In this report, we look back at the issuance and credit trends we observed in the U.K., Dutch, Spanish, Italian, French, and Irish residential mortgage-backed securities (RMBS) markets through 2020 and examine what they may mean for developments in 2021 and beyond. The COVID-19 pandemic will leave a mark on RMBS credit metrics and issuance volumes, but it will likely also accelerate innovation in mortgage products and origination practices in the medium term. In addition, an increasing focus on ESG factors could lead to an increase in green mortgage production.

Expected longer term product development is discussed in more details on page 33.

Few Rating Actions Resulting From COVID-19

In 2020, we reassessed our outlook for European mortgage markets, but this led to only limited RMBS rating actions. Overall, we placed 17 tranches in European RMBS transactions on CreditWatch negative (see "17 Ratings From Spanish, Portuguese, Dutch, And U.K. RMBS Transactions Placed On Watch Negative," published on May 6, 2021, and "Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic Forecasts," published on May 1, 2020).

Table 1

Looking ahead, we expect that the various employment support schemes launched across Europe in response to the pandemic will lessen the blow for mortgage borrower credit metrics in the first half of 2021. On Dec. 2, 2020, the European Banking Authority (EBA) reactivated its guidelines on legislative and non-legislative debt payment moratoria. As a result, lenders in Europe will be allowed to offer payment holidays on mortgage, personal, and business loans until the end of March 2021 for a total of nine months (including payment holidays already granted). As a consequence, payment utilization rates may increase in some countries, notably Spain, Italy, and Portugal. We will continue to focus on the analysis of liquidity mechanisms in RMBS transactions in 2021.

Beyond that, there is less certainty: RMBS transaction performance will depend on how successfully governments eventually pull off the balancing act of gradually lowering assistance to borrowers and earners as the economic environment improves.

We discuss individual countries in more detail below.

RMBS Issuance Could Bounce Back Modestly In 2021

After a strong first quarter in 2020, investor-placed European RMBS issuance stalled due to the pandemic and ended the year down 38% at €23 billion--the lowest annual total since 2013. Issuance could bounce back from this low base in 2021, assuming a successful rollout of vaccines and an associated easing of restrictions and economic recovery.

While the decline in European placed RMBS volumes was severe, the diversity of new placed issuance arguably increased in 2020, with the core U.K. and Dutch markets seeing relatively larger placed volume declines than more niche areas. French and Spanish placed RMBS issuance together actually more than doubled, accounting for almost one-fifth of the total in 2020.

Monetary policy response is likely to stifle RMBS issuance

Throughout the pandemic, underlying bank lending to households and nonfinancial corporates in the U.K. and the eurozone remained resilient with low-single-digit annual growth rates. This supports net issuance of wholesale funding, potentially including securitizations and covered bonds, though these products' share of the overall funding mix will partly depend on the availability and cost of issuers' central bank alternatives.

The monetary policy response to the pandemic saw central banks revive their large-scale provision of cheap term funding for credit institutions, which will likely stifle bank-originated structured finance supply once again. In the U.K., the approaching maturity of some originators' borrowings from official sector funding schemes had promised to spur growth in bank-originated structured finance through 2020 and beyond. However, in March 2020, the Bank of England relaunched its Term Funding Scheme, now dubbed the TFSME. This contributed to lower U.K. covered bond and bank-originated securitization supply in 2020, with financial institutions drawing down nearly £70 billion from the new scheme during the year. The European Central Bank (ECB) loosened the terms of its equivalent scheme of targeted longer-term refinancing operations (TLTROs), leading to a similar effect in the eurozone. Most recently, in early December 2020, the ECB scheme was again extended to provide funding until the end of 2024. The ECB also raised the amount banks can borrow under the scheme by 10% and extended the timeframe for application of the most favorable borrowing rate.

Pandemic Shakes Up Trends In Mortgage Lending

How mortgage lenders assess borrower income differs across Europe, depending on local market norms and regulations. However, underwriting models that rely on automated, quick decisioning based on relatively simple borrower income profiles may struggle to assess the complicated income patterns that have arisen during the pandemic. Larger lenders rely on mass underwriting of relatively straightforward cases to gain scale. These lenders will likely either have to acknowledge that underwriting complicated cases will take more time and cost more, or elect to forgo this business, acknowledging that they do not have sufficient inhouse expertise to assess complex income. Both approaches would likely reduce loan origination volumes for those lenders. This would push some borrowers to specialist lenders, for whom assessing complex income is business as usual. Given the U.K. has the largest pre-existing specialist lending sector it is likely to be the main beneficiary in Europe in the short to medium term.

COVID-19 effect on youth will drive product innovation

COVID-19 is a perfect storm for younger people attempting to buy property, with youth unemployment across Europe rising faster than overall joblessness and from a higher starting point (see chart 1). In addition, we expect generally lower interest rates, compared to pre-COVID-19, to help sustain high property prices. Although initiatives like the U.K. and Dutch stamp duty holidays offer relief to younger borrowers aiming to purchase property, under- and unemployment combined with high prices mean that accumulating a deposit to purchase a property remains challenging, especially in markets with strict regulations on loan to value (LTV) ratios at origination, such as Ireland. As long as rates remain low this scenario is likely to endure. However, this could drive product innovation, with loan products that release equity from the properties of older borrowers likely to evolve. Examples of possible innovation are reverse mortgages, trading down mortgages, retirement interest-only lending, and lending where the parents/relatives act as guarantor of younger borrowers' mortgage loans.

Necessity is the mother of invention

COVID-19 has forced the hand of some lenders to innovate sooner than would ordinarily have been the case. For example, faced with a scenario where properties could not be valued using physical inspections, lenders employed alternative methods such as automated valuation models. Similarly, some lenders have increased their use of electronic identification as a replacement for physical identity checks, and some are encouraging the use of Open Banking to reduce the need to handle physical documents. These examples demonstrate the trend toward lower perceived value of physical interactions in the mortgage origination process. Consequently, lenders who have already imbedded these changes in their processes and are looking into areas of further automation--such as fintech--have been handed an advantage. These lenders will be able to originate faster and cheaper than those using traditional underwriting approaches. Relatively new lenders may be able to reach scale quickly as a result.

Green mortgages

Although the pandemic inevitably slowed the development of green mortgage products, usually linked to energy certificates, this evolution has not stopped completely. At the EU level, several successive initiatives have promoted energy-efficient mortgages. The first two projects defined what an energy efficient mortgage is and designed the tools to track how green banks' mortgage books are (i.e. what proportion of outstanding mortgages could be considered green) and establish their relationship with credit risk. A third project--the Energy-Efficient Mortgages Market Implementation Plan--started in September 2020 and focuses on devising a label that could be awarded to banks for having a certain proportion of their mortgages in line with the definition from the Energy efficient Mortgage Action Plan (EeMAP). All these definitions should facilitate the production of green mortgages across EU member states. Product development has continued across Europe, with lenders in most RMBS markets actively lending or developing green products. Banks and larger financial institutions are currently at the forefront of green lending, with specialist lenders seemingly preferring, for now, to operate in higher yielding assets. Given that bank originated European RMBS issuance is currently limited, it may be beyond 2021 before we see a sizeable green mortgage securitization market.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

U.K.: Government Action Will Only Delay The Rise In Arrears

Credit: Arrears Will Take Time To Show

While we expect U.K. GDP to rebound in 2021 (+6%), it will be approximately 2.6% below pre-COVID-19 levels. In addition, unemployment will rise by 1.9 percentage points to 6.7% (see "Appendix"). Mortgage arrears will likely increase but the effect could be tempered by the various furlough and payment deferral (holiday) schemes, which authorities have currently extended to the end of April 2021 and July 2021, respectively (see chart 2). These schemes are intended to assist borrowers and earners until economic recovery hopefully takes hold (see "Flattening The Curve--The Outlook For U.K. RMBS Arrears In The Wake Of COVID-19," published on Nov. 23, 2020).

Repossessions likely to be minimal in the first half of 2021

The U.K. government extended the moratorium on repossessing residential property to the end of January 2021, by which time the repossession process will have effectively been halted for 10 months (from Oct. 31, 2020, lenders could start court action). Landlords' ability to evict tenants has also been softened, with the ban extended until at least Feb. 21, 2021. Additionally, the minimum notice period for tenant evictions has doubled to six months until at least March 31, 2021, in England, Wales, and Scotland, and 12 weeks in Northern Ireland. A survey by the Resolution Foundation found that 5% of private renters have agreed a rent deferral or reduction, and those behind on rental payments represent about 13%. Rental arrears of this scale are not currently feeding through to buy-to-let (BTL) mortgage arrears as portfolio landlords can use surplus rent from other properties to make up any shortfall, and smaller scale landlords often have other earned income that may help keep them current on loan payments.

Litigation activity is paused until Jan. 31, 2021, although the Financial Conduct Authority (FCA) is proposing to extend the pause until April 1, 2020. Once it resumes, courts are likely to face a backlog of cases from before and during the COVID-19 pandemic. This means that any new litigation will have to wait for the backlog to clear, possibly lengthening the overall time to recovery.

Notwithstanding the court process, there may be other practical barriers to repossession. Firstly, lenders are likely to need to demonstrate that a borrower's position cannot be realistically resolved, and that repossession is the only solution. This could potentially be difficult if COVID-19-related disruption in employment is the sole cause of arrears.

Pockets of vulnerability emerge

The Bank of England estimated that borrowers with a high debt service ratio (DSR; above 40%) are the most likely to be in arrears. However, they estimated that this proportion was only 1.3% in mid-2020 (up from 0.9% at the end of 2019) and simulated that the unemployment rate would have to rise to about 14% for the proportion of borrowers with a high DSR to reach the level observed during the great recession. Borrowing costs are currently low thanks to the modest leverage and low interest rates. Overall, U.K. household debt accounted for 123% of income in first-quarter 2020, lower than the 2008 peak of 144%. The various government support and payment holiday schemes have so far increased both borrowers' income resilience and their debt servicing capacity.

From an RMBS performance perspective, we expect legacy (pre-2009) U.K. nonconforming transactions with exposure to self-certified borrowers and interest-only loans to have greater exposure to borrowers with high debt service levels. Furthermore, employees in the hospitality and retail sectors tend to be among the low-to-middle income/wealth households and the most at risk of unemployment and are likely to be most exposed to COVID-19's effects. Transactions with a large portion of borrowers on a standard variable rate where rate reductions have not been passed on fully or at all are also more vulnerable to performance decline. Unfortunately, information on borrowers' employment sector is seldom captured in RMBS transaction data, and in any case, would likely only be accurate at the time of origination.

Housing Market: The U.K. Housing Market Has Proven Resilient After An Unprecedented Second Quarter

The U.K. housing market has exhibited a recent strong rebound and resilient price growth (see chart 3). It did not record a decline across any property types and/or regions. House prices rose 1.6% in 2020 and we forecast a modest decline of 1.9% in 2021. September mortgage approvals were at a 13-year high, driven by the pent-up demand and the stamp duty holiday. Housing construction went through a significant downturn in second-quarter 2020 (-46% year-on-year as of April 2020) before sharply recovering. As of September 2020, the construction output was back to February 2016 levels and down 10% year-on-year, according to the Office for National Statistics.

Housing demand may ease in the coming months though due to the exhaustion of the pent-up demand, expiry of the stamp duty holiday, looming changes to property eligibility for the help-to-buy scheme, and the expected deterioration of the labor market as well as a return to lockdown restrictions.

Lending And RMBS Issuance

Issuance fell sharply to a €14.7 billion-equivalent in 2020 from a €25.2 billion-equivalent a year earlier primarily due to a smaller number of transactions (28 vs. 37) and the lack of large legacy deals (e.g. with collateral from NRAM PLC, formerly known as Northern Rock (Asset Management) PLC).

Some return in lender risk appetite

Reassessment of risk and operational challenges means that loan warehouses that were budgeted to be full are not. Banks' mortgage lending volumes have dipped since the start of the pandemic while specialist lenders have seen their share remain roughly stable (see chart 4).

The market has stabilized now as some lenders have returned but with a limited offering. Additionally, some lenders are adding higher LTV loans back to their product line-ups, after these products were the first to be pulled. The market has become less competitive and interest rates are therefore higher in the high LTV segment. According to Moneyfacts, there are currently 80 mortgage products for LTVs greater than 90%, up from 40 at the beginning of September 2020. The supply of loans at greater than 90% LTV is still limited with only eight mortgage products.

Restrictions in higher LTV lending disproportionately affected first-time buyers and their proportion of lending fell to 18% in second-quarter 2020 from 21% in 2019. Similarly, house purchase as a loan purpose by contrast to re-mortgage declined in relative terms. Both lending to first-time buyers and for house purchase bottomed out in the third quarter of 2020, due to pent-up demand.

Rates are on the rise and quality on the increase

Mortgage rates rose across the LTV ratio spectrum but to a greater extent for high LTV loans (see chart 5). For instance, the typical 75% LTV rate is up by 50 basis points (bps) since April 2020, whereas the 90% LTV rate is at a five-year high. At the same time, lending at low LTV (below 75%) increased while that at high income multiples reduced. For instance, the former rose to 63.5% of total origination volumes in second-quarter 2020 (2019: 60.4%) while the latter fell to 32.8% from 35.6% on a joint-income basis during the same period, according to the FCA.

A less competitive environment

Overall, lenders were able to capitalize on the less competitive environment and increased perceived risk by charging borrowers more, even as swap rates fell. This means that credit spreads have increased, significantly so for some lenders depending on their product mix. Recently originated assets therefore have the yield available to meet any increase in spreads demanded by investors to cover potential future mortgage deterioration. This means that RMBS transactions are more likely to be issued. Overall, in the short term the combination of high house prices and a mini-boom in origination--which is largely making up for the ground lost in the middle two quarters of 2020--will support RMBS issuance volumes in the first half of 2021. Beyond that, fundamental macroeconomic uncertainty may weigh on RMBS transaction volumes.

The Netherlands: A Mild Credit Deterioration Is On The Cards

Credit: A Buoyant Economy

The Dutch economy has been buoyant since mid-2013 with uninterrupted GDP and house price growth, featuring among the leading EU countries in terms of economic performance. In 2020, we expect that the Dutch economy shrank by only 4.1% while house prices grew by 6.1%.

This better-than-peers expectation has been reflected in mortgage performance: only 22,000 secured borrowers received a payment holiday due to COVID-19, according to the Dutch Central Bank. This represents about 60 bps of all mortgage borrowers, and we observed similarly low take-up in the Dutch RMBS transactions that we rate. Several reasons explain this effect. Firstly, there was no legislated payment deferral program, with lenders left to decide on the viability of requests individually. Secondly, the government's three aid packages had improved households' finances and therefore limited the blow of COVID-19 on mortgage performance.

Throughout the pandemic so far there has been minimal movement in arrears metrics. This performance is noteworthy considering that Dutch RMBS transactions, unlike most other European countries, classify payment holidays as arrears.

A gradual and modest expected rise in arrears

We expect arrears to gradually rise with a slight acceleration in the second half of 2021 once the various support schemes come to an end. There are roughly 70,000 mortgage loans in arrears (slightly below 2% of the total), down 38% from their peak in 2015. Prime Dutch RMBS transactions record a lower delinquency rate than the wider market (see chart 6). Given the expected moderate increase in unemployment rate, the number of mortgage borrowers in arrears should be less than the previous peak.

Performance is likely to be underpinned by state action. The job retention program covers more than a third of employees, the third highest proportion in the EU, behind Luxembourg and France, according to the International Monetary Fund. In addition, unemployment benefits are relatively generous, with claimants paid 70% of salary for up to 38 months from the third month (75% for the first two months), subject to an overall cap of €204 per day.

Repossessions may rise from a very low level

Lenders are now allowed to foreclose following a moratorium on repossessing residential property that ended on July 1, 2020. The financial regulator encourages borrowers to discuss more flexible arrangements with their banks. Foreclosures have historically been very low: below 1% since 2014 and below 50 bps since 2018.

Given the current monotonous positive path of residential property prices (+42% over the past five years), mortgage legislation that has gradually restricted high LTV loans at inception, and mortgage interest deduction, we believe that the proportion of borrowers under water should be negligible in case of a downturn, unlike in 2013/2014.

Housing Market: Strong House Price Growth Across The Board

Dutch residential property prices grew by 8.1% year-on-year in third-quarter 2020 (see chart 7). While cities in the Randstad are lagging, all regions recorded strong figures, with Groningen leading at 10.8% year-on-year. Calcasa calculated that properties in the lower price brackets (below €250,000) performed better, growing at about +11% year-on-year.

The high house price growth is on par with high transaction volumes, which are nearing their 2017 peak (see chart 7). As of third-quarter 2020, there were 228,000 transactions over the previous 12 months. A relatively stable house price expectation combined with higher recent origination volumes mean that there is no shortage of mortgage collateral to securitize.

Policy response aiding first time buyers

Land registry data suggests that demand from younger buyers (below 35 years old) has been strengthening for the last few quarters and that they represent close to half of the total number of buyers. In addition, the government published its 2021 budget in September in which it scrapped the transfer tax (equal to 2% of property price) for any first-time buyers under the age of 35. This measure will further help sustain demand from this category.

Lending And RMBS Issuance

Dutch investor-placed RMBS issuance was €3.2 billion from nine transactions in 2020, down 41% from 10 transactions in 2019. Obvion N.V.'s smaller transaction size and the absence of Aegon N.V.'s Saecure program in the public market primarily explain the lower issuance tally. That said, the nascent BTL sector helped make up some of the slack with four transactions.

Rising lending volumes

Steady economic growth has fueled lending volumes, which have been steadily increasing since first-quarter 2019, particularly the remortgaging activity (see charts 8 and 9). With overall mortgage origination remaining buoyant, originators may have tapped alternative funding channels, including unstructured residential mortgage funds.

Supply of and demand for mortgage products may wane in the short term

The Dutch Central Bank's third-quarter Bank Lending Survey shows that lenders are in the process of raising their loan margins across the entire risk spectrum, while loan demand will also diminish in the face of bleaker housing market prospects and falling consumer confidence.

BTL lending volumes likely to increase

We anticipate more origination in the BTL sector as more lenders come to the market. Increased competition may lead to changes in products and underwriting standards and/or compression in achievable margins.

Spain: Clouds Gather On The Horizon

Credit: Restrictive Dual Payment Holiday Schemes Yield Low Utilization

Different moratorium schemes were rolled out to support vulnerable borrowers during the COVID-19 pandemic. Some of them were offered by the government (legal moratorium) and others offered by the banking system (sectorial moratorium). However, utilization rates in Spain were low because requirements for granting the payment holiday were more restrictive than in other jurisdictions. Only vulnerable borrowers can access the legal moratorium (equal to three months of capital and interest payments), although any borrower can access the moratorium offered by the banking system (only capital payment for up to 12 months).

The use of the legal moratorium for mortgage loans has been stable since it was launched, reaching a peak of 4.3% as of the end of October 2020. Use of the sectorial moratorium, which includes mortgages and non-mortgage loans, has increased over time but remains below 5%. However, the utilization rate for sectorial moratoria may keep increasing given that the application period for the legal scheme ended on Sept. 30, 2020. That said, the government announced on Jan. 18, 2020, that it is about to approve a new payment holiday scheme available until March 31, 2021. The payment holidays could last up to three months.

Expediente de Regulación Temporal de Empleo (ERTE)

On March 12, 2020, the government announced a short-term work scheme (the Expediente de Regulación Temporal de Empleo [ERTE]) that has since been extended until May 31, 2021. The ERTEs are temporary redundancy plans on the grounds of force majeure. Other fiscal measures to cushion the economic shock from COVID-19 also include support for the self-employed, among others (see "Spain Outlook Revised To Negative From Stable On Mounting Fiscal and Structural Challenges; Affirmed At 'A/A-1'," published on Sept. 18, 2020). There were 755,000 workers in ERTE status as of end-2020, down 80% from April 30, 2020 according to figures from the Spanish Ministry of Labor. While on ERTE, recipients can claim unemployment benefits corresponding to 70% of their base salary for the first six months and 50% thereafter, for up to two years.

Transition out of the ERTE scheme is likely to result in gradually rising mortgage arrears in the second half of 2021, in our view. We forecast that the unemployment rate will rise by 1.5 percentage points to 17.5%, mostly fueled by tourism/hospitality employees. The broad unemployment rate (including unemployment, underemployment, or economically inactive persons) was already 10 points higher than the headline unemployment rate in the second half of 2020.

Foreclosures on hold until May 2021

On Dec. 2, 2020, the Spanish government approved that all foreclosures related to defaulted residential mortgage borrowers without alternative housing (vulnerable borrowers) are forbidden until May 2021. The number of foreclosures has been steadily decreasing for the past six years, while the number of quarterly foreclosures has fluctuated between 5,000 and 3,000 in 2020.

Catalonian Decree Law 17/2019

The Catalonian regional government amended a prior law in place since 2015. This law regulates the obligation of large dwelling holders to offer social rent leases prior to commencing foreclosure actions to those borrowers in risk of residential exclusion. The mandatory duration of the social lease term must be at least seven years. The law, which is only applicable in Catalonia, might lengthen the recovery timing for these properties. Based on our understanding of the latest changes, we do not believe there could be a ratings impact, given that this only affects imminent foreclosures and that the estimated levels of defaults are not high.

Housing Market: House Price Growth Is Sharply Decelerating

Spanish house prices have continued to rise, growing 1.7% year-on-year in third-quarter 2020, though this is a sharp decrease from the quarterly average of 5.7% recorded during 2016-2019 (see "Appendix"). We expect 2021 house price growth to remain muted in all regions, however prices may decline in coastal areas where the foreign and second homes market are more significant. The expected house price flattening is driven by the contraction of the economy, lower foreign demand, and the continuing high level of uncertainty regarding the evolution of the pandemic. The Bank of Spain has pointed out that the financial situation of households is deteriorating due to the adverse effect on disposable income and we expect the doubtful mortgage loan ratio to rise (see chart 10).

According to the Bank of Spain, Spanish GDP will record its largest fall in recent history in 2020. GDP fell by 5.2% and 17.8% quarter-on-quarter in first-quarter and second-quarter 2020, respectively, a sharper decline than those recorded in other European countries. At the end of 2022, we expect activity will still be below its pre-pandemic level. Finally, housing demand is recovering slowly (see chart 11).

Lending And RMBS Issuance

Investor-placed Spanish RMBS issuance has been anemic over the past couple of years. There were only two transactions (FT RMBS Prado VII and Miravet S.a.r.l., Compartment 2020-1) in 2020, totaling about €1 billion. This follows Miravet 2019-1's placed tranche of €290 million a year earlier.

Lending is slowing down

The effect of COVID-19 on mortgage lending is beginning to moderate, although whether this trend consolidates will depend on how the pandemic progresses in the coming months. Since the beginning of the pandemic in March 2020, the number of mortgage approvals has been decreasing: the number of mortgages granted declined by 16% during the first nine months of 2020.

Limited innovation

Product-wise, the Spanish mortgage market has remained very traditional, with French amortization and minimal BTL loans or second lien mortgages. That said, one innovation is that loan products are gradually switching from floating to fixed interest rates. This trend is underpinned by the downward shift in yield curves and the maturing derivative markets, which enables the use of interest risk mitigation techniques for longer maturities. Fixed-rate loans currently represent 16% of all outstanding mortgages in Spain compared with 14% in 2019 and only 6% in 2016.

Ongoing affordability tightening mark credit conditions

Since the start of the pandemic, affordability measures have not been significantly tightened as they were already conservative. Having learned lessons from the past--in particular, the risks entailed by rapid credit expansion and excessive lending to highly leveraged and volatile industries such as real estate--banks had already tightened their underwriting standards prior to the start of the pandemic. We expect underwriting standards to remain tight. According to the Asociación Hipotecaria Española, as of mid-2020, 89.2% of Spanish residential mortgages have a non-indexed LTV ratio below 80% and loans with an LTV ratio greater than 100% represent only 5% of the total.

Italy: The Extension Of Various Public Support Schemes Will Stabilize The Housing Market For A Few More Months

Credit: Various Government Schemes Helped Support Household Income

The Italian government introduced several measures since the beginning of the pandemic that supported household income and consequently helped the resilience of the real estate market. These measures include the expansion of the Wages Guarantee Fund ('Cassa-Integrazione'), job retention schemes, and subsidies for the self-employed and those working in sectors hardest hit by COVID-19, such as tourism. The Budget Law for 2021 has extended job support schemes until the end of March 2021, while some measures will be available until the end of June 2021. Latest data from INPS, the national institute of social security, show that almost 3.5 million people received payments under the Cassa-Integrazione scheme, for a total of 13.6 million requests (i.e. each beneficiary made several honored requests; see chart 12).

Government sponsored payment moratorium valid for up to 18 months

As a further support to households, in March 2020 the Italian government introduced a payment moratorium for mortgage loans secured on the main residence, for borrowers who suffered an income reduction due to the COVID-19 outbreak. Under this scheme, the full instalment can be suspended for a maximum of 18 months, and half of the suspended interest instalments are paid by a state fund (see "How European ABS And RMBS Servicers Are Managing COVID-19 Disruption And Payment Holidays," published on June 4, 2020).

Data from the Ministry of Economy and Finance show that as of mid-November 2020, 128,000 requests had been approved for a total outstanding balance of mortgage loans of about €13 billion. The scheme has now been extended until the end of 2021. However, some of the eligibility criteria have been tightened. For example, self-employed borrowers and entrepreneurs running small businesses are no longer eligible under the scheme.

Banks rolled out a payment holiday scheme

In parallel with the government payment moratorium, the Italian banking association (ABI) launched a payment holiday scheme, signed by most Italian banks, which allowed families to suspend the principal instalments on their mortgage loans for a maximum of 12 months. Data from ABI show that Italian banks have approved 340,000 payment holiday requests for a total outstanding balance of about €23 billion, as of mid-November 2020. In total, Italian households benefited from payment holidays on an outstanding balance of €86.6 billion versus a stock of €634 billion of loans to Italian households as of August 2020, meaning a 13.6% utilization rate. The ABI scheme has been extended until the end of March 2021 and is currently available for a maximum suspension of nine months for either the principal instalment only or the full instalment.

Some banks are currently also offering their own schemes outside the ABI umbrella, and each bank has its own conditions. Usually borrowers not eligible for the government scheme will opt for that proposed by their bank. They cannot benefit from both.

In the universe of our rated Italian RMBS transactions, the proportion of loans benefitting from payment holidays generally ranges between 10% and 20%, with a few outlier transactions beyond that range. The number of loans on a payment holiday stabilized in recent weeks despite the second wave of COVID-19 and some regions experiencing new lockdowns. We expect only a limited portion of borrowers on payment holidays to become delinquent at the end of the suspension period, thanks to the support expected from the government.

The government has drafted a pro-growth 2021 budget, which includes additional stimulus packages. Italy will be able to rely on large funds coming from the newly created EU Recovery and Resilience Fund, receiving as much as 12.5% of GDP in loans and grants between 2021 and 2023. The government will likely allocate the bulk of the 12.5% funds to fight the coronavirus economic effects and continue supporting affected borrowers via different government-sponsored schemes, which would be credit-positive for RMBS.

Repossession moratorium

The government also implemented a moratorium on foreclosure procedures related to the borrower's main residence. The moratorium was implemented in April 2020 with an original expiry date in October 2020 but has now been extended to the end of June 2021. Tenant evictions have also been suspended until the same date.

Housing Market: Resilient House Price Growth

Quarter-on-quarter Italian house price growth was 3.1% in second-quarter 2020, according to Istat. We expect house prices to grow a modest 0.5% in 2020, followed by a limited decline of 0.5% in 2021 (see "Pandemic Won’t Derail European Housing Price Rises," published on Oct. 20, 2020).

After a negative trend in the first and second quarters of 2020, the number of residential property transactions increased by 3.1% in third-quarter 2020 year-on-year, according to the latest report from Osservatorio Del Mercato Immobiliare (see chart 13).

Lending And RMBS Issuance

Since the 2008 financial crisis, most Italian RMBS issuance has been retained. There were no investor-placed Italian RMBS transactions in 2020 and only one €315 million transaction in 2019. To put these figures into perspective, only four of the past 10 years saw some any investor-placed issuance for an average annual total of only €1.1 billion.

Stable loan origination

The Italian mortgage market has not experienced material changes as a result of the pandemic. Data from the latest ABI monthly outlook show that in September 2020 the volume of loans for house purchase had increased by 2% compared with the previous year, in line with the growth rate recorded in 2019.

Data from the Bank of Italy show that in second-quarter 2020 the indebtedness of Italian households has increased as a percentage of available gross income, due to the reduction of the latter. However, at 63.2% this figure still remains well below the European average of 96.1%.

Credit conditions point toward further tightening of underwriting standards

According to the latest ECB Bank Lending Survey in October 2020, Italian banks have only slightly tightened their residential mortgage loan underwriting policies as a result of the worsening economic conditions. According to the survey, banks expect to further tighten their underwriting policies, while they do not expect mortgage loan demand to change significantly.

France: Government-Sponsored Schemes Will Help An Already Resilient Property Market

Credit: No Special COVID-19 Payment Holidays

There were no payment holiday schemes introduced by legislation in France for residential loans. Nevertheless, French residential loans often include temporary payment suspension contractual clauses. Borrowers can typically benefit from those by satisfying certain rules, such as not being in arrears at the time of the request. Over the second quarter 2020, servicers have typically seen a material increase in these requests, although the overall utilization rate remains in the usual range of 1% to 5%, which is relatively low compared with other countries.

Requests peaked in April 2020/May 2020 and have decreased since then to below 1%. We will nevertheless keep monitoring any potential developments over 2021 for the RMBS transactions that we rate.

Partial unemployment package

The government rolled out a partial unemployment package ('dispositif de chômage partiel') by way of a tweak to an existing law, whereby employees receive an indemnity of 70% of their gross salary with a minimum of €8.03 an hour (instead of receiving their salary). The indemnity will equal the salary for those on a minimum wage. This measure was valid until Dec. 31, 2020. From Jan. 1, 2021, the indemnity reduced to 60% of gross salary. A third of eligible employees benefitted from this scheme according to the OECD. We expect only a marginal rise in mortgage arrears given the likelihood that staff on a partial unemployment package will be eligible for generous unemployment benefits.

Widespread out-of-court settlements make limited impact on repossession irrelevant

Although COVID-19 restrictions did slow down the court process, generally we do not expect this to significantly increase recovery timelines and most default cases continue to be resolved outside the court system. Furthermore, the French residential market is characterized by a material proportion of loans secured by guarantees ('caution') instead of mortgages on the property, which further limits the potential effect of court delays.

Housing Market: House Prices Still Growing

House prices in France likely rose in 2020 despite the COVID-19 lockdowns and the unprecedented fall in economic activity. According to the Insee-Notaire Index, French house prices flattened over the third quarter 2020 amid a decline in housing transactions (see chart 14). As of June 2020, house prices increased by 5.2% year-on-year, following increases of 3.8% and 3.2% in 2019 and 2018, respectively, according to Eurostat (see "Appendix".)

The property price resilience can be explained by government support to preserve jobs and businesses during the crisis, the continuously low interest rate environment, and increased savings from households over the lockdown period leading to an improvement in their overall creditworthiness. We forecast a mild increase in French nominal house prices over the next three years.

Lending And RMBS Issuance

Investor-placed French RMBS issuance rose in 2020 to €3.3 billion from €1.7 billion in 2019. French banks have historically been large and active covered bond issuers, but some have more recently turned to RMBS.

High Council for Financial Stability's recommendations

In early 2020, the Haut Conseil de Stabilité Financière (HCSF; High Council for Financial Stability) announced a series of recommendations encouraging French banks to tighten some of their underwriting criteria in order to reinforce prudent lending. These include limiting loan terms--which had been creeping up to under 25 years--and limiting the debt-to-income ratio to 33% (i.e., keeping overall monthly repayment charges to less than a third of a household's income) (see chart 15). The recommendations allow for a tolerance (overriding the recommendations) of 15% of loan production, with 75% of the tolerance to be granted to first-time buyers.

Regulators' recommendations to tighten underwriting standards weigh on credit conditions. Underwriting standards in France are typically prudent with mainly fixed rate loans and a focus on the borrower's solvency. We have however not noted any material underwriting changes from French banks triggered by the pandemic.

These changes should have a positive effect on the overall risk of mortgage loans in France. We understand that access to loans has become more difficult for certain borrowers (e.g., BTL borrowers) and this may decrease the volume of housing transactions. According to the Insee-Notaire Index, the volume of transactions has decreased in the first nine months of 2020 year-on-year from a peak of 1.07 million to 0.99 million transactions.

Tightening in credit conditions

The credit conditions as per the latest ECB lending survey reflect this. They point to a dual tightening in the terms and conditions (in line with that in 2011 during the sovereign debt crisis) and in underwriting standards, reflecting higher risk perception and the regulatory recommendations.

Ireland: Macroeconomic Environment Should Markedly Improve In 2021 But Reperforming Collateral May Suffer

Credit: Blanket Approach To Payment Holidays Is Effectively Over

As November and December 2020 figures are reported, we expect them to reveal a further decline in already low remaining payment holiday utilization rates. According to data from Banking and Payments Federation Ireland, there were 8,800 owner-occupied and 1,600 BTL borrowers on payment holidays at the end of October 2020. This translates into utilization rates of 1.9% and 3.5%, respectively. We expect that in early 2021 some of these borrowers will be unable to return to their previous mortgage terms and will fall into the mortgage arrears resolution process. The number of borrowers that fall into long term arrears could increase due to further lockdowns whose length will depend on the pace of roll out of the COVID-19 vaccines.

Beginning in March 2020, all lenders and servicers in the Irish RMBS transactions we rate offered payment holidays of up to six months to support borrowers. The peak take-up rates ranged from 5%-12% of the pool balance for prime assets, to over 20% for some reperforming pools. Given the nature of the underlying collateral, Irish reperforming RMBS transactions are particularly vulnerable to performance deterioration, especially as there was already evidence of weak performance before the pandemic.

Market-wide owner-occupied mortgage arrears greater than 90 days have so far been stable at 5.6% (by number of loans) as of June 2020 (see chart 16). We expect these figures to rise in the short-term, albeit not to the levels of the previous recession where 90+ owner-occupied arrears were as high as 13%, given the support provided by the Pandemic Unemployment Payment (PUP; see below).

Moving forward and following the EBA's announcement on guidelines about debt payment moratoria, the Banking and Payments Federation Ireland has indicated that a blanket approach to payment holidays is no longer in place. Standard payment breaks will be available on a case-by-case basis as part of a range of options in line with the Mortgage Arrears Resolution Process.

Number of claimants under the PUP has fallen by a quarter since the peak

The current PUP scheme available to employees and the self-employed is due to expire in March 2021 but the Irish government has indicated that this could be extended if required. The initial blanket payment of €350 per week has been reduced to between €203 (in line with the primary rate of the jobseeker's benefits) to €350, depending on previous earnings.

As of Jan. 18, 2021, there were 460,000 people receiving the benefit according to the Department of Social Protection. This is down from about 600,000 PUP claimants at the height of the coronavirus pandemic in April and May 2020. Despite the apparent positive trajectory, we believe that a portion of the remaining PUP claimants--especially those employed in the hospitality sector--are likely to roll into arrears. We therefore expect the arrears level to rise modestly over the coming year.

Repossessions have barely moved from their historical suppressed level

The Irish mortgage market is characterized by a protracted repossession process for owner-occupied mortgages. BTL mortgages can be more straightforward, particularly if a receiver can be appointed. COVID-19 restrictions slowed down the court process generally, and we expect overall recovery timelines to increase in the first half of the year given the current level 5 lockdown. Most cases continue to be resolved outside the court system.

Housing Market: Modest Residential Price Decline

Overall house prices have held up relatively well with Central Statistics Office data showing an increase of 0.2% in the year to November 2020. Dublin prices fell by 0.9%, compared with 1.2% growth in the rest of the country (see "Appendix"). Demand for house purchases remains strong given the continued supply shortage, particularly in Dublin and the cities. This shortage of supply is likely to have been exacerbated by the slowdown in construction activity throughout the various stages of lockdown, which limited completions. Those are down 9.4% year-on-year in third-quarter 2020 following a 32% decrease in second-quarter 2020.

That said, the introduction of level 5 restrictions will decrease housing transactions volumes in the first half of 2021 given that movement more than five kilometers is restricted and visiting a property is not possible unless for very specific reasons.

Lending And RMBS Issuance

At €1.1 billion, Irish RMBS issuance fell sharply in 2020 from €4.0 billion a year earlier, including €886 million of non-performing transactions.

Borrowing is cheaper than renting

With overall lending rates having fallen in recent years it is often significantly cheaper to service a mortgage than to rent. Five-year fixed rates are currently between 1.95% (according to Avant Bank data) and 2.5% (according to Bank of Ireland data). Cairn Homes, the largest domestic housebuilder, estimated that renting a three-bedroom house in Dublin could be as much as 56% more expensive than owning a similar property.

We do not expect that COVID-19 will significantly decrease mortgage demand in the coming months but drawdowns will be delayed until the second half of the year due to lockdown restrictions.

Current rental rates across Ireland remain high, with smaller landlords continuing to exit the market due to insurance costs, property tax, and income tax, in addition to high BTL interest rates making it hard to return a profit. Availability is unlikely to improve in the short-term, in our view.

Underwriting standards hold steady, but lending slowed

On the regulatory front, the Irish Central Bank has confirmed it will maintain the macroprudential measures limiting LTV and loan-to-income (LTI) ratios into 2021.

Generally, underwriting changes have varied across lenders but have centered around affordability. There is now greater scrutiny on borrowers relying on COVID-19-related state payments as well as those either employed or self-employed in sectors deemed vulnerable. Exemptions to the central bank mortgage measures on LTV and LTI are available once again in 2021 but lenders are taking a more conservative approach to who receives them.

Following the onset of the COVID-19 pandemic, mortgage lending and transactional activity slowed (see chart 17). According to the Banking and Payments Federation Ireland, mortgage approvals fell by 19% in volume terms year-on-year in the first 10 months of 2020.

Product innovation

The Irish government's Help-To-Buy scheme will remain in place until December 2021, with the maximum relief increased to €30,000 from €20,000 and, although take up has been limited, the rebuilding Ireland home loan (a government-backed mortgage for first-time buyers) remains available.

The minister for housing is looking to introduce an affordable housing plan where the state will take up to 30% equity. Full details of the plan are yet to be released with legislation due to be brought in over 2021.

Seniors Money Mortgages (Ireland) DAC recently announced that it plans to introduce equity release mortgages (lifetime mortgages) in the Irish market. This product was available before the 2008 financial crisis but is the first of its type in recent years.

Long-Term Lending Trends: Green Mortgage Originations Continue To Grow Slowly While COVID-19 Stimulates The Ascent Of Fintech

Green Mortgages

Green mortgage production in Europe is in its infancy but a number of countries are actively lending on a green basis. Product development and launch were the primary focus in 2020, and we expect 2021 to be the year when lenders establish critical mass with any sizeable green residential mortgage securitization activity occurring post 2021. Green mortgages are limited in that they link to energy efficiency only, and the borrowers tend to have a mainstream profile, which means that interest margins tend to be in line with prime non-green mortgages. Future evolution is likely to bring in other niche product elements, for example green BTL or first-time buyer green mortgages.

The U.K green mortgages' market is still in its infancy, and only a handful of high-street lenders including Barclays Bank PLC and NatWest Group PLC, are currently offering green mortgages. In line with the overall European market, the current offering is generally limited to credit on new homes with high energy efficiency. We expect this collateral to feature in any initial U.K. green mortgage RMBS. A likely evolution in the medium term is products that assist borrowers in improving energy certificates on pre-existing properties. From a credit perspective, this would be primarily for transactions that are not concentrated in new build properties.

Dutch lenders have offered green mortgages since the 1990s. Beyond endorsing sustainability values, financial incentives have been a clear appeal to borrowers (the so-called green lending model). Banks tend to offer either a lower interest rate or a higher mortgage value to borrowers whose property is considered green. Current estimates are that a green mortgage can attract a lower overall margin of 15 bps compared to a standard mortgage. In the long term, secured energy-efficient properties will have lower running costs and any incremental improvements (for properties with a lower energy label) will increase their values. Given that the Netherlands has been an early adopter, we expect green mortgages to evolve here first, perhaps incorporating green credentials into BTL lending and also increased focus on lending to improve existing properties.

In Spain, some banks (e.g. Triodos Bank N.V., Banco Santander S.A., Bankia S.A., Banco Bilbao Vizcaya Argentaria S.A., Caja Rural de Navarra, Cajamar Caja Rural, Sociedad Cooperativa de Crédito, and Unión de Créditos Inmobiliarios [UCI]) offer green mortgages but they are not actively marketed. Green mortgages, which usually have a lower interest rate, mainly collateralize new houses, except loans from UCI, which also offers green mortgages linked to rehabilitation (i.e., energy improvement on the existing stock). UCI estimates that 5% of its total 2020 production was in the form of green mortgages. Green mortgages were excluded from the 2019 reform of the mortgage law.

In Italy, in the first half of 2020, some medium and large Italian banks started to offer green mortgage loans. Green mortgages come with margins that are usually 10 bps lower than standard mortgages, and some of them also include energy efficiency related services in cooperation with non-financial partners. We believe the market will grow as Italian banks seem particularly committed, evidenced by the fact that 14 out of 55 banks that part of the Energy Efficient Mortgages pilot scheme are Italian.

In Ireland, Allied Irish Banks and Bank of Ireland are offering lower rates on green mortgages for borrowers looking to buy new or refurbished energy efficient homes. Both have made the product available for new and existing customers, but given the energy efficiency requirements, it is likely to be predominantly new home mortgage lending.

Fintech

The U.K. mortgage market has long been a hotbed of innovation and we expect this to continue partly fueled by COVID-19, partly a continuation of trends that were emerging pre-pandemic. We anticipate that end-to-end automation of the lending process will become more commonplace. For example, a process where underwriting, identity checking, property valuation, income verification, and final mortgage offer and acceptance are all done electronically. Although some sectors of the U.K. market lend themselves to automation, others do not--such as complex income lending. However, even in this sector, originators are likely to try using initiatives such as Open Banking to create some degree of automation. Fintech origination may create technological advantages over larger, more established lenders and may be making inroads into their respective market shares, but the window to capitalize on this may be short as these more established lenders innovate too. Another possibility is that fintech lenders end up being acquired by banks as a replacement or funded through forward-flow agreements from banks keen on mortgage risk, but with no desire for the overhead of a large origination team.

The Dutch mortgage market is already highly automated and relies heavily on outsourcing generally. It is somewhat unique in that origination outsourcing is also relatively common. Therefore, many of the technology advantages are already embedded in the Dutch mortgage origination process. Some fintech providers who offer mortgages utilize already established outsourcing partners in much the same way more established mortgage lenders would. Consequently, given the costs involved, existing outsourcing players are likely to be best placed to enhance the role of technology in mortgage origination.

In Ireland, the large domestic banks remain dominant in the Irish mortgage market but in recent years both Finance Ireland Credit Solutions DAC and Dilosk DAC have entered the market. Dilosk initially entered the BTL space but is now also active in the owner-occupied market, specifically targeting the public sector. The most recent addition to the market is Avant Money (trading name of Avantcard DAC), which entered in the middle of 2020. All three lenders use brokers and compete on price with slight nuances to their products. Although all are looking to grow their mortgage lending in 2021, they will be somewhat limited in terms of their scale. Dilosk (2019) and Finance Ireland (2020) both already tapped the RMBS market.

Later-Life Lending

In March 2018, the U.K.'s FCA reclassified retirement interest-only loans (RIOs) as standard mortgages (i.e. no longer regulated under the equity release rules) to make them more appealing to older borrowers and provide an alternative to equity release products. As of November 2020, the number of RIO providers and products rose to 21 and 112 from 12 and 38 at the end of 2019, respectively, according to Moneyfacts. The average interest rate was 3.59%. However, only 2,911 RIOs were sold since 2018, falling far short of the FCA's projection of 21,000. this was first due to the affordability assessment excluding pension drawdown and considering only a single applicant's income, even for a joint application. Secondly, borrowers may prefer annuity mortgages in order to leave the property as inheritance. Thirdly, standard mortgages are now available with a 40-year maturity (the proportion of mortgages available with this maturity has increased to 50.9% in 2019 from 35.9% five years earlier, according to Moneyfacts), which cannibalizes the RIO market. Notwithstanding this, we anticipate RIO volumes may become significant enough to create an emerging new RMBS asset class in the medium term.

In the Netherlands, the higher LTV nature of Dutch mortgage products does not make them readily suited to equity release or second-lien lending. Product evolution for older borrowers is likely to mirror products such as the U.K.'s RIO mortgage.

Reverse mortgages have been offered in Spain since 2007. However, this has not been a popular product, with fewer than 100 contracts signed in the past few years from a peak of just 800 contracts in 2009. Reverse mortgages may become more popular given the growing percentage of older landlords, the higher life expectancy, and the low government pensions. However, it is perceived as a complex product with some reputational risk.

Other U.K. Products

There were a couple of U.K. RMBS transactions backed by second-charge mortgages in 2020: Elstree Funding No. 1 PLC (West One Secured Loans Ltd.) and Castell 2020-1 PLC (Optimum Credit Ltd.). That said, second-charge lending volumes fell 40% year-on-year in September 2020 bringing the total for the last 12 months down by 46% to £56 million, according to the Finance and Leasing Association. However, credit performance has been strong. In the first quarter of 2020, there were only 13 repossessions. Increased risk aversion among mainstream lenders, their reluctance to lend at higher LTV ratios, together with inflexible assessment of income, may help second-charge lenders recover from the downturn. Borrowers are more likely to obtain further financing through a second lien than through a further advance with an existing lender. Additionally, second lien product offerings are evolving to help address the fact that saving a deposit is challenging for many younger borrowers. Examples of products that have recently launched or could launch soon include a product that enables parents to take on a second-charge loan in order to fund a gifted deposit with a maximum LTV ratio of 75%, and a "piggyback" second charge, where a first and second lien are originated, perhaps by different unrelated lenders, as part of one initial underwriting process.

Medium-term product development in the U.K. is likely to be dominated by other products looking to provide a required deposit to poor younger borrowers and possibly simultaneously lending to older borrowers. Candidates include:

• A private version of the help-to-buy scheme. Faced with tighter property eligibility from 2021 and currently expected to end in 2023, private versions of this scheme are likely to materialize. Private versions may have greater flexibility on property type, which under the current government scheme are limited to new build properties.
• Shared ownership mortgages. The end of the help-to-buy scheme will also likely provide impetus for its nearest equivalent: shared ownership. Shared ownership mortgages have traditionally been originated by banks and are not common in RMBS transaction pools.
• Guarantor mortgages. Lending that is guaranteed by someone other than the primary borrower exists in the unsecured space and is not completely novel in the secured arena. The guarantee can take many forms including the guarantor having their income assessed and being responsible for payment of the loan in the event of non-payment by the main borrower. Other forms of guarantee go beyond payment of ongoing loan installments to additional borrowers having charges placed on their own property.

Appendix

Related Research

• Economic Research: The Eurozone Can Still Rebound In 2021 After Lighter Lockdowns, Dec. 1, 2020
• Flattening The Curve--The Outlook For U.K. RMBS Arrears In The Wake Of COVID-19, Nov. 23, 2020
• Pandemic Won’t Derail European Housing Price Rises, Oct. 20, 2020
• Spain Outlook Revised To Negative From Stable On Mounting Fiscal and Structural Challenges; Affirmed At 'A/A-1', Sept. 18, 2020
• U.K. Mortgage Payment Holiday Risks Emerge As COVID-19 Requests Have Peaked, Sept. 2, 2020
• How European ABS And RMBS Servicers Are Managing COVID-19 Disruption And Payment Holidays, June 4, 2020
• Credit FAQ: Reporting Requirements For COVID-19 Payment Holidays In European Structured Finance, May 27, 2020
• 17 Ratings From Spanish, Portuguese, Dutch, And U.K. RMBS Transactions Placed On Watch Negative, May 6, 2020
• Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic Forecasts, May 1, 2020
• COVID-19 May Be A Litmus Test For European RMBS Calls, April 15, 2020
• European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020