KBRA Releases Research – UK RMBS: Growth of Specialist Lenders to Continue?
17 Sep 2024 | London
KBRA releases research examining the sustainability of growth for UK’s nonbank or specialist lending sector (SLS), which has undergone significant growth in residential mortgage-backed securities (RMBS) issuance in the last several years. However, higher interest rates and an increased cost of living have adversely affected affordability for borrowers and landlords. This has created a challenging landscape for SLS to originate new mortgage loans. In addition, regulators have altered policies aimed at increasing the quality of buy-to-let (BTL) mortgage origination, including proposals for energy-efficiency improvements for older properties. With bank originators returning to the RMBS market, a valuable source of funding for SLS originators faces growing competition. In this report, KBRA explores RMBS issuance by specialist lenders and their relative strengths and weaknesses compared to RMBS issuance by banks in the UK.
Key Takeaways
- SLS developed a niche in the UK mortgage market for its lending and servicing activity with robust growth over the last few years. SLS lending has grown to GBP20.5 billion from GBP18.2 billion in the last 10 years.
- SLS’s use of the securitisation market for funding has helped to drive UK RMBS issuance volumes; SLS issuance was 37% of all UK RMBS issuance in 2023, up from just 6% in 2016. KBRA expects a slowdown in SLS issuance volumes due to the slower pace of new lending in 2023-24.
- Higher excess spread in SLS issuance versus non-SLS also helps to mitigate increasing delinquencies and potential losses in transactions. Excess spread in SLS RMBS averaged 1.9% from 2021 to 2023 and can be relatively higher compared to bank- and building society-originated transactions.
- SLS collateral performance has shown resilience to increasing interest rates, with 90 days+ delinquencies ranging from near zero to 2.8%, depending on the product and seasoning. Delinquencies are expected to rise further as borrowers experience cost of living pressures, but repossessions and losses are mitigated due to lower loan-to-value (LTV) originations and low levels of unemployment.
- SLS offers a variety of mortgage products to suit the needs of the underserved segment of the UK mortgage market, expanding and deepening available sources of financing for borrowers.
Click here to view the report.
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