The Italian Bersani Decree, which eliminates prepayment penalties on certain mortgages, has set off the highest rate of prepayments since 2000, according to Standard & Poor's. The bump is providing some lift to investors in an otherwise sluggish European ABS sector.
"I imagine that investors in Italian RMBS are very happy to be getting yields sooner than later," said one market observer. "This means they can cash out and re-invest in wider spreads. What started for them around 13 basis points to 14 basis points is now around 40 basis points and may go to 50 basis points."
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). The treatment of outstanding loans originated before 2001 will have a maximum applicable penalty of 0.5% of principal outstanding. Penalties for mortgages maturing in three years and two years or less will drop to 0.2% 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 might be charged a maximum fee of 1.9%; for loans maturing in three years' and two years' time or less, the penalties drop to 0.2% and flat, respectively.
"Average prepayment rates for Italian RMBS increased by 1.6% to 8.5%, showing that a clear and notable structural break in prepayment patterns is occurring in this market," said S&P credit analyst Giorgio Frascella. "The new law provisions on prepayments set forth by the Bersani Decree are combining with higher interest rates and market competition to drive up the prepayment rates."
According to the rating agency, the Italian RMBS market is more solid when compared to the rest of Europe. Despite interest rate rises, delinquencies remained broadly stable in the third quarter and in line with predictions. Italian RMBS collateral performance also stayed unchanged. However, increasing interest rates are likely to further strain borrowers.
Better Than Average
A Milan-based solicitor, who has sat in on several recent private meetings held by players in the Italian ABS sector, said the market in Italy benefits from the Bersani Decree because it has enabled borrowers to stabilize their debt-to-equity ratios. "In Europe, borrowers are typically 80% in debt on their house, with the remadining 20% in equity," he said. "In Italy, where banks use very conservative lending policies, the typical homeowner is more like 55% in debt, far below what is seen in other markets, with 45% equity."
In previous years, conservative lending practices meant that the country was "far away from a subprime scenario," said that attorney. That situation made Italian RMBS more attractive to investors than RMBS in other countries, such as the United Kingdom. House prices remain stable, he added. There are concerns, however, that disposable income for Italians has dropped so severely that it could strain their abilities to repay in the future.
According to the solicitor, several RMBS deals are almost ready to come to market, but the transactions are being held back until cautious investors get a sense of how the sector will perform for the rest of the year. The deals will move as soon "as the price is right," he added.
Indeed, only one new transaction, the 122 million Palazzo Due Funding & Co. S.C.A., has recently come to market. That deal is a refinancing of the 2001 notes issued by Palazzo Finance Due SpA. Also, according to the S&P report, ratings continue to look good for deals that have already priced. For instance, on the Class B notes issued by Cordusio RMBS S.r.l. was raised to AAA' from AA+.' Over the same period, the notes issued in four transactions were placed on CreditWatch with positive implications: F-E Mortgages S.r.l., Berica 2 MBS S.r.l., Berica 3 MBS S.r.l. and Siena Mortgages 03-4 S.r.l.
"Going forward, we consider that a slight deterioration of the collateral performance might be likely, considering the high share of floating-rate mortgage products included in the Italian RMBS securitizations that we have rated," said the S&P analysts. "However, we do not expect the severity of any deterioration to be the same across all the transactions we rate."
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