment, in general, have remained resilient to the global economic downturn."
According to Dresdner Kleinwort Wasserstein, at least another e20 billion (US$22.7 billion) of RMBS issuance is expected this year - which would increase total volume to e70 billion (US$ 79.5 billion) and constitute a substantial chunk of the overall securitization market. The company expects issuance for all asset classes to total e165 billion (US$187 billion) by year-end.
Why the confusion?
So does it mean that recent doomsday predictions of a slowdown in the housing market are simply shrugged off? Not necessarily, say market sources, who reiterate that housing affordability depends on more than just house prices. Interest rates, unemployment and tax rates are all at favorable levels for homebuyers. One possible issue for RMBS investors is that home appreciation has leveled off in recent years, lowering potential recoveries, but even in a worst-case scenario, RMBS structures benefit from excess spread to mitigate losses. So only a dramatic fall in interest rates combined with rising unemployment would adversely affect deals. A high level of borrower awareness in the U.K has also largely driven volumes.
Lower interest rates have indeed made housing more affordable in the U.K as well as throughout the continent. "Should consumer spending continue to rise, there is, of course, a risk that a sharp interest rate rise would put pressure on the performance of RMBS transactions," explained S&P's Kane. "Although from the resilience shown so far we currently don't envisage that RMBS investors face the edge of a credit precipice."
Numerous, sometimes contradictory, market reports from several different institutions have perhaps added uncertainty to market. "There is a variety of house price indices published in the U.K. and each has its own merits and disadvantages, depending on its intended use," reported Maddi Patel at Barclays Capital. "Timing of the publication and sources of data used are certainly key factors in differentiating the indices' results."
Among the data providers that Barclays references in its reports are Nationwide and Halifax. Since both can be subject to speculative buying trends, they are, historically, poor indicators, said Patel. Another issue is that neither index includes all properties, she said. "Nationwide includes only owner-occupied properties and excludes properties that may not be typical and which could distort the series in any way." As examples, Patel offered re-mortgages, properties valued over GBP1 million (US$1.6 million) or properties that were sold at a discount to market value.
Patel also had reservations about data from Rightmove.co.uk, which showcases member estate agents on the Web. According to Barclays, 2,900 branches have posted their asking prices on the Rightmove site; that is approximately 30% of the properties on the market. The Web site has indicated that its figures are at least six weeks ahead of the Nationwide and Halifax figures. Patel believes, however, that there are not enough parties with access to the Web site to make a difference.
A solution could well be on its way in the form of a government-sponsored index that aims to provide about a third of all monthly house completions so that they compensate for the time lag between when the data is collected and when its actually posted. The index, which will be produced by the Office of the Deputy Prime Minister, aims to expand on an existing index that currently reports 5% of completions by 49 member of the Council of Mortgage Lenders. "The new survey will be based on all completions from a number of lenders, which will increase the sample size to 30,000 completions per month from the current 3,000 per month," said Patel. And last year, The European Group of Valuers (TEGoVA) also made moves to bring more uniformity to mortgage valuations, proposing to unleash new valuations for the purpose of securitization this year (see ASR 11/11/02).
But at this point, no one really envisions fluctuations in the current market dramatic enough to threaten RMBS tranches. U.K. RMBS issuance should continue to grow and, from continental Europe, the industry is hoping to see new players. July has already seen a testament to this trend. According to market tables, the latest deals to emerge include the Portuguese RMBS that priced earlier this month, Hipototta No.1 plc and a Swiss mortgage deal, Chalet Finance. Both deals were over the billion-dollar mark.
On the less fleshy side, a e350 million (US$397.8 million) from Spain emerged under AyT Hipotecario, along with a small e75 million (US$85 million) securitization backed by Hungarian residential mortgages.