Fitch: Refinancing Boosts Italian Mortgage Lending Activity

Loan refinancing was the dominant factor behind the sharp increase in the annual prepayment rate to 3.2% in 1Q15 from 2.5% in 4Q14, Fitch Ratings says. The figures in Fitch's latest Italian Mortgage Market Index reflect the growth in new residential mortgage lending volumes in the same period. Fitch understands that existing loan refinancing represents more than 50% of total new mortgage origination.

This wave of prepayments is due to low interest rates and renewed lender appetite for lending. Lenders perceive the refinancing of existing mortgages (ie subrogation) as a less risky form of origination. We expect the trend of increased prepayments of existing loans and origination of new replacement loans to continue in coming months.

In 1Q15 Italian home prices continued to decline by 0.3% qoq, to stand at 16.3% below the 2008 peak. This is driven by the relatively wide gap between housing demand and supply. Further home price correction is likely, with a trough of 20% (from peak) being reached in 2016.

In the first three months of 2015, the proportion of loans in late stage arrears and the constant default rate (CDR) both contracted by 10bp and the average now stands at 1.5% and 1.3%, respectively. In Fitch's view the falling arrears level constitutes a first sign of stabilising performance, after years of deterioration. However, with a patchy economic recovery underway, it is too early to expect a continuous improvement in arrears performance in the coming quarters.

Originator intervention in RMBS transactions boosted cumulative recoveries to 21.8% of cumulative defaults in 1Q15 from 20.1% a year earlier. A substantial amount of defaulted loans were repurchased in the period to replenish transaction cash reserves. In general, the recovery process in Italy is lengthy and is expected to produce only limited proceeds in the short term.

Fitch's 'Mortgage Market Index - Italy' is part of the agency's quarterly series of index reports. It includes information on the performance of residential mortgages, predominantly from RMBS transactions, but also those held on bank balance sheets. The report sets the housing market against the macroeconomic background and provides commentary on the emerging trends. 
The data behind the Mortgage Market Index report is also shown in the RMBS Compare, which is an Excel-based tool for displaying the performance of individual transactions against each other and Fitch's benchmark indices. It also includes indicators of the broader mortgage markets, home prices and macro-economic background.