Optimism grows as UK RMBS proves resilience and adaptability

UK RMBS bankers arriving in Barcelona for FT Live and AFME Global ABS 2025 are in a bullish mood. After suffering amid the broader market turmoil that followed so-called “liberation day” tariff announcement in the US on April 2, the asset class has quickly recovered and market conditions suggest that their early-year optimism was justified.

With the Bank of England’s Term Funding Scheme for SMEs winding down, which provided cheap liquidity for banks during the pandemic, there is an increasing imperative for issuance.

This is despite some hurdles, such as the UK government’s recent stamp duty increases, which is likely to reduce lending volumes, particularly for the buy-to-let sector.

“We don’t think that issuance can massively increase given the lending constraint,” says Douglas Charleston, partner and portfolio manager at TwentyFour Asset Management. “But there’s a general trend that banks particularly are probably going to use RMBS a bit more prominently in their funding mix than they have done historically.”

Issuance so far this year has been slightly below last year’s run rate, UK RMBS issuance having reached €8.5bn in the first quarter, versus €9.2bn for Q1 2024, according to the Association for Financial Markets in Europe (Afme). Issuance slowed in April, following the US tariff turmoil.

“The market has jolted,” says Alastair Bigley, managing director for European RMBS at S&P. “Issuance for the year is still relatively robust compared to years prior to 2024. [Last year] was a record year for investor-placed issuance, so 2025 being down on 2024 needs to be put in context.”

A large amount of mortgage lending, specifically buy-to-let, was brought forward to March to get ahead of the stamp duty tax rise in April, which could subdue lending over the summer.

With interest rates projected to fall, many believe that the worst is behind the market, and that UK RMBS will continue on a positive trajectory after the Global ABS conference.

“We believe Q3 will present a particularly strong window for issuance,” says Hugo Davies, chief capital officer of specialist mortgage lender LendInvest. “If base rates are cut in line with current market expectations, it will inject renewed confidence into the market, making our products more affordable and accessible, and lifting volumes across the sector.”

Moreover, while delinquencies for most non-prime UK RMBS asset types are still increasing, the rate at which performance is deteriorating is generally cooling.

“We’re seeing marginal declines in arrears, or stabilisation,” says Steve Harrison, director of debt capital markets at Together, a UK lender. “This is in almost all sectors of our book now in terms of credit performance.”

While legacy collateral is continuing to perform poorly, with a pick-up in delinquencies, there is positive news on recently issued loans.

“We looked at the delinquency roll rate, and the signs are — if you look at non-conforming and buy-to-let — [that] the pace of borrowers moving into early delinquency states is cooling,” says Aritra Banerjee, director of European spread products research at Citi. “On the fundamentals side, I think we are probably past the worst levels that we saw in the last 18 to 24 months.”

While there has been an increase in delinquencies in buy-to-let mortgages, market participants are largely confident in the asset class’s structural integrity, highlighting its resilience since the financial crisis.

“In most cases, concerns around deteriorating credit performance are linked to legacy BTL portfolios originating before 2008,” says Davies. “I would be very surprised if any post-crisis lending — written under more rigorous standards — presented any structural issues that could pose a real risk to the asset class.”

Indeed, this should set up the asset class for a strong year even considering the headwind of the stamp duty increase.

“Based on our conversations with lenders there seems to be more optimism about BTL lending volumes than last year,” says Bigley. “Although the recent stamp duty hike was not positive, it is still an asset class that offers leveraged upside.

“In other words, a 25% deposit can offer 100% access to house price increases. This feature still makes it an attractive asset class.”

One of the trends that has evolved in 2025 has been that the spread differential between prime UK RMBS and buy-to-let or non-conforming has been shrinking as investors get more comfortable with less mainstream asset types.

For example, Enra priced its buy-to-let trade, Elstree 2025-1 1ST, at 72bp over SONIA on February 19, only 16bp wider than Atom bank’s Elvet Mortgages 2025-1 on February 5, the most recent prime RMBS at the time.

In addition, investors are growing more comfortable with traditionally less established assets, such as second lien loan backed RMBS

Together’s second lien backed RMBS, TABS 2025-2ND1, which was priced on February 5, was one of the first signals that investors are becoming increasing eager to buy assets outside of traditional prime RMBS.

“Often investors get comfortable with an originator or a broader product set,” says Harrison. “Then they ask, ‘how can I get a little bit of a pick-up in yield?’ And second charge is a good example of that.”

Many of those who invested in Together’s first charge shelf saw several similarities when looking at the second charge shelf, such as similar prudent underwriting criteria and low LTVs, according to Harrison.

“I don’t think investors are saying ‘I cannot ever invest in x, y, z’,” says Harrison. “Investors are finding a way to get credit approval to invest in second charges because they want to expand their opportunity set.

“I think it’s really encouraging. The unfair stigma around second charges from the GFC, particularly Helocs [home equity lines of credit] in the US, finally seems to have disappeared.”

Another reason for confidence is how the UK RMBS market dealt pragmatically with the most significant shock for credit markets this year: the US tariff announcements.

Issuers were wary of approaching the market at the time, and no UK RMBS trades came to market between Lendco’s Atlas Funding 2025-1 trade, which was priced on April 4, and Pepper’s Castell 2025-1 trade, which reopened the market when it was priced on May 7.

Indeed, the likes of Santander and Plata Finance delayed deals as spreads were pushed wider, but particularly robust Pepper and Paratus’ UK RMBS trades — on May 7 and May 8, respectively — signalled that the market had quickly shaken off the concerns.

“In truth, strong underlying assets still attract interest,” says Davies at LendInvest. “But few are willing to test the market and be first. And yet, time and again, the market proves more resilient than expected, quickly moving past recent shocks.”

At least, in the case of US president Donald Trump’s 90-day tariff pause, announced on April 9, issuers had a clear idea of how long they could rely on markets remaining stable.

“One important factor [for issuance timing] is that the tariffs will be revisited after July 7,” says John Millward, managing director, structured finance, at HSBC. “This may drive issuers to strike while the iron’s hot, so I think we will see some people accelerating into this window from now [May 9] until the end of June.”

Despite economic uncertainty, issuers still have to remain active regardless of what tariff news July will bring.

“Platforms such as LendInvest have no choice but to take a longer-term view of the world and can’t be swayed by short-term shocks which haven’t materialised yet,” says Davies. “We definitely don’t plan on tightening our belts for the rest of this year”

Moreover, there seems to be conviction that tariff headlines are unlikely to have any direct impact on the quality of the assets themselves.

“I don’t see the US tariff news as having a clear, direct fundamental impact on UK RMBS collateral,” says Banerjee at Citi. “It has obviously led to spread widening across the market more broadly.”

Not all RMBS are created equal. In the case of UK issuers, banks generally have many alternative funding options, such as deposits or covered bonds, which they can move to in the event of spreads being pushed wider. These options are not necessarily available for special lenders.

“Spreads increasing in RMBS might damage the bank issuance market as they look to other cheaper funding sources,” says Bigley. “Bank issuance has been strong in very recent years compared to the historical past, so there’s a question mark as to how the second half of the year may look for bank issuance.”

Even if RMBS spreads are not forced wider, some in the market are still expecting large banks to continue to see the benefits of funding options outside of RMBS.

“Large UK banks are likely to continue benefiting from covered bonds as a funding source,” says Harry Choulilitsas, director of ABS and CLO syndication for Europe and UK at Natixis. “Given their tighter trading levels and deeper investor base relative to securitization, we don’t anticipate a major shift back into RMBS from these institutions.”

However, securitization still offers differentiated value to some of these other asset classes, such as a broader investor universe as well as more flexible structuring, which should remain attractive for specialist and non-bank lenders, Choulilitsas says.

Another potential tailwind for UK RMBS volumes is the increasing scale of bridging finance.

“Until 2023, the market was typically valued at around £6.5bn,” says Davies. “But today, it’s likely closer to £12bn– £13bn.”

Although the lending market is growing extremely quickly, there are still doubts as to whether securitization is the optimal funding method for these assets versus the more flexible warehouse arrangements with banks that bridging lenders currently favour.

“If I were in a position to add bridging loans into a BTL securitization I would absolutely do that,” says Davies. “But the issue is that bridging is a much more unpredictable asset type, and cashflow is only generated by timely redemptions.

“I certainly think the first step to seeing a bridging securitization would be to mix it with BTL mortgages.”

Weighing against the view of those who expect large UK banks to continue to see value in covered bonds, the Prudential Regulation Authority recently announced plans to stop non-UK covered bonds being eligible as Level 2A High Quality Liquid Assets under the Liquidity Coverage Ratio rules.

This has caught the eye of some securitization market participants.

Although the PRA has said that their plans are on pause, the uncertainty could create an opportunity for securitized assets to step in as a possible alternative while UK banks are uncertain about the future of LRC treatment for non-UK covered bonds.

“There is a possibility that, while that uncertainty prevails, some of that gets repositioned in securitization,” says Millward. “This hasn’t really played out yet, but I think could have a positive impact for UK RMBS, especially prime.”

There is another overarching reason to be cheerful: the health and performance of the property finance sector is fundamentally tied to interest rates, and projections are for rates to fall a lot further.

“As rates fall, loans become more affordable, unlocking greater demand and enabling the market to expand,” says Davies. “With this dynamic in play, the sector is well positioned for renewed and sustained growth.”

Still, the positive impact of this is not likely to be immediate, given the time between loans being made and being securitized.

“Interest rates coming down should be a positive for lending volumes,” says Bigley. “But it has a delayed effect, so we probably won’t see it manifest into more securitizations until 2026.”

The rates story isn’t the only reason to feel optimistic about the sector. Harrison at Together highlights the increasing need for lending in the buy-to-let market, which should naturally lead to an increase in issuance.

“One optimistic data point is that from 2008 to 2021 [according to the English Private Landlord Survey 2023] there’s been a 42% increase in UK household renting,” says Harrison. “That’s very supportive of the buy-to-let market, which isn’t always recognised given the doom and gloom headlines around the sector in the press.”

Amid the buoyant optimism about 2025, some market participants reiterate the need for discipline and caution.

In recent years, a large amount of capital has flowed into the specialist lending market, particularly in the case of bridging. As a result, new platforms with limited track records have entered the lending market.

This brings a need for vigilance.

“The concern is that, in chasing growth or meeting investor expectations, these platforms may feel pressure to take on more risk or misprice it entirely,” says Davies. “With more capital in the market than available deal flow, there’s a risk of increasingly aggressive behaviours across the sector, as platforms compete to deliver on their business plans.”

Amid these concerns, several institutional safeguards on the supply side should protect against this becoming a problem for the sector.

“I think, given the institutional funding nature of most of the mortgage market, being heavily funded by banks means there is limited potential for lenders to enter the market without sufficiently strong underwriting criteria,” says Harrison. “[If they lack this], they will find it more difficult to attract the funding they would require to grow.”

Moreover, the buy-side remains something of a guardrail against poor quality assets finding their way into securitizations.

“The sophistication of the investor base, and their ability to differentiate between different originators from a risk point of view and price accordingly, is very strong for ABS,” says Millward. “If an issuer is going to come, and they’ve got a limited track record, then you can be confident that investors are analysing that and pricing for it or adjusting their appetite for it in an appropriate way.”

Evidently, with these factors in mind, UK RMBS looks set for another strong year.