While much of the focus has been placed on U.S. and U.K. government initiatives, Continental Europe has also made strides to implement measures to alleviate the economic pressures on the market.

In Germany, a draft bill recently passed aims to help banks transfer structured securities, such as ABS and CDOs, to a government-backed unit on a voluntary basis. The government plan would allow private banks to offload troubled assets to a special-purpose vehicle, with a 10% reduction in their booking value. In return, the banks will receive a government-guaranteed bond amounting to the transfer value of those assets.

The plan focuses mainly on commercial banks, which can transfer toxic securities acquired before Jan. 1 to this special-purpose vehicle. Banks will have to pay a risk-adequate guarantee fee to the government-owned financial market stability fund, or SoFFin, which guarantees the bond. They will also have to pay an annual fee over a guarantee period of 20 years to the difference between the 90% booking value of the securities and the fundamental value of the assets, which is typically lower than the booking value, according to the draft bill.

The government aims to implement the bill, which requires approval by the lower and upper houses of parliament, before the general elections take place in September. The government is also examining a second model that might eventually supplement the special-vehicle unit model for commercial banks by helping Landesbanken restructure by transferring troubled assets and non-strategic assets to an institution, with the former owners still liable for the risks stemming from these assets. However, the government has said that this plan will be complicated and will need time to be finalized.

The Greek government this year announced mortgage support measures that may have a positive impact on the revival of the domestic housing market. The measures are intended to stimulate mortgage credit demand by reducing transaction costs (i.e., notary fees) as well as expanding the tax deductibility scope for residential mortgage loans originated in 2009 and 2010. However, their effectiveness ultimately lies on the Greek banks' discretion to extend credit amid the current financial conditions. The Greek government has also pledged to guarantee loan amounts granted in excess of 75% LTV ratio, and up to 100% LTV, for loans disbursed by the end of 2010. Fitch Ratings said that a guarantee for high-LTV loans means that the state itself would be liable for up to the first 25% of credit losses under the new scheme. This could lead to more aggressive loan underwriting from Greek lenders who have recently been reducing mortgage origination volumes in light of ongoing funding challenges and elevated credit concerns.

Existing Greek RMBS transactions are structurally protected from an inflow of new high-LTV loans, given the tight loan substitution conditions in place. Fitch said that reduced costs and increased tax incentives could potentially drive an increase in loan prepayments from borrowers seeking to benefit from the new regime. However, no major prepayment impact is foreseen at this stage because of the high prevailing interest rates on offer.

The Spanish government has addressed current market problems through implementing special measures that include a state guarantee scheme covering against remuneration, the issuance of notes, bonds and obligations admitted to the official secondary market in Spain; extended coverage of bank deposit guarantees; and creation of the Financial Assets Acquisition Fund managed by the Spanish Treasury to purchase top-quality financial assets of Spanish credit institutions and SPVs to enhance the flow of credit to companies and individuals.

In March, Spain also announced various measures including a E38 billion ($51.6 billion) stimulus package to cushion the effects of the global financial crisis on the real economy. The stimulus package includes E6 billion in tax cuts, the provision of E4 billion of liquidity to credit-strapped companies and households and an extra E11 billion to be spent on public works.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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