Specialist lenders fight on for RMBS after MFS collapse

Specialist lenders with public residential mortgage-backed securitization programmes, or which plan on entering the market, are in a resilient mood despite their business going through a turbulent period following the fall of specialist bridging lender Market Financial Solutions in February, involving accusations of fraud, which its owner categorically denies.

This, combined with the Iran war, which started at the end of February, temporarily shut the public asset-backed securities market and caused spreads to widen.

“The ABS market has been incredibly resilient since the Iran war broke out,” says Jacob Binnema, head of European public securitization at MUFG. “Although the market shut for a short period, with spreads pushing wider and some issuers pre-placing deals for certainty of execution, we are at a point where some deals are getting tighter prints than at the start of the year, with massive order books.”

This is positive news for the UK RMBS market, but there is still a huge level of uncertainty about how the fall of MFS will impact specialist lenders and whether it will cause private funding to dry up as banks grow more cautious.

“We understand that some banks are working through their portfolios more generally and the future state is likely to be one of enhanced due diligence, not just on the asset pools that are being funded but more generally on the originators and their corporate governance structures, risk management approaches, etc.” says Steve Harrison, director of debt capital markets at Together, a UK lender. “This could create higher barriers to entry for small to medium size lenders.”

Funding for specialist lenders after the fall of MFS will only continue as normal once funding providers are comfortable that the risk of fraud and double pledging of assets, which MFS has been accused of but denies, has been diminished beyond reasonable doubt.

“I think the immediate impact of the fall of MFS will be that banks become more cautious about providing funding to specialist lenders,” says Kanav Kalia, director at Oxane Partners, a technology services provider for private investors. “Everyone is very cautious now about being exposed to fraud or misreporting, so our clients really want to do an extensive deep dive on transaction data.”

While banks and private credit firms conducted due diligence before the collapse of MFS, more scrutiny is likely to take place in future to mitigate the risk of being exposed to another lender at risk of collapse. This could take several forms like more frequent and continuous due diligence checks, data verification and site visits.

Banks may choose to pay for investor service providers to check specialist lenders regularly, to look for links between different special purpose vehicles (SPV) or data anomalies which could be signs of manual intervention and fraud.

How the several banks and private credit funds with exposure to MFS will change their lending practices in the future is a key question.

Increasing the data reporting burden for specialist lenders would hit the sector, but banks deciding to leave it could also seriously damage the market. This would lead to less competition for lenders looking for funding, resulting in more expensive pricing for warehouses and forward flow agreements.

A £228m hit to its lending to MFS led Barclays to announce in a media call on April 28 that it would be reducing its activity with certain lenders. This came not long after it revealed in October that it was taking a £110m loss from its exposure to US auto lender Tricolor.

“We are constraining lending to certain structured finance counterparties who operate more vulnerable business models and cannot convince us of the quality and independence of their financial controls,” Barclays chief CS Venkatakrishnan said on the media call.

Jefferies, which has £103m of exposure to a warehouse facility but expects the hit to net earnings to be less than $20m, wrote to its clients, stakeholders and others to set out its response to its exposures.

Jefferies said the facility was sized at a level within its risk appetite, and the net loss was well within its risk tolerance, implying the collapse of MFS would not lead to a change to its asset-backed finance (ABF) underwriting practices, although Jefferies has not directly claimed this.

Though some banks like Jefferies look like they will continue to support the specialist lending sector, the impact of banks like Barclays leaving will hit lenders looking for bank funding.

Some banks appear to be tightening their ABF lending practices, but it seems no banks are planning on severing ties with lenders immediately after MFS’s collapse, giving lenders time to look for new funding partners.

“We haven’t had anyone pull our funding lines, even by funders who have been directly impacted by the fall of MFS, because we have strong and longstanding relationships with them, and because they appreciate our diligence in auditing,” said Taher Miah, director for capital markets at LendInvest, a UK lender.

“While our own funding remains secure and unaffected, we are aware of reports that certain senior investors are choosing not to renew revolving credit lines for smaller lenders in the market.”

This response would mean funders allow the loans to amortise, which should not disrupt asset pools and will give the originators time to look for new funding partners.

Another response to the uncertainty in the sector could centre on specific funding arrangements. Banks may come to prefer warehouse agreements, in which the lender typically holds the equity tranche, compared to forward flow agreements, where banks agree to buy loans on an ongoing basis from a lender.

“Forward flows have gained a lot of traction recently because some businesses don’t have the equity while they are still growing, so that might be a little bit harder as investors are going to want to see skin in the game and aligned interests,” says Joshua Meier, investment professional in structured credit at Five Sigma Finance, an investment advisory firm.

The other major question following the fall of MFS is whether it will impact bridging lenders primarily, or whether all specialist lenders will be subject to greater scrutiny and be forced to take more expensive private funding.

This depends on the outcome of the investigation into why MFS fell, and while that is still an evolving situation, there have been allegations that fraud and the double pledging of assets was the primary reason the lender collapsed.

“Mr Raja categorically denies any and all allegations of fraud or dishonesty and is confident this matter will be sensibly resolved in due course,” a spokesperson for MFS owner Paresh Raja said.

“I think the fall of MFS isn’t just about bridging lenders, but really about fraud issues which can affect any sort of asset-backed lending,” says Meier. “Investors are going back to the basics for credit underwriting, verification checks and AUP [agreed-upon procedure] audits, which will ultimately be a positive thing for asset-backed finance in the long-run as it will mitigate any risks which could currently exist.”

The other question is whether bridging lenders can commit fraud easier through double pledging bridging loans compared to other asset types.

“I think there are structural issues around the bridging and development lending space where double pledging can potentially be harder to detect,” says John Barbour, CEO at Rockstead, a risk consultancy and management service provider. “A key vulnerability is the gap between loan completion and the formal registration of the charge at Land Registry, which can sometimes take up to 18 months. Where a bridging loan could turn over in six months, this creates a significant window of exposure. Consequently, you have to look elsewhere in the company for red flags.”

The fall of MFS could also limit funding to smaller and newer lenders or impact larger, more established lenders too.

Many of these bigger specialist mortgage businesses plan to continue with their funding plans as usual.

“We have a number of lenders which provide us with funding lines, and it’s fair to say there has been an increase in the amount of scrutiny and questions posed to us since the fall of MFS,” says Paolo Tanca, UK treasurer at ColCap, an Australia-based mortgage lender which is active in the UK. “This is because they want to eliminate any risk of being exposed to a lender which is double pledging assets, but not to the point that it would hamper our growth and aspiration.”

Assuming banks require lenders to do more and deeper due diligence, more expensive funding and a smaller market could be the results of lenders being unable to afford to pay for this greater level of reporting.

“I think we are going to see some consolidation in the bridging market,” says Barbour, “because if you have a weaker balance sheet it will likely be harder to absorb the additional due diligence burden which is expected, and cost of funding may start to rise as some banks retreat from the space in the short term because of concerns around risk.”

While some of the larger and more experienced specialist lenders may assume the fall of MFS will have a minimal impact on them, the stricken business was relatively large player in the bridging market with a peak loan book of £2.4bn across a network of companies connected to MFS and a 20 year lending history. The total UK bridging loan sector stood at £13.4bn in the fourth quarter of 2025.

“I think the fall of MFS will impact both smaller and larger lenders, given that MFS was one of the largest bridging lenders in the UK,” says Meier. “So, if anything, investors may want to take a second look, whether through a heavy site visit or data review, at some of the larger lenders that may get less focus due to a long relationship or track record relative to your smaller or ‘problem’ originators.”

While the fall of MFS may bring an increase in scrutiny for smaller and newer lenders, the immediate impact also depends on who these lenders have existing relationships with and how concerned those banks are about risk in the sector.

“We’re in a solid position, partly because of the transparency that comes with being AIM-listed, but also because of how we work with our funders,” says LendInvest’s Miah. “JP Morgan, who is one of our biggest partners, actually spotted the potential risks in the bridging market quite early on. They commissioned an independent audit of our loans at the end of last year specifically to show we were clear of double pledging abuse.”

Plenty of specialist lenders, such as Together, LendInvest and ColCap, have established public RMBS programmes, which should in theory ease any concerns banks have about fraud.

“I think there will be a bit more confidence in lenders which run public RMBS programmes, where you’ve issued deals, called deals and reissued deals,” says Miah. “Every public SPV also has an audit, looking at the existence of loans, cash reconciliation on a month-to-month basis, which will probably be looked at by investors in even more detail now, even though they have already been done for years in the background.”

Specialist lenders operating a public RMBS programme will likely have been lending for several years and may well already have funding warehouses or forward flow agreements in place, meaning they will already have a lot of data they can share with banks.

“Your large institutional investors who provide £100m-plus funding lines already want three to five years of a lending track record, so it’s possible not much will change on that front,” says Meier. “But for originators who get funding from growth capital providers with funding facilities of £10m, £30m or £50m — that’s probably where funding will get more challenging after the fall of MFS. So I do suspect it’s going to be harder to raise capital for those with six months or one year of history, unless they have a very strong background.”

While the increasing reporting burden will be difficult for the market over the next few months, optimists believe it will ultimately strengthen the specialist lending market in the long-term, leading to a much stronger RMBS market with more funding certainty.