Industry analysts are seeing signs that the slowdown in the Spanish housing market is beginning to leave its mark on Spanish RMBS deals. A report published by Fitch Ratings last week said that the slower growth in house prices weakened the recovery cushion for Spanish RMBS deals and is beginning to impact arrears, particularly for the less-seasoned recent transactions.

"The likelihood of a rise in arrears is driven by increasing interest rates, a slowing down in the economy and new products being offered outside lenders' areas of expertise, backed by riskier collateral," reported Fitch analysts. "The increase in Euribor in the past 12 months has also raised monthly installments."

According to Standard & Poor's, the Spanish housing market is made up almost entirely of variable-rate loans, with less than 1% of outstanding mortgage being fixed-rate mortgages. Analysts at S&P said that the recent increases in interest rates might take an average of six months to be fully incorporated, so the impact of recent rate increases might start showing up more in coming quarters.

Although Spain has no formal subprime sector, mortgage lenders there have aggressively expanded a segment of the market catering to riskier borrowers that functions along the lines of the U.K. subprime mortgage market. During the last several years, lenders have developed an increasing number of products to cater to nonprime borrowers. Fitch reported earlier this year that over the past year, it has observed interest from international players exploring subprime capabilities in Spain and that appetite for subprime paper was likely to grow in Spain.

According to the Fitch report, a number of transactions are now experiencing rising delinquencies of around 1%. More troubling is the fact that transactions with concentrations in the Valencia and Murcia regions are showing delinquencies more than double those of other deals from programs at the same seasoning. Deals backed by loans made by specialist lenders to riskier borrowers with virtually no employment history are also registering the highest arrears, and Fitch said that recently closed deals, backed by high LTV loans, are expected to have an increase in delinquencies.

"The market has been uncertain over house price growth and direction in Spain and remains anxious for any troubling signs that might appear in RMBS deals," reported analysts at the Royal Bank of Scotland. "Some of those signs have begun to surface, but they appear in need of more analysis rather than indicating that panic should ensue."

To be sure, Fitch has stated that while arrears are on the up, Spanish RMBS deals still fare far better when compared with the rest of Europe.

"In the event of an economic downturn, despite an increase in arrears and falling house prices, recoveries should remain high for well-seasoned Fitch-rated Spanish RMBS deals," reported analysts at Fitch. "The increase of 21.7% in house prices in the past two years in Spain provides a healthy cushion for recoveries."

So far, arrears have increased only on isolated transactions. S&P reported that TdA 25 had breached its trigger level on its reserve fund at the end of June. The reserve fund was down by 12.4% from its target, principally drawn from reduced excess spread due to NAS-IO notes.

And analysts at the Royal Bank of Scotland said they found a number of discrepancies in the last performance reports that merited further investigation. Among the deals it flagged were Caja Madrid's Madrid RMBS II, which, in its August investor report released in September, reported it had tapped its reserve fund for 846 million ($1.1 billion), or 1.4% of its required amount.

Royal Bank of Scotland analysts said the discrepancy highlighted its general concerns about Spanish mortgage collateral in transactions. Arrears seemed to be building at an unprecedented rate. RBS also noted that when Caja Madrid structured its Caja Mairid II deal, the Spanish bank used shorter write-off mechanisms to reduce the required credit enhancement. "That means that the principal and interest charged off was greater than the approximately 70 basis points of spread provided by the swap," explained analysts. "The level of reported arrears suggests that the reserve will continue to be tapped."

Some of the other Spanish deals for which TdA acts as trustee also appear close to performance triggers, said Royal Bank of Scotland analysts. Among those it listed are UCI's and certain of Banco Santander's transactions, both of which have shown volatile behavior in delinquencies. Although the Royal Bank of Scotland said it did not predict a loss for bondholders, it did expect reserves to

be drawn.

"We believe that Caja Madrid disagrees with the numbers produced by the gestora, and, with our analysis showing numbers that conflict or appear not to be correct within a number of investor reports produced by TdA, we are concerned over the quality of the data produced," reported the Royal Bank analysts.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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