Italian Mortgage Ratings Update

An Italian mortgage ratings update has just been issued by Fitch Ratings.

This post explains the headline changes covered by the Italian mortgage ratings update, including changes to the criteria Fitch Ratings use for assessing credit risk in the Italian residential mortgage market.

Overall, the changes made by the Italian mortgage ratings update mostly concern the Fitch Ratings assumptions for the Italian market.

The Fitch Italian mortgage ratings update is mostly concerned with the evolution of the wholesale mortgage market in Italy.  The Italian mortgage ratings update is expected to have an impact limited to existing Italian RMBS ratings and no impact on Italian covered bonds ratings.

Because it is written for the wholesale money markets, this Italian mortgage ratings update will have a very limited impact in the retail Italian mortgage market, but it is likely to restrain Italian bank mortgage lending in the medium term.

The Assumptions

Most of the agency’s assumptions, including baseline and stressed default scenarios as well as quick sale assumptions in the case of mortgage default levels, have remained unchanged. Overall Fitch offer a stable medium term view on the Italian mortgage and housing market.

Some assumptions have been slightly adjusted based on a regression analysis conducted on a sample of over 143,000 residential mortgage loans in Italy, but these are largely technical modifications to their model.

Fitch have recalibrated their foreclosure frequency (FF) matrix, including some specific foreclosure frequency adjustments for specific loan/borrower/property profiles. They have also updated the property value thresholds of illiquid properties.

In particular, the foreclosure frequency adjustment for non-Italian borrowers has increased. This change is supported by data showing the materially worse observed performance of non-Italian borrowers in Fitch-rated RMBS as compared with Italian nationals. This may lead some banks to further restrict mortgage lending to non-residents.

Fitch has moderated its house price decline (HPD) assumptions because the Italian housing market has performed broadly in line with the agency’s expectations.

In this Italian mortgage ratings update, the house price decline assumption is for the ‘AA+sf’ to remain stable at 43%.

Italian nominal house prices, i.e. with no allowance for inflation or deflation, have recently started flattening. This change has been supported by a stabilising outlook for the Italian market house price drivers, including new retail lending volumes and the affordability ratio for new housing transactions.

Fitch has slightly reduced its peak-to-trough assumption at ‘Bsf’ to 20% from 22%. This implies a further house price fall of 7% from quarter 4 2013 levels.

A further technical change has been made in this Italian mortgage ratings update to better align the forecast regional house price decline expectations with the forecast for national prices. To achieve this Fitch has changed the source of data it uses when indexing property values. As a direct result of this change, Fitch has also recalibrated the forecasting  model used to predict regional house price decline.

Finally, low prepayment stresses have been reduced to 2% in each year after closing in light of observed data trends in the Fitch-rated RMBS. This reflects the stabilisation of prepayment rates at low levels due to the currently low interest rate environment and subdued new lending.

Italian Mortgage Market Impact

The application of the revised assumptions is expected to have a limited effect on existing ratings of Italian RMBS transactions.

There are few transactions with significant exposure to non-Italian borrowers, therefore the change in related assumptions will have little effect on the analysis of Italian bank mortgage portfolios overall.

The revised assumptions for non-Italian borrowers may result in a lower breakeven asset percentage for Italian covered bonds programmes secured by cover pools with a significant portion of these loans, albeit no rating impact is expected. This may however lead Italian banks to offer a lower loan to value ratio to non-resident Italian mortgage borrowers.

The overall effect of the Fitch Italian mortgage ratings update is likely to be that the lending criteria of the stronger Italian banks will increasingly diverge from that of the weaker Italian banks. This trend will almost certainly be reinforced when the results of the European Central Bank asset review becomes available to the banks and the regulators. This may well lead to quite large differences between Italian banks in respect of loan to value (LTV) requirements for Italian mortgage applicants. There may also be a widening of the rate spread for mortgage products, with the stronger banks offering lower Italian mortgage rates than the weaker bank. In this market it is vital to ensure that you conduct detailed market research of the market to ensure you identify the best value Italian mortgage product.

You will find up-to-date coverage of the economic trends influencing the Euro mortgage market on the Market Trends page of our Best French Mortgage site.