Re­cov­er­ing house prices to sup­press losses in mort­gage deals

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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