Recovering house prices to suppress losses in mortgage deals
Recovering house prices in the UK, Ireland, Spain and the Netherlands will help to suppress losses in residential mortgagebacked securities (RMBS) deals, Moody’s Investors Service said in a special report. The recovery has been less pronounced in the Italian market.
As house price growth typically increases borrower equity, Moody’s currently anticipates higher recoveries on those loans that do default, all else being equal.
“House price increases can prompt overheating, but at this stage, the risk is remote to our ratings in RMBS deals,” said Stanislav Natassine, a Senior Analyst at Moody’s.
“Our analysis shows that the current increase in house prices in Ireland, Portugal and Spain is still not sufficient to further increase the modelled house price stress rates according to our approach. In order to take into account the house price increases in the UK, Italy and the Netherlands, we assume higher house price declines in our stressed case scenario,” observed Rodrigo Conde Puentes, Analyst at Moody’s.
The rating agency’s research shows that the performance of the outstanding RMBS transactions is improving overall in all of the markets in its sample.
“The pace of the house price recovery has varied across European RMBS markets. The different macro conditions and pressure points that affect borrower affordability mean that the observed pace of the house price rise — and the housing market’s recovery — is different across these economies. Of the key European RMBS markets, Ireland’s house price recovery has been the most pronounced, with the UK closely behind,” said Gregory Davies, an Assistant Vice President at Moody’s.
Moody’s said the pace of the housing market’s recovery in Ireland is sharper than in other European RMBS markets, mainly because of the severity of the Irish market’s collapse in 2008-2012. While the pace of the recovery could be an indication of potential overheating in the market over the long term, at this stage, the increase in house prices is not sufficient to have an impact on Moody’s model outputs for outstanding Irish RMBS transactions.
The rating agency says that macroprudential measures proposed by the Central Bank of Ireland to restrict lending at higher LTV and loan-to-income (LTI) ratios will likely temper the pace of house price growth in the short term, if implemented. House price increases have generally also translated into an improvement in arrears; this improvement will likely continue as long as Ireland’s macroeconomic conditions remain positive.
The pace of house price growth in the UK may become comparatively more moderate than the pace of house price growth in other European countries, owing to a potential softening of demand for buy-to-let (BTL) properties in the UK. In Spain, a strengthening macroeconomic environment, persistent low interest rates and fewer house repossessions will increase mortgage loan origination and push up house prices, provided that housing demand picks up. Loan origination in Spain increased by about 13% during 2014-15, and Moody’s considers that the increase in origination will likely translate into higher property over the remainder of 2015.
Dutch originators’ data show that housing recovery rates in the Netherlands have been steadily increasing since 2013. The credit-positive house price recovery in the first half of 2015 will increase the proceeds that originators can recover in cases of foreclosure and will reinforce the broadly stable performance of Dutch RMBS deals.
In Italy, Moody’s expects house prices to remain flat for the next year.
In contrast with some other European markets, Italy stands out because it did not experience a housing bubble before the crisis. Household debt is still relatively low, at around 62.6% as of Q4 2014, and so does not influence the Italian market’s house price trends very significantly.
Instead, lack of housing relative to other European markets is a stronger driver of Italian house prices, as is the country’s weak macro environment, given its high unemployment rate and nascent, fragile economic recovery.