Italy mortgage deal may negatively impact RMBS-S&P

MILAN, June 26 (Reuters) - Standard & Poor's could place existing Italian securitisations backed by home mortgages on CreditWatch with negative implications if debtors are given the chance to renegotiate their loans, the agency said on Thursday.

Under the terms of a convention signed by the association of Italian banks and the Economy Ministry, borrowers can ask their banks to turn their floating-rate mortgages into fixed-rate ones. The convention also lowers payments to their 2006 levels and can extend the time for which the mortgage can be paid.

"For those existing transactions where the convention is being underwritten, we would expect to place ratings on CreditWatch with negative implications, dependent on the collateral characteristics", while analysing the impact on the deals, Standard & Poor's said in a statement.

The agency said it expected to resolve any potential CreditWatch status by the end of the year.

As for new transactions, S&P said it would use its standard rating criteria only if the special purpose entity (SPE) -- which buys the mortgage pool off a bank in a securitisation deal -- did not adopt the convention.

Even in this case, however, S&P saw the risk of a "sudden and high level of prepayments" and said it may reflect that in its analyses.

On the other hand, if "the SPE declares it will subscribe to the convention, we will, in the absence of specific structural mitigants, factor the potential effects on cash flow by analyzing the revised amortization plan," it said.

By the end of August, Italian banks and SPEs need to state whether they intend to subscribe to the new rules. Borrowers will then have until the end of November to ask to renegotiate their mortgages.

It is estimated that borrowers representing between 5 and 10 percent of the stock of variable-rate mortgages granted by Italian banks will ask for the renegotiation.

(Reporting by Valentina Za; Editing by Victoria Main)