UK RMBS market remains buoyant

The UK residential mortgage-backed securities (RMBS) market is not expected to experience the same problems that that have blighted the US subprime mortgage market over the past few months, according to analysts from Fitch Ratings.

In the past six months, just under two dozen US subprime mortgage lenders have either been shut down or sold because of diminishing returns, according to Bear Stearns. The fears about the increasing risks affiliated with home equity loans results in lower prices for corresponding subprime RMBS tranches.

The UK has a developed non-conforming RMBS market, however, it has not shown signs of being influenced by difficulties in the US market.

"Spreads for UK subprime RMBS markets seem to have stabilised despite negative news coming out of the US," said Gregg Kohansky, senior director for UK and Ireland RMBS at Fitch Ratings. "One reason why the UK subprime RMBS market continues to grow is that collateral and structural features of the market are seemingly becoming better understood by investors."

It is mainly hedge funds and those who are looking for investments with a potentially higher rate of return who are buying UK subprime RMBS.

The differences between the US and the UK RMBS markets seem to be partly related to issues surrounding origination and underwriting, says Kohansky. Relative stability in the UK market is possibly due to more rigorous mortgage regulation, with more stringent affordability assessments taking place when people apply for a mortgage. This could mean less chance of default when making non-conforming loans.