Determinants of Primary Market Spreads on U.K. Residential Mortgage-Backed Securities and the Implications for Investor Reliance on Credit Ratings

The Journal of Fixed Income Winter 2012, 21 (3) 7 - 14

We provide empirical evidence about the credit factors that affect the pricing of newly issued residential mortgage-backed securities (RMBS) in the U.K. Our findings add an important element to the current debate by regulators throughout the world regarding whether investors rely exclusively on credit ratings in making investment decisions. Our results show that credit factors such as subordination level and collateral type that are taken into account by credit rating agencies when assigning a rating still have a significant impact on the new issuance spread even after accounting for the credit rating. The implication is that investors do not rely exclusively on ratings.

Keywords: MBS and residential mortgage loans, information providers/credit ratings, developed markets [UK], analysis of individual factors/risk premia