Chile's domestic RMBS has lost a lot of friends over the last several months. An unprecedented jump in prepayment levels, particularly among prime borrowers, has led to downgrades in the sector and convinced investors that cashing out is the way to go. "There's no interest in investing [in this paper] at the moment," said an official at a Santiago-based insurance company.
While the damage hasn't deteriorated into defaults, investors have been turned off enough to prefer selling the collateral and foregoing the remaining yield than holding on. In the past several months, after consulting with bondholders, Banchile Securitizadora and BCI Securitizadora have sold the underlying portfolios of bruised deals they arranged. Two additional transactions from BanChile are understood to be in the process of selling off collateral and others might follow, sources said.
It was the coupling of vulnerable structures and a sustained drop in interest rates that took down deals in the sector. The decline in rates encouraged borrowers - particularly in the prime segments - to refinance. An exemption on the stamp tax for refinancings, and, to a lesser degree, a drop in associated expenses, provided further incentives, Fitch Ratings said in a report.
According to the Superintendency of Banks and Financial Institutions, the average rate on the kind of mortgages that are securitizable was 5.22% in March 2005 for terms between 12 and 20 years. While that marked a jump from an all-time low of 4.61% in July 2004, it remains well below the 7.71% averaged in March 2002.
Egged on by historically low interest rates, borrowers prepaid their mortgages in unforeseen droves. A big portion of mortgages that banks originated between 1996 and 2002 were swept up in the refinancing wave. In the prime segment, prepayment rates tripled from historical levels, while in the subprime class they have doubled, according to the Fitch report.
Had deals featured structures with potentially high prepayments in mind, they would have fared better. As it was, many relied on overcollateralization through excess spread, precisely the type of structure least shielded from the prepayment onslaught. "Banks were selling portfolios at a premium," said Gregory Kabance, director of Latin American structured finance at Fitch. The bet that the excess spread would make up for that proved to be a poor one in an interest rate climate that was looking more and more like that of a developed country. "They misjudged the risk," Kabance said.
While structurers could, in the future, fashion deals better equipped to deal with leaps in prepayment rates, the current rate environment makes the economics for arrangers less attractive, according to a source at a securitizing agent.
And, though rates have been rising lately, the refinancing boom in Chile has not been played out. In a sign that the prepayments are still inflicting damage on existing deals, only last week Standard & Poor's affiliate Feller Rate slashed the rating on a Santander Santiago-led RMBS to BB' from BBB' on the national scale.
Lease deals stand firm, for now
Elsewhere in the housing sector, deals backed by housing leases, which target low-income borrowers, have so far weathered the storm. But a change in the payment schedule of a government subsidy to lessees could lead to trouble down the road, sources said. Prior to last year, the subsidy was paid out periodically during the life of the leasing contract, deterring lessees from refinancing since they would lose the subsidy. Now the government payout is in a lump sump at the beginning of the lease, thereby eliminating that penalty for refinancing.
On the other hand, banks are not exactly tripping over each other to sign on the kind of low-income individuals that gravitate to the leasing sector. "These clients are less attractive for banks because they can't be sold [an array] of products," said Marcelo Arias, head of structured finance at Feller Rate.
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