Originator support should diminish for Spanish structured finance transactions through refinancing and restructuring of loans that are at risk or delinquent, Fitch Ratings analysts said.

The recent prepayment rates of Spanish RMBS have been mostly driven by loan restructurings of at-risk borrowers, rather than refinancings by performing borrowers.

Since most residential and SME borrowers already benefit from a low interest rate environment, there is limited motivation for performing borrowers to refinance. Credit might not be available or new loans might be charged with higher borrowing costs. This further reduces the incentive for performing borrowers to refinance.

However, without originator support, higher losses will occur in securitized portfolios. The rating agency believes that originator support for Spanish structured finance will diminish in the near term. This is the result of the reputation risk associated with structured finance downgrades diminishing since investors are now very much aware of the economic prospects in Spain.

In addition, repurchasing risky assets as part of restructuring could have negative implications on the creditworthiness of the financial institution if such assets are transferred back onto the banks' balance sheet. In addition, many retained securitization notes are well above the European Central Bank (ECB) rating threshold for repo eligibility.

"Originator support helps explain higher-than-expected loan prepayments and declining portfolio delinquencies within Spanish securitizations," according to Jeffery Cromartie, senior director in Fitch's structured credit team in London. "This also creates a degree of rating stability — which could keep notes eligible for repo funding with the ECB."

Given funding pressure for some Spanish financial institutions, Fitch believes maintaining ECB eligibility is a key motivation for originator support.

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