In this French residential mortgage-backed securities (RMBS) primer, S&P Global Ratings provides a comprehensive guide to the fundamentals of both the French housing and home loan markets, describes origination key features and risks, and explains how the French securitization legal framework works.

Robust Performance Underpinned By Strong Regulation, Social Protections, And Guarantee Schemes

Regulatory environment

Home loan lending in France is effectively a legal monopoly of banks since nonbanks cannot operate as home loan lenders. Under the Single Supervisory Mechanism, the European Central Bank (ECB) oversees France's largest banks. Locally, French banks are also supervised by the French regulator--Autorité de Contrôle Prudentiel et de Résolution (ACPR)--in combination with the French High Council for Financial Stability (HCSF). The HCSF has historically been an active regulator and has in recent times amended rules governing origination standards in France as a response to changing market conditions. For example, it has amended rules relating to debt-to-income (DTI) ratios (2022), loan-to-value (LTV) ratios (2022), and loan maturity limits (2022). These changes impose legally binding limits on France's home loan lenders.

On the borrower side, French consumer law may be considered more borrower friendly than in some other countries. For example, France has a relatively lengthy recovery process and a usuary law, which sets the ceiling rate and is intended to protect individuals from abusive borrowing practices. It reflects the current weighted-average rate charged by French banks. Therefore, French lenders will have to wait before they see the full benefit of recent rising interest rates on their domestic loan books. However, underwriting tends to be conservative, leading to stronger risk cushions embedded in RMBS structures and likely stronger performance.

French households exhibit generally good credit characteristics. In our view, their sound creditworthiness results from a cultural aversion to risk, prudent lending, banks' selling practices, and very protective consumer regulation.

Product and borrower characteristics

The absence of a nonbank sector means that products are generally standardized with limited innovation visible. Home loan lenders tend to rely on cross-selling products to borrowers, rather than offering them innovative or esoteric home loans, to increase profitability.

Almost all housing loans are fully amortizing, subject to a standard contractual prepayment penalty. Interest-only loans are limited and essentially granted to a few affluent borrowers coming from private banking. In terms of tenure, the average home loan maturity in France is about 20 years. That said, it is not uncommon to have a 25-year or up to a 30-year maturity. However, in January 2022, the HCSF legally capped the loan maturity at 25 years. Contractual payment holidays (typically for a limited period and subject to the lender's approval) are market standard and could be used to absorb unexpected financial distress.

French banks grant home loans to self-employed borrowers if they have a sufficient track record of stable revenues, but there are no self-certified borrowers.

The main borrower eligibility criterion under French banks' credit underwriting policies is the DTI ratio--which is based on net salary before income tax--in contrast to other mortgage markets such as the U.S. or the U.K., where more importance is given to LTV ratios. Underwriting standards are generally conservative, and the maximum DTI is typically 33%-35%. As a result, the performance of French residential loans is less linked to house prices and the LTV ratio than in the U.S. or U.K.

In addition, as a condition to being granted a home loan, borrowers must obtain and maintain an insurance policy covering the borrower's death, temporary or permanent disability, and incapacity to work. This contrasts with other countries where the only requirement is that the property itself is insured and there is no obligation to insure against loss of income.

Guaranteed loans

French residential loans are secured against borrower defaults either by a traditional mortgage deed or by a guarantee (known as "caution"). The latter is provided by an insurer, a credit institution (usually the originator's dedicated subsidiary), or a dedicated marketplace entity called Crédit Logement, which guarantees about 33% of home loans and is owned by major French banks.

Loans guaranteed by cautions are privileged by French banks and eligible for borrowers that are considered less risky. Overall, guaranteed loans represent more than 60% of the outstanding home loans and their share is constantly increasing.

Social welfare

The French employment legislation is strict and limits fluctuations in the unemployment rate in periods of recession. Protection against dismissal in France is relatively high compared with the U.K., and comparable to that in Germany and Italy. We see the high level of protection against dismissal of permanent and temporary workers as favorable for the hypothetical unemployment levels under economic stress, as fewer people are expected to lose their jobs. The welfare support benefits system in place in France is generous despite past years' initiatives to reform some employment protection arrangements. Unemployment benefits in France not only require a lower number of months to qualify, but the benefit period is also longer, and the cap allowance is higher.

Overview Of The French Housing And Home Loan Market

The French housing market has been expanding steadily over the past 10 years, with 3.6% growth on real terms annually since 2018, accelerating in 2020 and 2021. About 45% of the population lives in the Paris region and/or in a city of more than 100,000 people. This, combined with an appetite for second homes (around 10% of homes in France are second homes), has historically pushed demand and house prices up.

In our opinion, a modestly negative movement in house prices would not significantly weaken French borrowers' credit quality. This is because of banks' conservative underwriting criteria and the absence of a direct link between house prices and the default rate on housing loans. Additionally, the riskiest population segment has no access to credit, which, coupled with a structurally high level of unemployment, limits homeownership for a large portion of the population in France. French borrowers continue to exhibit generally good credit characteristics, and in our opinion, this will continue as they have renegotiated the applicable interest rate to benefit from the low interest rate environment over the past decade.

Originator profiles

Chart 1

The French market is concentrated in a few large systemic banks, all with sustainable domestic market positions. Four of the six largest domestic players (Crédit Mutuel S.A., Crédit Agricole S.A., BPCE S.A., and La Banque Postale S.A.) have full or partial cooperative status, or are government-related commercial entities, meaning they remain profit oriented, but do not seek to maximize short-term profits. Their objective is long-term value creation for the ultimate owners (clients for cooperative groups, as they are not listed), which means that stability and the absence of volatility in domestic returns is the priority. French banks offer domestic retail clients few complex and high-risk products, excluding nonconforming borrowers.

French banks have a one-stop shop strategy, offering many products and services to their customers all under one roof. These banks are well placed to keep streamlining and developing fee-generating activities, thanks to their universal banking model.

French banks have the smallest share of revenue from net interest income in Europe. From that perspective, the home loans origination business, which structurally generates low profits, is a tool to attract the best customers and generate cross-selling opportunities. Consequently, French RMBS transactions tend to generate less excess spread than other European RMBS transactions.

Additional Underwriting Criteria

LTV ratios

Historically, it is not unusual in France to have home loans with an original LTV ratio exceeding 100%, as some home loans also finance an upfront fee (a notary and guarantor fee) if the maximum DTI ratio is not reached. In recent years, when the interest rate was particularly low, French banks were keen to request a minimum amount of equity.

Property valuation

When underwriting loans, there is no property valuation performed as banks rely on borrowers' affordability rather than a property valuation. The property's original valuation is considered equal to the purchase price by default. This purchase price feeds the French notary's database, which is used to calculate France's national house price index. France has a full recourse market, meaning there is full recourse to the borrower's possessions beyond the secured property.

Rental income

Although buy-to-let (BTL) loans are relatively common in France, accounting for approximately 20% of loans in our rated RMBS transactions, exclusively BTL transactions do not exist. Origination standards are relatively conservative, and lenders generally give credit to 70%-80% of the supplemental rental income with additional sources of income, such as the borrower's salary, when calculating the DTI. The debt service coverage ratio is not used, so the DTI remains the key metric.

Energy performance certificates (EPCs)

French banks are progressively collecting and using the EPC rating to determine loan eligibility. The French government has implemented bans on renting properties with low EPC classes. Since August 2022, rents of properties labeled as class G and class F have been frozen. Since January 2023, properties with energy consumption exceeding 450 kWh/m2/year cannot be rented. Therefore, for BTL loans related to those properties, banks will either request some comfort on refurbishment plans or may not give credit to future rental payments at all. Starting in 2025, all properties labeled class G will be banned from the rental market, followed by class F in 2028, and class E in 2034.

Operational Risk

We typically consider that French home loans do not require intensive servicing. In our opinion, the French home loan market is deep and populated by several entities that could step in if the servicer becomes unable or unwilling to perform its duties during the life of a transaction. Therefore, the potential effect of disruption on the issuer's cash flows is limited.

Recovery Process

The recovery process and receipt of proceeds differs depending on whether a loan is guaranteed. If the loan is not guaranteed and the borrower's personal situation appears too difficult for an amicable agreement to be reached, the loan is accelerated, triggering the recovery of the full home loan amount. The bank may seek a consensual sale of the property, or as a last resort, foreclosure of the secured property in its capacity as mortgagee. An independent expert may be mandated for a property valuation, which will be used as a reference to set the auction price. Under French law, in addition to the direct recourse to the mortgaged property, the bank, in its capacity as a lender, has a general right of recourse to all funds and possessions owned by the borrowers ("droit de gage general") under article 2284 of the French Civil Code.

When the home loan is guaranteed by a guarantor, the recovery process differs depending on when the guarantor intervenes--either at the beginning or at the end of the process. In the first case, the guarantee is drawn in favor of the relevant bank as soon as there is a failure to pay. The guarantor checks the compliance of the claims and will start paying the relevant guaranteed amounts, including both unpaid interest and principal. Upon payment by the guarantor, the original servicer still services the home loan for a maximum duration of 24 months for Crédit Logement-guaranteed loans. The guarantor will make its best efforts to reach an amicable solution with the client. During this period, the guarantor can opt either to take over the payment of due installments, or request the acceleration of the loan by the bank and immediately reimburse the bank with all guaranteed amounts. In any event, the guarantor is committed to reimburse all guaranteed amounts at the end of the delegated servicing period. At this point, the servicing of the home loan is performed by the guarantor for its own account.

If the guarantor intervenes at the end of the process, the recourse to the guarantee is triggered only when all other recovery options are exhausted, with the guarantee covering only the final loss.

The French RMBS Market

Chart 2

France's historical RMBS investor-placed issuance volumes are lower than in other European jurisdictions as France is the largest covered bonds-issuing country in Europe (see "French Covered Bond Market Insights 2023," published on Sept. 7, 2023). French banks prefer to issue covered bonds as they are generally cheaper to fund with longer tenors, while RMBS are instead used as a tool to diversify a bank's funding and investor base or as collateral for the ECB's refinancing operations.

Chart 3

Typical French RMBS structures

French RMBS transactions are typically structured with a single 'AAA'-rated senior tranche to optimize funding costs. Considering the prime collateral and the strong credit characteristics of French borrowers, our 'AAA' credit coverage for a static French RMBS transaction is usually lower than the regulatory 5% retention requirement for European securitizations.

As of today, there are no French BTL-only RMBS transactions.

Strong credit performance

French RMBS transactions that we rate generally perform much better than other European RMBS transactions.

Chart 4

This can be explained by the French banks' credit risk culture and their conservative underwriting criteria, which exclude the riskiest population segment.

Overview of the French securitization law

The securitization law was first introduced into French legislation in 1988 by enacting changes to the French Monetary and Financial Code by means of a law (n. 88-1201) dated Dec. 23, 1988, with a decree (décret) n. 89-158 dated March 9, 1989. Originally, the securitization issuer was a fund denominated as "fonds commun de créance". Since decree-law (ordonnance) n. 2008-556 dated June 13, 2008, securitization entities are now "organisme de titrisation", which could either be in the form of a fund ("fonds commun de titrisation"; FCT) or a commercial company ("société de titrisation"). The FCT is the most common form of securitization issuer.

Bankruptcy remoteness

French securitization entities are bankruptcy remote by law as insolvency proceedings governed by the French Commercial Code are not applicable to the securitization entities in accordance with the French Monetary and Financial Code.

Commingling risk

Under French securitization law there are specially dedicated bank accounts ("compte d'affectation spécial"). The sums credited at any time to each specially dedicated bank account and arising from collections under the purchased home loans will exclusively benefit the issuer. Therefore, the servicer's creditors will have no rights to seek payment of their claims out of the sums standing to the credit of the relevant specially dedicated bank account, even if insolvency proceedings commence against the servicer.

Our assessment of the amounts at risk of commingling considers both the amounts accumulated in the servicer collection account before the servicer's insolvency (accumulation risk) and the amounts that may be paid to that account following the servicer's insolvency before the borrowers are notified to pay into the issuer account (notification risk).

Our commingling risk considerations depend on the transaction's structural mitigants. RMBS transactions tend to structurally mitigate commingling risk by using bank accounts with appropriately rated banks.

Setoff risk

Potential setoff risks could arise if the originator becomes insolvent. The setoff risk of the lender's employees results from borrowers/originator employees offsetting their loan repayments with salaries due by the originator. Deposit setoff risk arises when borrowers offset their loan repayments with deposits held with the originator when the originator is a deposit-taking entity. Nevertheless, we usually receive sufficient legal comfort on this risk when we rate a French RMBS transaction.

Treatment of hedging arrangements

Under French legislation, the issuer can enter into hedging agreements to cover interest rate risk. In these circumstances, we analyze the hedging agreement and the issuer's priority of payment like any other securitization transaction.

Claw-back risk

For French RMBS, claw-back risk no longer exists once home loan receivables are sold to French securitization entities. In accordance with the French Monetary and Financial Code, the assignment of home loan receivables and of their ancillary rights by the seller to the securitization entity is valid even if the seller is bankrupt on the purchase date, and even when any proceedings governed by the French Commercial Code or any equivalent proceedings governed by any foreign law against the seller have been initiated after the purchase date.

Securitization Versus Covered Bonds

French home loans can be either securitized or used as collateral in a covered bond. The recourse to the issuer and the consequent lack of risk transfer is the main difference between covered bonds and RMBS. Since in covered bonds the credit risk remains with the originator, it has a greater incentive to manage it prudently. Covered bond programs have dynamic cover pools so that assets that repay or that are no longer eligible are replaced, compared to RMBS, where the pool is generally static, and assets are not replaced. Finally, covered bonds tend to have bullet maturities, while in most RMBS transactions, principal collections are transferred directly to investors (see "S&P Global Ratings' Covered Bonds Primer," published on June 20, 2019).

Table 1

Related Criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
• Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
• Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Principles Of Credit Ratings, Feb. 16, 2011
• Methodology For Servicer Risk Assessment, May 28, 2009

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