Catalonian law on housing emergencies may deter buyers of NPL pools

Potential buyers of non-performing Spanish mortgage loan pools will likely be deterred by the Catalonian law 24/2015, which addresses housing emergencies, according to Moody’s Investors Service.

“Under the new law, private equity firms and hedge funds that buy NPL pools at high discounts could lose their benefit. If a bank sells the loan to a third party at a lower price than the loan’s current balance, the borrower can be released from their debt by paying the third party the very same price,” said Alberto Barbachano at Moody’s.

“Even if the subsequent transfer of the loan to a securitisation is made at par value, there is a risk that the borrower could pay back the debt for the same price that the third party paid. This would result in part of the mortgage being effectively written off, it can no longer be collected from the borrower, and would entail a loss for the SPV,” added Juan Miguel Martin-Abde, an analyst at Moody’s.

“Even though

there

exists

a

similar provision in the Spanish Civil code, the new Catalonian law is wider in scope and less burdensome in terms of criteria for the exercise of this right by the borrower,” both Alberto and Juan Miguel concluded.

Moody’s said the inclusion of Catalonian assets transferred below par in Spanish residential mortgage-backed securities (RMBS) might be adversely affected by this law. However, the law’s provision will not affect outstanding or new transactions, where the seller in question directly originated the portfolio, or where the sale and the subsequent transfer to the specialpurpose vehicle are made at par value.

In addition, Moody’s considers that the law’s effectiveness might be jeopardised because of the practicalities required. If there were no contractual provisions in the loan requiring the consent of, or communication with the underlying loan’s borrower, it may be difficult for the borrower to find out that the loan has been sold, or the relevant terms and price.