Italy's more conservative approach to lending has resulted in the country's housing market withstanding the current economic environment, unlike neighboring European countries. This has also preserved the fundamentals of securitization structures.
According to Fitch Ratings, Italy represents one of the most important RMBS markets in Europe, with a market share of 6% by issuance size and 9% by number of deals in 2007. During this year, RMBS continued to represent the Italian securitization market's main asset class in terms of volume and number of deals, at 64% and 48%, respectively.
But unlike neighboring mortgage markets, Italian banks maintained a much more conservative approach to lending that in the RMBS heyday was often criticized as a barrier for Italy to reach its true growth potential.
Today it is that conservatism that has kept structures intact and, as market analysts said, sheltered the sector from the impact of the market crunch that has crippled the Spanish, Irish and U.K. markets.
"To understand why Italy has currently fared better than some of the other markets, you have to look at where the credit crunch hit the hardest, and this was the real estate and financial services," said Pier Paolo Vaschetti, an assistant vice president at Moody's Investors Service. In Italy, these two sectors have historically been less important than in other European markets.
For example, average LTV, household indebtedness, real estate price volatility, transparency and foreclosure timings are all important differences from many other European markets. Italian banks have been historically more conservative. For example, many institutions have been reluctant - for a variety of reasons - to consistently lend more than 80% LTV.
It was also less common to see borrowers take on debt beyond their mortgage in Italy. By contrast, in other markets, it was not uncommon for borrowers to get a mortgage and take on unsecured debt to accommodate extra fees such as furnishings.
"This can also be confirmed by the level of indebtedness in borrowers in Italy that is lower compared to the average level of indebtedness in other European countries," Vaschetti said.
In addition, the use of RMBS was commonly seen as a solution for alternative funding by banks. In fact, the majority of the originators are financial institutions in Italy, with mortgage loans as just one of their traditional products.
Nonetheless, although the situation may currently seem less dramatic compared to other countries and asset classes, Vaschetti said that Moody's noted an increase in delinquencies and defaults in Italian RMBS portfolios mainly resulting from the weak economic conditions, which also explains Moody's negative outlook for the sector.
According to Moody's, cumulative defaults in the Italian RMBS market increased to 1.16% of original balance in 4Q08, up from 0.99% in 3Q08 and 0.74% one year earlier in 4Q07. Moody's noted that many new transactions were rated during 2006 and 2007 and therefore, until 3Q07, the overall rate of increase in defaults appeared to decline. However, the past year recorded rapidly increasing levels of cumulated defaults, most notably by transactions in vintages 2003 (1.48%), 2004 (1.89%), 2005 (1.29%) and 2006 (1.48%) vintages. Cumulative default data for the above-mentioned vintages is provided as of 4Q08.
Of these vintages, the following transactions recorded the highest cumulative default levels as of 4Q08: Giotto Finance (3.05%) and Argo Mortgage (2.71%) of the 2002 vintage; Giotto Finance 2 (4.36%) of the 2003 vintage; Argo Mortgage 2 (4.03%) of the 2004 vintage; Castoro RMBS (2.54%) and Vela Home Series 3 (2.35%) of the 2005 vintage; and Berica 6 (2.76%), Vela ABS (2.40%) and Vela Home Series 4 (2.39%) of the 2006 vintage.
Daniela Di Filippo, director in European structured finance at Fitch, said that while it's true that historically banks have practiced more conservative lending, the high level of competition over the last three years slightly changed this landscape. Some lenders started to tentatively explore new market segments and include nonstandard products in their offering, but very few players exclusively targeted the nonconforming client segment. "Despite the high competition, Italian banks continued to apply stricter credit standards than in the rest of Europe," Di Filippo said.
It is estimated that the market catering to higher LTV products is limited to only 5% of loans. Nonconforming Italian mortgage portfolios (i.e., portfolios including loans that are not in line with the traditional lending approach) are not comparable to other European countries in terms of their credit risk profile aggressiveness, she added.
Di Filippo added that RMBS performance will be further bolstered by a more stable property market, although the reduced housing demand allowed property prices in Italy to remain fairly stable in 2008.
According to major real estate market players' forecasts, in 2009 property prices in Italy are expected to decrease no more than 10%, still well below market-value-decline assumptions that Fitch applies in its analysis.
Di Filippo said that the upward trend in 90+ arrears in deals mainly reflects the rising interest rate of past months. "It is difficult to make any forecasts on the future performance of Italian deals," she said. "It will mainly depend on the effects of the ongoing global financial crisis on the overall Italian economy and, in particular, on unemployment rate trends and borrowers' disposable income and how such factors will be counterbalanced by the current decreasing interest rates trend, which, in turn, is supporting a reduction in families' debt load."
Recession Moves In
The greater economic woes are as much of a concern in Italy as anywhere else. Italy is battling with the repercussions of recession and is facing growing unemployment rates that could trickle down to RMBS performance.
Moody's highlights that, unlike other European economies, Italy's growth did not depend on the real estate sector, and the growth rate of GDP has historically been much lower than other countries. "Italy's unemployment has constantly decreased in the last five years," said Alex Cataldo, general manager at Moody's Italia. "It has gone up in the current environment but at a slower rate than neighboring markets."
Di Filippo also pointed out that there has been political support for unemployment as well as in-house bank support of payment holidays. The Italian Banking Association (ABI) and the economy minister signed an agreement regarding the so-called "Tremonti-Bond" decree. The decree involves the Treasury purchasing newly issued hybrid debt in exchange for banks continuing to provide adequate corporate lending and offer unemployed borrowers the possibility to suspend their payments for at least 12 months.
The aim of the initiative is to reduce pressure on the SME sector and on households and, at the same time, support banks in maintaining their core capital in order to provide appropriate actions. For example, to avoid negative consequences, banks might be restricted from providing payment holiday options in RMBS deals since the owner of the asset is the SPV. However, this would not provide the borrowers whose mortgage has been securitized with such opportunity.
While market analysts do not believe the initiative will directly support RMBS, it is also unlikely to directly affect noteholders. "We doubt that the government intends to negatively affect the Italian RMBS market," said Unicredit analysts. "In fact, the original design of last year's Tremonti-Bond decree might have harmed RMBS, but the government's amendments helped avoid any negative impact on investors/borrowers so far. Hence, we believe that neither borrowers nor investors will be negatively impacted by this decree."
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