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

In this paper, we provide empirical evidence about the credit factors that impact the pricing of newly issued residential mortgage-backed securities (RMBS) in the U.K. There is an important implication of our findings for 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 credit rating. The implication is that investors do not rely exclusively on ratings