"With the unemployment rate expected to rise further over the near-term and potentially exceed 20%, there appears to be little prospect for moderation in arrears and defaults on consumer ABS and RMBS transactions in the near term," says Rui J. Pereira, Managing Director and Fitch's Madrid Structured Finance group head. "Mitigating factors for affordability, including lower interest rates and government consumer support programmes, will not be sufficient to offset the surge in unemployment and its impact on consumers' ability to service their debt. As such, arrears and defaults are expected to continue their upward trend."
Fitch believes that the affordability benefits derived from lower interest rates are likely to be more than offset by sharply deteriorating labour conditions. Likewise, the Spanish government sponsored temporary debt moratorium or specific lender loss mitigation programmes focused on the unemployed and other eligible mortgage borrowers have not yet been implemented with sufficient scale by lenders to have a direct impact on credit performance over the near-term. As such, Fitch believes that accelerating job losses will continue to pressure Spanish consumer ABS and mortgage credit performance over the near-term.
Fitch analysis of historical mortgage and consumer loan performance metrics against unemployment data shows a very high correlation, particularly in the weaker part of the economic cycle. Notably, increases in unemployment are highly correlated to, and a key driver of, rising arrears and defaults in Spanish consumer and mortgage loans. Since the end of 2007, unemployment in Spain has more than doubled and stood at 17.4% at end-Q109. Over the same time horizon, mortgage arrears reported by the Bank of Spain increased from 0.73% in Q407 to 2.4% at end-Q408, representing over a three fold increase. In the consumer ABS sector, as measured by the Fitch Consumer ABS Delinquency Index, the impact has been even more pronounced, with loans 90 plus days in arrears increasing from 0.8% at year-end 2007 to 4.8% in March 2009.
Weakening macro-economic fundamentals and individual transaction performance trends have been the key drivers behind rating actions in recent quarters in the Spanish ABS and RMBS sectors. Rating actions have been largely concentrated in the 2006 and 2007 vintages originated near the peak of the market, with more aggressive collateral composition and significantly weaker performance relative to the overall average. For example, in the RMBS sector, rating actions have focused on high loan-to-value and specialty lenders' transactions. Older RMBS and consumer ABS transactions benefit from significant seasoning, growing credit enhancement driven by transactions de-leveraging, and better credit performance metrics, but are not immune from the sharply weakening economy.
