Summary
- Our European RMBS index tracks the collateral performance to date of the transactions that we rate. The summary includes frequently asked questions about our methodology for compiling the index.
- Overall, European RMBS collateral performance has deteriorated in all jurisdictions, particularly in the U.K. pre-2014 buy-to-let (BTL) and pre-2014 nonconforming sectors. Higher delinquencies in Spain reflects changes in the index composition, and in Ireland, a combination of changes in the index composition and performance variation.
- Rising delinquencies in one specific transaction underpin increasing Dutch BTL delinquencies rather than an overall sector-wide deterioration.
- For most transactions, total delinquencies have remained in the +2 or -2 percentage points range compared to Q4 2022. The U.K. pre-2014 nonconforming index is an outlier, with 33 out of 65 transactions experiencing increased arrears above two percentage points.
- Prepayment rates across Europe have remained a mixed picture. Pre-2014 U.K. collateral continues to exhibit higher than historic prepayment rates. Dutch BTL prepayment rates have contracted. Signs of an expected sell-off of property by Dutch investors amid proposed changes in regulation are yet to materialize.
- Overall, we expect the credit performance of mortgage collateral backing European RMBS to continue deteriorating in 2023, even if inflation is likely to recede in Q2 2023 as pressures from energy costs fade. Credit performance is unlikely to get back on track before mid-year 2024. Furthermore, pass-throughs from the commodities price shock may occur, especially in the services sector and due to rising labor costs. Some central banks, like the ECB, believe that inflation will be stickier, not reaching target before the second half of 2025. Therefore, policy rate cuts are unlikely before late 2024. Nonetheless, forbearance and government assistance could mitigate the speed and severity of any credit deterioration. While lower speculative-grade RMBS ratings could come under pressure, we expect structural protections, proactive servicing, and transaction deleveraging to ensure the ratings remain broadly stable.
Table 1
| Total delinquencies (%) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | ||||||||
| All countries - index | 3.9 | 3.5 | 3.3 | 3.2 | 3.1 | |||||||
| France and Belgium | 0.5 | 0.4 | 0.5 | 0.5 | 0.4 | |||||||
| Italy | 1.7 | 1.6 | 1.6 | 1.4 | 1.5 | |||||||
| Ireland | 6.9 | 6.3 | 4.5 | 4.4 | 7.5 | |||||||
| Netherlands (excluding BTL) | 0.4 | 0.3 | 0.3 | 0.4 | 0.4 | |||||||
| Netherlands BTL | 0.5 | 0.2 | 0.6 | 0.5 | 0.6 | |||||||
| Portugal | 3.8 | 3.6 | 3.6 | 2.7 | 2.7 | |||||||
| Spain | 6.0 | 5.6 | 8.1 | 7.9 | 6.5 | |||||||
| U.K. prime | 1.2 | 1.1 | 1.1 | 1.0 | 0.9 | |||||||
| U.K. BTL | 4.3 | 3.5 | 3.2 | 2.9 | 2.8 | |||||||
| U.K. BTL - pre-2014 | 6.3 | 4.9 | 4.2 | 3.7 | 3.4 | |||||||
| U.K. BTL - post-2014 | 1.2 | 1.1 | 0.9 | 0.9 | 1.0 | |||||||
| U.K. nonconf | 13.5 | 12.0 | 10.5 | 10.4 | 10.9 | |||||||
| U.K. nonconf - pre-2014 | 15.2 | 13.3 | 11.2 | 11.2 | 11.5 | |||||||
| U.K. nonconf - post-2014 | 3.4 | 3.2 | 3.4 | 3.1 | 3.0 | |||||||
| BTL--Buy-to-let. Q--Quarter. | ||||||||||||
Table 2
| Key performance indicators | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (%) | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | |||||||
| Prepayment rate | ||||||||||||
| All countries - index | 10.3 | 11.5 | 11.3 | 11 | 10.3 | |||||||
| France and Belgium | 4.5 | 5.5 | 7.7 | 8.7 | 8.9 | |||||||
| Italy | 4.3 | 4 | 3.4 | 5 | 4.6 | |||||||
| Ireland | 9.7 | 8.9 | 9.3 | 5.8 | 4.7 | |||||||
| Netherlands | 7.4 | 8 | 10.7 | 12.8 | 12.8 | |||||||
| Netherlands BTL | 13.9 | 14.4 | 20.5 | 23.7 | 18.8 | |||||||
| Portugal | 9.5 | 6.8 | 6.1 | 6.4 | 6.2 | |||||||
| Spain | 8.2 | 7.4 | 5.5 | 5 | 4.4 | |||||||
| U.K. Prime | 24 | 26.5 | 23.4 | 17.8 | 17.6 | |||||||
| U.K. BTL | 13.9 | 18.5 | 14.7 | 13.1 | 11.7 | |||||||
| U.K. BTL - pre-2014 | 14.1 | 20 | 15.5 | 12.3 | 10.8 | |||||||
| U.K. BTL - post-2014 | 15 | 17 | 13.7 | 16.3 | 16.5 | |||||||
| U.K. nonconf | 13.1 | 16.8 | 13.8 | 13.3 | 12.7 | |||||||
| U.K. nonconf - pre-2014 | 13.5 | 17.3 | 13.5 | 12.6 | 11.8 | |||||||
| U.K. nonconf - post-2014 | 11.1 | 13.7 | 16.9 | 19.6 | 23.6 | |||||||
| BTL--Buy-to-let. Q--Quarter. | ||||||||||||
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Table 4
| New ratings activity as of March 2023 | |||||
|---|---|---|---|---|---|
| Closing date | Country | Asset class | Analyst | Noteworthy features | |
| Bridgegate Funding PLC | Jan. 19, 2023 | U.K. | BTL | Vedant Thakur | Static RMBS transaction that securitizes first-lien U.K. loans (either owner-occupied and BTL residential mortgage loans). The loans are secured on properties in England, Wales, Scotland, and Northern Ireland and were mostly originated between 2006 and 2008. Of the portfolio, approximately 63% of collateral was previously securitized in the Deva Financing PLC transaction which redeemed in 2021. The remaining 37% of loans were never securitized and were retained on the seller's books. |
| Tower Bridge Funding 2023-1 PLC | Feb. 3, 2023 | U.K. | BTL | Vedant Thakur | Static RMBS transaction that securitizes a portfolio of 78.5% BTL and 21.5% owner-occupied mortgage loans secured on properties in the U.K. Belmont Green Finance Ltd., a nonbank specialist lender, originated the collateral between 2017 and 2022 via its specialist mortgage lending brand, Vida Homeloans. Approximately 67% of the collateral was previously securitized in the Tower Bridge Funding No. 4 transaction. The collateral comprises complex income borrowers with limited credit impairments, and with a high exposure to self-employed, contractors and first-time buyers. |
| Dutch Property Finance 2023-1 B.V. | Feb. 8, 2023 | Netherlands | BTL | Sandra Fronteau | Static RMBS transaction that securitizes a portfolio of BTL mortgage loans secured on properties in the Netherlands. This is the 10th Dutch Property Finance transaction that we have rated. Most of the loans in the pool were originated in 2021 and 2022 (67.0%). DPF 2023-1 involves the sale of a portfolio of Dutch mortgage loans originated or acquired by RNHB B.V. RNHB was originally part of FGH Bank N.V., which in turn was a Rabobank Group's subsidiary , but was purchased by CarVal Investors LLC in late 2016. In the pool, 33.7% of the portfolio (49.6% based on our methodology) by current property value comprises commercial (17.5%) and mixed-use (16.2%) properties. |
| Shamrock Residential 2023-1 DAC | March 3, 2023 | Ireland | Reperforming | Sinead Egan | Static RMBS transaction that securitizes a portfolio of €343.08 million loans (of which €3.06 million are subject to potential write-off), which comprise owner-occupied and BTL primarily reperforming mortgage loans secured over residential properties in Ireland. The securitization comprises three purchased portfolios, Leaf (36.5% of the pool), Cannes (52.6%), and Phoenix (10.9%). Each of these sub-portfolios were previously securitized in RMBS nonperforming loan transactions. AIB Mortgage Bank, AIB Finance Ltd., EBS DAC, and Haven Mortgages Ltd. originated the loans in the leaf portfolio. Permanent TSB PLC, Start Mortgages DAC, and Bank of Scotland (Ireland) Ltd. originated the loans in the Cannes subpool. The Phoenix portfolio aggregates assets from five different originators. |
| Elstree Funding No.3 PLC | March 22, 2023 | U.K. | BTL | Aarondeep Hothi | Static RMBS transaction that securitizes a portfolio of 65.2% first-lien BTL mortgages, 31.1% second-lien owner-occupied mortgages, and 3.7% second-lien BTL mortgage loans secured over properties in the U.K. West One Secured Loans Ltd. (WOSL), a wholly owned subsidiary of Enra Specialist Finance Ltd. (Enra), originated the loans in the pool between 2021 and 2022. Most of the second-lien owner-occupied pool is categorized as prime, with 98.4% originated under Enra's "prime plus" or "prime" product range and the remainder categorized as "near prime". The near prime loans are categorized by lower credit scores and potentially more adverse credit markers, such as county court judgments (CCJs), than those under the prime or prime plus ranges. |
| Domi 2023-1 B.V. | March 31, 2023 | Netherlands | BTL | Alejandro Marcilla, CFA | Static RMBS transaction that securitizes a portfolio of €278.5 million BTL mortgage loans (as of Dec. 31, 2022) secured on properties in the Netherlands. Domivest B.V. originated the loans in the pool between 2021 and 2022. It is the sixth Domi-originated RMBS securitization. The pool's seasoning is low, with almost all loans originated less than a year ago. |
| Grosvenor Square RMBS 2023-1 PLC | March 31, 2023 | U.K. | Prime | Aarondeep Hothi | Static RMBS transaction that securitizes a portfolio of owner-occupied and BTL mortgage loans secured on properties in the U.K. The transaction has a prefunding mechanism under which the issuer can only purchase loans currently securitized within Finsbury Square 2020-2 PLC, a transaction we currently rate. Kensington Mortgages Company Ltd. (KMC), a non-bank specialist lender originated 99.9% of loans in the pool. The mortgages originated by KMC were all previously securitized within transactions from the Finsbury Square or Gemgarto shelf. |
Summary Of Methodology For Our European RMBS Index
What is included in the European RMBS index?
We include a transaction once nine months have elapsed since the closing date. This is because we expect that performance developments of a transaction are likely not to be visible immediately after closing. As the index is current balance weighted, including transactions with less than nine months of performance will lower the denominator of the index and may give an overly positive impression of performance.
Are esoteric RMBS transactions included?
We assess this on a case-by-case basis. By way of example, equity release (reverse mortgage) nonperforming transactions backed by residential mortgages are excluded, while reperforming RMBS transactions are included.
What is the data source?
It is compiled form investor reports, and as such is based on each transaction's definition of arrears.
What is the definition of total delinquencies?
Total delinquencies are defined as arrears for one or more calendar months.
Is it loan count or dollar-weighted index?
The index is calculated as the current balance of loans in each arrear's status (as reported in the investor reports), divided by the current balance of each transaction (as reported in the investor reports). As such, in some countries which have a limited number of transactions forming the index, larger transactions will drive the overall group.
What does table 3 represent in terms of total delinquencies change?
To lessen the natural limitations of a dollar-weighted index, this table shows the transaction count by absolute arrears change within a certain group. We categorize these changes in three buckets: Total delinquencies down by more than two percentage points," total delinquencies up by more than two percentage points," and total delinquencies are stable (change between -2 percentage points and +2 percentage points)". This table only incorporates transactions that are included both in the current quarter and in the previous one.
When a transaction redeems, how does it affect the index? Does it affect the past quarter(s)?
When a transaction redeems, it does not contribute to the index beyond that point. It has no effect on reported values for previous quarters.
When do we cut off the index for a given quarter?
The cut off is based on the period covered in investor reports. For example, if the index covers the period up to first-quarter 2022, for a quarterly reporting transaction only collateral data with a cut-off between Jan. 1, 2022, and March 31, 2022, is included. For transactions that report monthly, we use the latest report from the quarter.
Both pre- and post-2014 indices are presented. How is this classification performed?
This is based on the origination date of the assets. If a pool of assets is split equally between pre- and post-2014 vintages, we will assess on a case-by-case basis whether it is included in the pre- or post-2014 index.
Why do prior quarter's numbers sometime change?
There are two main reasons:
- Data can be amended by the servicer/party providing the investor report.
- Newer data for the most recent quarter is available. For example, in a transaction that reports monthly, if we receive data until February 2022 when producing the first-quarter 2022 index, we will use the data up until that date. However, if we then receive March 2022 data when producing the following quarter's index, we will backfill first-quarter 2022 for that transaction with the March 2022 data.
How are transactions that contain a mixture of BTL and owner-occupied collateral classified?
For countries with separate BTL and owner-occupied indices, for example U.K. and Netherlands, we typically classify the transaction based on which portion of the collateral is the largest at the issuance date. For example, if a pool had 60% BTL collateral and 40% owner-occupied collateral at closing, it would form part of the BTL index. If the relative split of BTL and owner-occupied reversed due to prepayment or amortization, we would not typically change the classification.
How is nonconforming collateral categorized?
There is no standard market definition of nonconforming. Broadly speaking, nonconforming collateral does not meet the definition of prime. This is typically due to the pool having material exposures to borrowers with previous adverse credit, such as prior mortgage arrears and county court judgments, and/or significantly complex income. The assessment of whether a pool is nonconforming can be subjective and is disclosed in related ratings commentary.
Where do second-charge transactions appear in the index?
We do not include them as a separate index given these are just a handful of transactions. Instead, they are based on the categorization of the transaction (prime, BTL, etc.).
Related Research
- U.K. Residential Mortgage Servicing Flexibility Could Ease Arrears Pain, April 26, 2023
- Scenario Analysis: How Much Shock Can U.K. RMBS Take?, March 1, 2023
- European RMBS Index Report Q4 2022, Feb. 9, 2023
- European RMBS Outlook 2023: Permafrost Or Thaw?, Jan. 12, 2023
- European Housing Prices: A Sticky, Gradual Decline, Jan. 11, 2023
- Cost Of Living Crisis: Payment Shock Greatest In Legacy U.K. Nonconforming RMBS, Dec. 15, 2022
- Economic Outlook U.K. Q1 2023: A Moderate Yet Painful Recession, Nov. 29, 2022
- Economic Outlook Eurozone Q1 2023: Reality Check, Nov. 28, 2022
- Credit FAQ: Assessing The Impact Of Increasing Multifamily Exposure On U.K. Buy-To-Let RMBS Transactions, Nov. 24, 2022
- U.K. Buy-To-Let RMBS: Sheltered But Not Immune To Rate Rises, Nov. 24, 2022
- European RMBS Market Update Q4 2022: The New Normal For How Long?, Nov. 9, 2022
- Basis Risk, Not Collateral Performance Affecting U.K. RMBS , Nov. 2, 2022
- Cost Of Living Crisis: How Bad Could It Get For Irish Reperforming RMBS?, Oct. 25, 2022
- Irish Nonbank Lenders May Capture More Of The Irish Mortgage Market, Oct. 25, 2022
- Cost Of Living Crisis: U.K. RMBS 2.0 Has Built-In Resilience, Sept. 6, 2022
- U.K. Nonconforming RMBS: Looking Beyond Headline Arrears, Aug. 25, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Alastair Bigley, London + 44 20 7176 3245; Alastair.Bigley@spglobal.com |
| Secondary Contacts: | Feliciano P Pereira, CFA, Madrid + 44 20 7176 7021; feliciano.pereira@spglobal.com |
| Giovanna Perotti, Milan + 390272111209; Giovanna.Perotti@spglobal.com |
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