The door is opening for lenders to use the residential mortgage backed securities market as a more frequent funding source now that cheap central bank funding from the Covid era and before is rolling off. And the best way for issuers to approach RMBS is by setting up a master trust.
A master trust is effectively a large pool of mortgages from which many securities can be issued, rather than a smaller pool allocated to a single RMBS
Lenders that have them are able to issue RMBS quicker and more frequently, as once a trust has been set up, new mortgages can be added to the pool, and a different series of notes can be issued.
Times are changing
Master trust RMBS have generally traded 3bp-4bp tighter than similar standalone deals up to now, but there are early signs that the spread premium is beginning to diminish.
Investor should, in theory, pay up for RMBS from a master trust programme. They generally get deeper liquidity from these deals, and they only have one collateral pool to monitor and do due diligence on.
But this premium look set to move tighter rather than wider. Bank of Ireland priced its debut master trust, Bowbell Master Issuer 2025-1, at 50bp over SONIA on May 29, having announced the programme on May 21.
Newcastle Building Society then managed to price its debut standalone Hadrian Funding 2025-1 trade at the same spread last week.
While it’s important not to overinterpret the pricing of only two deals, this could be an early sign that the spread between master trust and standalone deals is vanishing.
This is especially the case as banks that have only recently set up master trusts and therefore not only increase the volume of master trust RMBS available but also do not have the full pricing benefit that pedigree brings — like Bank of Ireland — come to the market.
Decision time
Some banks and building societies may look at the standalone versus master trust premium dissolving and conclude that there is little point in paying the large set-up costs of starting up a programme, but this ignores the other benefits of doing so.
For issuers that want to issue RMBS regularly or quickly, paying the upfront cost of setting up a master trust allows them to achieve both.
The speed at which trades can be brought to the market from an established master trust is an advantage when it comes to getting ahead of expected periods of market volatility, such as the end of the US tariff pause on July 9.
They also offer issuers the benefit of being able to make principal payments in different forms like hard bullet, soft bullet and scheduled amortisations. Issuers can deploy these to their advantage depending on the interest rate outlook.
Standalone RMBS are generally limited to using pass-through structures.
More lenders are seeing long term value in RMBS as a funding method, with Yorkshire Building Society setting up the UK's second mortgage-backed master issuer programme since the 2008 financial crisis in October 2024.
Master trusts aren't for every lender looking to securitise some mortgages, however. The high set-up costs mean they only suit large mortgage lenders that would benefit from the flexibility of coming to the RMBS market at least once or twice a year.
But for those that do make the leap, setting up a master trust signifies a lender’s commitment to the RMBS market for the long-term. And it is the long-term outcomes that should guide such decisions rather than short-term spread fluctuations.