The Spanish real estate market is proving strong, despite scares that resulted from the recent decrease in equity prices on the Madrid Stock Exchange (ASR, 4/30/07).

Generally speaking, the outlook remains positive and, by the beginning of last week, trades began to settle.

Market analysts said that, though some securitization paper could be affected in the short term, the recent troubles in Spain will likely not lead to the foretold debacle of the Spanish real estate market (ASR,4/7/07) that some pundits predicted as a result of U.S. subprime woes.

"Has the Spanish real estate bubble burst?" asked Jean-David Cirotteau, lead ABS analyst for Societe Generale. "We believe not. Leveraged loan CLOs may suffer - particularly those with higher exposure to Spanish real estate developers. We expect some defaults will occur, although losses should be limited to equity participants."

Spain registered 18.2 billion ($24.6 billion) of new issues in 2006 in its SME CLO segment. According to SocGen research, the exposure to the real estate sector in a number of these portfolios is, on average, at 34.1%, but in some cases it is over 55%. SocGen analysts said that senior tranches should remain unaffected since credit enhancement within the structures will prevent a severe deterioration, leaving only the triple-B tranches at an obvious risk.

Cirotteau said that this possibility of default should not bleed over to Spanish RMBS. With 35.86 billion of new issues in 2006, Spain is tallied as Europe's second-largest RMBS market and is structured mainly on owner-occupied loans, with a limited proportion of subprime borrowers.

According to Deutsche Bank Securities, Spanish RMBS deals continue to display stable arrears. Spanish banks also stated last week that the credit trends in the Spanish mortgage lending books remain relatively benign. "We don't expect performances to deteriorate heavily for the majority of the securitized deals," Cirotteau said, even if the market, which seems to have stabilized, begins a downturn yet again.

However, with mortgage rates at their highest in over two years and household gearing at unprecedented levels, the Spanish market remains vulnerable to weakening consumer fundamentals. Spanish mortgage lending and borrowing has recently been compared to the U.S. mortgage markets, and thus deemed more vulnerable to the U.S.-styled crisis recently happening in its subprime mortgage segment. "Spain came under scrutiny several months ago, and this led to small spread widening at the end of 3Q06, which was then followed by a narrowing period until recently when a busy pipeline ended this narrowing period," Cirotteau said.

However, Deutsche Bank analysts said that even a moderate adjustment in house prices could have a noticeable impact on employment and GDP growth given the economic dominance of the housing market.

To be sure, Spanish real estate itself is continuing to slide. Nationally, house price growth slowed to 7.2% in 1Q07 from 9.1% in 4Q06, according to Spain's el Ministerio de Vivienda. Although all regions recorded annual house price increases, decreases in house price inflation were registered on a quarterly basis in Leon (-0.1%), Salamanca (-0.28%), Caceres (-1.2%) and Huesca (-0.7%).

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

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