Mortgage bond and MBS market development in Spain and Portugal

Securitization Conduit, The, Spring-Winter, 2001 by Mathilde Franscini, Tamara Schillinger

Moreover, the volume of mortgages for private housing has increased at an average rate of 30% a year since 1995. This is due primarily to the dramatic reduction in the mortgage rate (from 68% in 1992, down to 4.8% in 2000) and secondly to the Spanish economic upturn.

Since 1998, MBS have established themselves as a source of refinancing alongside Cedulas Hipotecarias. However, at EUR 1.5 bn in 1998 and EUR 3.5 bn in 1999, the issue volume of the Spanish mortgage bonds was well below that of MBS transactions.

Rating:

The strict regulations imposed by the Spanish Central Bank lead to a very low rate of default in mortgage lending and consequently to a high rating for MBS.

C. Tax Treatment

A deduction of 20% of interest and capital payments (25% for the first 2 years) from the tax to be paid, up to the amount of ESP 750,000, and of 15% from a further ESP 750,000.

D. Legal Framework

1. Mortgage Bonds

The following elements constitute the Spanish legal framework for mortgage bonds:

* Spanish mortgage bonds follow the characteristics prescribed under Article 22(4) of the UCITS Directive.

* Law 2/1981 of March 25, 1981 on the regulation of the mortgage market & royal Decree 685/1982 of March 17, 1981

A 10% weighting for mortgage bonds was established by Royal Decree 845/1999 on May 21, 1999. This reduces the own funds requirements by half, thereby facilitating their acquisition by national mad foreign institutions. This favorable treatment is the result of the translation of article 22(4) of the Directive 85/611/CEE (UCITS) into the Spanish law (Law 20/1998 July 1, 1998), which recognizes the particular guarantees of mortgage bonds.

A decision by the Bank of Spain to accept "AAA" rated Spanish mortgage-backed bonds as collateral for liquidity borrowing has jump-started its securitisation market.

2. Mortgage-Backed Securities

The legal framework for MBS was created in July 1992 with the Real Decreto 19/1992. This law allows the creation of independent funds, which may only invest in mortgage certificates (pools) and refinance through MBS.

These mortgage certificates are participation certificates on building loans, which securitise the exploitation rights relating to a property in the event that the underlying loan cannot duly be repaid. There is no time limit for the sale of the property, which contrast to other European countries practices.

The fund's management is taken over by a "trustee" (2), who acts on behalf of the fund. Unlike in the case of MBS transactions in other countries, this agent not only takes on the duty of control body but also actively manages the fund and partly also the way in which the MBS is structured. Both the fund and the "trustee" are legally independent from the sellers of receivables in order for the investor to be protected from the originator's insolvency risks.

E. Risk Assessment

1. Credit risk

a. Mortgage bonds

In the case of mortgage bonds, the credit risk depends on the quality of the originator and of the collateral.

Collateral:

Spanish mortgage bonds are secured by all the mortgage loans registered for an issuer, whereas public sector loans do not qualify as cover assets. The loan to value for commercial properties is 70% and 80% for home loans. Although the LTV varies according to the type of collateral, there is no such differentiation at the instrument level. Indeed, as in France, there is only one single type of CH. Cover assets remain on the balance-sheet.