Greece's mortgage market is experiencing an uptick in volume. Favorable interest rates have led to more refinancing among borrowers, and lenders are continuing to experiment with new mortgage products to attract first time borrowers. However, what's good for the economy has translated into some trouble for existing RMBS deals, which are beginning to have prepayment troubles, according to industry experts.

Fitch Ratings recently upgraded three tranches and affirmed 19 others from seven Greek RMBS transactions. The upgrades reflect increasing credit enhancement levels in the deals. The rise is generated by the sequential note paydown of the notes and an increase in the principal payment rate of these deals as a result of more competition in the Greek market. "Over the past six to 12 months, the Greek mortgage market has experienced competition from lending banks," said Alison Ho, associate director at Fitch.

Along with falling interest rates, there has been increased borrower interest that has come with new mortgage product availability. The market has seen more fixed-rate mortgage products, as well as a growing number of loans offered in Swiss Franc denominations, Ho says. "It delineates the growing maturity of the market which, in comparison to other European mortgage markets, has had a low level of mortgage lending, with just 23% of GDP made up of mortgage lending compared to the European average of 40%," she said.

The increase in competition has had a noticeable effect on existing Greek RMBS deals. With the exception of the Grifonas and Byzantium RMBS deals, the transactions Fitch reviewed have seen a significant rise in the level of principal repayments over the last six months. "These loan refinancings have resulted in loans breeching the representation of warranties within the structure, which means that these loans have had to be retired from their respective portfolios," Ho said.

Although these retired loans can be replaced, deal structures set limits as to how much of the loans are eligible for replacement. All three Themeleion RMBS transactions have now reached the 15% limit on replacement loans as a percentage of the original portfolio and can no longer bring new loans into the pools. This has resulted, Ho says, in the payment rates accelerating the pay down of the notes, which has also had a negative impact on the characteristics of the portfolio.

"There is a clear element of adverse loan selection where the level of arrears for loans greater than one month have all begun to rise," she said, adding that the 2006 vintage seemed to be most affected by the rise in prepayments.

The Grifonas portfolio has not experienced the same prepayment trends as other Greek RMBS deals, as it comprises solely loans granted to civil servants through the Consignment Deposits and Loans Funds (CDLF), a public law entity owned wholly by the Hellenic Republic. Payments are deducted directly from the borrowers' salary or pension, thus resulting in extremely low levels of arrears.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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