The Spanish government has introduced a new mortgage securitization guarantees program. The aim is to inject liquidity into what has become a very stagnant sector.
According to Spain's Instituto de Credito Oficial, up to 3 billion ($4.7 billion) of guarantees are to be made available to banks, savings banks and credit cooperatives.
The deadline for applications is on April 24. The plan includes home building programs and offers mortgage-repayment relief for borrowers having difficulties repaying their loans. The guarantees are expected to stimulate the financing of subsidized housing.
The plan requires that a minimum of 80% of the mortgages in a securitized pool backed by subsidized housing. Lenders must also pledge to reinvest the amounts of the guarantee. Market reports have said that the additional eligibility criteria requires that the loans must not be in arrears or over 80% LTV. The guaranteed tranche must also be triple-A rated through internal credit enhancement and be worth more than 100 million.
Deutsche Bank analysts said that the initiative closely resembles the guarantees that were available on a limited basis for eligible Spanish SME CLOs. Between 2002 and 2006, the Spanish government and the Region of Catalonia guaranteed almost 10 billion of Spanish SME CLO bonds. "The program is also likely to be similar in scale to what has been observable in the Spanish SME CLO market, where roughly 15% of cumulative issuance between 2004 and 2006 was wrapped by the government," Deutsche Bank said.
However, the 3 billion that the Spanish government has pledged represents only 2% of the total gross Spanish mortgage lending in 2007 and 6% of Spanish RMBS primary volumes in 2007, a relatively small portion of the market. "It's an affordable housing program that provides better affordability for challenged borrowers, given that the conditions in the Spanish mortgage market have tightened. This pledge will provide some much-needed liquidity but only to this particular sector," Deutsche analysts said.
Since August 2007, most of the securitizations executed by Spanish banks have been retained by the originator, with the eligible securities pledged to the European Central Bank (ECB) as a part of repurchase agreements (REPO). These agreements have an average tenor of about 90 days. Fitch Ratings estimates that roughly $54 billion of Spanish ABS and MBS have been issued since August 2007 and could be used as collateral under the ECB repo arrangements.
"It's important to note that the ECB repo arrangements are not something new," a market analyst said. "Institutions have been using this type of liquidity for several years now, and it is uncertain how long banks will continue to use the program."
Deutsche Bank said that the success of the government's proposal will depend on the all-in funding cost of government-guaranteed RMBS bonds in the capital markets for banks. "In the pre-crisis Spanish securitization market, the average nonguaranteed SME CLO triple-A launch spread was 14 basis points while government guaranteed bonds typically priced 10 basis points inside this level," Deutsche analysts said. "We believe such premiums will be significantly wider in the current market."
As an example, triple-A tranches of Dutch RMBS backed by NHG-guaranteed securitized bonds have typically priced inside of 15 basis points, and since the onset of the credit crisis, Dutch lenders have taken advantage of this cheap funding option, with around 6 billion of NHG-guaranteed mortgage RMBS appearing outside of the Netherlands. An NHG guarantee is a Dutch government guarantee on securitized mortgage loans.
It's likely that the Spanish RMBS guaranteed tranches will also price closer to nonguaranteed bonds, providing Spanish banks with a potentially important mortgage funding outlet in the current market, according to Deutsche Bank analysts.
"The significant limitation here, however, is the relatively small scale of such guarantees relative to the extent of mortgage financing in Spain," analysts said. "We certainly do not see Spanish-government-guaranteed RMBS in itself reopening the broader securitization market going forward, and therefore believe that Spanish banks will continue to rely on ECB-repo financing over 2008, possibly in combination with placed wrapped senior bonds."
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