articles Ratings /ratings/en/research/articles/220906-cost-of-living-crisis-u-k-rmbs-2-0-has-built-in-resilience-12476252 content esgSubNav
In This List

Cost Of Living Crisis: U.K. RMBS 2.0 Has Built-In Resilience


China Securitization: Auto ABS And RMBS Tracker August 2022


Par Wars: U.S. CLO Document Provisions Evolve To Provide Managers More Flexibility


Hayfin Emerald CLO X DAC European Cash Flow CLO Notes Assigned Ratings


Swedish Covered Bond Market Insights 2022

Cost Of Living Crisis: U.K. RMBS 2.0 Has Built-In Resilience

U.K. mortgage borrowers' cost of living is rising at a rate not seen for decades, as consumer price inflation surges and monetary policy tightens in response. We expect arrears in U.K. RMBS collateral pools to rise as a result, with legacy nonconforming collateral the most heavily affected (see "Cost Of Living Crisis: How Bad Could It Get For U.K. RMBS?," published on May 20, 2022).

Given our expectation that the U.K. RMBS sector could experience some stress, we have revisited our analysis of the structural resilience of pre- and post-GFC RMBS, comparing origination standards and transaction structures to understand the potential risks. Additionally, we have compared the observed performance of pre- and post-GFC RMBS.

Previously, we observed that a combination of tighter regulation and market standards, driven by investor demands, led to reductions in risk layering, extension risk, and counterparty risk (see "U.K. RMBS 2.0 Origination And Structural Evolution Combine To Reduce Credit And Reinvestment Risk," published on Jan. 7, 2019).

In this article, we add further information to our analysis on affordability, second-lien loans, buy-to-let (BTL) lending, fixed-rate lending, and transaction prefunding, based on changes in regulation and market practices over the past three years. Our comparison shows that the effect of the changes overall has not materially increased risk in RMBS 2.0 transactions, and that they remain much more robust than their pre-GFC counterparts. Our performance comparisons show that post-GFC U.K. RMBS shows greater resilience, with the caveat that we have yet to see this cohort go through an economic stress as severe as the GFC. Overall, we believe that U.K. RMBS structures are well placed to withstand the current cost of living crisis pressures.

We cover the main changes observed over the past 15-year period since the GFC that, in our opinion, will support credit and investment performance in the light of the cost of living crisis.

Table 1

Credit Characteristics Comparison
GFC era originated loans Post-GFC originated loans
Although residential owner-occupied mortgages were a regulated product, regulation was not prescriptive which allowed lenders to stretch core lending criteria such as affordability and loan-to-value (LTV) ratios. BTL loans were specifically not regulated. Regulation has become more prescriptive making it harder for lenders to compete on core credit characteristics. BTL loans are now regulated by virtue of PRA rules requiring lenders to stress interest rates when assessing loan serviceability. Please see "affordability" below for more details.
Regulatory requirements when assessing affordability prior to the MMR tended to be "principles based". In practice, this allowed lenders to devise their own approaches and justifications as to why a loan was viewed as affordable. This led to a divergence in practice from lender to lender and as new lenders entered the market they were able to gain market share by relaxing core credit criteria such as affordability. Competitive pressures forced established lenders to follow suit and relax criteria. The MMR introduced prescriptive, industry wide, and enforceable affordability rules which required lenders to validate income and also assess non-mortgage related household expenditure, including other debt (car loans, credit cards etc.) when classifying a loan as affordable. In addition, lenders were required to use a stressed interest rate higher than the initial rate of the loan when assessing the affordability of loan payments. As of Aug. 1, 2022, the stressed interest rate requirement was withdrawn and represents a loosening of affordability requirements. However, given LTV ratio constraints remain in place, it is not immediately clear whether we will see a loosening in affordability standards. We currently understand that lenders that finance non-banks have shown little appetite to loosen affordability assessments, but this is something to monitor.
Risk layering
The U.K. mortgage market was at the front line of product evolution in Europe in the lead-up to the GFC. Products that were initially designed for bespoke idiosyncratic scenarios, for example self-certification for self-employed borrowers, became mainstream products. For example, it was not uncommon for loans to be advanced to borrowers with multiple risk attributes, for example, a borrower could be all of self-certified, have past adverse credit events, and be a BTL borrower. Risk layering is limited. By virtue of the combined impact of changes in investor appetite and the MMR, material levels of risk layering are not common. Notwithstanding this, lending to borrowers with past adverse credit has not been directly legislated against.
Used extensively by nonconforming lenders. Despite claims it was used merely as a mechanism to speed up the origination process, the practice was widely abused as borrowers exaggerated incomes and lenders applied insufficient scrutiny to the plausibility of stated income. Following the recommendations of the MMR and introduction of mandatory affordability tests, including at stressed interest rates, self-certification was effectively outlawed.
Some lenders used fast-track, as distinct from self-certification, to offer borrowers faster loan decisions. Low risk borrowers would not, unbeknownst to the borrower, have their income checked. Although designed for low-risk borrowers, lack of transparency around lender scoring models and score cut-offs meant the lenders' definitions of low risk was often opaque and was relaxed over time. Like self-certification, the MMR recommendations effectively outlawed fast-track.
Borrowers often used the interest-only option to stretch their affordability as an interest-only mortgage has lower monthly payments than an equivalent repayment loan of the same size. Consequently, borrowers with the lowest affordability and an unrealistic chance of saving enough funds to have a viable repayment vehicle often took interest-only loans. Following the MMR, lenders can currently only advance interest-only loans where there is sufficient evidence of a realistic repayment strategy. The Financial Conduct Authority (FCA) no longer deems strategies such as "downsizing" to be specific enough. Interest-only loans need to be assessed from an affordability perspective as though they are repayment loans. Regulation also caps the percentage of a lender's total interest-only originations, with lenders required to explain any breach of the cap. This effectively means interest only is generally reserved for higher credit quality borrowers.
Adverse credit
Exposure to adverse credit in U.K nonconforming transactions, as demonstrated by the prevalence of borrowers with county court judgments (CCJs), prior mortgage arrears, and bankruptcy orders (BOs) was considerable. Of particular note were loans to borrowers with prior mortgage arrears who had been able to refinance while in arrears by virtue of house price appreciation despite not having made a mortgage payment for a significant length of time. The MMR did not explicitly regulate against loans to borrowers with adverse credit. Rather, the quantities of adverse credit loans in RMBS transactions are controlled by investor tolerances to such loans and indirectly by virtue of the MMR requiring the lender to demonstrate a loan is affordable.
Second liens
Not common in RMBS transactions of the pre-GFC era and when present tended to be blended with first lien loans. Second lien loans from this era tended to show significant risk layering, for example, loans could be a second lien cash out remortgage to a credit impaired borrower. Borrowers also tended to use second lien loans for debt consolidation and equity withdrawal. In addition, they were often used when the first charge holder had refused to grant the borrower a further advance (for example, if they had been in arrears recently).

Second lien loans are becoming increasingly common but enhanced regulations, meaning that second liens require an affordability check equivalent to that of a first charge, have derisked the product. In addition, the fallout of the GFC has created nuanced uses of second liens that were rare before. For example, borrowers using second liens are those whose first charge borrower is no longer lending, and for whom an overall cheaper cost of financing can be obtained by taking out a second lien in addition to a first lien rather than refinancing the first charge with a new lender and taking on further borrowing. Please refer to "S&P Global Ratings' U.K. Second-Lien Mortgages Primer," published on Jan. 31. 2022, for more details of the second lien market in the U.K. since the GFC.

Specifically excluded from the mortgage regulation that became effective in 2004 and the MMR and as such, were unregulated until 2017. This allowed lenders to gain market share by relaxing loan-eligibility criteria such as debt service coverage ratios. When the BTL sector reopened following the financial crisis, lenders' risk appetite contracted. As the market evolved, boosted by strong demand and improved macroeconomic conditions, its status as an unregulated product meant that BTL became the leading growth product for mortgage lenders. This triggered market participants' concerns that the market was overheating.
In the lead-up to the GFC, lending criteria became increasingly stretched and saw the introduction of products that differed significantly from those that were prevalent at the asset classes' inception in 1996. For example, first-time buyer BTL and top slicing of income where borrowers use earned income to supplement lower rental income in the affordability calculation.

See also "Risk layering" above.

In response, the PRA introduced stringent affordability rules in 2017, which required lenders to assume stressed interest rates when assessing affordability. Unlike the MMR, which covers residential lending and the FCA oversaw, the PRA did not introduce BTL regulation to protect borrowers' interests, but rather with a primary objective of safeguarding the U.K financial system. Accordingly, it only applies to entities regulated by the PRA. However, most lenders not regulated by the PRA have adopted the PRA's affordability requirement as best practice or because warehouse finance providers require it. For detailed analysis of the BTL market in the U.K., see "S&P Global Ratings' U.K. Buy-To-Let Market Primer," published on June 1, 2021.

Lending into retirement
Lenders typically required borrowers to pay off their loan at or around state retirement age (65). However, as interest-only loans were common, such borrowers did not have a suitable repayment vehicle. Average lending ages have increased over the past decade, with some lenders lending to 85 years of age. This step change in underwriting has occurred at a time when pension reforms have created less certainty in retirement income. Currently most loans are repayment, although with recent regulatory changes this is likely to change.
Representations and warranties
Prior to the financial crisis, originators typically, although not exclusively, either securitized their assets more or less immediately or, sold them to an entity intending to securitize them more or less immediately. In these cases, these parties were able to make comprehensive representations and warranties because they were the originator or because they were able to pass on the representations and warranties they had obtained when they acquired the portfolio from the originator. For traded mortgage portfolios of legacy RMBS, representations and warranties are typically limited in time (sunset provision), by monetary amount or have conditional language, for example, "to the best of our knowledge" language. We consider this to be a credit negative, and typically factor this into our analysis through higher default assumptions.
Interest rate products
Mortgage loans were primarily either short-term (two years) fixed rate or discounted variable rates in the lead-up to the GFC, which meant borrowers were quickly exposed to the effects of increases in interest rates on their mortgage repayments. Two-year fixed-rate products became the market standard post-GFC, which has meant that borrowers, on average, have had some form of insulation against rate rises. More recently, longer-term fixed rates have become common, with the market moving toward an average fixed rate of five years. As a result, borrowers are on average insulated against interest rate rises to a much greater degree than pre-GFC.

Table 2

Liability Structures Comparison
GFC era originated loans Post-GFC originated loans
Pro rata amortization
Pro rata amortization was a common feature of passthrough U.K. RMBS transactions leading up to the GFC. Pro rata amortization was typically only permitted when certain triggers were satisfied. For example, the doubling of credit enhancement for non-junior notes, a requirement for an at target reserve fund, no uncleared principal deficiency ledger (PDL) balance, defaults and/or delinquencies and/or losses to be below a certain level (normally set broadly at the expected case). It differed by transaction whether triggers were reversible and therefore whether pro rata amortization could resume if a trigger had been breached and then cured. No longer a feature of U.K. passthrough RMBS, see also "Extension risk mitigants".
Extension risk mitigants
From its inception to 2008, the technology used to mitigate extension risk in U.K. RMBS evolved. Current U.K. passthrough RMBS transactions use different techniques to mitigate extension risk and may utilize more than one of the following techniques:
Step-ups: Initially step-ups of significantly wider than the initial margin were payable and used as an incentive to call. Step-up ratios were often double or more the initial note margin. Over time, step-up ratios tightened from 2.00x to 1.25x of initial note margins before disappearing completely in the years immediately before the GFC. Call options and step-up margins: The post-GFC response from a structural perspective has been the reintroduction of step-up margins and call options. By definition, options are not guarantees and option holders are often rated below the highest rating on the underlying transaction or are not rated at all. In addition, it is not a given that call options will always be honored even if the option holder remains solvent. If liability margins are wider at the time the call option becomes exercisable than the liability margins on the transactions, then there is no economic incentive to call the transaction. We have observed a contraction in step-up margins from double the initial margin to approximately 1.5x the initial margin over time. In this situation, investors are relying on option holders to call transactions in order to effectively generate goodwill and honor expectations.
Prepayment rate: The high prepayment rate that we often observed in U.K. RMBS transactions when underlying loans exited their initial discount and fixed period was cited as a "natural hedge" to extension risk. However, as investor demand for U.K. RMBS waned, mortgage lenders either contracted their lending appetite or closed completely. This, combined with house price declines meant that many borrowers were unable to find a new lender to refinance with when their introductory rate ended. Auctions: A variation on the theme of a call option is an auction where the issuer appoints a marketing agent on behalf of the rated noteholders to sell the underlying assets for an amount equal to par plus accrued interest on the rated notes.
Post call waterfall switch: If a non-exercise of the call option occurs, some transactions change their waterfall such that they divert excess spread to pay down the then most senior notes rather than paying to a residual noteholder, also known as "turboing". Excess spread can be defined in different ways, for example, it may be defined as being excess funds after paying rated notes or after paying all notes including unrated notes. The protection offered by such a mechanism depends on excess spread levels, which are a function of asset performance, margin compression, asset yield, and the ratio of rated to unrated notes.
Step-up on underlying assets: Another technique involves pricing underlying loans with significant margin step-ups. These are timed to occur at the same time as the note step-up, which should, within the context of a functioning mortgage market, significantly increase prepayments as borrowers chase better deals.
Techniques to ensure rated liabilities paid commitments on a timely basis varied in the lead-up to the GFC. Variously, they included the use of reserve funds and notably the use of external liquidity facilities. The introduction of Basel III has seen the cost of external liquidity facilities increase. Combined with the unintended consequence of transactions paying finance costs on standby drawings, liquidity facilities are now not a feature of U.K. RMBS transactions. Instead, liquidity risk is managed through the use of general reserve funds of liquidity reserve funds and principal to pay interest.
External liquidity facilities had consequences for a number of U.K. RMBS transactions when the facility provider was downgraded and the facility was drawn to cash. This left the RMBS transaction with a senior financing cost for the facility, but in most cases no actual need for the money. This was particularly severe for transactions where the liquidity facility could not amortize owing to a breach of performance triggers. Liquidity reserves: The specific mechanics of liquidity reserves differs by transaction. They are usually a sub-set of a wider general reserve fund. If the issuer can only use the liquidity reserve fund to pay class A interest, the liquidity reserve floor will be set relative to the class A notes' balance and the size of the wider notes will be set relative to all rated notes. The payment of the liquidity reserve amount, whether from interest or principal is often senior to all notes below the class A notes.
Principal to pay interest: Typically, the issuer can use principal to pay interest on senior notes only. When the issuer uses principal to pay interest, it writes a PDL on the notes in reverse order of seniority. This means that when principal is borrowed to pay interest on the senior notes, it is, in effect, the junior noteholders who are doing the lending. There are various scenarios where this could materially affect the junior notes. For example, in high default scenarios excess spread may be insufficient to pay back borrower principal. This would be particularly pronounced in a high interest rate environment where principal is used to pay a high note index. Transactions that have unhedged basis risk will face additional risk if there is a sudden and significant divergence between the basis for which there is insufficient interest funds to cover.
Reserve funding methods
How reserves were funded differed by transaction. However, as a general observation, from the RMBS market's inception to the GFC, there was a move away from reserves that were fully funded upfront by the transaction's sponsor. Reserves that were part funded upfront and fully funded using excess spread became the norm. Likewise, reserves are now typically funded partly upfront and more rarely partly funded upfront and also from excess spread. The move toward reserve funds funded up front equates to a higher day one investment for an originator and better risk alignment.
Although scenarios where initial reserves never met their target amounts were rare, rated noteholders preferred fully funded upfront reserves as they demonstrated "skin in the game," meaning the originator/seller retained some of the credit risk associated with the loans underlying the securities. A notable nuance to this is that some liquidity reserves are funded from principal upon certain trigger events. This may have consequences for junior noteholders. Please see "Liquidity" above.
Senior interest-only certificates/detachable 'A' coupons
Senior interest-only notes were common in U.K. RMBS transactions, especially those with high asset margins, for example, transactions containing second-charge lending. Senior interest-only notes tended to be time limited, for example for the first six to eight interest payment dates. This is because, for unseasoned collateral, it usually takes time for delinquencies and defaults to emerge, and during this time there was a significant amount of excess spread in transactions. Absent a senior excess spread note, in this scenario, excess spread would leak to residual noteholders. Residual notes tended to be unrated. The senior excess spread did not allow issuers to monetize upfront excess spread at a high rating level. No longer a feature of U.K. passthrough RMBS.
In some transactions such a feature had no analytical effect, as the excess spread would have leaked to the residual noteholder. In other transactions, where the reserve fund was not fully funded at closing, reserves struggled to reach target levels, which lowered the creditworthiness of the rated notes.
Net interest margin (NIM) notes/excess spread notes
Excess spread notes were notes that had a notional and interest component, but were ultimately all payable from excess spread. Similar to detachable A coupons (see above) they were an attempt to monetize excess spread upfront. The fact that such notes had a rating made it easier for the issuer to sell them. Relative to not having an NIM note in a transaction, NIM notes were only an issue to rated noteholders if they ranked senior to reserve fund replenishment. NIM/excess spread notes made a return to U.K. RMBS transactions and became common from 2020 onward, driven by a healthy amount of excess spread available in most transactions. Excess spread notes are, by nature, not asset backed and rely solely on excess collections received on the assets relative to the cost of liabilities. The proceeds from excess spread notes are typically used to fund reserve funds or for transaction costs. They are generally junior to reserve fund replenishment and often switch to a zero coupon after the transaction call date.
Time subordination
We define time subordination as a structure where notes of the same class and where all notes of that class shared the same PDL, but received principal payments sequentially on a passthrough basis. For example, the class A notes would be divided into three classes, class A1, A2, and A3. Class A1 received principal in priority to class A2, and class A2 received principal in priority to class A3. This meant that the class A2 and A3 notes would be more exposed to a back-loaded period of stress and losses, at a time when the class A1 notes had fully redeemed. Not currently a feature of U.K. RMBS, although revolving facilities are used to structure bullet maturity notes assuming call options are honored.
Time subordination had the benefit that, assuming the issuer exercised call options, in the example above, the class A2 and A3 notes could be sized at a level where if the expected prepayments occurred, they would not receive any principal before the calls, making them in practical terms a bullet repayment note.
However, when call options were not honored by the option holder, the class A2 and A3 notes experienced not only credit risk, but significant extension risk.
Deferrable interest
In most U.K. RMBS transactions, failure to pay timely interest on the class A notes was typically an event of default. However, for notes below the class A notes, the issuer could typically defer interest and interest accrued on the unpaid interest. The main change is that notes junior to the class A notes often now contain a provision, that even if they can defer interest when the class A notes are outstanding, at the point at which they become the most senior notes they must pay timely interest.
It was not a feature that when the junior notes became senior notes (when the class A notes redeemed) that they would be required to pay timely interest. This feature removes any barrier for junior notes to be rated 'AAA', once they are the most senior note outstanding, and if the transaction's performance warrants it.
This created an effective ratings cap below 'AAA' for such notes, as 'AAA' ratings usually require the timely payment of interest.
A number of pre-GFC transactions used prefunding where the issuer would issue notes in an amount that exceeded the outstanding collateral, with a promise to buy the remaining collateral by the first payment date. There were certain requirements that the new collateral had to adhere to, to qualify for the transaction. Failure to acquire qualified collateral in the stipulated time required repayment of the prefunding amount. Typically, investors do not prefer prefunding transactions as this brings in uncertainty for collateral quality. Issuers seldom used prefunding immediately following the GFC, but it returned around 2019 to U.K. nonconforming RMBS and was widely used over 2021. Prefunding appeals to issuers as it allows them to achieve the largest possible transaction size and arbitrage the weighted-average cost of funding obtainable on a term RMBS transaction versus the cost of warehouse funding.
From a credit perspective, although worst case assumptions can be made to where the pool may migrate to, prefunding creates a target date by which a certain origination volume needs to be met and incentivizes the possible arbitrage of loan-eligibility criteria, where new originations are within the letter of limitations, but not the spirit. In our analysis, we assess the originator's lending volumes in the lead-up to the transaction and whether it is realistic to originate the volume required by the first payment without a deterioration in credit quality.

Failure to prefund and repayment of monies advanced by investors operates differently by transaction. In some transactions, money is paid sequentially through the waterfall, in others it is paid pro rata in the ratios of rated notes at the start of the transaction. The difference in mechanism significantly affects the WAL of the notes and how credit deterioration may play through. Prefunding was particularly prevalent during 2021 in U.K. RMBS transactions due to a low cost of funding and high lending volumes. For further information, please see "What Is Prefunding And How Does It Affect U.K. RMBS Transactions?," published on March 24, 2022.

Net weighted-average coupon (WAC) cap
Not a feature. The feature is common in the U.S. RMBS space and featured in a few pre-2019 U.K. RMBS transactions, although it has not really been a feature in the last few years. The feature attempts to reduce the interest liability due on bonds, similar to how a subordinated step-up margin works. Notes are paid interest using lower of the coupon and the net WAC cap, where:

(a) the scheduled interest on the assets (whether received or not, so therefore maintaining credit risk)

(b) the senior fees

(c) the current balance of the mortgage loans at the beginning of the collection period

(d) the floating rate note balance for each class

[a-b]/c =(e) will then give a percentage rate applicable

The rate applicable will then by divided by the floating rate note percentage [d/c].

The result of this will be applied to the outstanding balance of the relevant notes to determine whether it is higher or lower than the relevant coupon.

We calculate the net WAC assuming all loans are performing. Our ratings address the payment of the lower of the net WAC and the coupon. We do not consider net WAC additional amounts in our analysis and non-payment of these is not a default.

Interest payments on all the notes (except class A) is calculated as minimum (net WAC cap, accrued interest for the respective notes).

Net WAC additional amount = accrued interest – net WAC cap

Overall Summary Of Pre- And Post-GFC Position

Investors in pre-GFC RMBS transactions suffered as transactions' WALs increased exponentially on the back of separate but related events. Firstly, house price declines meant certain borrowers had negative or low equity, and, as lenders became capital or funding constrained, higher risk mortgage products disappeared, never to reappear. In addition, borrowers who had been in arrears and cured, found a lack of lenders sympathetic to the blemish on their credit profile. Some borrowers still remain unable to refinance despite rising house prices. For example, self-certified borrowers who embellished their income at the point of origination and interest-only borrowers without a repayment vehicle effectively find themselves trapped in their existing mortgage.

We consider that risk layering is considerably lower than pre GFC, based on the above comparison of credit characteristics, which overall reduces extension risk (failure of the call option holder to buy the assets back from the issuer at par) in post-GFC transactions. The wholesale disappearance of products following post-GFC reforms made a significant portion of the borrowers that backed pre-GFC RMBS transactions unable to refinance in perpetuity, which ultimately caused extensions in transactions. Although there still remains a risk that products and underwriting standards that are currently considered appropriate are legislated against in the future, the extension risk of a post-GFC transaction is more likely to be linked to shorter-term factors (e.g., house price declines and lender appetite), than a structural change (e.g., the disappearance of products), which should reduce extension risk overall.

Techniques to eliminate extension risk remain broadly the same as in the pre-GFC era, with investors still reliant on the exercise of options from unrated entities as the absolute backstop. The move toward "turboing" using excess spread in order of seniority provides a backstop of sorts but its effectiveness is linked to myriad factors including credit performance of the loans, bank lending appetite, and the cost of alternative mortgage funding for borrowers relative to the rate they are currently paying.

Overall, we consider that counterparty risk is, on average lower than in pre-GFC RMBS transactions as liquidity is now provided internally rather than externally and swaps are used less frequently to hedge basis, currency, and standard variable rate risk.

Pre- And Post-GFC Performance

Pre-GFC U.K. RMBS saw sustained high levels of delinquencies, which picked up around the GFC and remained elevated. In the charts below we present relevant performance metrics that show the impact of the changes highlighted above.

Chart 1


Chart 2


Post-GFC transactions have generally seen much lower levels of delinquencies. Additionally, the levels at which delinquencies have remained since 2019 in U.K. prime RMBS and the level at which delinquencies have peaked in U.K. nonconforming post-2014 and U.K. BTL post-2014 indices are much lower than in pre-GFC collateral, despite the COVID-19 lockdowns occurring in these periods. This indicates that the post-GFC assets have a more stable credit profile and a lower neutral point of delinquencies, likely due to tighter underwriting standards and market practices.

Chart 3


Chart 4


Chart 5


Prepayment rates in pre-GFC collateral dropped as they went through the crisis and remained low, which caused issues within transactions.

Chart 6


Chart 7


Prepayment rates have been generally higher in post-GFC originated collateral, with the U.K prime index likely kept lower by the pre-GFC originations, which have seen low prepayment rates as borrowers have been unable to refinance. While there have been some early spikes in prepayment rates in the indices, we expect these to show greater stability and predictability over time as borrowers are generally locked into fixed-rate mortgages.

Chart 8


Chart 9


Chart 10


Cumulative loss rates on pre-GFC nonconforming collateral reached 5.9% in 2008 vintages, although the excess spread available across pre-GFC transactions has meant that all debited PDLs, which have occurred in the life of the transactions, have been cleared. Post-GFC collateral has seen much lower levels of losses, albeit without undergoing a stress as severe as the GFC, but given the structural and origination improvements discussed, we expect them to continue to show greater stability.

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Alastair Bigley, London + 44 20 7176 3245;
Secondary Contact:Josh Timmons, London (44) 20-7176-0831;

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back