After two years of work, amendments to the Cedulas Hipotecarias framework have been completed. On May 2, a publication of the royal decree 716/2009 in Spain’s Boletín Oficial Del Estado stated the terms of the amendments.

Dresdner Kleinwort analysts said that the core aspects of these regulations have been known to the market for some time and have already been legally implemented in early December 2007 (Ley 41/2007). They are, therefore, unlikely to have any immediate effect on pricing.

The changes include an increase in the legal minimum-overcollateralization required for Cedulas Hipotecarias based on a defined core cover asset portfolio (eligible portfolio)  to 25% from 11%. LTV requirements for commercial real estate loans that might be included in this eligible portfolio will be tightened  to 60% from 70%.

The threshold for residential loans remains unchanged at 80% in principle, though this level can be increased to up to 95% if an additional guaranty or mortgage insurance is in place.

Regional limitations for eligible cover mortgages are extended to the European Union area provided local loans comply with the requirements of the Spanish regulator.

The introduction of a cover register on the basis will also serve as the rationale for increased transparency requirements the banks will have to meet within their annual reports. The requirements include a cover calculation on both nominal and present value basis. Additional details are to be outlined by Banco de Espana.

Existing mortgages must be entered into this register within one year, while new loans issued after the regulations came into effect are to be registered within six months.

Substitute cover assets will now be admitted, but they must be assigned to individual Cedulas issues and must not exceed 5% of their nominal value. The list of assets eligible for this purpose is a relatively broad one, not only including EU government paper but generally also listed bonds of non-group issuers provided they are at least rated on par with Spain or the country's Cedulas Hipotecarias. Other liquid assets may also be admitted by the regulator.

"As a result of these regulations coming into effect, Fitch Ratings is likely to improve its D-factors for Cedulas which, to our knowledge, do not yet reflect the legal amendments and therefore still appear extraordinarily poor in the current 34% area," said analysts. "However, direct positive rating effects with Fitch could be offset by the agency’s increased liquidity requirements. While the introduction of substitute cover assets should be helpful in this respect, it is hardly likely to eliminate all concerns."


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