Germany has set new regulations for residential mortgage book sales to third parties. The law referred to in German as "Risikobegrenzungsgesetz" is expected to lead to a longer workout process for German residential mortgage loans.
Agreed to on June 27 by the parliament (Bundestag) and passed on July 4 by the upper house (Bundesrat), the new law comprises a number of amendments designed to improve transparency in loan agreements and to address borrower fears of mistreatment by the mortgage book purchaser. In addition, it clarifies foreclosure practices for mortgage loans.
According Unicredit Markets and Investment Banking analysts, there has been some intense discussion in Germany in the past regarding the transfer of loan receivables as alleged loopholes in German law have been reported. One of the concerns is that borrowers whose mortgages have been transferred by the originator might be at a disadvantage. These borrowers loan contracts could be terminated by the mortgage's new owner, which analysts said could lead to a repossession.
Under the new law, residential mortgage loans granted after the effective date of the Risikobegrenzungsgesetz can now only be terminated when the borrower is in arrears with at least two loan instalments and also when arrears add up to at least 2.5% of the initial nominal loan amount. Based on a standard residential loan with a 5% interest rate, the loan will be terminated when the borrower is in arrears with five monthly installments, compared to three to four months previously.
Second, for newly originated mortgage loans a notice period of six months will apply before the foreclosure process on the property can be started by the lender. Previously, property liens (Grundschulden) could be declared as immediately due and enforceable.
According to Unicredit, the German legislator has not agreed on any special rights of loan-termination for borrowers whose loans are transferred by the originator. There has also been no general prohibition of loan transfer and the right of termination of a contract by the lender due to a significant financial deterioration of the borrower is still possible under the new legislation.
Fitch Ratings said that the new law will lead to longer workout periods for residential mortgage loans but it will not have negative impact on existing RMBS transactions because the changes will only apply to new loans.
"When analyzing future RMBS transactions, Fitch will distinguish between loans granted before and after the new law became effective," said Susanne Matern, senior director and head of Fitch's structured finance team in Frankfurt. "For loans granted after the effective date, Fitch will adjust its assumptions on workout periods."