October 15, 2009 / 5:22 PM / 8 years ago

UPDATE 1-Nationwide latest UK bank to try to revive RMBS

4 Min Read

* Nationwide in public RMBS sale - source

* Economics of issuance remain in question

* Other RMBS deals in pipeline (Adds background)

By Alex Chambers

LONDON, Oct 15 (Reuters) - Nationwide Building Society [NAT.UL] plans its first public sale of a mortgage-backed bond, a banker working on the deal said, a sign that the reopening of the market is building momentum.

Barclays Capital, Citi and JP Morgan are joint-lead managers on the sterling-denominated residential mortgage-backed securitisation (RMBS), the manager at one of the banks in charge of the planned sale said.

"Yes it's back. There are a couple of deals bubbling behind the ones that are out," said one banker.

"Another European RMBS will be launched very soon and that will be sizeable," he added.

The emergence of another public sale just weeks after one for Lloyds via its Permanent Master Trust surprised some market watchers because RMBS spreads are still much wider than alternative mortgage financing options.

Public sales of RMBS came to a complete standstill early in the credit crisis, though the paper was still issued to be used as collateral in repo transactions at central banks.

The reason that they are now back in the game may be that bankers are positioning themselves for a possible future date when central banks may turn off, or at least reduce access to, such emergency liqudity facilities.

HBOS paid 170 basis points over mid-swaps to sell an earlier 4 billion pound ($6.50 billion) five-year deal. [ID.nLL3241]

Those bonds have since narrowed to mid-swaps plus 110 bp, bankers said. At the start of October Barclays sold a 10 year covered bond at 65bp over the same money market rate benchmark.

Given this disparity it is hard to explain why any issuers would currently use RMBS as a financing route on the grounds of economics alone. This extra expense feeds directly through to the rate they are able to offer mortgage borrowers.

Not only is RMBS expensive, bank borrowers can no longer get off-balance accounting treatment for using it.

The new Basle rules on banks also remove the advantage conducting securitizations formerly provided mortgage originators in the form of regulatory capital relief.

Finally, diversification of investor base is no longer an argument. A big part of the investor base disappeared when structured investment vehicles and bank conduits stopped buying RMBS. The main buyers of the RMBS product now are the same who buy banks' other credit products.

A survey of European mortgage lenders conducted by JP Morgan published in October revealed that most lenders thought that spreads would need to tighten further for RMBS to be a viable market for them. Some 44 percent said that spreads were between 50-100 bp wider than that required for issuance to be economic. [ID.nL7273396]

Still, the benefits of having viable funding options have been clearly illustrated over the course of the past two years.

Given the relative dearth of credit products in the market, borrowers' attempts to get investors to re-engage with RMBS make sense, even if the spread they have to pay does not, analysts said.

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