Fitch: Portugal's Proposed Tax Hike May Strain RMBS Performance

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Portuguese household incomes would feel the strain of a proposed hike in income tax, which would in turn have a knock-on effect on arrears and default levels in the RMBS transactions, according to an Oct. 5, Fitch Ratings report .

The proposed tax hike would increase the average rate of income tax to 11.8% from 9.8% and introduce a 4% income tax surcharge for 2013.

 "The combination of the magnitude of the increase, the universal nature and direct effect on net income means this is likely to have a greater impact on performance than other austerity measures, such as sales taxes and cuts in public sector spending," analysts said in the report.   

Fitch said that the exact impact on performance  is hard to calculate, but if the tax hike were to push a borrower with a 75% LTV mortgage from a DTI of 35% to a DTI of 45% it would increase base case default assumptions  to 10% from 8.1%.  

"Transactions that are already failing to generate the necessary excess revenue to provision against defaults are most exposed to the increase in income tax," said analysts.

 Lusitano 4, 5 and 6 transactions are good examples of transactions where the reserve funds have been heavily drawn (53.3%, 33.5% and 13.7% of their targets, respectively) to provision for the pipeline of loans that are in arrears by between 12 and 24 months. The Lusitano transactions were downgraded for performance reasons last month as part of a review of 30 Portuguese RMBS transactions.


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