The Italian banking regulator has released further information on its Bersani decree, announced at the beginning of February and slated to come into effect later this year.
According to the terms revealed, borrowers will have more incentive to make early repayments on mortgages. However, the new law is not expected to make a significant dent in existing mortgage prepayment rates.
The Italian Bersani Decree eliminates prepayment penalties on mortgages for all loans granted from April 3 and on all "first home" mortgages granted after Feb. 2 (ASR, 2/12/07). According to market reports, the treatment of outstanding loans originated before 2001 will have a maximum applicable penalty of 0.50% of principal outstanding (the penalty for mortgages maturing in three years' and two years' time or less drops to 0.20% and 0%, respectively).
For floating- and mixed-rate loans originated in or after 2001, the penalty is the same, but borrowers of fixed-rate loans made in or after 2001 may be charged a maximum fee of 1.90%; for loans maturing in three years' and two years' time or less, the penalty drops to 0.20% and 0%, respectively. "We expect a pickup in Italian mortgage prepayments as a result," Royal Bank of Scotland analysts said.
However, Fitch Ratings noted that the increasing principal payment rates (PPRs) for Italian RMBS face an uncertain impact from the legislative changes in Italy. Historically, high prepayment penalties have discouraged refinancing but the market has experienced a pickup in prepayment rates over the past year or so despite these charges. According to Fitch, the recent pickup is likely influenced by more competition and increasing euro-zone interest rates, which have made refinancing more attractive, even with the penalty costs.
However, the new terms for penalty fees outlined under the decree will likely result in higher prepayment speeds for future securitization transactions, and this has led to some market jitters. UniCredit Banca per la Casa, one of the largest Italian mortgage lenders, recently put together a transaction worth 3.9 billion ($5.2 billion) and some of the investors were left wondering about the impact the Bersani decree would have on this deal. According to Alessandro Gatto, director of European securitization at Societe Generale, the investors were making much ado about nothing.
Gatto added that, along with the penalty charges for early repayments, there were other disincentives that borrowers faced when looking to switch mortgages. "One of these major costs is to the notary public," he said. "In addition to purchasing a home, the notary public is used when switching mortgages, so there are double costs, sometimes worth 1% to 2% of the transaction."
According to Fitch, borrower mobility in Italy is less than in other European countries, as Italians tend to make a lifetime home purchase and are less inclined to relocate after becoming homeowners. "Many Italian RMBS deals include both residential and commercial loans mainly to small, family-run businesses," Fitch analysts said. "Deals containing a portion of commercial loans demonstrate higher and more volatile payment rates, as such, loans tend to be larger than residential loans."
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