The U.K. is one of the few countries in Europe where securitization remains a significant funding source for mortgage originators, but cheap central bank financing schemes and renewed economic deterioration can crowd out issuance and push up arrears, according to a Standard & Poor's report.
Investor-placed U.K. RMBS issuance reached about €22 billion ($28 billion) equivalent in the first three quarters of 2012, representing more than 40% of publicly-placed European securitization issuance, according to the report published today.
The variety of U.K. mortgage lenders returning to securitization post-crisis — or using it for the first time — along with the emergence of a sizable U.S. investor base, are considered longer-term positives for U.K. RMBS issuance growth.
Activity from specialized mortgage market segments, like the U.K. buy-to-let mortgage sector could also boost securitization issuance in the coming quarters.
But a contracting U.K. economy, weak mortgage lending growth, and cheaper funding alternatives for issuers —
"The U.K.'s renewed economic contraction since late 2011, sluggish property prices, and the tough lending environment are continuing credit negatives for mortgage loan performance, in our view," said S&P credit analyst Mark Boyce. "Secondary market RMBS spreads have tightened significantly in 2012, potentially keeping securitization on the table as a funding option for some mortgage lenders. Even so, competitive alternative funding sources--such as the Bank of England's "Funding for Lending" scheme--are likely to have a net negative effect on investor-placements, in our view."
S&P said that weak economic backdrop could also lead to a growth in arrears in U.K. RMBS. Boyce calculated the proportion of loans more than six months in arrears could rise by about 15%--to 1.2% in December 2013 from 1.1% in June 2012--under S&P's baseline forecast.
