Fitch Ratings said today that mortgage support measures announced earlier this week by the Greek government may have a positive impact on the revival of the domestic housing market.
Their effectiveness ultimately lies on the Greek banks' discretion to extend credit amid the current financial conditions.
The new government 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.
"Mortgage debt penetration in Greece stands below Eurozone average, and is significantly lower than countries like the Netherlands, where a full tax deductibility regime has promoted market growth over time," said Lara Patrignani, senior director, in Fitch's European structured finance team in London. "Given also that transaction costs in Greece have traditionally been high by international standards, both of these measures have the potential to stimulate the country's mortgage and property market."
The Greek government has also pledged to guarantee loan amounts granted in excess of 75% loan-to-value (LTV) ratio, and up to 100% LTV, for loans disbursed by the end of 2010. Fitch 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.
"Given that for a credit-worthy customer, Greek banks would anyway exceed the 75% LTV threshold, the new scheme may effectively encourage underwriting of marginal credits," said Spyros Michas, associate director, in Fitch's European structured finance team in London. "The possibility of excessive risk-taking is there, raising the need for adequate regulatory supervision aimed to preserve responsible lending, while increased credit is flowing through the economy."
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 and 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.