The establishment of the Italian NPL market has spurred the growth of a subprime borrower base in the country. And ABS market participants are ready for the challenge. In fact, Italian servicers said that they are prepared to take on the task of servicing subprime mortgage portofolios and are confident about the extensive experience they have gained by working in the more established Italian NPL market.
Outside of the U.K., subprime mortgage products are not as developed. On the European continent, the Netherlands has developed a subprime market that focused primarily on near-prime borrowers. However, the rise in arrears and foreclosures across the Dutch market over the last few years has produced a larger group of subprime borrowers. Germany has also seen similar activity, though it might take some time before these products are refinanced via the securitization market. Italy, on the other hand, has had no subprime lending products being offered.
According to Fitch Ratings, which earlier this year hosted a seminar on the Italian mortgage servicing sector, the substantial nonperforming loan market in Italy has created a subprime borrower culture similar to those in Germany and the Netherlands. Fitch noted that at least one servicer with banking capabilities indicated the development of loan products geared at subprime borrowers. "Italian servicers understand that should a subprime market emerge, emphasis would need to be put on early arrears collections tactics, appropriate training and systems investment," said Edward Register, a director in European structured finance at Fitch. "However, cultural and regulatory issues may hinder the development of such a market."
Fitch said that from an operational perspective, subprime loans require more monitoring and a more proactive approach to servicing early arrears, management and collections. Servicers said that if subprime lending were to take off, a greater emphasis would be put on specific training on collections and loss mitigation tactics. It was generally noted that a lack of adequate documentation and mediocre information technology were some of the servicers' biggest challenges, along with timing and the inefficiencies of the Italian courts.
Cultural barriers and regulatory hurdles are hindering the profit incentive to get these product lines out. Under Italian usury laws, the interest rate charged on a mortgage loan cannot exceed that which is charged by the country's central bank - subprime lending is typically charged at a higher interest rate in other countries. "At the moment, the challenge is how to develop product and stay within the relevant laws," Register said.
Subprime was often perceived as sub performing in Italy but Fitch's Register believes that the long history Italians have with NPLs could ease borrowers into better understanding how these mortgage products function.
According to Standard & Poor's, which last week held its 2H06 outlook teleconference in London, where this topic was discussed, the subprime buzz isn't likely to impact volumes in 2006. If these deals begin to flow, it won't be before next year. "We see a general trend in Southern European countries [in] the way individuals operate - they are generally becoming more leveraged," explained Jose Ramon Tora, director of continental markets at S&P. "After some of these countries go through some recession we will see more segments there for a nonconforming market." In Italy, Tora said that some of the main players were already looking into the different possibilities to tap this segment.
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