Fitch Ratings has reported that the European RMBS market was marked by robust issuance totalling e41bn during the period to May 2006, but warned that the macroeconomic backdrop and interest rate uncertainty were threats to performance in some areas.

The UK non-conforming sector was at the forefront of issuance growth with a number of new entrants. However, weaker credit performance in the UK market characterised the first part of the year with an overall increase in arrears. The UK non-conforming sector remains most affected with some further reserve fund draws and the first downgrade seen in this market.

Fitch notes that uncertainty surrounding UK interest rates and expectations of unemployment increasing slightly mean performance is likely to deteriorate further before improving.

Fitch also commented on the impact of euro interest rate rises on prepayment rates, the cost of mortgage loans and borrower affordability. Expectations of interest rate rises caused a recent increase in mortgage refinancing in fixed-rate mortgage markets, as borrowers have locked in existing low rates. This trend is expected to continue as the European Central Bank is anticipated to increase rates further during the course of 2006.

Variable-rate borrowers can expect to see their affordability stretched as rates rise. Despite fixed-rate borrowers being unaffected in the short term, the borrowers may be exposed to increased affordability problems on fixed-to-floating rate loans once the loan reverts to its full variable rate.

Fitch said that despite a resilient housing market having remained resilient, greater competition, especially in the near prime segment, is driving a shift in UK underwriting criteria and mortgage products.

The ratings agency noted a landmark European RMBS transaction, this being the first non-UK European non-conforming RMBS. Lansdowne Mortgages Securities No. 1 plc in Ireland was issued by new entrant Start Mortgages Ltd.

A Fitch newsletter ‘European Mortgage - RMBS, Housing & Credit' is available on