When it comes to RMBS performance, Europe is leagues ahead of the US. That's the conclusion of a new report from Fitch outlining losses in global structured finance transactions issued between 2000 and 2011.
Among the wealth of data in the analysis — and even taking peripheral European countries into account — it was the outperformance of European RMBS compared with the US that stood out.
EMEA RMBS deals have suffered realised losses of just 0.004% from $2.3tr of issuance, while US RMBS deals have seen realised losses of 3.5% from $2.68tr of supply. Looked at another way, US deals have so far performed 875 times worse than their EMEA counterparts.
It doesn’t get much better for the US deals when looking at Fitch’s expected losses. US RMBS losses are expected to reach 9.9%, whereas EMEA RMBS transactions will hit 0.2% losses. That means US RMBS will underperform relative to European RMBS by a factor of nearly 50.
Even the weaker performing jurisdictions in Europe perform better than prime US RMBS. Spanish RMBS losses have reached only 0.1% so far, compared with 3.9% losses for US prime RMBS.
There are admittedly characteristics in Europe that make the RMBS product different from its US equivalent. The prevalence of floating rate mortgages in a low interest rate environment has allowed institutions to keep mortgages affordable, and banks have assisted with forbearance and renegotiation when necessary.
European banks also have recourse to the borrower, and not just the property, in the case of a foreclosure.
But it is figures such as the 13.1% of losses already realised in US sub-prime RMBS that have guided the regulatory response in Europe to ABS in general. This is ridiculous. The European product has shown enough outperformance to deserve improved treatment from regulators. Fitch’s report is only the latest of several data sets showing the low losses incurred in Europe.
As it stands, all ABS is excluded from the liquidity buckets for banks under the Capital Requirements Directive IV and incur exorbitant capital charges under Solvency II. Regulators have an opportunity to come to their senses in the next few months, as the Basel Committee meets in December to finalise LCRs and EIOPA return a review of Solvency II capital charges in February 2013.
European RMBS is performing in a league of its own. Regulation needs to start reflecting that.