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Fitch Spain Rmbs Criteria
Fitch Spain Rmbs Criteria
Performance Analytics
Fitch adopts a threestage approach in its analysis of Spanish
Andy Brewer RMBS:
+44 20 7417 3481
andy.brewer@fitchratings.com 1. Asset Analysis: the underlying collateral is examined through
the loanlevel default model to calculate gross credit
enhancement, or expected losses for the relevant rating level.
Related Criteria Reports The default model takes into account the loan, borrower,
This report forms part of Fitch’s overall property and lenderspecific factors that most influence
rating approach and should be read in default probability and possible recoveries.
conjunction with the following reports:
· “A Guide to Cash Flow Analysis for 2. Cash Flow Analysis: the outputs of the asset analysis are
RMBS in Europe”, 20 December 2002; placed in the context of the proposed transaction structure
· “European Criteria for Mortgage through Fitch’s proprietary cash flow model, to determine the
Insurance in RMBS Transactions”, net credit enhancement appropriate for assigning certain
4 July 2007. ratings to the RMBS notes under analysis.
Additional reports are listed in Appendix 8.
21 December 2007
www.fitchratings.com
Structured Finance
3. Legal Analysis: the deal’s documentation is · information and research studies published by
reviewed to assess the proposed structure in the Asociación Hipotecaria Española (AHE),
light of the country’s legal framework; to check Asociación Nacional de Establecimientos
if it is compatible with Fitch’s rating criteria; Financieros de Crédito (ASNEF), mortgage
and to detect any risk that could not be insurers and investment banks.
adequately assessed in the first two stages of the
analysis. A summary of Fitch’s review of the Spanish
mortgage market is provided in Appendix 7.
This report addresses primarily the asset analysis
performed with Fitch’s default model. The n Model Approach
mechanics of the cash flow modelling are addressed Through the loanbyloan default model, Fitch
in a separate report “A Guide to Cash Flow Analysis calculates gross credit enhancement levels, which
for RMBS in Europe”, published on 20 December would cover expected losses at each rating level
2002. Only some specific features that distinguish before taking into account any benefits of excess
Spanish structures from those of other jurisdictions spread or structural support in the transaction.
are summarised here. The methodological approach Expected losses, defined as the product of the default
underlying the Spanish residential mortgage default probability and loss severity, are measured for each
model is consistent with that used for other European stress scenario separately and for each loan in the
jurisdictions. However, it also reflects the legal, portfolio. Together with an assessment of origination
economic and cultural characteristics specific to the and servicing quality, the analysis takes into account
Spanish mortgage market. the characteristics of each individual borrower, loan
and property that most influence default probability
Sources of Information and possible recoveries. Mortgage loans are also
The agency has revised its assumptions to reflect the subject to stresses resulting from Fitch’s assessment
results of its recently conducted analysis of the of historical defaults and house price movements
Spanish RMBS market. This comprises a detailed in Spain.
review of the historical performance of securitised
portfolios and of Spanish mortgage lenders’ data as Loanbyloan base default probabilities are
well as information on the Spanish mortgage market, calculated using a base default probability matrix
combined with a comprehensive assessment of that considers each borrower’s willingness to pay
relevant economic information. Among others, the (based on loantovalue or LTV) and ability to pay
agency took into consideration the following sources (based on debttoincome or DTI). This default
of information: probability matrix has been constructed by
consolidating available delinquency information
· aggregate staticpool performance information from the market; it illustrates the expected level of
(both in terms of delinquencies and recoveries) cumulative defaults on an average Spanish mortgage
by origination vintage from several major loan, with a given LTV and DTI. Once the base case
Spanish lenders from 1998 onwards; default probabilities have been calculated, Fitch
adjusts them on a loanbyloan basis to account for
· aggregate issuer information on delinquencies, individual loan characteristics in the portfolio.
repossessions and recoveries for all Fitch rated Fitch’s default model also calculates a recovery
RMBS; percentage, ie the recovery of principal and interest
upon foreclosure of the loan. Based on its analysis of
· arrears and default information from securitised the real estate market, Fitch determines market
loan portfolios managed by the largest Spanish valued decline (MVD) assumptions for different
cash bond administrator (sociedad gestora) in regional groups. MVDs are further adjusted by
terms of RMBS issuance volumes; factors related to specific loans and property
attributes.
· loanbyloan repossession data from some
lenders; On a portfolio basis, gross credit enhancement is
expressed as the product of the average default
· historical house price index published by the probability weighted by the loans’ outstanding
Ministerio de la Vivienda (MVIV) balances, otherwise referred to as the weighted
average (WA) frequency of foreclosure (WAFF).
· economic information reported by the Instituto Fitch also calculates a weighted average recovery
Nacional de Estadística (INE) and the Bank of rate or (WARR), whereby loanbyloan recovery
Spain (BoS); rates are weighted by the loans’ outstanding balances
and default probabilities.
Spanish Residential Mortgage Default Model Criteria: December 2007
2
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n Default Probability Fitch considers the individual underwriting
Fitch believes the fundamental variables affecting guidelines of lenders regarding affordability
borrowers’ potential for default are a combination of measures in conjunction with corresponding lending
their willingness and ability to pay. limits. For instance, some lenders compute DTI and
additional affordability measures such as the
Willingness to Pay household’s remaining cash balance after debt
Fitch measures willingness to pay by the amount of payments and regular expenses have been paid out.
equity invested in the home, as determined by the Many lenders integrate these measures into a
original loantovalue (OLTV). The agency assumes comprehensive credit scoring system that
that the amount of equity the borrower initially additionally takes into account credit bureau
invested for the purchase of the property information.
significantly affects the likelihood of default when
the borrower is in financial distress. Additionally, a Typically, Spanish lenders calculate overall DTI
large initial down payment is usually indicative of a ratio by dividing total monthly debt obligations by
borrower with higher financial means or saving monthly net income whereby:
capacity.
· monthly net income is defined as the resources
Empirical evidence across Europe and the US remaining after deductions for social security
suggests that borrowers who have made a more and income taxes;
substantial down payment at origination have a
better track record of maintaining their loans. This is · total monthly debt obligations are defined as all
irrespective of the fact that, upon enforcement of the financial obligations of a borrower with a
security, the borrower remains liable for any maturity of over 12 months.
shortfall after the lender has sold the property.
If the loan is signed by two household members, DTI
Indeed, in Spain, mortgage loans are full recourse.
ratio is usually computed at the household level. The
Borrowers are therefore personally responsible for
agency applies the above definition of DTI for the
their debt and the lender can seize all their
assessment of the base default probability on a loan
unencumbered present and future assets if the loan is
byloan level. Fitch splits affordability into five
not fully repaid by the sale of the mortgaged
classes, shown in the following table:
property.
Spanish Residential Mortgage Default Model Criteria: December 2007
3
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3 Month+ Arrears – European Comparison
Germany Ireland Italy Netherlands
(%) Portugal Spain UK – BTL UK – Prime
2.5
2.0
1.5
1.0
0.5
0.0
1 11 21 31 41 51 61 71 81 91 101 111 121
Months since issue
Source: Fitch
overall ultimate cumulative arrears levels and cure In light of this data, Fitch has recalibrated upwards
rates by origination year. most of the Spanish base default probability matrix
and adjusted the shape of the DTI and LTV default
Until recently, the overall Spanish mortgage market curves.
has performed better than in most other European
jurisdictions. Indeed, securitised residential However, looking forward, Fitch anticipates that the
mortgage loans have experienced lower historical performance of some mortgages in securitised pools
arrears and default rates in Spain than in most other will be further affected by risk factors which are not
European countries. As illustrated in the chart above, all captured by the historical performance data upon
the level of threemonth plus delinquencies which the base default probability matrix has been
compares fairly favourably with those in other updated. These risk factors mentioned above include
European RMBS. However, in the past quarters, recent changes in macroeconomic conditions,
arrears in Spain have showed a marked increase, products and underwriting practices. Hence, as
albeit from a low base (see Around the Houses – detailed below, Fitch has incorporated the following
Quarterly European RMBS Performance Update Q3 factors into its analysis:
2007, published on 25 October 2007 and available at
www.fitchratings.com). Aggregate performance · a specific module to account for the impact of
information from Spanish lenders also showed some interest rate variations on DTI;
increases in arrears. In both performance data sets
data from securitised funds and overall loan book · default probability adjustments to address
data from Spanish lenders Fitch observed an lenders’ nonaverage origination and
increase in arrears for the recent vintages of most underwriting practices;
lenders. Moreover, the data also indicated greater
variations across lenders depending on their size, · revised or added loanbyloan default
home region and overall origination and probability adjustments, especially to account
underwriting practice. for borrowers’ employment and credit history
and new products.
This increase in arrears is mainly attributable to the
combined effect of: (i) the negative impact of higher Default Probability Matrices
indebtedness levels on Spanish borrowers’ ability to On average, newly originated mortgages in Spain
pay, mainly driven by recent interest rate rises and have an OLTV of around 70% and a DTI of 35%,
property price increases; and (ii) developments in the both marginally higher than in the past. However,
Spanish mortgage market, mainly in terms of the Spanish market is also more segmented than
underwriting criteria and products, including before between homeowners and firsttime buyers,
products with enhanced flexibilities. Indeed, the which tend to be in the upper LTV and/or DTI
highest arrears are being seen in recent transactions, buckets. Indeed, a quarter of originated loans have
especially the ones backed by high LTV loans or by LTVs above 80% while a quarter of originated loans
loans originated by specialised lenders or through have a DTI above 45% (source: AHE). Additionally,
brokers. For more detail on the main risk factors maturities of newly originated mortgages have
identified for the Spanish mortgage market, please lengthened in the last decade from 17 years to over
see the Appendix 7. 28 years on average, with maximums generally at 35
Spanish Residential Mortgage Default Model Criteria: December 2007
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years. Loans with higher DTI also tend to exhibit the The base default probability is ratingscenario
longest maturity. specific. The default probability matrix at the ‘BBB’
level is set out in Appendix 1.
Spanish borrowers are therefore more vulnerable to
interest rate variations than before especially in the DTI Adjustment for Interest Rates
higher DTI buckets (see below the analysis of DTI Fitch recognises that DTI may change during the life
sensitivity to interest rate risk by loan maturity). To of a mortgage. Initially low DTIs can increase if, for
account for this increased risk, Fitch slightly example, the borrower takes out another loan to buy
steepened the Spanish DTI/default probability curve. an additional asset. More generally, Spanish
mortgages are overwhelmingly floating rate, usually
Fitch’s ‘AAA’ Default Probabilities with annual or semiannual reset dates. Borrowers
DTI class
are usually charged a margin over 12month Euribor
LTV (%) Class 1 Class 2 Class 3 Class 4 Class 5
or over another index also influenced by Euribor,
such as the reference indices for mortgage loans
0 3.2 3.7 4.1 4.6 5.0
40 3.9 4.6 5.2 5.9 6.5 (IRPH) from banks, savings banks, or both. If there
50 4.6 5.5 6.3 7.2 8.0 is a divergence between interest rates and wage
60 5.9 6.9 7.9 8.9 9.9 growth, a rate increase will raise the DTI ratio,
65 6.6 7.7 8.8 9.8 10.9 affecting a borrower’s ability to pay.
70 7.4 8.5 9.7 10.8 12.0
75 8.3 9.5 10.8 12.1 13.4
80 9.1 10.5 12.0 13.4 14.8 Actual DTI will be a function of initial DTI,
85 11.4 13.1 14.9 16.6 18.3 remaining time to maturity of the loan and the
90 13.6 16.1 18.5 21.0 23.4 differential between the current index level and the
95 17.2 20.0 22.8 25.6 28.4
97.5 20.9 24.1 27.3 30.5 33.7
index at the mortgage origination date. The table
100 24.6 28.2 31.8 35.4 38.9 below shows the actual DTI on a loan originated
110 27.1 31.0 35.0 38.9 42.8 with an initial DTI of 35% as a function of the
120 30.8 35.3 39.7 44.2 48.7 residual term and the absolute increase in interest
Source: Fitch rates since origination, assuming no income growth.
OLTV and DTI Default Curves
Fitch's Cumulative Default Probabilities Fitch's Cumulative Default Probabilities
'AAA' and 'BBB' scenario – class 3 DTI 'AAA' and 'BBB' scenario – 70% LTV
BBB – new BBB – old BBB – new BBB – old
(%) (%)
AAA – new AAA – old AAA – new AAA – old
40 14
35 12
30
10
25
8
20
6
15
4
10
5 2
0 0
0 40 50 60 65 70 75 80 85 90 95 97.5100 110 120 Class 1 Class 2 Class 3 Class 4 Class 5
LTV (%) DTI class
Source: Fitch Source: Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
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support may have explained in part the above commercial purpose or to purchase second
average performance of Spanish mortgages so far. homes and investment properties;
Conversely, part of the recent increase in
delinquencies may be due to a lower proportion of 4. Product Type: the agency will adjust the base
borrowers benefiting from such formal or informal default probability according to payment
thirdparty support. frequency, repayment types, and other payment
options. Specific credit analysis is also
A specific DTI module has been added to the default conducted for bridge loans, flexible loans and
model, whereby the initial DTI is actualised to multiple loans per borrower.
account for potential variations due to rises in
interest rates for the most vulnerable loans. If some information required to estimate these
Generally, average Spanish securitised portfolios default probability adjustments is not recorded, Fitch
have a WA DTI of approximately 35%, which, if will do casebycase adjustments.
each loan had such a DTI characteristic, would
equate to a cumulative base default probability in a A summary table with indicative levels of all the
‘AAA’ scenario of 9.7% based on a WA original relevant adjustments is included in Appendix 2.
LTV of 70%. If, following interest rate increases, the
actual WA DTI were 45%, the cumulative base Lender Adjustments
default probability would be 10.8%. Fitch’s base default probabilities assume the
underwriting criteria and origination practices of a
conservative Spanish lender originating a prime
Actual DTI (%) as a Function of mortgage for the purchase of a residential property in
Residual Term and Interest Rate Spain. Fitch reviews and analyses the lender’s
Increase origination and servicing guidelines and determines
Residual mortgage term (years)
whether a decrease or an increase in default
Interest rate
increase (%) 10 15 20 25 30 35
assumptions is warranted to account for nonaverage
1.00 37 38 38 39 40 40
origination and underwriting standards.
1.25 37 38 39 40 41 42
1.50 38 39 40 41 42 43 This adjustment to base default probabilities is
1.75 38 39 41 42 44 45 applied on a portfoliowide basis to reflect variance
Source: Fitch – Initial 35% DTI and no income growth is assumed from the practices and experiences of an average
standard lender. A number of factors will be
considered in this assessment, including: the general
Default Probability Adjustments
aggressiveness or otherwise of underwriting
Fitch adjusts the base default rates on a loanbyloan standards; origination channels and practices
basis to account for the specific lender, borrower and including internal quality controls; appraisal
product characteristics. The adjustments are used to techniques; and underwriter experience and
increase the base default probability for loans and performance track record. The agency also considers
the impact is cumulative, so that all nonstandard the quality of the data provided by the seller, both on
characteristics will be taken into account. The aggregate performance and on a loanbyloan basis,
following discussion on the base default probability such as DTI information or property valuation dates.
adjustments has been broken down into four The areas of focus for Fitch’s review are summarised
sections: in Appendix 4.
1. Lender Adjustments: for these adjustments, Note that the base default probability matrix has
Fitch considers, among other things, actual been constructed with data from prime lenders, with
performance data, track record, general some elements of nonconforming loans such as
aggressiveness of underwriting standards, second liens and buytolet properties. Pools
origination channels and overall loan diversity; originated by nonconforming or subprime lenders
2. Borrower Adjustments: Fitch reviews the would be analysed on a casebycase basis.
borrower’s employment status and history, the
Static Performance Data
number of borrowers’ signing the loan, their
Fitch requests lenders provide static performance
citizenship and residency status and their current
data preferably by LTV band, product and
and past arrears status;
origination vintage to determine the adjustments to
3. Loan Purpose: default probabilities are its standard base default probability matrices.
adjusted for remortgages for the purpose of debt Preferably, this data should also cover a relatively
consolidation, mortgages undertaken for long period of time (approximately seven years) and
be prepared on a sample similar to the portfolio to be
Spanish Residential Mortgage Default Model Criteria: December 2007
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securitised (for a general description of this data, see this region above the percentage that this region
Fitch’s report “Static data demystified”, published represents in Spanish dwellings or population (see
on 15 March 2005). Data that demonstrates the Appendix 7 on the Spanish mortgage market). The
predictive power of the lender’s credit scores is also adjustment will also depend on the economic
significant. The agency will use this information as a characteristics of the given region.
means of benchmarking the performance of the
lender to the industry, to determine whether an Borrower Adjustments
adjustment is required and, if appropriate, of what
magnitude. If there are multiple lenders within a pool Employment Status
of loans or loans originated by the same lender but Fitch is of the view that a borrower with a longterm
during different periods, Fitch may apply different employment contract, who earns a fixed monthly
adjustments to each lender or period of lending. salary, is more likely to be able to make monthly
mortgage payments than a selfemployed borrower
Origination Channel or a borrower with a temporary contract who is more
How a borrower is sourced (inhouse versus susceptible to economic cycles and business
intermediary) and evaluated in terms of credit quality interruption. Consequently, Fitch increases by 10%
are key factors when judging an originator’s quality. to 15% the base default probabilities for these
The bulk of Spanish mortgages are originated borrowers.
through banks and saving banks’ branches.
Specialised mortgage lenders originate mortgages Borrower’s History
mainly through networks of brokers, usually real In addition to current employment status, Spanish
estate professionals or financial intermediaries. lenders analyse a borrower’s profile by focusing on
its employment and credit history. In Spain, lenders
Increasing competition and ambitious growth plans may analyse the employment history of the applicant
have encouraged some Spanish lenders to develop through a specific social security record that retraces
their mortgage distribution channels. In addition to the labour history. Other variables include the
branch expansion outside of their core geographical number of years spent in the current post and the
areas, some lenders have also used mortgage brokers track record in the professional field. Income is
as a new distribution channel. The agency will usually verified with the last three payslips of full
closely review the lender’s overall aggressiveness as time employees and the most recent tax return of all
well as the origination guidelines and quality applicants. Most lenders also apply more stringent
controls for these new distribution channels. criteria for selfemployed borrowers and consistently
Following the results of this review, the following require additional information such as bank records.
adjustments will be applied on a lenderbylender Borrower and guarantor credit histories are verified
basis: with credit bureaux such as ASNEF which pools
negative information from major credit institutions
· default probability increases may be applied to and some other companies such as telecoms and
loans originated in recently opened branches or CIRBE, the central bank’s bureau, which contains
in regions which are new to the lender and data on outstanding loan amounts above EUR6,000
where the latter has shown aggressive lending; within the financial system per product type.
· Fitch will increase the default probability of Traditionally, for employees with shortterm
loans originated outside of branches by 15% to contracts or if this analysis indicated an erratic or
30% as available data suggests that loans simply a short employment history, Spanish lenders
originated through broker channels usually show would require additional formal thirdparty
higher arrears. guarantees such as parents cosigning the loan.
However, socioeconomic and demographic changes
Loan Diversity have changed the profile of applicants. Temporary
Fitch’s Spanish mortgage default model is based on employment contracts are now the norm, especially
the assumption that there are no unusually large for younger people and immigrants. Their labour and
loans or significant property, loantype, economic or credit history is also short, by definition. Moreover,
geographical concentrations in a pool. Penalties for many of these applicants cannot provide thirdparty
lack of diversity are incorporated into the lender guarantees as they do not have strong social
adjustment on a casebycase basis. networks in Spain.
For instance, the agency will apply a hit of 5% to Most applicants with short employment and credit
25% on borrowers in a certain region if the pool history are firsttime buyers, either young
presents a significant geographical concentration in households buying their first home or resident
Spanish Residential Mortgage Default Model Criteria: December 2007
7
Structured Finance
immigrants buying their first property in Spain. Fitch Delinquent Borrowers
does not specifically penalise for firsttime buyers on When rating a portfolio that combines current and
the grounds that the base default probability arrears mortgages, Fitch adjusts the base default
assumptions will include a broad borrower mix. rates for mortgages in arrears by the factors indicated
Firsttime buyers also tend to have higher LTV ratios, in the following table:
having had less time to save a deposit. Fitch’s
default matrices already assign higher default
Fitch Arrears Stresses (%)
probabilities to higher LTVloans. Moreover, many
Spanish lenders have started offering mortgage 0–30 days 25
31–60 days 50
insurance to these applicants as a way to mitigate the 61–90 days 75
loss severity in case of default (see Mortgage Over 91 days (nonperforming status)
a
100% DP
Insurance). a
Fitch assigns 100% default probability to these loans
Source: Fitch
However, the agency also recognises that
employment and credit history is one area where
The agency will also adjust the probability of default
underwriting requirements have weakened since the
for borrowers that are now current in their payments
last recession, as lenders not only required third
but have been late in their mortgage repayments in
party guarantees but also used to require more
stringent minimal length in current employment or the past, to reflect the higher propensity for default
residency in the country. Consequently, an among borrowers with past mortgage arrears. The
adjustment of 15% to 25% will be applied to the adjustment will be higher for loans where borrowers
have been in arrears more frequently and more
base probability of default of borrowers with short
recently. If this information is not recorded, Fitch
employment and credit histories, depending on how
will do casebycase adjustments.
comfortable the agency is with the lender’s
assessment of the borrower’s ability to service the
Adjustments for Loan Purpose
debt and job, and the credit checks carried out. If the
borrower’s history data field is not provided to Fitch
because lenders do not track it in their systems, Fitch Purchase Versus Remortgaging
will make conservative assumptions as to the Fitch does not differentiate between mortgage loans
percentage of borrowers with short credit and advanced to purchase a home and those advanced to
employment histories. refinance existing mortgage loans, unless the
purpose is debt consolidation. Remortgaging for
Number of Borrowers Signing the Loan reasons other than debt consolidation is a natural
Fitch will adjust the default probability by 20% if a occurrence as borrowers shop around for a good rate.
mortgage loan has been signed by more than two On the contrary, borrowers who remortgage for the
borrowers from different family or household units. purpose of debt consolidation that is, for the
This is to mitigate the risk that these borrowers have purpose of removing equity from the home perform
pooled resources so their DTI would pass the lender more poorly than those which are remortgaging for a
underwriting guidelines. Empirical evidence also lower rate.
suggests that these multiple borrowers are more
According to Fitch’s experience, securitised pools in
likely to default. If this information is not recorded,
Spain have not usually included remortgages for the
Fitch will also apply a casebycase adjustment.
purpose of debt consolidation. Pools with such loans
NonResident Foreigner would be analysed on a casebycase basis. If the
debt consolidation data field is not provided to Fitch,
Some recently securitised residential mortgage pools
but if some data indicates that mortgages were
in Spain have included loans granted to non
advanced for debt consolidation purposes, the
residents. In the absence of significant mitigants,
agency will make conservative assumptions. For
such as stricter underwriting guidelines for non
instance, if the property value has been readjusted
residents, Fitch will increase the base default rates by
after origination, Fitch will assess the reasons for
20%, since it is more difficult for lenders to perform
all the relevant credit checks on nonresident such update and will apply a default probability
adjustment in case the revaluation might have been
borrowers. In addition, nonresident foreign
conducted in the context of a remortgage for debt
borrowers may not have the same motivation and
consolidation purposes.
incentives to pay as a resident borrower, owing to
the distances and different jurisdictions involved.
The recovery process may also be longer and more
problematic.
Spanish Residential Mortgage Default Model Criteria: December 2007
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Second Homes and Investment Properties affected by changes in the interest rate (since the
While information concerning mortgage constant instalment is recalculated on each interest
performance for second homes in Spain is limited, reset date). Alternatively, the principal amortisation
Fitch believes that second homes and investment profile may be defined at loan inception based on the
properties are more susceptible to default. A interest rate on that date and will remain the same
financially distressed borrower is more likely to throughout the life of the loan. Consequently, only
suffer a default on a second home or an investment the interest component of the monthly instalment
property than on a primary residence. Accordingly, will be recalculated on each interest reset date,
Fitch increases the base default rates by 10% to 25% according to interest rate variations and remaining
in both cases. If this information is not recorded, principal at that time.
Fitch will do casebycase adjustments, considering
among other things, average percentage of second Interestonly loans for the full loan amount and
homes in the regions where the pool is maturity are still less common in Spain than in other
geographically distributed and any potential jurisdictions. Some lenders have included in recently
misrepresentation of occupancy status. securitised pools “partial” interest only products,
whereby the borrower may elect to pay at maturity a
Commercial Purpose given percentage of the loan, 30% for instance. To
Loans granted for commercial purposes represent a reflect the repayment/refinancing risk at loan
higher risk as the use of these funds is for business maturity, Fitch increases the default probability of
related activities. Consequently, repayment may be these products by 5% to 30%, depending on the size
partly funded by the business the property hosts: of the balloon payment as a percentage of the loan.
those revenues may be expected to be more volatile
than income from employment. For such loans, Fitch Other Payment Options
will adjust the DTI class and increase the base Spanish lenders have responded to intense
default probabilities on a casebycase basis. competition and stretched borrower affordability
due to the combined effects of strong property price
Adjustments for Product Type growth and rising interest rates by developing
products with reduced initial instalments and
Payment Frequency payment options during the remaining term. While
Mortgage payments by Spanish borrowers are initial principal grace periods are relatively common
generally made monthly by direct debit, although in securitised pools, most Spanish lenders offer new
some may be payable quarterly, semiannually or amortisation profiles: instalment buildup features,
even annually. Fitch believes that the longer the payment holidays, floatingrate loans where the
period between instalments, the longer it will take instalment amount is constant and the maturity is
for financial difficulties to manifest themselves, and floating, or even “personalised amortisation profiles”.
for the servicer to detect and tackle problematic Lenders have also expanded the range of interest rate
loans. For this reason, the agency increases the base features of loans. Beyond the traditional floating rate
default probability for quarterly, semiannual and loan, products may now include initial teaser rates or
annual payments by factors of 1.05, 1.10 and 1.15, inflationprotection options.
respectively.
When analysing these products, Fitch assesses the
Repayment Types potential risks of payment shock associated with the
In general, mortgages can pay on either an specific features of the loan’s interest and
amortising or an interestonly basis. Fitch does not amortisation profile, taking into consideration the
adjust the base default probability for amortising effects of interest rates on the principal redemption
loans (where a certain amount of principal is repaid profiles. The agency then reflects these risks, both in
in each instalment), but does make adjustments for the default probability assessment and in the cash
interestonly or balloon loans, to account for flow modelling of the portfolio. Default probability
potential defaults attributable to a repayment shock adjustments generally range from 5% to 25%,
at loan maturity. depending on the size of the potential payment shock
and its probability of occurrence over the life of the
Spanish mortgages generally follow a “French loan.
amortisation”, whereby the principal amortisation
schedule is based on a socalled constant instalment
method. For a floating rate loan, the French
amortisation schedule can work in two ways. The
most common method is the pure annuity basis of
principal repayment, common in the UK, which is
Spanish Residential Mortgage Default Model Criteria: December 2007
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Other OLTV and DTI Adjustments drawdowns. However, since Spanish securitisation
legislation specifies that assets are transferred with
Bridge Loans all rights but no obligations, the securitised collateral
These loans are granted to borrowers purchasing a is only composed of the first drawings on these
new home but who have not yet sold their current mortgages. In other words, the obligation to pay
residence. Once borrowers sell their current property, further draws lies with the lender and not with the
they are expected to pay down the original loan transaction fund. However, as all draws rank pari
amount so that the final loan reaches a maximum passu, proceeds from the recovery process will be
preagreed LTV over the new property. shared on a pro rata basis between the first draw
holder the securitisation fund and the subsequent
In Spain, some bridge loans benefit from a first draws with be held by the lender on the same basis.
ranking mortgage over both borrowers’ current and
new property. When borrowers finally sell their In its credit analysis, Fitch assumes that all
current property, the lender will release the security borrowers will redraw funds up to the maximum
only if the loan is paid down at least to the maximum allowed under each credit facility. As a result, the
preagreed LTV. However, some lenders only take a default probability of each loan in the portfolio is
firstranking mortgage over borrowers’ new property. calculated based on the higher of the OLTV or the
In these cases, the borrower is expected, but not maximum allowed future drawdown amount. Fitch
required, to pay down the original loan amount to may also apply a default probability adjustment on a
reach the expected preagreed LTV over the new casebycase basis. When calculating recoveries,
property. As a result, when measuring the Fitch will share recovery proceeds pro rata between
willingness to repay, Fitch takes into account the securitisation fund and the lender.
whether the current property has been sold when the
mortgage is securitised and, if it hasn’t been sold, Multiple Loans Per Borrower
whether the loan also benefits from a security over For low equity borrowers, some Spanish lenders
this current property. The table below summarises offer firstranking mortgages with an associated
how Fitch computes the OLTV depending on secondranking mortgage or personal loan to finance
these factors. the tranches above 80% property loantovalue.
Some lenders also offer second charge loans for the
In order to assess the borrower’s ability to repay, purpose of debt consolidation or home
Fitch stresses by one class the DTI of borrowers who improvements. Secondcharge mortgages rank junior
have not sold their first property, since presumably to the first charge (lien) holder in terms of the
these borrowers still have to pay a larger instalment distribution of enforcement proceeds from the
to cover both properties. Nevertheless, this may collateral upon which they are secured.
change depending on the bridge loan guidelines the
lender applies. For these borrowers, Fitch measures the willingness
to pay with the combined original LTV, based on the
sum of the original balances of the firstranking and
OLTV for Bridge Loans associated secondranking or personal loans. Fitch
Current property sold or not also estimates the DTI of the borrower by taking into
Security over: Not sold Sold account both loans. When calculating recoveries,
Current and new OLTV computed Maximum (OLTV proceeds are allocated to the loans in order of
properties on both properties on both properties; seniority. No recoveries are assumed for personal
preagreed OLTV)
New property only OLTV computed Maximum (pre loans, unless they benefit from mortgage insurance
on the new agreed OLTV; (see Recoveries).
a
property CLTV)
a
This OLTV may be above 100% If a pool comprises multiple firstranking loans per
Source: Fitch borrower, secured on different properties, the agency
will consider the global exposure by borrower.
Flexible Loans with Multiple Parts
Some Spanish lenders offer flexible credit facilities n Recoveries
in which, subject to a new credit check, borrowers
are given the right to have further drawdowns on Components of Recoveries
their mortgage, up to a maximum credit limit defined Fitch quantifies the potential recoveries in the
at origination, which may be higher than the OLTV. portfolio on a loanbyloan basis, considering key
Further drawings are usually capped at the lower of factors that include current LTV, mortgage insurance,
the credit limit defined at origination or 80% LTV. market value trends and property characteristics,
Further draws rank pari passu with the first or prior recovery timing and costs, such as repossession
Spanish Residential Mortgage Default Model Criteria: December 2007
10
Structured Finance
expenses and the cost of carrying the loan from rating scenario. This is a twostep process: firstly
delinquency to recovery (ie penalty and legal evaluating the indexed value of the property; and
interest). secondly, applying an MVD dictated by the severity
of the stress assumptions.
The agency defines possible recoveries at the time of
the transaction closing as the lower of:
Indexation
· the total amount due, defined as the loan’s Spanish lenders do not usually update the property
current balance plus interest accrued during the values in their databases unless the loan becomes
recovery procedure; nonperforming or the borrower is granted a new
loan secured on the property. Fitch therefore reviews
· net recovery proceeds, calculated as the indexed the property values given by the originators. If the
value of the property to which a regional market property value has been readjusted after origination,
value decline (MVD) factor is applied, stressed Fitch will assess the reasons for such update and may
by property specific adjustments (if applicable), apply a default probability adjustment in case the
minus recovery costs. revaluation may have been conducted in the context
of a loan refinancing for debt consolidation purposes
If net recovery proceeds are equal or greater than the (see above, Adjustments for Loan Purpose). If the
total current balance due, interest will also be property value is the one at the origination date of
recovered and the recovery percentage can thus be the loan, the agency will index it to determine the
greater than 100%. The most important factor in this value at the transaction date.
analysis is assessing the value of the property in each
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
Current MVDs vs. Old MVDs
'AAA' scenario
Old MVDs Current MVDs
(%)
60
50
40
30
20
10
0
Navarra
Extremadura
Aragon
Madrid
Murcia
Cataluna
Pais Vasco
Cantabria
Baleares
C.Valenciana
La Rioja
Andalucia
Asturias
Canarias
Castilla La
Castilla Leon
Galicia
Mancha
Source: Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
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Beyond these traditional difficulties, in Spain housing speculation and oversupply leading to
variation in property prices and in recovery proceeds suburban developments becoming ghost towns and
stems from: illegallybuilt residential properties, especially in
coastal areas.
· differences in the quality of housing, as
evidenced in the price differences between Coastal Regions Adjustment
newly built properties and older properties; In the “South and Mediterranean Coast” group, Fitch
identified six regions which may be more at risk than
· local housing market specificities, evidenced in their peers in the regional group in case of a property
the impressive price differences between coastal price downturn. These are popular tourist regions
and noncoastal properties and between where residential property prices have grown on
properties in traditional urban centres vs. average by more than 12% per year during the last
properties in newly urbanised peripheries; decade. Moreover, in the last five years, the supply
of housing stock has grown in these regions above
· the legal status of the property since protected the Spanish average. Such regions may therefore be
housing may be sold below market prices (see exposed to oversupply from the development of new
below); properties. Moreover, the proportion of second
homes is also higher in these regions than in the rest
· variability in the timescale of the legal recovery of the country. Should demand for second homes
process and associated costs. from Spaniards or nonresident foreigners fall, the
supply of properties available in these markets would
Deviation from the average may actually be greater increase and bring pressure to bear on prices,
in lower rating scenarios than in higher rating including the prices of first homes. Consequently
scenarios when presumably all sorts of properties Fitch will apply a 25% increase to the MVDs of
could end up repossessed. Consequently, Fitch properties in four regions of Andalucia (Almeria,
decided to adjust upwards the MVDs applied in Cadiz, Huelva, Malaga) in Murcia and in the
lower rating scenarios. Fitch also decided to apply Castellón region of the Communidad Valenciana.
some casebycase MVD adjustments, detailed
below. Fitch’s MVD assumptions by rating category Centre Regions Adjustment
and Autonomous Communities are presented in the The agency identified two regions that may be more
table below. at risk than their peers in the “Centre” regional group.
Both regions Guadalajara and Toledo neighbour
Recovery Rate Adjustments
Madrid and are located in the autonomous
In recognition of local housing market specificities community of Castilla La Mancha. Compared to
Fitch will adjust upwards the MVDs applied to their peers, these regions have experienced much
properties identified as more vulnerable to a property higher property price growth. Although the growth
price downturn. These adjustments are also intended of their housing stock has been relatively moderate
to capture and mitigate some of the concerns with compared to the rest of Spain, they also exhibit
the Spanish property market highlighted in the above average percentages of second homes. These
Spanish Mortgage Market appendix; namely,
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
are mostly traditional rural areas where some
housing speculation may have occurred due to the High and Low Property Value Hit
proximity of Madrid. Consequently, Fitch will Property value (EUR)
increase the MVDs of properties located in these Madrid,
Hit Barcelona Pais Vasco Other
regions by 15%.
1.10 <=90,000 <=90,000 <= 60,000
1.15 >= 750,000 >= 600,000 >= 450,000
Second Homes Adjustment 1.20 >= 950,000 >= 750,000 >= 600,000
Fitch recognises that demand for second homes is 1.25 >= 1,100,000 >= 950,000 >= 750,000
more volatile than for first homes. Moreover, second Source: Fitch
homes are liable to oversupply in Spain. In coastal
areas, large scale property developments have
targeted both nonresident foreigners and Spaniards. Protected Housing – VPOs
Second home resorts have also been built in the Protected housing in Spain takes the form of
mountainous or traditionally rural areas around Viviendas de Protección Oficial (VPOs) which are
prosperous urban centres for the weekends of social housing properties sponsored by local
wealthier urbanites. Presumably, in a stress scenario, governments with protected resale prices. This social
recovery proceeds from the foreclosure of these housing scheme is regulated by a large number of
properties would be reduced due to limited demand: regulations ranging from a string of royal decrees
local residents from these areas would not be able to dating back the 1960s to specific regional regulations.
afford them and urbanites would find these faraway These properties are targeted at lowincome and
dwellings inappropriate as first residences. As firsttime buyers. However, the criteria to qualify for
secondhome housing developments have emerged them are varied and a much broader range of buyers
all over Spain, the agency cannot identify on a seek to obtain them than those originally targeted.
propertybyproperty basis which properties The local authorities hold a call option over the
purchased as second homes could easily (or not) be properties at a prespecified initial official value
used as primary residences and, therefore, which linked to the construction cost of the property. This
ones are more at risk in a stress scenario. call option may last up to 25 years, or even more in
Consequently, Fitch will increase by 15% the MVDs some Autonomous Communities. A VPO may be
of all properties purchased as second homes, in all sold at a market price higher than the official value if
geographical areas. the property has been declassified as a VPO through
a specific legal and administrative process or if the
Low and HighValue Properties local authority decides not to exercise its call option.
Houses with relatively high market values for their
region are generally subject to greater price volatility Given the criteria used to assign VPOs, Fitch
in a deteriorating market owing to limited demand considers that there are no significant differences
between borrowers purchasing VPOs and other
for such properties. Pricing information is imprecise,
borrowers. Moreover, empirical evidence from some
since the limited liquidity in this niche market means
there is a lack of comparable benchmark housing. lenders suggests that there is no significant
The same is true for very low value properties for difference either in the recovery procedure between
which there may not be a liquid market. Fitch VPOs and other type of properties. However, when
differentiates by area to reflect the fact that relative loans backed by VPOs are securitised, in most cases,
and absolute house price movements vary by region. the sponsoring authority has not permanently waived
The first grouping includes the regions of Madrid its call option over the property. Consequently, the
and Barcelona where property prices are the highest agency calculates recoveries for these properties by
on average, the second group refers to the Pais applying the MVD stresses to the lower of the
official property value and the indexed current
Vasco Autonomous Community and the third
market value.
grouping includes all the remaining regions. Fitch
will increase base MVD assumptions using the
Commercial Properties
parameters detailed in the table below which have
The methodology used to determine MVD
been calculated based on a sample of property values.
assumptions for loans secured on commercial
properties depends on the characteristics of the
underlying asset. The value of commercial properties
is generally harder to assess than that of residential
properties, since valuations are likely to experience
higher volatility over time. Fitch takes particular care
when reviewing the originator’s valuation process
for commercial properties. The agency therefore
Spanish Residential Mortgage Default Model Criteria: December 2007
14
Structured Finance
expects to receive additional information on agent that will charge a success fee based on the
valuation figures provided and/or may apply realisation value of the collateral.
reductions to the property valuations depending on
the valuation methodology adopted and to account According to Spanish insolvency law, the recovery
for illiquid or highrisk industry sectors. process may take longer if the debtor is declared
insolvent and if the mortgage is secured over a
If appropriate, MVDs will be calculated in property that is necessary for the performance of the
accordance with Fitch’s standard analytical approach debtor’s professional activities. In this case, if the
to Commercial Mortgage Backed Securities (CMBS), liquidation phase of the insolvency proceedings had
which uses rental value decline (RVD) indicators not been initiated before the debtor was declared
and income capitalisation rates for specific property insolvent, the enforcement of the security will be
classes. RVDs are based on historical volatility prevented for a suspension period. This suspension
observations for the real estate market in Europe: the period will last a year since the declaration of
higher the volatility of a particular property type, the insolvency or, if it occurs earlier, until a settlement
lower the potential stressed rent achieved in the has been approved by the creditors, provided the
future and, therefore, the higher its RVD. The settlement does not affect the right to enforce the
income capitalisation rate of a property can be relevant security. Enforcement proceedings initiated
expressed as the yield generated in the market by before the debtor was declared insolvent will also be
properties with similar features and use (eg, hotels suspended for the length of this suspension period
will normally return a different yield from retail unless the auction of the property was announced
units). More information on Fitch’s CMBS prior to the declaration of insolvency.
methodology can be found in the special report
entitled “Criteria for European CMBS Asset Based on information received in Fitch’s operational
analysis”, dated 12 September 2007 and available at review visits, many lenders report an 18 month
www.fitchratings.com. timeframe, especially if the property is auctioned to a
thirdparty. Moreover, many cases do not always
Repossession and Carrying Costs complete the full legal process and an outofcourt
In calculating the net recovery proceeds, Fitch arrangement may be reached with the borrower.
subtracts the recovery costs from the estimated
realisation value of the property (computed as the Fitch’s worstcase estimate assumes a threeyear (36
indexed property value stressed by the MVD factors). month) recovery period, ie the time that elapses
between the start of the recovery process and the sale
Law 1/2000 governs foreclosure proceedings in of the property. The agency also assumes fixed costs
Spain. Enacted in 2000, it has streamlined and of EUR6,500. Based on actual cost data supplied to
smoothed the recovery process. As in other Fitch, the agency has revised upwards its estimate of
European jurisdictions, the costs of this process variable costs to 5.5% of the realisation value of the
involve a fixed and variable component. Fixed costs collateral.
are governed by law and primarily consist of the fees
associated with the “procurador” (the court To calculate the cost of carry, Fitch applies the
representative) and the “letrado” (the lender’s stabilised rate of interest ie after any teaser rate
lawyer) which, with certain legally defined period – to the loan balance for the duration of the
limitations, should be recoverable from the borrower. recovery period, ie 36 months.
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
Mortgage insurance will typically cover losses up to The PR and ORQ adjustment tables are presented
a maximum cover amount incurred by a lender on above and below. The ORQ applied adjustment will
loans that are advanced in excess of a certain LTV be defined on a casebycase basis following an
threshold attachment point commonly 80%. The assessment of the servicer’s ability to claim loss
preagreed covered amount will include the loan amounts under the policy, an analysis of the terms
balance between the attachment point up to 100% and conditions of the insurance policy, and the
and may also include unpaid accrued interest and history of claim payouts by the mortgage insurance
repossession costs in the event of a loss by the lender. provider.
Depending on the policy, the mortgage insurer will
pay the insured amounts at a predetermined date (eg Operational Risk and Quality of Policy
27 months after borrowers last paid their mortgage)
Adjustment
or when the loss is crystallised that is, after the
lender’s disposal of the property following ORQ quality level Credit range (%)
foreclosure on the loan and the auctioning of the ORQ1 96.5–97.5
ORQ2 93.5–95.5
property. ORQ3 89.0–92.0
ORQ4 76.0–80.0
In its analysis, Fitch gives credit to mortgage ORQ5 50.0–55.0
insurance according to the criteria set out in the Source: Fitch
report “European Criteria for Mortgage Insurance
in RMBS Transactions”, published on 4 July 2007.
The agency focuses on the rating of the insurer, the Calculating WALS
strength of the policies and whether they are Loss severity is the difference between the current
securitisationfriendly, and the claimspaying history balance on the loan plus the prior ranking mortgage
of the insurer. Fitch will calculate the value of the (if any) inclusive of foreclosure costs and accrued
potential claim on a loanbyloan basis. interest, and the postMVD property value. The loss
is adjusted to the extent that credit is given for
The claim amount to be paid by the mortgage insurer mortgage insurance.
is defined as the lower of the maximum coverage
according to the mortgage insurance policy and the For borrowers with multiple loans of different rank,
actual loss on the loan. However, Fitch adjusts this proceeds are allocated to the loans in order of
expected claim amount using two factors: seniority. If the borrower has a first ranking loan and
an associated unsecured personal loan, Fitch will
· a provider rating (PR) adjustment which assume that the borrower applies for insolvency. In
captures the financial ability of the mortgage that case, in Spain, the setoff rights will expire (that
insurer provider to pay the claim on an insured is, recovery proceeds will not be applicable to the
loan. It is therefore directly related to the Insurer personal loan). Hence, the agency will give no credit
Financial Strength Rating (IFSR) and the rating to the recoveries on the unsecured loan part, unless
of the notes; these loans benefit from mortgage insurance (see
Setoff).
· an adjustment for operational risk and quality of
the policy (ORQ adjustment) which is meant to In case of flexible mortgages where further draws
capture the risk arising from denied and reduced are allowed, Fitch will assume that borrowers will
claims and rescissions, as failure to comply with redraw up to the maximum allowed under the credit
the agreed policy can lead to a reduction or facility. Recovery proceeds will be shared pro rata
denial of the claim. between the securitisation fund and the lender.
The expected loss for each individual loan is equal to
Mortgage Insurance Provider Rating the product of loss severity and the default
Adjustment (%) probability specific to that loan. The calculation of
Note rating expected loss and resulting loss severity is therefore
IFSR of MI provider AAA AA A BBB BB B weighted not just by the current loan balances but
AAA 100 100 100 100 100 100 also the loan default probabilities, taking into
AA 75 100 100 100 100 100 account the differing risk profiles of different
A 50 50 100 100 100 100 portfolios. The sum of the expected losses for each
BBB 25 25 50 100 100 100 loan gives the gross credit enhancement sought for
BB 0 0 25 38 100 100
B 0 0 0 25 50 100 the pool as a whole. The WALS is calculated as the
Source: Fitch
gross credit enhancement percentage (gross credit
enhancement divided by the current balance) divided
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
by the WAFF. The following table Illustration of the default management processes, compliance with
Calculation of WALS , provides an example. stated guidelines, operational and financial stability,
adherence to timelines, and the soundness of its
Illustration of the Calculation of WALS internal control procedures. While Fitch’s dealrating
analysis has always included a servicer evaluation,
Los Probability Expected the agency’s servicer ratings consider not only the
Current severity of default loss
(EUR) balance (a) (b) (a x b)
servicing of the assets being securitised, but that of
Loan 1 100,000 25,000 20 5,000
all assets under the servicer’s management. This
Loan 2 80,000 15,000 30 4,500 provides a clear indication of the servicer’s full
Loan 3 120,000 40,000 40 16,000 capabilities, based on standard benchmark
Total 300,000 25,500 assessments. For full details of the benefits given to
Gross credit enhancement (EUR) 25,500 rated servicers, please refer to “Rating European
Gross credit enhancement (%) 8.5
Residential and Commercial Mortgage Loan
WAFF (weighted by current balance) (%) 30.6
WALS (gross c/e divided by WAFF) (%) 27.7 Servicers”, dated 14 March 2005 and available at
Source: Fitch
www.fitchratings.com.
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
Collateral averages in Spain as well as high and low PR
The collateral component of the model is an analysis assumptions. Current high prepayment assumptions
of the “runoff” of the portfolio of mortgage loans are detailed above. Prepayments are deemed to affect
and produces the profile of interest and principal the highest yielding loans first, thereby causing
receipts over the life of the portfolio in different further stress.
stress scenarios. The analysis factors in the following
components, among others: High Voluntary Prepayment
Assumptions
· scheduled amortisation profile of the collateral; (% of Performing Balance)
· voluntary prepayment rates; Year
· margin compression which will arise if higher Rating 5 and
marginloans default or redeem ahead of lower scenario 1 2 3 4 thereafter
margin loans; AAA 15 19 22 25 25
· interest rates; AA 14 17 20 23 23
A 13 15 18 20 20
· net effect of hedging agreements in place, if BBB 12 14 16 18 18
any; BB and 12 12 14 15 15
· delinquencies; below
· timing of defaults and recoveries; Source: Fitch
· servicing and senior expenses.
To stress the cash flows for both severity of losses Financial Structure – Typical Features
and liquidity, the agency makes assumptions on Transaction structures in Spain tend to be relatively
several of these factors. The magnitude of these standard, with a strong prevalence of combined
assumptions differs depending on the rating scenario waterfalls, features to cover provisioning for defaults
and may also be countryspecific, if appropriate. and interest deferral mechanisms aimed at protecting
senior bondholders against any deterioration in the
The WAFF for each rating is distributed according to credit quality of the collateral.
Fitch’s recession scenarios detailed in the report “A
Guide to Cash Flow Analysis for RMBS in Europe”, Priority of Payments
dated 20 December 2002 and available at Spanish RMBS structures usually comprise a
www.fitchratings.com . The recovery period, combined waterfall with cashtrapping mechanisms.
estimated at 36 months in Spain, will dictate the In these waterfalls, principal repayments are
period in which each cohort of default remains non generally subordinated to interest payments.
performing, ie earning no interest. At the end of the However, these structures often include an interest
recovery period, the WARR will be applied to the deferral trigger mechanism, which will switch the
initial balance that defaulted to establish the amount priority of payments to paying interest and principal
that is recovered. on the senior notes before paying any interest on the
junior notes. The triggers are generally set by
Fitch’s stressed interest rates scenarios are detailed reference to cumulative default ratios or, more rarely,
in the special report, “Interest rate Risk In Structured to principal deficiency mechanisms (see below).
Finance Transactions – Euribor”, dated 1 November Hence, in the event that severe delinquencies,
2006 and available at www.fitchratings.com. defaults or principal losses exceed a certain threshold,
this mechanism redirects funds away from the junior
Prepayment Rates (PR) notes and towards the more senior ones, completing
The voluntary PR measures the speed at which the subordination of the former ones and preserving
borrowers voluntarily prepay their loans. PR is an the seniority of the latter ones.
important variable when modelling RMBS, as high
PRs reduce the amount of performing collateral The ratings assigned by Fitch address payment of
available in the portfolio that will generate excess interest on the notes according to the terms and
spread to support losses. Low prepayments may also conditions of the documentation, subject to the
significantly stress transactions with low margin deferral trigger on the junior notes, if any, as well as
loans as very little excess spread will be left in the the repayment of principal by legal final maturity.
final years of the transaction to pay the higher Should a deferral trigger be hit on the junior notes,
margin subordinated bonds. interest might not be received during a period, and
Fitch’s ratings address payment of interest by final
The agency will use several prepayment assumptions maturity.
to stress the total amount of excess spread in Spanish
RMBS transactions. Fitch will consider historical
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
Provisioning rate, resetting quarterly and the index paid on the
The majority of Spanish RMBS transactions include loans, usually 12month Euribor or the reference
mechanisms that cater for loans in arrears by indices for mortgage loans from banks and savings
accelerating principal repayments on the notes. banks, with annual or semiannual reset dates.
Instead of waiting for a loss to materialise on highly
delinquent and defaulted mortgage loans, excess Some hedging agreements offer additional protection
spread is captured and used to amortise the note to the issuer such as:
balance in anticipation in respect of the amount · coverage of the potential risk of margin
provisioned. If available excess spread is not enough compression on the collateral through a
to cover this provisioned amount, the reserve fund guaranteed, predetermined margin;
may also be used. Once the loss is realised, any
recovered amount will flow back to the fund and · transfer to the swap counterparty of part of the
become part of the excess spread available to pay credit risk on the loans. This may be achieved if
principal and interest on the notes and to replenish the fund pays to the swap counterparty the
the reserve fund, if needed. This provisioning interest effectively received on the performing
mechanism mitigates the effects of negative carry balance of the loans and in return, the fund
costs as the fund no longer has to pay interest on receives the WA coupon on the balance of
delinquent and defaulted loans. It also ensures that outstanding notes;
excess spread is captured earlier in the transaction
when the loss is likely but not yet realised, hence · coverage of the servicing fees associated with
when available excess spread is higher. the servicing of the collateral.
In most Spanish transactions, provisioning takes the In its analysis of the transaction cash flow, Fitch will
form of a repayment amount whereby principal due simulate the profile of the portfolio margin, as
on the notes is defined as the difference between the determined by the hedging agreements.
outstanding notes and the performing portfolio
balance. Alternatively, provisioning may take the In some transactions, the hedging agreement only
form of principal deficiency ledgers (PDLs). The covers part of the basis and reset risk. This might
PDL is debited by the recorded arrears and credited occur when securitised loans pay a variable rate
up to its balance by the available excess spread and based on the reference indices for mortgage loans
reserve fund used to accelerate note pay down. (IPRH) from banks and/or savings banks, which are
Delinquent loans are usually technically defined as defined as the average of the interest rates charged
defaulted loans after 12 or 18 month in arrears, by the different banks, savings banks, or both, on
although some Spanish transactions have lower mortgage loans. Hence, these indices naturally
provisioning periods at sixmonth or longer, up to 48 include a margin over 12month Euribor. Some swap
months for loans with low current LTV. agreements do not hedge this difference between the
IRPH index and 12month Euribor. For instance,
Interest Rate Hedging Agreements
some swap agreements provide that the fund will
Almost all Spanish RMBS transactions include receive from the swap counterparty the threemonth
interest rate agreements designed to hedge the basis Euribor paid to the notes and that the fund will pay
and reset risks arising from the mismatch between to the swap counterparty the WA 12month Euribor
the index paid on the notes the threemonth Euribor
IRPH Indices for Spanish Mortgage Loans
Historical differential with 12month Euribor
2.5
2.0
1.5
1.0
0.5
0.0
Oct 1999 Oct 2000 Oct 2001 Oct 2002 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007
Source: Bank of Spain
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
index rate of the loans. In these cases, all margins on life of the transaction as a proportion of the original
the loans above 12month Euribor will be retained investment. When assigning such ratings, Fitch
by the fund as available funds for the priority of analyses several cash flow scenarios commensurate
payments. The agency will make conservative with speculative grade rating levels. The sensitivity
assumptions regarding this margin retained by the analysis that is performed consists of testing several
fund. After examining historical levels of the IRPH variables that affect the release of the reserve fund
indices versus 12month Euribor (see chart above), and consequently, the availability of interest and
Fitch will assume a decreasing differential between principal payments. Fitch therefore runs multiple
the indexes over time, lower than the minimum stress scenario assumptions, including:
historically observed differential.
· alternative timing of default and recovery
assumptions;
If servicing fees are to be paid by the swap, Fitch · alternative interest rates;
will take it into account in its cash flow analysis. · different prepayments speeds;
Nevertheless, the agency will make the conservative · different WA margin compression rates on the
assumption that the fund would still have to cover mortgage loans; and
some senior expenses. Moreover, Fitch will pay · exercise of the clean up call by the originator.
special attention to the rating downgrade language
incorporated in the transaction documents and This approach is consistent with Fitch's International
whether the formula to calculate the marktomarket LongTerm Rating definitions available at
of the swap takes these fees into account (for more www.fitchratings.com. When Fitch has analysed
details see “Counterparty Risk in Structured Finance such notes for Spanish transactions, the ratings
Transactions: Hedge Criteria”, dated 1 August 2007 assigned were between ‘CC’ and ‘CCC’. These
and available at www.fitchratings.com). rating categories are defined as follows:
Notes Financing the Reserve Fund · ‘CCC’ indicates that default is a real possibility.
In some Spanish transactions, the agency has been The capacity for meeting financial commitments
asked to assign a rating to the “equity piece” that is, is solely reliant upon sustained, favourable
to the notes issued to fund the reserve account. First business or economic conditions. For individual
loss pieces are not collateralised by the securitised obligations, the rating may indicate distressed or
portfolio, they may only benefit from the excess defaulted obligations with potential for average
spread on the collateral and the reserve fund, to the to superior levels of recovery;
extent not used to support the senior investors. Their
performance therefore requires very favourable · ‘CC’ ratings indicate that default of some kind
conditions for the collateral backing the more senior appears probable. For individual obligations, the
notes. rating may indicate distressed or defaulted
obligations with an average to belowaverage
The amortisation profile for first loss pieces is recovery.
usually structured to mirror the amortisation profile
of the reserve fund. Principal funds available for n Legal Framework
their amortisation is therefore limited to the cash
released from the reserve fund. The reserve fund The Spanish Securitisation Law
amortisation is usually subject to floors defined as Spanish legislation (Royal Decree 3/1993 and Real
percentages of the initial and current balance of the Decreto 926/1998) allows RMBS transactions to be
collateralised notes. Consequently, the equity piece structured through two routes, involving two
may not be amortised until the legal final maturity of different types of specialpurpose vehicles (SPV).
the transaction, or the cleanup call, if applicable. The first, Fondo de Titulización Hipotecaria (FTH),
Spanish transactions usually provide the cash and is used exclusively for the securitisation of
bond administrator with the right to exercise a clean residential mortgages. FTHs are closed funds that
up call when less than 10% of the initial collateral can only be used for a single issue and do not allow
remains outstanding. In most cases, the cleanup call asset substitution or subsequent asset repurchases.
does not guarantee the full or partial redemption of The second, Fondo de Titulización de Activos (FTA),
the equity piece. offers more flexibility, as it can be used for other
assets and is an openended fund, allowing
In Fitch’s opinion, these equity notes are ultimately
substitution and subsequent asset repurchases. It can
likely to default and therefore their ratings are
also be used for multipleissuer programmes.
supported by the expected recovery rates, defined as
the amounts investors are likely to receive during the
Spanish Residential Mortgage Default Model Criteria: December 2007
20
Structured Finance
Under Spanish law, assets are not actually sold, as In respect of Cedulas Hipotecarias, the amendment
this would entail a lengthy process of reregistering law provides that cover assets will be tracked in a
the mortgages at the property registry. Instead, specific register. The law also extends the range of
mortgage originators are permitted to issue eligible cover assets. These may now include
“Participaciones Hipotecarias” (PHs mortgage mortgage loans secured by properties located in
participations) and, since the new Finance Act of Spain and elsewhere in the EU. In terms of LTV, the
December 2003, “Certificados de Transmision de revised law lowers the maximum LTV limits from
Hipoteca” (CTHs mortgage certificates). However, 70% to 60% for commercial mortgage loans. The
mortgages transferred under the form of PHs are limit remains set at 80% LTV for residential
subject to certain restrictions to which CTHs do not mortgage loans, although the law contemplates that,
need comply. In particular, PHs need to be first lien under conditions still to be defined, the LTV may
mortgages, with a current LTV below 80% and the reach 95% if the portion above 80% benefits from
properties underlying the mortgage must be properly mortgage insurance. The law also includes the
insured. The securitisation fund subscribes to the possibility to cover up to 5% of the CH with liquid
PHs or CTHs under the terms of the deed of assets, also tracked in a specific register. Such
incorporation and the transaction documents. substitution assets include bonds issued by EU
states, listed CH issued by other financial
Recent Legislative Changes institutions, and other listed fixed income assets with
Spanish legislators voted for a new law, published on a rating equivalent to that of the Kingdom of Spain.
8 December 2007, “Ley 41/2007, de 7 de diciembre, Additional regulatory provisions will define other
por la que se modifica la Ley 2/1981, de 25 de marzo, highly liquidity assets that may be included as
de Regulación del Mercado Hipotecario”. This law substitutions assets.
41/2007 amends the act (Ley 2/1981) that regulates
the Spanish mortgage market and the legal form of The maximum issuance level of CH is lowered from
the underlying assets securitised in Spanish RMBS 90% to 80% of the eligible cover pool (after
or eligible as collateral for Spanish mortgage deducting assets earmarked for mortgage bonds and
covered bonds. The key revisions in the amendment securitisation transactions), thereby increasing the
law include: minimum legally required overcollateralisation (OC)
from 11% to 25%. Finally, the law reaffirms that CH
· additional requirements imposed on lenders to investors have preferred status over most other
improve the transparency of mortgage products; creditors in the event of the CH issuer’s insolvency.
The privilege of Cedulas noteholders against the
· provisions to foster the independence of cover pool is also extended to registered swap
property appraisal companies; counterparties.
Spanish Residential Mortgage Default Model Criteria: December 2007
21
Structured Finance
When reviewing the transaction documentation, scheduled principal and interest collections and
Fitch pays special attention as to how the structure the expected prepayments; and
mitigates this setoff risk before it ceases to be valid.
Some transactions include a provision to inform · maximum days at exposure, which comprise the
debtors within a limited number of days in case the holding period of the servicer, and any period it
seller is replaced as servicer of the collateral. In may take to notify and implement new payment
addition, some sellers commit in the documentation instructions for obligors.
to pay any setoff amounts crystallised before the
insolvency state. Cash Bond Administration (CBA)
A peculiarity of the Spanish mortgage market is the
If a borrower holds a firstranking mortgage and an role of the Sociedades Gestoras de Fondos de
associated personal loan agreement, Fitch will Titulización (Sociedad Gestora) or management
consider if the personal loan agreement contains companies provided for in the securitisation law.
crossdefault clauses with the related firstranking These companies are regulated and supervised by the
mortgage in favour of the lender. Under the Spanish Comisión Nacional del Mercado de Valores
Civil Code, whether the loans are performing or in (CNMV) and their activities are limited to the
arrears, the borrower’s payments will be applied first management of securitisation funds.
to the personal loan and then to the mortgage loan,
unless the borrower is declared insolvent or does not The sociedad gestora carries out the cash bond
agree with this procedure. Recovery proceeds administration (CBA) function but it may also be
following mortgage enforcement can only be applied actively involved in the preclosing phase of the deal
to the personal loans if the borrower has not been as securitisation arranger. After closing, it is
declared insolvent. As mentioned, if the borrower is responsible for cash reconciliation, waterfall
insolvent, the lender does not have the right to set calculations and reporting, including the monitoring
off any residual amounts from the proceeds of the of applicable triggers. It is also responsible for taking
mortgage enforcement against the personal loan. any action in the interest of the noteholders, such as
According to information received from legal the replacement of the servicers, account bank or
counsel, very few retail borrowers apply for personal swap counterparty, according to the terms and
insolvency in Spain. conditions of the documentation.
Spanish Residential Mortgage Default Model Criteria: December 2007
22
Structured Finance
n Appendix 1: Default Probability by Rating Levels
Spanish Residential Mortgage Default Model Criteria: December 2007
23
Structured Finance
n Appendix 2: Base Default Probability and Market Value Decline Adjustments
(Typical)a
b
The adjustments will be determined on a casebycase basis
Source: Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
24
Structured Finance
n Appendix 3: Gross Credit Enhancement Calculation
Property Realisation Value (Post MVD)
Indexed Property Value x (1 MVD) (EUR) 101 694
Repossession Costs
Fixed Costs 6 500
Variable Costs (Realisation value x 5.5%) 5 593
Total Repossession Costs 12 093
Net Recovery Proceeds
= Realisation Value Repossession Costs 89 601
Recoveries
Minimum of:
Total Amount Due 388 020
Net Recovery Proceeds 89 601
Recoveries (EUR) 89 601
Recovery Rate
(Recoveries /Current Balance) (%) 27.2
Source: Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
25
Structured Finance
n Appendix 4: Fitch Spanish Origination and Servicing Review
Spanish Residential Mortgage Default Model Criteria: December 2007
26
Structured Finance
n Appendix 5
Loan Purpose
Financing purpose Text Financing/Refinancing/Debt consolidation
Investment properties Text Investment property/Owner occupied
Second homes Text First home/Second home
Commercial purpose Y/N N
Interest Rate
Mortgage rate (variable, fixed, fixed to floating) Text Variable, Fixed, Fixed to floating
Reference index for floating loan Text Euribor 12month, IRPH Banks or Saving Banks
Interest reset frequency Text Semiannually, annually
Interest reset date Date 01/08/2008
Current interest rate Percentage 5%
Margin over index Percentage 1%
Product Type
Payment frequency Text Monthly, Quarterly, Semiannually, Annually
Repayment types Text French amortisation, Interestonly
Payment options
End of principal grace period Date 1/02/2008
Instalment build up feature Y/N Y
Percentage increase Percentage 25%
Payment holidays option Y/N
Number of possible holidays Number 6
End of option Date 01/02/2015
Initial teaser rate Y/N
Teaser rate Percentage 3%
End/reset date Date 01/02/2007
Bridge Loans Y/N Y
Preagreed final loantovalue Percentage 80%
Current and property value(s) Number 200,000
Current property sold or not Y/N Y
Flexible Loans (Y/N) Y/N Y
Maximum drawable amount Number 200,000
Multiple loans Y/N Y
Prior charge original loan amount Number 100,000
Prior charge current loan amount Number 50,000
Mortgage Insurance
Mortgage insurance provider Text MIG SA, none
MI attachment floor (eg 75%) 80%
Maximum claimable amount 20,000
a
Source: Fitch Additional information will be required if it is deemed necessary
Spanish Residential Mortgage Default Model Criteria: December 2007
27
Structured Finance
n Appendix 6: Regulatory Framework
The following section briefly describes the laws and regulations that govern the mortgage loans and transaction
documents in Spanish RMBS transactions.
The Codigo Civil Español and Real Decreto de 24 de julio de 1889 (Spanish Civil Code) regulates the causes
and consequences of a breach in the terms of and events of defaults affecting civil contracts in Spain. In the
absence of specific terms and conditions, the Spanish Civil Code regulates the events of default in a typical
Spanish RMBS transaction.
Texto Refundido De La Ley Hipotecaria (Decree of 8 February 1946) and Reglamento Hipotecario (Decree of
14 February 1947) describe the base regime that regulates mortgage granting in Spain.
Ley 2/1994 de Subrogación y Modificación de Préstamos Hipotecarios (Law 2/1994) governs the modification
of the original terms and conditions of the mortgage loans, permitting borrower prepayments and the application
of prepayment penalties. Real Decree Law 2/2003 of 25 April 2003 and Law 36/2003 of 11 November reduce
the prepayment penalties for full loan prepayments to 0.50% of the current loan balance for floating rate loans
originated after 27 April 2003.
Orden Ministerial de 5 de Mayo 1994: Transparencia de la Condiciones Financieras de los Préstamos
Hipotecarios (Ministerial Order of 5 May 1994) regulates consumer protection considerations such as price and
mortgage terms, and ensures the transparency of mortgage agreements.
Ley 1/2000: Ley de Enjuiciamiento Civil (Law 1/2000) regulates mortgage execution and enforcement. The
regulation unifies all legal procedures related to this issue under a single legal regime.
Mortgage products
The law generalizes the figure of flexible mortgages or “hipotecas máximo” whereby the mortgage loan will
cover current and future payment obligations up to a predetermined amount. In other words, future credit
exposures of any kind may be secured on the same initial mortgage.
Reverse mortgages are also introduced to allow homeowners to release cash from their properties. Only people
over 65 years old and dependant persons due to extreme disability may take a reverse mortgage on their first
home. Reverse mortgages on all other properties are permitted for all. The property can only be claimed by the
bank when the homeowner dies, although inheritors may cancel the loan by paying back to the bank the monies
received plus interest within two years.
Spanish Residential Mortgage Default Model Criteria: December 2007
28
Structured Finance
Prepayments
To encourage lenders to offer fixedrate mortgages, the amendment law replaces traditional prepayment
penalties with a cancellation fee and an interest rate risk compensation fee, for all newly originated mortgages.
The cancellation fee will compensate the lender for the costs of originating the mortgage. This fee is capped at
0.5% of the prepaid amount, if prepayment occurs less than five years after origination, and at 0.25% of the
prepaid amount, if prepayment occurs five years or more after origination.
The compensation fee for the interest rate risk will not be applicable for variable rate mortgages with reset
periods equal to or lower than 12 months. The amount paid by the borrower will depend on whether the lender
incurs a gain or a loss due to interest rate variations between the loan origination date and the prepayment date.
This loss or gain will be computed as the difference between the loan outstanding balance and the loan market
value, computed with a specific formula incorporating the current market rate applicable for a loan of this
maturity. Should the prepayment lead to a gain for the lender, the borrower will not pay any compensation fee.
Should the prepayment lead to a loss for the lender, the prepayment fee will be the one defined in the mortgage
contract. This fee may be defined in one of the two following ways: (i) as a percentage of the outstanding loan
balance defined in the mortgage contract; (ii) as a portion of the loss incurred by the lender. If so, the lender
would in turn have to compensate the borrower in case the prepayment leads to an interest rate gain.
The key revisions for CH include an extension of the range of eligible cover assets, which will be tracked in a
specific register. Eligible assets may now include mortgage loans secured by properties located in Spain and
elsewhere in the EU. In terms of LTV, the revised law lowers the maximum LTV limits from 70% to 60% for
commercial mortgage loans. The limit remains set at 80% LTV for residential mortgage loans, although the law
contemplates that, under conditions still to be defined, the LTV may reach 95% if the portion above 80%
benefits from mortgage insurance. The law also includes the possibility to cover up to 5% of the CH with liquid
assets, also tracked in a specific register. Such substitution assets include bonds issued by EU states, listed CH
issued by other financial institutions, and other listed fixed income assets with a rating equivalent to that of the
Kingdom of Spain. Additional regulatory provisions will define other highly liquidity assets that may be
included as substitutions assets.
The maximum issuance level of CH is lowered from 90% to 80% of the eligible cover pool (after deducting
assets earmarked for mortgage bonds and securitisation transactions), thereby increasing the minimum legally
required overcollateralisation (OC) from 11% to 25%. Finally, the law reaffirms that CH investors have
preferred status over most other creditors in the event of the CH issuer’s insolvency. The privilege of Cedulas
noteholders against the cover pool is also extended to registered swap counterparties.
Spanish Residential Mortgage Default Model Criteria: December 2007
29
Structured Finance
n Appendix 7: Spanish Mortgage Market below). Indeed, a marked increase in residential
Market housing construction and public works has boosted the
share of the construction sector in Spanish employment
from about 9% in 1995 to about 13.4% in 2006,
Macroeconomic Considerations
whereas the contribution of construction to GDP has
The performance of the Spanish economy over the gone up from about 6.9% in 1995 to about 10.9% in
past decade has been extremely strong. As 2006.
illustrated in the charts below, over this period,
Spain experienced exceptional GDP growth, The key role played by credit expansion in recent
outpacing other European countries. This growth growth leaves the Spanish economy significantly
indexes a wider process of convergence with the exposed to the tightening in global credit conditions
richest EU economies in deepening of capital and underway since August 2007. Fitch therefore forecasts
income levels. Indeed, Spain benefited from an economic growth to decline markedly from 3.8% in
unprecedented fall in the cost of capital after 2007 to 2.5% in 2008 and 2.4% in 2009, well below
entering the EU, leading to negative real short trend. (See Fitch’s report, “Global Economic Outlook”,
term interest rates for four years until 2006. Gross published on 5 October 2007.) A significant downward
domestic investment increased dramatically from adjustment in growth is expected, as property market
21.7% of GDP in 1996 to 30.6% in 2006. Rapid excesses are unwound, investment rates decline
credit growth also brought Spain in line with towards more typical advanced country levels and
countries such as the UK and the Netherlands in inflation is brought down. Remaining supply side
banking credit to the private sector. The country’s inflexibilities in the labour market and retail sector may
unemployment rate decreased from 20.6% in 1997 make this adjustment tougher than expected.
to 8.0% as of September 2007. Finally, Spain also
benefited from a marked asset price appreciation, However, Fitch believes that Spain’s risk of a hard
especially of real estate assets (see Housing landing in the form of an outright recession or of a
Macroeconomic Environment
GDP Growth Gross Domestic Investment
Real % change % of GDP
Spain France
Spain France
Germany Italy
(%)
Germany Italy
(%)
Netherlands United Kingdom
Netherlands United Kingdom 35
6
5 30
4
25
3
2 20
1 15
0
10
96 97 98 99 00 01 02 03 04 05 06 07*
1 96 97 98 99 00 01 02 03 04 05 06 07*
Source: Fitch *Estimated Source: Fitch *Estimated
Bank Credit to Private Sector Unemployment rate (%)
% of GDP Spain France
Spain France
Germany Italy
Germany Italy (%)
(%) Netherlands United Kingdom
Netherlands United Kingdom 20
190
170 16
150
12
130
8
110
90 4
70
0
50 96 97 98 99 00 01 02 03 04 05 06 07*
96 97 98 99 00 01 02 03 04 05 06 07*
Source: Fitch * Estimated Source: Fitch * Estimated
Spanish Residential Mortgage Default Model Criteria: December 2007
30
Structured Finance
systemic stress is moderate. Despite the current housing in Spain does not look greatly overvalued.
account deficit, services exports perform well. Spanish housing was historically undervalued and
Public finances are the strongest of any large longrun demand has increased due to significant
‘AAA’ sovereign and the government may use socioeconomic and demographic shifts, including:
fiscal policy to spur growth. The agency also takes
comfort from Spain’s very strong banking sector, · declining structural unemployment (see above),
which benefits from the highest measure of and rising labour force participation; and
intrinsic banking quality (‘A’ Banking System
Indicator (BSI)). For more details, please see · impressive population growth, yet outpaced by the
Fitch’s special report, “Bank Systemic Report”, growth in the number of households (+10% and
published on 27 September 2007. +19.8%, respectively, from 2000 to 2006
according to INE and BoS), as average household
Housing Market
size decreased due to a higher divorce rate and the
breakdown of multigenerational households.
A Booming Property Market
Along with other countries that have also The demand for housing has also been spurred by
experienced strong real estate appreciation, Spain Spaniards’ preference for homeownership over rent
has attracted comment regarding property market (according to the BoS, as of 2005, 86.3% of primary
overvaluation. That said, and as illustrated in the residences were owner occupied). Rising per capita
chart below, real house prices have not been rising income also led them to demand higher quality housing.
any faster than in other economies where property As of the 2001 Census, an estimated 16.2% of the
markets have been exuberant. As detailed in the housing stock comprises vacant properties, some of
special report, “House Prices and Household Debt which are presumably in poor conditions. In addition,
– Where are the Risks?”, dated 29 July 2007, and whenever possible, Spaniards also like to purchase
Fitch’s opinion is that, relative to other economies,
Housing Market
Real House Price Index Population Growth
2000 = 100 Yearonyear growth (%)
Spain France
Spain France
Italy Netherlands
Germany Italy
United Kingdom Ireland (%)
(%) Netherlands United Kingdom
US 2
200
180 1.5
160
1
140
120 0.5
100 0
2000 2001 2002 2003 2004 2005 2006 96 97 98 99 00 01 02 03 04 05 06
Source: Fitch Source: Fitch
Spanish Households and Housing Outstanding Mortgage Loans
Stock (EURbn) Other mortgages
Net absolute annual increase (000)
New Households New Dwellings Residential Mortgages granted to Households
900
1,000
800
700 800
600
600
500
400 400
300
200
200
100
0 99 00 01 02 03 04 05 06 Sep
97 98 99 00 01 02 03 04 05 06 June 07
07 Source: Bank of Spain, Fitch
Source: Bank of Spain, Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
31
Structured Finance
second homes. The Bank of Spain estimates that, rise in average mortgage rates since their lowest in
in 2005, 21% of Spanish households owned a September 2005.
property that is not their primary residence. These
properties accounted for 16% of the housing stock Indeed, since mid2005, the demand for housing has
(2001 Census). Finally, demand for housing has started to level off as Spanish borrowers found it
also been spurred by foreigners purchasing second increasingly difficult to afford to buy a property.
homes or retiring in Spain. Fitch estimates that in Affordability has been stretched by the combined effect
2006, these accounted for more than 3% of of rising property prices and interest rates. This trend is
property purchases by number. indicated by the pointintime, theoretical net debtto
income indicator published by the Bank of Spain. In
As illustrated in the charts above, Spanish builders 1996, if a household with a median income bought an
have largely supplied this demand. In the past average property with an 80% LTV mortgage, it would
decade, while close to four million additional have allocated 33% of its income to pay the first
households have been created, about six million mortgage instalment, after tax deductions. At the end of
housing units have been added to the housing 1999, new homebuyers would have had to allocate only
stock – around a quarter of the current total stock 20% of their income to pay their first mortgage
is therefore less than 10 years old. Spanish lenders instalment. However, as of September 2007, this
have financed both the construction of new indicator of affordability had increased back to 36.5%.
properties by real estate developers and their final Besides this indicator on the theoretical debt service
purchase by individual borrowers. The outstanding ratio of newly contracted mortgages, the BoS also
volume of mortgage loans granted by Spanish publishes an indicator of the average existing debt
financial institutions has grown exponentially service ratios of Spanish households. For the stock of
reaching EUR990bn as of September 2007. households with existing debts, principal and interest
Residential mortgages granted to households payments amounted to 17% of the median gross
account for over 57% of this stock, while the rest income of these households in 2005, up from 14.5% in
includes mortgage loans to small and medium 2002. This same ratio increased from 30.5% in 2002 to
sized enterprises (SME) and loans to real estate 38.1% in 2005 for the households in the lower income
developers. Finally, Spanish household debt has buckets (Source: Household Financial Survey of the
risen from 31% of GDP as of the end of 1995 to BoS)
83% as of June 2007. Note, however, that 95% of
As noted, strong fundamentals underlie property price
this household debt is longterm, housing related
growth in Spain and the slowdown has been gradual so
indebtedness.
far. However, given their weight in the economy, a
Housing Market Slowdown downturn of the real estate and construction sectors
The chart below illustrates that adjustment is may lead to an increase in unemployment, thereby
affecting Spanish borrowers’ ability to pay. Moreover,
clearly underway in the housing market: property
the slowdown in the housing market may also lead to
price inflation fell to 5.3% in Q307 from a peak of
higher default ratios as it will become increasingly
15% in December 2003. The annual growth rate of
difficult for highly delinquent borrowers to work out
housing credit to households also decreased to
their loans by quickly selling their property.
17.5% in September 2007 from a peak of 27% in
Q106. This turnaround follows a 2.2% absolute Lower or even negative property price growth may also
Property Price Growth, Average Mortgage Rate and Theoretical DTI
(%) Annual P roperty P rice Gro wth (LHS) A verage M o rtgage Rate (LHS) Theo retical Net DTI (RHS)
20 40
18 35
16
30
14
12 25
10 20
8 15
6
10
4
2 5
0 0
juin 96 juin 97 juin 98 juin 99 juin 00 juin 01 juin 02 juin 03 juin 04 juin 05 juin 06 juin 07
Spanish Residential Mortgage Default Model Criteria: December 2007
32
Structured Finance
erode some of the equity built up by Spanish 15% during the past five years and second homes
borrowers. However, Fitch believes that, in most may account for over 30% of dwellings. Fitch
cases, this negative equity will have a limited understands that, in the context of housing
impact on borrowers’ willingness to repay their speculation, some of these properties have also
debt. Even if faced with negative equity, Spanish been illegally built or disregarding longterm
borrowers still have a strong incentive to repay sustainability.
their mortgage as the rental market is
underdeveloped. This is also the case with the sub · Some noncoastal regions have also experienced
prime market, hence limiting their possibility to strong property price growth due to their proximity
purchase a property at a later date. Moreover, and to large urban centres such as Madrid, Barcelona
as often noted, Spanish borrowers have a strong or Bilbao. Although demand is arguably quite
aversion to defaulting on debt. This aversion is strong in most cases, it is to be feared that
reinforced by the fact that mortgage lenders have oversupply could transform certain specific
full recourse to the borrower: that is, if a borrower suburban developments into ghost towns.
defaults on his mortgage and the proceeds from
foreclosure do not cover the outstanding principal · Overall, the agency believes that a sharper
amount, the lender will chase the borrower for the adjustment may occur in the second home market
shortfall. Finally, family members often help due to oversupply. Second homes are mainly
borrowers absorb temporary payment shocks. On located in the coastal regions mentioned earlier.
the other hand, higher delinquencies are to be Hence, demand for these properties relies on a
expected, mainly for owners of second homes or continued interest from nationals and foreigners in
investment properties, including investors who the appeal of Spain’s coastal areas. Second homes
speculated on property price increases. have also been built in mountainous or
traditionally rural areas close to prosperous urban
Indeed, the adjustment may possibly speed up in centres. In these areas, demand is generated mainly
some areas where oversupply has built up the most. by wealthy urbanites as local residents are usually
To be sure, house builders are already slowing not able to afford them and many of these faraway
down their activities in the face of lower demand, dwellings are inappropriate as first residences for
as buyers hold off in anticipation that prices will most urban workers.
fall further. However, dwellings in construction
may bloat the property market in some particular Spanish Residential Mortgages
areas. Property prices have actually decreased
slightly in recent months in some regions and local Mortgage Lenders
markets. The vast majority of Spanish mortgages are granted by
traditional financial institutions. Hence, saving banks
To assess the particular vulnerability of local (Cajas de Ahorro or Cajas) and banks hold 56% and
housing markets, Fitch has reviewed housing 36% of total outstanding mortgages, respectively
market developments for Spanish Autonomous (September 2007). In addition, rural saving banks
Communities, regions and major urban centres, account for 6% of this total. A small, albeit growing,
including property price growth, the growth of the market share of 1.5% is held by specialised lenders or
housing stock and the proportion of second homes. EFCs (Establecimientos Financieros Especializados),
The agency also weighted macroeconomic and which do not take deposits.
demographic factors to assess the resilience of the
local economy. A summary table of some regional The Spanish mortgage market is overwhelmingly a
indicators is presented at the end of this appendix. conforming market where lenders target prime
Following this analysis, the agency has identified borrowers. The typical mortgage is granted for the
the local housing markets that it believes are most purchase of a first or second home. Buytolet
vulnerable to a property price downturn. These mortgages are not as frequent as in other jurisdictions
include: due to a limited rental market. However, rental
properties and property purchases for investment
· Popular tourist regions in Spain’s South and purposes are probably higher than reported, due to
Mediterranean coast where large property relatively high tax evasion. Mainstream lenders may
developments have been spurred on due to also grant some residential mortgages for commercial
population growth, including Spanish and purposes. Some also grant flexible loans where
foreign retirees, but also due to demand for borrowers may, after some years and following the
second homes, especially from foreigners. In amortisation of part of the loan, cash out some of the
some of these regions, the housing stock has equity built in their homes. However, the property is
increased at annual compound rates of 10% to not reappraised. Indeed, mainstream lenders do not
Spanish Residential Mortgage Default Model Criteria: December 2007
33
Structured Finance
EFCs compete with some mainstream lenders,
Major Spanish Banks and Saving especially savings banks and smaller banks, which may
Banks 2006 also offer similar products (e.g. first and second
Annual Loans to ranking mortgages) and/or target similar borrowers (see
Total Average individuals
Loans loan / total
below).
Lender (gross) growth loans
EUR bn To summarise, EFCs target prime or near prime
End2006 % 20042006 % End2006 borrowers to which they may offer some non
a
Banco Santander 531.5 18.8 59
a
conforming products. Indeed, even for these specialised
BBVA 262.3 22.3 41 lenders, loans without proper verification of income are
Banco Popular 77.4 19.2 31
Español extremely rare and may only be granted for low LTV
Banco de Sabadell 55.6 27.4 25 loans, in very specific circumstances.
Bankinter 32.2 25.3 70
Likewise, loans granted to borrowers with material
La Caixa 139.3 23.8 60
Caja Madrid 96.0 28.2 56 adverse credit history are marginal. Over the past
Bancaja 66.8 35.6 41 decade, Spain has exhibited a low level of
Caixa Catalunya 43.5 26.5 50 delinquencies, therefore limiting the pool of potential
CAM 50.0 36.4 55 borrowers with a credit impaired history. According to
Caixa Galicia 28.5 40.7 38
Unicaja 20.8 21.2 53 the Bank of Spain, as of May 2007, the outstanding
Cajasol 20.2 14.8 53 balance of mortgages granted to borrowers with some
Bilbao Bizkaia 17.3 23.6 69 kind of adverse credit history only represents 1.27% of
Kutxa the total outstanding mortgage balance.
Cajamar 17.7 28.4 61
a
Source: Fitch. Loans to individuals represent 34% of Banco
Santander’s total loans in Spain, and 49% of BBVA total loans in Residential Mortgage Loans Granted
Spain.
by Specialised Lenders (EFCs) 2006
typically offer pure equity extraction products Issued % of
Number of Volume issued
such as home equity lines where properties are re EFC Mortgages (EURm) volume
valued just to extract cash. UCI 22,506 3,398 62
Santander 4,883 826 15
Specialised lenders or EFCs tend to focus on the Consumer
relatively higherrisk products and borrowers. Finance Group
GE Capital 4,092 421 8
Some, such as UCI, have been active in the Bank
Spanish mortgage market for more than a decade Credifimo 3,601 398 7
while others, such as GE and GMAC, have DB Credit 1,546 256 5
entered the market only recently. EFCs usually Other 2,020 211 4
distribute their products via brokers, and in some Source: ASNEF, Fitch
cases, via special agreements with mainstream
lenders. They target niche borrowers traditionally Spanish lender origination policies for creditimpaired
not well served by mainstream lenders, especially borrowers are usually very strict and these borrowers
firsttime buyers with low or no equity. EFCs tend to be automatically rejected. Typically, lending
offer them mortgages with high LTVs or a first decisions are made on a hierarchical basis after the
and a secondcharge mortgage to finance the application has been evaluated with a creditscoring
portion of the loan above 80% LTV. The borrower system. Spanish lenders usually have a relatively good
usually pays a higher margin on this second picture of borrower profiles thanks to their own internal
charge mortgage. However, this funding client management systems, reports from the two main
mechanism may also allow him to prepay part of credit bureaus, Asnef and Experian, and from the
his mortgage more easily. EFCs also serve database maintained by the Bank of Spain, CIRBE,
borrowers with limited credit and employment which tracks all borrower outstanding balances above
history. Some also lend to borrowers with minimal EUR6,000 as well as their performance. Note, however
adverse credit history, such as phone bills, which that due to strict privacy laws in Spain, all the
may also be accepted by some mainstream information contained in these databases is pointin
lenders, in limited cases. Their product offering time, meaning that as soon as a borrower pays down
includes some debt consolidation products, any delinquent loan, his credit record is cleared.
sometimes offered in collaboration with
specialised financial brokers.
Spanish Residential Mortgage Default Model Criteria: December 2007
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DTI vs. Original LTV by borrower segment
85
2005 2006
80 Firsttime buyers
2004
Original Loan to Value (%)
75
70 2nd Homes
65 2006
2005
60 2004
2004 Homeowners
55
2005
50 2006
45
40
15 20 25 30 35 40 45
Debt to Income (%)
Source: Fitch, AHE
Recent Market Trends developer loans with the ultimate goal of gaining
Although the Spanish mortgage market is business from the final individual homebuyer and
primarily a prime market with some elements of establish a banking relationship from which to cross
nonconforming, it should, however, be noted that, sell other banking products. As a result, branch
on average, the overall risk profile of the market networks have increased considerably in strong
has increased in recent years. In the context of a economic centres such as Madrid (+37% from 1996 to
highly competitive mortgage market, a number of 2006) and in coastal regions such as Murcia (+42%)
Spanish financial institutions have mitigated the (Please see the Summary Table at the end of this
decreasing affordability of housing by loosening appendix).
their underwriting standards and increasing their
offering of products with more flexibility for In addition to expanded branch networks, some
buyers. The following discussion on recent trends mainstream Spanish lenders have also started to source
in the Spanish mortgage markets deals with mortgages through broker networks, the traditional
changes in distribution patterns, borrower profiles distribution channel of EFCs. These brokers are usually
and underwriting guidelines and in products. real estate professionals or financial intermediaries
such as insurance brokers. Some estimate that up to
1. Origination Strategies 15% of Spanish mortgages are originated though this
As in the past, the bulk of Spanish mortgages are channel. Evidence suggests that loans originated
originated through the country’s numerous retail through these channels usually have a higher risk of
branches. Indeed, Spain boasts a ratio of over 1 default than loans granted to existing branch clients or
branch per 1,000 inhabitants, compared to an even to new clients walking into a branch. This may
average of 0.6 in other EU countries. Interestingly, simply be because the lender has less knowledge of the
this ratio has been almost stable over the past borrower. However, given Spain’s numerous retail
decade, as retail branch networks grew slightly branches, most likely it also reflects a selection bias,
faster than the Spanish population (+16.3% vs. whereby brokers deal mainly with borrowers with a
12.7% from 1996 to 2006, respectively). However, poor track record at their bank. Finally, instances of
these average figures mask wider geographical fraud are much more common for loans originated
disparities and variations between lenders, as through brokers. Indeed, some EFCs with experience
some reduced the size of their retail branch dealing with brokers have set in place advanced
networks while others dramatically expanded their mechanisms to detect cases of fraud and to monitor
networks, especially in areas outside of their potentially unreliable brokers. Note that Spanish
traditional geographical focus. For instance, authorities are also planning to regulate more tightly
Spanish banks have increased their networks by these financial intermediaries.
1,173 branches between January 2004 and June
2006 whereas Spanish saving banks have been 2. Borrower Profile and Underwriting Guidelines
more aggressive by increasing their networks by Socioeconomic and demographic changes have
2,342 branches. These new areas were usually changed the profile of applicants. With respect to the
selected due to their strong population and/or labour market, and according to data from the Spanish
housing market growth. Lenders, and especially Employment Ministry (INEM), while selfemployed
saving banks, have also financed real estate workers account for about 18% of the active
population, among employed workers, temporary
Spanish Residential Mortgage Default Model Criteria: December 2007
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employment contracts are now the norm. In 2006, · Around 40% of these are borrowers who are
88% of newly contracted employees in Spain were typically not Spanish residents, including
hired as temporary workers. As a result, in 2006, relatively wealthy EU nationals buying a second
34% of Spanish employees had a temporary home or deciding to retire to the Spanish coast.
employment contract (Source: 2006 “Sintesis · The rest are borrowers who recently migrated to
Annual del Mercado de Trabajo”, INEM). These Spain and who usually have permanent residency
contracts may be granted both by the public and status. The Bank of Spain estimates that, as of
the private sector, under different legal forms and November 2007, 7.2% of outstanding mortgages
for different lengths. Some temporary workers have been granted to foreign residents.
stay in a position for less than a month while some
others may stay for several years in the same Their labour and credit history is also short, by
position: their three to six month temporary definition. Moreover, many of these applicants cannot
contracts are renewed until a specific project or provide thirdparty guarantees as they do not have
task is completed. strong social networks in Spain.
Spanish Residential Mortgage Default Model Criteria: December 2007
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incorporate a margin over Euribor, are less also continues to grow. As of 2006, Fitch estimates that
commonly used than before. single issuer covered bonds and CDOs of CHs
accounted for close to 40% of gross new residential
On average, newly originated mortgages in Spain loans in Spain while RMBS new issuance accounted
have an OLTV of around 70% and a DTI of 35%, for about a quarter of gross new residential loans in the
both marginally higher than in the past. However, country.
the Spanish market is also more segmented than
before between homeowners and firsttime In line with past years, Spanish RMBS issuance was
buyers, which tend to be in the upper LTV and/or impressive in 2007, reaching EUR52.4bn as of 1
DTI buckets. Indeed, a quarter of recently December 2007, compared to EUR38.9bn as of end
originated loans have LTVs above 80% while a 2006. Most of this issuance takes the form of jumbo
quarter of recently originated loans have a DTI transactions, defined as those worth over EUR1bn. As
above 45% (source: AHE). Additionally, a result, the average transaction size in 2007 stands at
maturities of newly originated mortgages have over EUR1.5bn. Outstanding securitised mortgages as
lengthened in the past decade from 17 years to a proportion of total outstanding mortgages (which
over 28 years, on average, with maximums include loans to real estate developers and SMEs)
generally at 35 years. Loans with higher DTIs also reached 13.8% in September 2007, a notable increase
tend to exhibit the highest LTV and the longest since this figure has been stable at 9.9% since 2004
maturity. (Source: AHE).
Spanish Residential Mortgage Default Model Criteria: December 2007
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Structured Finance
fourth, respectively, by total loan book as of
the end of 2006. All three lenders also issued Spanish RMBS Originators
notes backed by pools of high LTV mortgages. Issued
Amount Outstanding
a
(EURbn) volume
2. Mediumsized institutions, which regularly a
# Originator 2006 2007 (EURbn) %
tap the RMBS market, at least once a year.
1 BBVA 15.4 16.0 12.2
These include Bancaja (‘A+/F1’) CAM 2 Bancaja 2.8 6.5 13.2 10.0
(‘A+/F1’), Caixa Catalunya (‘A/F’), 3 Bankinter 2.8 2.7 11.1 8.5
Bankinter (‘A+/F1’) and Barclays Bank SA, 4 CAM 3.1 3.2 10.2 7.7
which is owned by Barclays Bank PLC 5 Barclays 3.1 3.0 9.1 6.9
6 Santander 2.0 4.1 7.7 5.8
(‘AA+/F1+’). Also included in this group is a 7 UCI 3.2 1.4 7.0 5.3
specialised mortgage lender, UCI. 8 Caja Madrid 3.8 3.0 6.4 4.8
9 Caixa Catalunya 1.5 1.6 6.1 4.7
3. Smaller institutions that securitise assets 10 La Caixa 1.5 1.5 6.0 4.5
11 Ibercaja 2.4 1.2 4.2 3.2
either on a standalone basis or by pooling
12 Cajamar 2.2 1.0 3.9 3.0
them into multiseller transactions. This group 13 BBK 1.0 1.5 3.1 2.3
also includes Credifimo, a specialised 14 Banco Pastor 0.9 0.7 2.8 2.1
mortgage lender that participated in multi 15 Kutxa 0.8 1.2 1.8 1.4
seller transactions such as TDA 25, TDA 27 Other originators 3.7 1.6 7.5 5.7
and TDA 28. These pooled transactions Multi Originators
usually come to market under the name of the Banks, Savings 2.8 1.3 10.1 7.7
a
management company involved in the Banks, EFC
transaction or, under the name of the rural Rural Saving Banks 1.3 1.5 5.4 4.1
saving banks association (e.g., Rural Total 38.9 52.3 131.6
Hipotecario 9). In April 2007, the a
Outstanding volume of RMBS and MBS transactions listed in
management company Ahorro y Titulizacion AIAF as of the end November 2007. Rank computed by
(AyT) constituted a securitisation fund to percentage of outstanding RMBS securitised volume.
Source: Fitch, AIAF
issue a number of independent series by up to
38 different Spanish savings banks. The
financing the purchase of a second home in Spain.
maximum overall size of this fund, called
AyT Colaterales Global Hipotecario, FTA, is
· The geographical distribution reflects the
limited to EUR16bn. As of the end of mid
originator’s historical franchise. However, as some
December 2007, five separate series of RMBS
lenders have expanded their territorial reach,
notes had been issued from this fund.
securitised pools tend to be less concentrated than
before.
Spanish RMBS Portfolios
To a large extent, trends in securitised portfolios · Most loans are originated through branches,
reflect the evolution of new mortgage production although some pools present increasing numbers
in Spain as detailed above. As illustrated in the of brokeroriginated loans.
table below, securitised mortgage pools have
therefore tended to exhibit somewhat riskier · Floatingrate loans still predominate but the WA
profiles: margin of securitised pools is usually lower than in
previous years, as intense competition in the
· Higher weighted average LTV, usually mortgage market has fostered margin compression.
around 80%, and, since the end of 2006, pools Some pools also comprise an increasing number of
comprised of only highLTV loans: indeed, loans with interest rate and payment options.
2006 saw the first purely high LTV
transactions, which reached EUR3.8bn at end · The seasoning of the securitised pools has tended
2006 and EUR13.3bn for the first half of 2007. to decrease, usually down to 12 or 24 months.
· Although pools still comprise primarily Some Spanish RMBS transactions have comprised
mortgages backed by owneroccupied and mixed portfolios of residential and smallticket
primary home properties, the proportion of commercial mortgages. This feature, combined with
second homes is increasing. the trend towards decreasing seasoning in securitised
pools, reflects the extensive use of securitisation by
· An increasing proportion of loans granted to some lenders, who refinance through this route much
nonSpanish nationals, most of them residing of their new mortgage production.
in Spain but also nonresident foreigners
Spanish Residential Mortgage Default Model Criteria: December 2007
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Payment Patterns fee, for fixed rate loans, prepayment penalties will also
In recent years, the Spanish mortgage market has include a variable component computed to account for
experienced historically high prepayment rates, the effective interest rate risk. Fitch does not expect
above 10% or even 15% for some lenders. With this change to significantly affect prepayments as the
heightened competition between mortgage lenders, level of prepayment penalties and proposed reduction
prepayments increased as borrowers sought to are low.
refinance their mortgages with lower margins or to
take advantage of new products such as flexible Within RMBS transactions, trends in principal payment
mortgages. The rise in property prices acted as a rates (PPR), which include both scheduled and
further incentive to refinance as some property voluntary prepayments, indicate that the PPR index for
owners could sell their property and realise an Spanish RMBS deals rated by Fitch fell marginally in
often substantial equity gain, repaying their Q307, to 15% from 15.35%, reflecting a small by quite
mortgage loan either to climb the property ladder widespread decrease across transactions. For more
or to acquire a second property. details, see “Around the Houses – Quarterly European
RMBS Performance Update Q3 2007” published 25
However, as the main causes for higher October 2007.
prepayment rates (PRs) are becoming less
effective, the agency believes that PRs are bound Performance
to decrease, reverting back to the historical Regarding the overall performance of the Spanish
averages in Spain, between 8% and 10%. On the mortgage market, the Bank of Spain publishes a
one hand, the attractiveness of refinancing may dynamic indicator of outstanding delinquent loans with
now be more limited as price competition between more than 90 days in arrears over total outstanding
lenders has bottomedout and credit conditions loans. As of June 2007, the Spanish financial system as
may become tighter. Moreover, with lower a whole had a low nonperforming ratio of 0.50%.
property price growth, effective LTV will now However, this index has to be used with caution as the
decrease less rapidly and some borrowers with strong growth of the denominator (the total loan book
high OLTVs may even be locked out of of Spanish institutions) partially masks the increase in
refinancing. Spain’s relatively high transfer taxes the delinquent balance. Still, this index has been rising
up to 10% of the property sale price, depending on steadily in the past quarters. Fitch is of the opinion that
the region will no longer be mitigated by this increase in arrears is mostly due to the impact of
property price increases, which allowed borrowers recent interest rate hikes which increased borrowers’
to recoup the amount paid through capital debt service ratios. It may also indicate in some cases
appreciation in a matter of months. For more riskier profiles of borrowers/products as well as the
details on this issue, please see the special report, changes in underwriting guidelines mentioned above.
“Diversity in Union – Prepayment Drivers in
European RMBS – Update”, dated 11 October To begin with, loans granted by EFCs exhibit much
2007 and available at www.fitchratings.com. higher delinquency ratios, currently 4.13% of
outstanding loans. This is to be expected as EFCs target
On 7 December 2007, Spanish legislators voted a
borrowers with much riskier profiles who presumably
reform of the mortgage regulation law (see
are also more vulnerable to interest rate changes.
Appendix 6) which will, among other things,
Savings banks also exhibit higher delinquency ratios
change prepayment penalties to encourage lenders
than banks (0.57% vs 0.34%). Finally, according to the
to offer fixedrate mortgages. Prepayment
Bank of Spain, the delinquency ratio of foreign
penalties for variable rate mortgages, currently
residents is about double the average ratio.
capped at 1.5% of the prepaid amount, will be
reduced to a cancellation fee capped at 0.5% of the
With respect to the performance of Spanish RMBS
prepaid amount. In addition to this cancellation
Spanish Residential Mortgage Default Model Criteria: December 2007
39
Structured Finance
transactions, overall, these deals perform well. Terrassa MBS 1 transaction also drew on its
According to Fitch’s index, the level of three reserve fund due to an upward trend in arrears and
month plus delinquencies remains among the a provisioning mechanism for loans more than 12
lowest in Europe, even if arrears within RMBS months in arrears. The reserve fund was later
deals in Spain have increased in the last quarters replenished with recoveries and excess spread.
(please refer to the chart presented on page 4 of
this report in the Default Probability section). For Fitch has reviewed the performance of these
more details, please also see “Around the Houses transactions and taken a number of rating actions
– Quarterly European RMBS Performance Update (please see a summary at the end of this appendix).
Q3 2007” published 25 October 2007. However, Fitch has downgraded the two junior tranches of the
some of the more recent transactions are TDA 25 transaction, which combined higher arrears, a
experiencing a marked upward trend in liquidity mismatch and an IO tranche. The agency also
delinquencies not seen in previous issues. More changed the Rating Outlooks for the junior tranches of
details on the performance of the Spanish RMBS several transactions, including Madrid RMBS II, TDA
transactions for which Fitch maintains a rating are CAM 6 and TDA Cam 7, TDA 25 and TDA 26, IM
presented in the “Spanish Performance Bulletin Terrassa MBS 1 and UCI 14, UCI 15 and UCI 16.
2007”, published on 27 September 2007. This These changes in Outlooks are mainly due to the steep
performance report comprises specific deal increases in arrears observed in these transactions.
information and arrears as well as a comparison of Rating Outlooks for European structured finance
deals from the same originators. tranches provide forwardlooking information to the
market. An Outlook indicates the likely direction of
To summarise, the highest arrears are being seen any rating change over a one to twoyear period.
in transactions from 2006, backed by high LTV
loans from mainstream lenders such as Caja Fitch will continue to closely monitor the performance
Madrid, or by loans from specialist lenders such as of Spanish RMBS transactions, and especially of the
UCI and Credifimo (within the TDA 25 transactions that present some of the risks identified
transaction, for instance). A number of Spanish above (payment shocks due to interest rate increases,
transactions have drawn from their reserve fund. high LTV loans and broker originated loans). More
In addition, with upward trends in arrears, the details on the performance reviews of these
main reasons for these draws include: transactions can be found in the press releases
published by Fitch and available at
· A liquidity mismatch in the first payment www.fitchratings.com.
period, arising from the notes accruing
interest during a longer period than the n Conclusion
collateral. Such draws have affected the TDA Fitch recognises that the Spanish mortgage market is at
25, AyT Génova IX and AyT Caja Murcia II a turning point whereby, after over a decade of strong
transactions. growth and outstanding performance, some tensions
are likely to appear. Moreover, and, as in other
· Interestonly (IO) strips, which accrue interest jurisdictions, these tensions may be amplified by the
on a balance defined as a percentage of the global credit crisis underway. Consequently, Fitch will
senior notes. This reduces the level of excess monitor on an ongoing basis the developments that
spread available at the bottom of the waterfall may affect the performance of Spanish RMBS
and needed to amortise written off loans, for transactions and the criteria used to rate them.
instance. Transactions with IO and draws on
the reserve fund include TDA 24, TDA 25, At this point, Fitch believes that the performance of
and TDA Cajamar II. Spanish mortgages, and hence of securitised mortgage
pools, is and will mostly continue to be affected by the
· Provisioning mechanisms whereby highly risk factors that have been reviewed in detail in this
delinquent loans are amortised in full six, 12 appendix. These risks factors include macroeconomic
or 18 months after the first arrears, using factors such as interest rate increases and housing price
available excess spread, and the reserve fund, trends as well as casebycase factors such as the
if required (see Cash Flow Analysis section of quality of loan origination and underwriting and
this report). This conservative mechanism is borrower profiles. These four risk factors are
present in virtually all Spanish RMBS. The summarised below:
draw on Madrid RMBS II was mainly
triggered by a steep increase in arrears and a 1. Interest Rate Variations
very conservative definition of loans that have As highlighted, recent rises in interest rates have had a
to be written off at six months arrears. The IM direct impact on Spanish households’ debt service
Spanish Residential Mortgage Default Model Criteria: December 2007
40
Structured Finance
ratios as their mortgages are overwhelmingly loans with payment options such as initial grace
floating rate. Consequently, even if the European periods and payment holidays.
Central Bank does not increase its policy rates, if 4. Possible changes in Payment Patterns
sustained, the rise in interbank rates since the Again, on a casebycase basis, Fitch understands that,
summer of 2007 will still feed through to Spanish in the event of an economic downturn, some of the
mortgages. Moreover, borrowers with long borrowers that contracted a mortgage in recent years
maturity loans are much more vulnerable to these may display different payment patterns than the
interest rate variations. excellent ones observed in Spain so far. For instance, a
portion of firsttime buyers may suffer from potential
2. Downturn of the Housing Sector job cuts as they are most often hired under temporary
As detailed in the Housing Market section of this contracts and/or in cyclical sectors. Due to changes in
appendix, adjustment is clearly underway in the kinship patterns such as higher divorce rates, or
housing market. Even if the slowdown has been because they recently settled in the country, a small
gradual so far, a housing downturn may lead to an share of borrowers may also not be able to rely on the
increase in unemployment in some sectors, longer support of local networks to help them pay their
workout periods for delinquent borrowers and mortgage, as Spanish borrowers traditionally did.
possibly higher delinquencies for borrowers who
speculated on property price increases. Fitch also Nevertheless, unlike in some other jurisdictions, in case
believes that some local housing markets, such as of a real estate downturn, the bulk of Spanish
coastal areas and second homes, are more exposed borrowers with negative LTVs are not expected to stop
in the case of a downturn. paying their mortgage. Even if faced with negative
equity, borrowers would still have a strong incentive to
3. Loan Origination and Underwriting repay their mortgage as the rental market is
Besides these macroeconomic factors, future underdeveloped. This is also the case for the subprime
performance will be affected on a casebycase market, hence limiting their possibility to purchase a
basis by the quality of loan origination and property at a later date. Moreover, and as often noted,
underwriting. However, and even if the overall Spanish borrowers have a strong aversion to defaulting
risk profile of the market has increased in recent on debt. This aversion is reinforced by the fact that
years, the overall quality of Spanish mortgages is mortgage lenders have full recourse to the borrower’s
high with a low albeit increasing average LTV present and future assets, and to the ones of his
at around 70% and overwhelmingly prime guarantor, if any.
borrowers and conforming products.
To sum up, the agency recognises that the Spanish
The higher risk products and riskiest borrowers economy is at a turning point. To reflect the results of
tend to be found among mortgages granted by this analysis of the Spanish mortgage market, Fitch has
specialised lenders but also by some mainstream revised its criteria and assumptions used to analyse the
lenders. For these mainstream lenders, Fitch credit risk in Spanish RMBS. In light of the historical
believes that potentially lower quality mortgages performance data reviewed, base default assumptions
may be found in the books of some of the lenders have been recalibrated upwards overall, an adjustment
with the most aggressive expansion strategies, to debttoincome has been introduced to account for
especially among the mortgages they originated the impact of interest rate variations and loanbyloan
through new distributions channels (branches default probability adjustments have been revised to
outside of their core geographical areas and/or account for nonstandard origination and underwriting
broker channels) or among the ones granted to procedures, historical default data, borrower’s
borrowers with no proven job and credit record. employment and credit history and new products.
However, and notwithstanding a shorter credit and Market value decline assumptions have been increased
labour history, these loans are underwritten with to reflect the most recent data on the Spanish real estate
full documentation and loans granted to borrowers market and adjustments have been introduced for some
with some kind of credit history are marginal. In coastal and centre regions and for second homes.
terms of products, the risks are concentrated in
Spanish Residential Mortgage Default Model Criteria: December 2007
41
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n Summary Tables
Spanish Residential Mortgage Default Model Criteria: December 2007
42
Structured Finance
n Appendix 8: Related Research
Related Research
Publication Date published
Rating European Loan Servicers – the Spanish Market Addendum 25 Sep 2007
Criteria for European CMBS Asset analysis 12 Sep 2007
Counterparty Risk in Structured Finance Transactions: Hedge Criteria 01 Aug 2007
European Criteria for Mortgage Insurance in RMBS Transactions 04 Jul 2007
Interest Rate Risk In Structured Finance Transactions: Euribor 01 Nov 2006
Covered Bonds Rating Criteria – Stop or Continue? 13 July 2006
Static Data Demystified 15 Mar 2005
Rating European Residential and Commercial Mortgage Loan Servicers 14 Mar 2005
Commingling Risk in Structured Finance Transactions: Servicer and Account Bank Criteria 9 June 2004
European RMBS surveillance: Post Issuance Reporting Standard 19 Jan 2004
A Guide to Cash Flow Analysis for RMBS in Europe 20 Dec 2002
Around the Houses – Quarterly European RMBS Performance Update 25 Oct 2007
Diversity in Union – Prepayment Drivers in European RMBS – Update 11 Oct 2007
Global Economic Outlook 5 Oct 2007
Bank Systemic risk Report 27 Sep 2007
Spanish RMBS Performance Bulletin 2007 26 Sep 2007
Interest Rate Issues for European RMBS 5 Sep 2007
House Prices and Household Debt – Where are the Risks? 29 Jul 2007
Fitch Issuer Report Grades May 2007 Update 31 May 2007
Source: Fitch
Spanish Residential Mortgage Default Model Criteria: December 2007
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Spanish Residential Mortgage Default Model Criteria: December 2007
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