It also reinforces the continued support for specialist or non-bank mortgage lenders, particularly from global pension funds and debt investors when a number of them are understandably unhappy about the recent lack of central bank funding support.
Investors in UK based RMBS have, over the last decade or so, become more confident in the underlying value of such securities. While many industry commentators have identified significant potential headwinds, investors have gained confidence from stable housing markets and robust underwriting.
Today’s challenges for investors have not changed significantly; they need to fully understand and predict the performance of a loan portfolio. Clearly firms’ regulatory reporting responsibilities articulate underlying risks and detail capital and risk management processes, but most companies’ disclosed documents are out of date as soon as they are published.
That can certainly be said for any review taking place post COVID-19 lockdown. For instance, the advice from the FCA to lenders when reporting default statistics is not to count loans with COVID-19 related payment holidays. That is distorting the picture of the potential underlying performance of loan books because that policy obscures the real position, i.e. what the borrower can afford without government help.
If payment holidays are not classed as arrears, in the truest sense, and consequently arrears triggers are not raised, then investors need to be aware of these risks; a performing loan could quickly turn into a non-performing one. Potentially this can impact the income from the securitised portfolio and with one in six UK mortgages being on a payment holiday the effect could be significant. So, back to investors’ confidence levels – the quality of the underlying assets are paramount and exhaustive checks and controls need to have been in place. Throughout this pandemic we have been helping sellers ensure that their processes stand up to any level of scrutiny and also helping investors fully understand the make-up of portfolios and the inherent risks within them. Whether a seller or buyer, give us a call and let us explain how we can help.