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Investors missing trick in RMBS market

Sarah Davidson

October 29, 2010

A report released by ratings agency Fitch earlier this year showed that just 3% of triple A rated residential mortgage backed securities in the Euro area have been downgraded on tranches issued between 2005 and 2007. By comparison, 82% of AAA rated RMBS in the States have been downgraded for the same period.

Tony Ward, chief executive of dormant lender Homefunding, chief executive, told Mortgage Introducer: “There have been some misguided views on the ratings agencies screwing up with their AAA ratings in Europe and the UK in particular. European mortgage backed securities are good quality and since Britain was the biggest issuer of RMBS, by and large we haven’t had a problem.”

John Charcol’s Ray Boulger said the UK and US housing markets are worlds apart.

In a third of all American states homeowners who are underwater on their property (owe more to their lender than their house is worth) can walk away from the house and have that debt written off, leaving the lender with a loss.

In the UK by contrast, even borrowers who go into negative equity and have their property repossessed are still liable for any shortfall in the debt outstanding to the lender.

Boulger said: “A lot of the problems suffered by the US don’t apply in the UK which is why such a small percentage of AAA rated securities in Europe have been downgraded. The underlying security is very different.

“Too many investors tend to discount UK RMBS because of the problems in the States. I think it’s surprising investors don’t recognise the value they can get from prime and buy-to-let assets in the UK.”

Earlier this year Precise Mortgages secured a wholesale line of funding to finance buy-to-let loans and this week announced it was moving into prime residential mortgages.

It is backed by US private equity investor Elliot Assocates and Boulger said: “It tells you an awful lot about the margins on offer if US private equity is investing in UK mortgages.”

Despite this analysts are predicting that the amount of structured finance, asset backed securities, across the world will shrink by a minimum of $400 billion this year on last.

Analysts at JPMorgan suggest the downward trend will continue due to the disappearance of debt-fuelled special investment funds that were huge buyers of structured bonds, the loss of confidence in ratings agencies and failure of bond insurance that guaranteed debts and boosted ratings to triple A levels.

But restarting new issuance of the securitisation markets is vital if the UK mortgage market is to increase the amount of money available to make residential loans.

Currently, the US and Europe are putting together new rules to try to give investors in these securities greater protection and therefore, arguably, confidence to invest in RMBS.

In most cases the rules indicate that the loan originator should retain around 5% of the core assets and further rules about the disclosure of loan level data to investors are being mooted.

Tony Ward said: “In a sense there’s no change from how it’s always been. Though not all securitisations before the credit crunch were structured this way, the good ones were.

“In terms of looking at granular level data there is an argument that if the security is structured properly it simply isn’t necessary, but it does seem sensible that investors should look underneath the AAA rating at what they’re buying.”

Earlier this year the Bank of England issued a market note saying it would require granular data for securities to be eligible for the long term discount window facility.

“In practice that means granular loan level data is going to be necessary across the market,” Ward added.


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