Sunday, 10 May 2009
Gov't measures have potential to stimulate housing market
The new government measures are intended to stimulate mortgage credit demand by reducing transaction costs (i.e notary fees) as well as expanding the tax deductibility scope for residential mortgage loans originated in 2009 and 2010.
"Mortgage debt penetration in Greece stands below Eurozone average, and is significantly lower than countries like the Netherlands, where a full tax deductibility regime has promoted market growth over time," says Lara Patrignani, Senior Director, in Fitch's European Structured Finance team in London. "Given also that transaction costs in Greece have traditionally been high by international standards, both of these measures have the potential to stimulate the country's mortgage and property market".
Moreover, in an apparent effort to support mortgage credit supply, the Greek government announced that it separately guarantees loan amounts granted in excess of 75% loan-to-value (LTV) ratio, and up to 100% LTV, for loans disbursed by the end of 2010.
Fitch is cautious with regards to the latter measure; a guarantee for high-LTV loans means that the state itself would be liable for up to the first 25% of credit losses under the new scheme. This could lead to more aggressive loan underwriting from Greek lenders who have recently been reducing mortgage origination volumes in light of ongoing funding challenges and elevated credit concerns.
Crucially, LTV is the single most important criterion in Greek mortgage underwriting. Apart from an indicative 75% LTV limit recommended by Bank of Greece (BoG), existing regulatory guidelines also impose a 40% limit on a borrower's debt-to-income (DTI) ratio. In Fitch's view however, both LTV and DTI regulatory guidelines have been largely ineffective as it is ultimately down to the lenders' discretion to override them.
"Given that for a creditworthy customer, Greek banks would anyway exceed the 75% LTV threshold, the new scheme may effectively encourage underwriting of marginal credits," says Spyros Michas, Associate Director, in Fitch's European Structured Finance team in London. "The possibility of excessive risk-taking is there, raising the need for adequate regulatory supervision aimed to preserve responsible lending, while increased credit is flowing through the economy."
Overall, Fitch expects continuing deterioration in Greek mortgage asset performance. As the new measures aim to stimulate new lending without addressing existing mortgage borrowers, there is no immediate rating impact on the outstanding Greek mortgage-backed issues; securitisations (RMBS) and covered bonds. However, Fitch will consider the potentially inferior credit risk profile of high-LTV-guaranteed loans when assigning new ratings to Greek transactions.
Existing Greek RMBS transactions are structurally protected from an inflow of new high-LTV loans, given the tight loan substitution conditions in place. As for the Greek covered bonds, Fitch will closely monitor the evolution of such loans - should they be introduced into the cover pools - as part of its periodical surveillance. Given the reduced costs and increased tax incentives in place, loan prepayments could potentially increase from borrowers seeking to benefit from the new regime. Nevertheless, no major prepayment impact is foreseen at this stage, owing to the high prevailing interest rates on offer.
Facing its first recession this year since 1993, Greece has recently seen an increase in the national unemployment rate along with a contraction in residential construction activity. According to the BoG, business and household confidence have also declined significantly, leading to lower residential investment and reduced demand for credit by households. Based on unofficial market sources (in the absence of a timely national house price index), Fitch understands house prices are currently experiencing considerable downward pressures, largely in line with international trends. Nevertheless, the fundamental characteristics of the Greek market - including high home ownership ratio, a relatively debt averse culture, and strong family ties - are expected to support house prices against a severe downfall scenario.
It is unclear as to when the new measures take effect. As more information becomes available, Fitch will evaluate the incremental impact of the measures on the market and any subsequent credit implications for the outstanding Greek RMBS transactions and Covered Bond programmes.