The new Italian Tremonti Decree may impact Italian RMBS and Obbligazioni Bancarie Garantite (OBG) programs, Fitch Ratings said.

However, it is still too early to assess how Italian mortgage originators and servicers will interpret the new legislation, or whether it will impact ratings.

The decree enables Italian banks to receive government funds to help recapitalization efforts in exchange for a commitment to maintain mortgage borrower support. The support includes increased lending commitments and payment holidays for at least twelve months for qualifying distressed borrowers.

Fitch believes that the decree might potentially have negative ramifications for Italian RMBS transactions and OBG programs. In Italian RMBS and OBG programs, mortgage loans are typically classified as in default once a borrower is a specific number of installments in arrears, usually determined as seven unpaid monthly installments for loans paying on a monthly basis.

Monthly payment holidays will still be treated as payments in arrears. If this is the case, the fact that a loan benefits from a payment holiday will have no impact on the delinquent or defaulted loan definition and the related excess spread provisioning mechanisms.

Accordingly, Fitch would expect servicers of RMBS portfolios and cover pools to continue to follow this approach and disclose defaulted and delinquent loans in their portfolio servicer reports, but also to add detail on the share of defaulted and delinquent loans that are benefiting from payment holidays.

Details on eligibility for the scheme and how it will be employed by lenders will shed further light on the possible effects the scheme will have on RMBS and OBG structures.

"If the borrower is not capable of recovery, but is still eligible for the scheme, then there could be a widespread exercise of the payment holiday option," Fitch analysts said. "This could cause increases in loss severity if interest during the payment holiday period is capitalized, and could also lead to potential liquidity shortfalls for RMBS issuers and OBG guarantors."

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