Brexit will curb UK mortgage lending and reverse RMBS issuance gains

Post-referendum uncertainty will weigh on UK mortgage lending, particularly in the buy-to-let (BTL) sector. This in turn will lower the issuance of securities backed by residential mortgages, said Moody’s Investors Service.

“With reduced demand for credit and downward pressure on house prices, economic uncertainty will likely reverse previously positive market conditions for the UK mortgage market, lowering RMBS issuance,” said Kamran Sabir, a Senior Analyst at Moody’s.

The rating agency said BTL property purchases will contract the most, given the dual impact of uncertainty of future rental income growth and house price growth. This is combined with the increased cost due to the stamp duty changes for second homes, which came into effect this April. These factors in aggregate, will reduce the demand for BTL properties and therefore mortgage lending in this sector, lowering BTL RMBS issuance.

Increased market volatility and uncertainty about the regulatory framework post-Brexit may have reduced the ability of lenders to access the public RMBS market. Early indicators in the secondary market show that Aaa spreads have widened most in the BTL and non-conforming sectors. The spreads are likely to settle down over time, but at a higher handle, making securitisation less economical.

The first half of 2016 saw strong volumes and the number of newly issued rated residential mortgage-backed securities doubled year-on-year. Private equity owned lenders used securitisation to fund mortgage lending and portfolio purchases, issuing five transactions, while issuance from traditional lending banks fell to only 12% of all transactions in H1 2016. Most notably, Towd Point Mortgage Funding 2016-Granite 1 plc from US equity firm Cerberus was the largest RMBS deal for a decade.