Spains New Mortgage Laws And BankGuidelines Could Push Up RMBSLosses But Improve TransparencyPrimary Credit Analysts:Mark ...
Spains New Mortgage Laws And Bank GuidelinesCould Push Up RMBS Losses But ImproveTransparencyNew Spanish mortgage legislat...
Ley 1/2013 Could Lengthen Recovery Periods And Increase Losses OnDefaulted MortgagesLey 1/2013 introduced several changes ...
• If the lender buys the property at auction and sells it at a profit within 10 years, the amount that the borrower owesdr...
Table 1Modifications To Real Decreto Ley 6/2012 Under Ley 1/2013 (cont.)Mortgage paymentthreshold forconsidering loanrestr...
The Central Government May Challenge Andalucías Moves To ExpropriatePropertyThe regional government of Andalucías April 9 ...
• Use updated collateral valuations; and• Periodically review refinancing and restructuring policies to validate their eff...
Additional Contact:Structured Finance Europe; StructuredFinanceEurope@standardandpoors.comWWW.STANDARDANDPOORS.COM/RATINGS...
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or ...
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Spain's new mortgage laws and bank guidelines could push up rmbs losses but improve transparency 1j3 s

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Spain's new mortgage laws and bank guidelines could push up rmbs losses but improve transparency 1j3 s

  1. 1. Spains New Mortgage Laws And BankGuidelines Could Push Up RMBSLosses But Improve TransparencyPrimary Credit Analysts:Mark S Boyce, London 02071768397; mark.boyce@standardandpoors.comRocio Romero, Madrid (34) 91-389-6968; rocio.romero@standardandpoors.comSecondary Contact:Virginie Couchet, Madrid (34) 91-389-6959; virginie.couchet@standardandpoors.comTable Of ContentsLey 1/2013 Could Lengthen Recovery Periods And Increase Losses OnDefaulted MortgagesThe Central Government May Challenge Andalucías Moves To ExpropriatePropertyNew Loan Classification Criteria Could Improve Securitizations AssetTransparencySpains Mortgage Legislation Has Become More Borrower-FriendlyRelated ResearchSTRUCTUREDFINANCERESEARCHWWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 11143267 | 301112013
  2. 2. Spains New Mortgage Laws And Bank GuidelinesCould Push Up RMBS Losses But ImproveTransparencyNew Spanish mortgage legislation and changes to loan restructuring guidelines for banks could have ripple effects onsecuritizations from the country, in Standard & Poors Ratings Services view. Two laws aiming, in part, to preventevictions of vulnerable borrowers recently went into effect: "Ley 1/2013," which modifies existing Spanish mortgagelegislation and introduces new rules to protect at-risk borrowers, became effective on May 15, and on April 9, theregional parliament of Andalucía approved "Decreto Ley 6/2013," a set of housing regulations allowing the regionalgovernment to take possession of properties from lenders in some cases. Furthermore, on April 30, 2013, the Bank ofSpain released new criteria that banks must apply when making decisions on loan restructurings and refinancings, andwhen classifying such loans in their financial statements.In our view, Ley 1/2013 and Decreto Ley 6/2013 may further restrict mortgage lenders ability to repossess propertiesin a timely manner, and could also depress ultimate recoveries on defaulted loans. However, we expect theincremental credit deterioration in outstanding Spanish residential mortgage-backed securities (RMBS) transactions tobe small. Possible governmental expropriations of bank-owned properties in Andalucía under Decreto Ley 6/2013could also lower investor confidence in the local legislative regime, which could in turn hurt property investment andhouse prices, in our opinion. The move may also set a precedent for other Spanish regions. That said, we expect thecentral government to challenge the law before the Constitutional Court of Spain, so its unclear to us whether and forhow long the new rules will remain in force.Overview• In April and May 2013, the regional government of Andalucía and the central Spanish government introducedchanges to mortgage laws, partly to prevent evictions of at-risk borrowers.• In April 2013, the Bank of Spain released guidelines governing banks loan restructuring decisions andclassification of restructured loans for reporting purposes.• In our view, the recent mortgage law changes could lengthen loan repossession periods and reduce ultimaterecoveries on defaulted loans--a potential credit negative for RMBS transactions, although we expect theimpact to be modest.• We believe that the new loan restructuring requirements could lead to greater transparency for some Spanishsecuritizations collateral quality, potentially pushing up investor confidence over time.The new criteria that banks must employ when deciding on loan restructurings and refinancings, and when classifyingsuch loans for reporting purposes, may make lenders asset quality more transparent, in our view. Reported collateraldata in RMBS and asset-backed securities (ABS) backed by loans to small and midsize enterprises (SMEs) mightbenefit from this improved transparency, if lenders change their securitizations servicing statements to maintainconsistency with their broader financial reporting. In this case, however, the reported performing collateral balance insome Spanish securitizations could decline in the coming months.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 21143267 | 301112013
  3. 3. Ley 1/2013 Could Lengthen Recovery Periods And Increase Losses OnDefaulted MortgagesLey 1/2013 introduced several changes to Spanish mortgage legislation. Broadly, these changes fall into fourcategories:• The temporary suspension of evictions for particularly vulnerable borrowers;• The possible suspension of extrajudicial sales of foreclosed properties for which the mortgage contract containsabusive clauses;• Modifications to auction rules for foreclosed properties; and• Changes to measures introduced in 2012 aimed at protecting some at-risk mortgage borrowers, including wideningborrower eligibility for loan restructurings and write-offs.The new law stipulates that lenders cannot evict "particularly vulnerable" groups for the two years beginning May 15,2013. The law defines such groups as:• "Large" households (broadly, those with one or two parents, and three or more children), single-parent householdswith two children, or households with children under three years old;• Households with disabled persons, or persons with a dependency or illness that renders them permanently unableto work;• Households where the mortgage borrower is unemployed and has exhausted their unemployment benefit; and• Households with victims of gender violence.Such groups are eligible for protection under the law provided that:• Joint household income is less than three times the "Indicador Público de Renta de Efectos Múltiple" (IPREM)—theSpanish reference index for benefit payments—currently €6,400 annually;• In the past four years, the mortgage payment as a proportion of household income has increased by 1.5 times;• The mortgage payment represents more than 50% of net household income; and• The mortgage is secured on the borrowers only property.The second part of Ley 1/2013 amends existing rules partly to resolve conflicts between Spanish and European Unionlegislation. The legislation empowers notaries to suspend extrajudicial house sales when the borrower has claimedbefore a judge that the mortgage contract contains abusive clauses. The new rules also stipulate that mortgage arrearsinterest (where the securing property is the borrowers residence) cannot exceed three times the legal rate of interest(currently 4%), and that such interest cannot be capitalized.The third part of the law makes several changes to the rules that apply to the auction process for foreclosed properties.For example, where the auctioned property is the main residence of the borrower:• Auction bidders cannot buy the property for less than 75% of its original valuation. Previously, there was no suchthreshold.• If there are no bidders at the auction, the lender can acquire the property for no less than 70% of the auctionvaluation (assuming that the borrower owes more than this percentage)—up from 60% under the previous rules.• Borrowers can pay off 65% of the amount they owe within five years of the auction, or 80% within 10 years, with thelender obliged to write off the remainder.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 31143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  4. 4. • If the lender buys the property at auction and sells it at a profit within 10 years, the amount that the borrower owesdrops by 50% of the profit.Finally, Ley 1/2013 amends "Real Decreto Ley 6/2012," which the government introduced in March 2012 to protectborrowers already in arrears, or at risk of falling into arrears. Under Real Decreto Ley 6/2012, struggling borrowersthat satisfy certain criteria could request loan restructuring packages and partial principal write-offs, and in some casesopt to return the property to the lender and cancel the outstanding balance (a so-called "dación en pago"), assumingthat the lender subscribed to a new banking "Code of Best Practice" (see "How Spains New Best Practices ForMortgage Lenders Could Affect RMBS Credit Quality," published on March 22, 2012).The new rules broaden eligibility for loan restructurings, partial write-offs, and dación en pago to varying degrees. Forall three, Ley 1/2013 removes the requirement that all household members be unemployed, and lowers the incomerequirement: The mortgage payment must now account for more than 50% of net household income in most cases,down from 60% under previous rules. Eligibility requirements for loan restructurings have loosened more than forpartial write-offs and dación en pago, since borrowers no longer need to prove that any state benefits that they receiveare insufficient to meet the mortgage installment, and they are now eligible for loan restructuring even if the propertyis not their only home.We summarize some of the main changes to these rules in Table 1.Table 1Modifications To Real Decreto Ley 6/2012 Under Ley 1/2013Real Decreto Ley 6/2012 Ley 1/2013Borrower eligibilityrequirements for loanrestructurings1) Mortgage installments must account for morethan 60% of the borrowers net household income2) The maximum original property price rangesbetween €120,000 and €200,000, with the exactfigure depending on location 3) The mortgageloan is for the borrowers sole property 4)Household members and mortgage co-signersreceive no work-related income, and do notreceive state benefits sufficient to meet theirmortgage payment installments1) Household income is less than three times the IPREM (or up tofive times, in cases where a member of the household has a severedisability) 2) In the past four years, the mortgage payment as aproportion of household income has increased by 1.5 times, or thehousehold became "particularly vulnerable"* over the period 3)Mortgage installments account for more than 50% of net householdincome (or 40%, if the household contains disabled persons, or thosewith a dependency or illness that renders them permanently unableto work) 4) The maximum original property price ranges between€150,000 and €400,000, with the exact figure depending on locationand the number of dependentsBorrower eligibilityrequirements forpartial loan write-offsSame as for loan restructurings Requirements for loan restructurings, plus: 5) The mortgage loan isfor the borrowers sole property 6) Household members andmortgage co-signers do not receive state benefits sufficient to meetthe mortgage payment installmentsBorrower eligibilityrequirements for"dación en pago"Same as for loan restructurings Requirements for partial loan write-offs, but replacing point 4 with: 4)The maximum original property price ranges between €120,000 and€200,000, with the exact figure depending on locationMaximum mortgageloan interest rate afterthe borrower proveseligibilityThe contractual mortgage interest rate plus 2.5% The contractual mortgage interest rate plus 2.0%Loan restructuringpackage lenders mustoffer to eligibleborrowers1) A four-year capital repayment holiday 2) Aninterest rate reduction on the loan to EURIBORplus 25 basis points annually over the four-yearperiod 3) An extension of the mortgage loan termto a maximum of 40 years1) A five-year capital repayment holiday 2) An interest rate reductionon the loan to EURIBOR plus 25 basis points annually over thefive-year period 3) An extension of the mortgage loan term to amaximum of 40 yearsWWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 41143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  5. 5. Table 1Modifications To Real Decreto Ley 6/2012 Under Ley 1/2013 (cont.)Mortgage paymentthreshold forconsidering loanrestructuring packageto be "inviable"Mortgage payments exceed 60% of net householdincomeMortgage payments exceed 50% of net household incomeDación en pagoconditionsAfter the "dación en pago", the borrower mayremain in the property for up to two years, payingannual rent equivalent to 3% of the outstandingmortgage balance. During this time, the annualinterest rate on unpaid rent amounts will be 20%After the "dación en pago", the borrower may remain in the propertyfor up to two years, paying annual rent equivalent to 3% of theoutstanding mortgage balance. During this time, the annual interestrate on unpaid rent amounts will be 10%IPREM--Indicador Público de Renta de Efectos Múltiple. *The household is large, consists of a single parent with two children, contains a memberunder three years old, or contains disabled persons, or persons with a dependency or illness that renders them permanently unable to work.Source: Standard & Poors.Overall, we expect that Ley 1/2013 may cause ultimate losses on defaulted mortgage loans to increase modestly—asmall credit negative for RMBS. Loan restructuring requests under the Code of Best Practice have accelerated since itsintroduction—with borrowers initiating 44% of requests since March 2012 in first-quarter 2013 alone—and borrowersnew broader eligibility for protection under the code could cause applications to rise further. Loan restructurings couldpick up as a result, potentially pushing up long-term arrears in RMBS pools. Even so, we note that lenders rejectedabout two-thirds of applications in the 12 months through first-quarter 2013, mainly because applicants did not meetthe eligibility requirements. Less than 10% of cases—about 300 of the 3,300 requests lenders handled—resulted in adación en pago. Considering that there were more than 14,000 instances of dación en pago in 2012, the impact of theCode of Best Practice on mortgage losses remains low, in our view.The impact of changes to auction processes on Spanish RMBS is unclear, in our view. On the one hand, the higherminimum purchase price for auctioned properties (for the winning bidder or for the lender, if there are no bidders)could increase loan recovery amounts for RMBS. On the other hand, borrowers new ability to write off part of theoutstanding loan amount within 10 years of the auction, and to share in the potential profit of the lenders subsequentsale of the property, could reduce future recoveries from defaulted loans. However, we would expect such futurerecoveries to be small.While we dont know how many borrowers will qualify for two-year eviction relief under the new temporary measures,we believe that the legislation could further lengthen repossession periods for some mortgage loans. Given fallinghouse prices in Spain, this could push up ultimate losses. This is already the case, in theory, for dación en pago underthe Code of Best Practice—where lenders must allow borrowers to remain in the property for two years—but suchinstances remain scarce. The new rules could make this phenomenon more widespread, in our opinion, although weexpect the incremental impact to be small.Indeed, its possible that measures preventing borrowers eviction could push down house prices further, in our view.Under Ley 1/2013, a lender can still sell such a property, but the buyer would be unable to evict the borrower. Sincethe borrower pays no rent over the moratorium period, such properties may see some value declines.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 51143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  6. 6. The Central Government May Challenge Andalucías Moves To ExpropriatePropertyThe regional government of Andalucías April 9 approval of Decreto Ley 6/2013 allows the state to expropriate certainproperties for a maximum term of three years if the borrower is at risk of eviction. To qualify, the borrower mustsatisfy the following requirements:• The house must be the borrowers main residence, and no household member must own another property;• The eviction could lead to a situation of emergency or "social exclusion" for the borrower;• The mortgage payment as a proportion of household income has increased by 1.5 times since the mortgage loanwas granted;• The mortgage payment accounts for more than one-third of household income; and• Household income is not more than three times the IPREM.The regional government would charge the borrower an amount not more than 25% of net household income per yearfor the use of the property, transferring this rental amount to the lender. The regional government would also pay thelender annually the difference between 2% of the property value and the rent that the borrower pays. (We note that inthis respect, the regional law is more respectful of property rights than the temporary moratorium on evictions underthe state law, where the borrower pays no rent for two years.) If, during the three-year period, the borrower is able toaccess similar quality housing to that of the property, the lender would be able to retake possession.As with the central governments measure to stop temporary evictions, we expect that Decreto Ley 6/2013 couldincrease the time-to-recovery for defaulted mortgage loans and increase mortgage losses, although we dont know howmany borrowers will qualify for protection under the law. More broadly, the new legislation could weaken investorsconfidence in property rights under the local legislative regime, potentially leading to lower investment, and possiblydragging house prices down further. Andalucía may also set a precedent for other regions: For example, the CanaryIslands are reportedly considering similar legislation.That said, we expect the central government to challenge the law before Spains Constitutional Court. We alsounderstand that the European Commission has suggested that the legislation may be incompatible with the terms ofSpains recent banking bailout. As a result, its unclear whether and for how long Decreto Ley 6/2013 will remain ineffect, but we will continue to monitor its progress.New Loan Classification Criteria Could Improve Securitizations AssetTransparencyIn April 2013, the Bank of Spain released criteria that banks must use when making decisions on loan refinancings andrestructurings. The criteria also stipulate how banks must report on such loans in their financial statements.In particular, for refinancings and restructurings, banks must:• Base their decisions on individual analysis of the borrowers income and ability to repay;• Base specific loan conditions—such as interest rate, term, and grace period—on realistic payment arrangements;WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 61143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  7. 7. • Use updated collateral valuations; and• Periodically review refinancing and restructuring policies to validate their effectiveness.Furthermore, banks will have to classify such loans as "doubtful," "substandard," or "standard" in their financialstatements. Standard loans are those for which there is evidence that amounts due will likely be recovered (includingthe inexistence of long grace periods, the existence of a repayment plan that ensures adaptation to the borrowers netincome, and the presence of guarantors of high credit quality). Doubtful loans are those for which there is evidencethat the borrowers ability to repay is weak. Substandard loans are of a quality between "doubtful" and "standard."Banks must categorize restructured and refinanced loans as "substandard" by default, unless there is sufficientevidence to suggest reclassification. Subsequently, they may only reclassify loans as "standard" if the borrower has metcontractual loan commitments over a certain period (generally more than six months) and analysis shows animprovement in the borrowers ability to pay. Banks must review their refinanced and restructured portfolios andreport any changes in classification to the Bank of Spain by Sept. 30, 2013.If lenders that issue securitizations—which also generally act as servicers to such transactions—opt to update thetransactions servicing statements to reflect the changes in their reporting methodologies, some securitizationsinvestor reports (notably, RMBS and SME ABS) could begin to provide useful information to investors about the levelsof restructured loans. We believe that this could lead investors to have more faith in the accuracy of collateral dataover time. In the short term, however, such a change may well lead to a decrease in the reported performing collateralbalance in some transactions.Spains Mortgage Legislation Has Become More Borrower-FriendlyWhile we continue to view Spanish mortgage loans as full-recourse instruments, recent legislative changes haveweakened banks ability to enforce secured collateral, in our view. Furthermore, borrowers broader eligibility formortgage loan restructurings under the banking Code of Best Practice mean that loan modifications will likely continueto rise in the coming quarters, delaying foreclosures in some cases.We expect these measures, in their current form, to have only a limited impact on RMBS transactions asset creditquality. As a result, we do not currently apply higher RMBS rating stresses to account for these changes.However, we note the move toward a more borrower-friendly legislative regime, both regionally and for the centralgovernment. The Spanish government may also find it necessary to further broaden the scope or extend theapplicability period of existing measures—for example, if borrowers currently at risk of eviction remain in the sameposition in a couple of years. If temporary measures to help at-risk borrowers become more permanent, we couldconsider changing the stresses that we assume in our Spanish RMBS rating analysis.Related Research• How Spains New Best Practices For Mortgage Lenders Could Affect RMBS Credit Quality, March 22, 2012• Spanish RMBS index report, published quarterlyWWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 71143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  8. 8. Additional Contact:Structured Finance Europe; StructuredFinanceEurope@standardandpoors.comWWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 81143267 | 301112013Spains New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency
  9. 9. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&Preserves the right to disseminate its opinions and analyses. S&Ps public ratings and analyses are made available on its Web sites,www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional informationabout our ratings fees is available at www.standardandpoors.com/usratingsfees.S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respectiveactivities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has establishedpolicies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certainregulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&PParties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for anydamage alleged to have been suffered on account thereof.Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed andnot statements of fact. S&Ps opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation toupdate the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgmentand experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P doesnot act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to bereliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any partthereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrievalsystem, without the prior written permission of Standard & Poors Financial Services LLC or its affiliates (collectively, S&P). The Content shall not beused for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees oragents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are notresponsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or forthe security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALLEXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FORA PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENTS FUNCTIONINGWILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In noevent shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused bynegligence) in connection with any use of the Content even if advised of the possibility of such damages.Copyright © 2013 by Standard & Poors Financial Services LLC. All rights reserved.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2013 91143267 | 301112013

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