Mortgage bond and MBS market development in Spain and Portugal.

AuthorFranscini, Mathilde
PositionMortgage backed securities

Similarly to France, Spain has set up a legal and regulatory framework with the objective to develop mortgage funding vehicles markets. However, as opposed to France, Spain has not adopted in a strict manner the German legal and regulatory framework. The great flexibility of MBS has contributed to the development of this mortgage funding instrument. In Portugal, given the high home ownership rate, the mortgage market has reached a critical mass relevant for securitisation. The new securitisation law of 1999 has set up the legal and regulatory framework necessary for a sound development of mortgage funding instruments.

  1. SPAIN

    1. Mortgage Lending Development

      Mortgage lending has developed into a fast growing and highly competitive market segment ill Spain. The driving forces behind this trend are an increased entry by universal banks in the market for mortgage loans and especially the boom in the private housing market since the late 1980s with a related downturn in mortgage interest rate levels. Since 1992, the mortgage interest rate has come down from 68% to the current 4.8%.

      Mortgage loans usually have fixed rates and low LTV ratios, and most residential properties are owner-occupied. Banks may also use RMBS as collateral in repurchase agreements.

    2. Specialized Funding Vehicles

      1. Mortgage Bonds-Cedulas Hipotecarias

        Mortgage bonds development:

        Argentaria's mortgage bond was launched at the start of 1999. In value it was EUR 1 billion with a ten year maturity listed in Luxembourg and Madrid. There was a difference in the rating compared to the German Pfandbriefe.

        Jumbo issues of Cedulas Hipotecarias are one of the most significant developments in the Spanish mortgage market. This new market emerged in Spain in 1999. Moreover, Moody's has upgraded the rating for the Argentaria jumbo (AAA rated) as a result of the merger of the two institutions, Argentaria and BBV to form BBVA.

        The volume of mortgage bonds outstanding currently amounts to an estimate of EUR 10 bn (as of year 2000), more than double the figure in 1998. Nevertheless, the proportion of mortgage bonds outstanding in relation to total mortgage loans only rose between 4% and 6% in the last few years and the trend is declining. This shows that the banks involved in the segment continue to prefer other refinancing channels.

        Nevertheless, the market for jumbo CH is expected to keep on growing. The circle of jumbo issuers should remain relatively small as the total mortgage stock is spread over a large number of institutions, and therefore only few banks have a sufficiently large number of assets eligible as cover.

        Issuers:

        Credit institutions which have included their activity in the mortgage sector in their statutes, which have obtained the authorization of the Spanish Minister of Economy and Finance and which have submitted themselves to a specific supervisory body (the Spanish Central Bank).

        Cedulas Hipotecarias may be issued by any credit institution who respect the few criteria mentioned above. Mortgage bonds can be issued by commercial banks, savings banks, credit co-operatives and specialized financial institutions. So far, the first two types have been carrying out most of the issuing activity.

      2. Mortgage-Backed Securities-Titulizacion Hipotecarias

        Mortgage market structure and legal framework:

        The Spanish Central Bank-Banco de Espana--regulates the mortgage market through guidelines on lending (1). Those regulations are very restrictive:

        * The maximum lending level (LTV ratio) is usually 80%.

        * The maximum debt-to-income ratio (DTI)--ability to repay--is 40%, the average being 27%.

        Furthermore, the use of scoring models and the credit history check of the mortgage applicants by credit agencies are part of the credit worthiness checks.

        Banco de Espana has a unique database which shows all loans for over Pta 1m.

        Mortgage lending represents a small portion in relation to Spanish GDP. Mortgages for private housing account for almost 80% of total mortgages.

        Savings banks have the largest share of the mortgage lending market with almost 52%. Apart from a large number of smaller, regional banks, there are now savings banks operating nationally, such as La Caixa, Caja Madrid mad Caixa Cataluna. Universal banks have the second largest market share at 38%. Mortgage banks...

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