The Catalan parliament approved the amendment (decree law 17/2019) on February 5, intending to promote access to housing for economically vulnerable borrowers.
With Spain among the countries hit hardest by the coronavirus crisis, recovery forecasts will have to be revised even further, as the law has the potential to affect lenders and RMBS transactions.
The decree has expanded the definition of “large holder” to include venture capital funds, securitization funds, financial entities and their real estate subsidiaries, investment funds, asset management entities and individuals holding at least 15 residential units.
If the landlord is an individual, the new law has extended the minimum term of the mandatory social lease — the amount of time a borrower can remain in their home after defaulting on their mortgage payments — from three years to five years. If the landlord is a legal entity, however, as is the case for most homes backing RMBS deals, the minimum term is extended to seven years.
After the extension, if borrowers are still classified as vulnerable, lenders are compelled to grant a one-time renewal of the social lease, meaning that some lenders could have to wait up to 14 years before enforcing foreclosure.
The metric by which borrowers are classified as vulnerable — the Indicador de Renta de Suficiencia de Cataluña (IRSC) — has not been updated since 2017. It labels someone with an income of less than €569.12 per month or €7,967.73 per year as vulnerable.
Once notice has been given, occupants have 30 days to prove that they are at risk, with the courts deciding who qualifies in cases where no answer is received.
If the borrower meets the criteria to qualify for social rent, the maximum monthly rent permitted will range from 10% to 18% of the occupant’s income, subject to conditions.
Current mortgage payments on RMBS deals with Catalonia exposure are at least double the social rents assigned under the conditions of the new decree, suggesting cash flows to some deals could be reduced significantly.
“It is expected that the servicers would deploy strategies such as cash-for-keys to incentivise occupants to surrender possession, in order to mitigate losses,” said DBRS in its report. “We believe this could negatively affect RMBS and NPL transactions, as enforcement will take longer if the mitigating strategies do not work.”
The rating agency rates six RMBS deals with an exposure to Catalonia, with collateral pools having exposures to the region of at least 30%. GlobalCapital assessed the risk to recent Spanish RMBS deals in a previous report.
The six deals rated by DBRS include Miravet 2019-1 with 72.1% exposure, BBVA RMBS 18 FT with 49.38%, Caixabank RMBS 3 with 37.97%, TDA Sabadell RMBS 4, Fondo de Titulización with 33.60%, BBVA RMBS 9 FTA with 30.12% and BBVA RMBS 19 FT with 30.12%.
Recovery forecasts will have to be readjusted in light of the amendments, as well as factoring the economic fallout from the Covid-19 pandemic, which has hit Spain harder than most European countries.
The Spanish government is considering implementing a semi-permanent form of universal basic income in the country to help prop-up the spending power of its citizens during the crisis.
There are ongoing appeals against the constitutionality of the social rent law.