Fitch: Prepayments on the Rise in Mexican Bank-Sponsored RMBS
NEW YORK--(BUSINESS WIRE)--Declining interest rates for mortgage products, the halt of new housing construction in 2013-2014, and the importance of house acquisition lending in the banking sector have fostered a competitive environment for tenured borrowers and pushed constant prepayment rates (CPR) up on securitized bank-originated mortgage portfolios, Fitch Ratings says. As of June 2014, Fitch estimates the weighted average (WA) annual CPR of securitized mortgage loans related to rated banks' RMBS is 11.0%, up from 8.1% in 2008.
We noted that some banks are launching mortgage products in the single-digit interest rate range. Currently, four of the largest Mexican banks offer mortgage loans with single-digit interest rates. Banxico (Mexico's central bank) has already published a 10.8% WA mortgage interest rate for the banking sector compared to 12.2% in June 2013. These products are usually associated with loan to value ratios (LTVs) in the 70%-80% range (assuming the loan is not co-financed by government entities Infonavit or Fovissste). On average, securitized mortgage loans are 6.8 years old which suggests performing borrowers have consistently paid monthly installments through at least one complete credit cycle. Jointly with a gradual housing price appreciation rate, securitized loan LTVs have declined to 50%-60%. We believe lower interest rates and reduced mortgage-transferability costs could continue teasing performing borrowers' prepayment rates.
High CPRs could have a negative impact on RMBS as a declining number of performing borrowers reduces excess spread (XS) which could be used to insulate against future losses from borrower delinquencies. The timing of these events would dictate the overall impact. If losses are back-loaded and XS is released during the early life of the transaction, credit protection could be lower than anticipated when losses appear.
While 'AAA(mex)' bank-sponsored RMBS are not isolated from risks associated with growing CPRs, they are well positioned against rising CPRs given their positive overcollateralization and XS levels as well as consistent stability in asset quality metrics. Fitch considers current CPR trends in its analysis and model assumptions consider stresses significantly above expectations. All 'AAA(mex)' rating were recently affirmed.
Mortgage loans are an important component of commercial banks' balance sheet. According to data from CNBV, they account for 17.4% of total lending portfolio (up from 16.6% since June 2013). When considering only the banks that participate in securitizations, their loans mix show 21.7% composed by mortgages. Given the supply shortage of new house construction seen in Mexico and considering Infonavit/Fovissste are expanding their credit products that are complementary to banks' mortgage products, Fitch believes a persistent competition for tenured borrowers would continue in 2014-2015.
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