(The following statement was released by the rating agency)
Feb 12 - The latest batch of proposed reforms to the Spanish mortgage market announced last week will tighten underwriting standards on mortgages with terms over 30 years, Fitch Rating says. However, in order to limit the impact on bank funding, the new rules will only apply to new mortgages. This means they will not trigger a drop in the overcollateralisation (OC) levels of covered bond programmes.
The proposals also saw a slight weakening of the recourse rules, a trend we have seen in several reforms recently.
The most significant impact of the rules regarding mortgages originated with a maturity of greater 30 years is that they will not be included as part of the eligible cover pool, which determines the maximum legal amount of covered bonds that can be issued by a bank.
Following our discussions with the Ministry of Finance, we believe this rule will only apply to newly originated mortgages. Existing loans with an original maturity over 30 years are not excluded from the eligible loan books, and banks - many of which are near their regulatory limits for total outstanding covered bond issuance - will not have to buy back bonds to satisfy the legal limits. The long-term consequences of the restrictions on 30-year mortgages will be better and more robust eligible cover pools.
With regard to the progressive weakening of full recourse rules, we believe the numbers of borrowers that will benefit from the loosening of the recourse rules is small so it should have limited impact on banks, RMBS and covered bonds. Under the new rules, banks can only purchase repossessed properties that fail to sell for 70% of the appraised value, up from 60%. More importantly, there is the potential for debt forgiveness on the remaining debt for borrowers who repay 65% of their remaining debt within four years.
The impact of these measures on the willingness to pay should be limited because the economic incentives to default on the property are less than the burden caused by the remaining debt or the cost of finding alternative housing.
The disincentives to default on a mortgage are strongest for primary residences so it will be important to see whether the new set of laws and procedures will only be applied to first residences or will be applied to all mortgages loans.
It is still too early to measure the complete impact of these rules as the law has not yet been passed. However, there has been a raft of reforms to the mortgage market since 2011, many of which have started to chip away at Spain's extremely strong recourse rules. We continue to monitor legislative initiatives in the Spanish market and will update our view and criteria assumptions accordingly.