In this Spanish residential mortgage-backed securities (RMBS) primer, S&P Global Ratings provides a comprehensive guide to the fundamentals of both the Spanish housing and mortgage markets. We also describe the key features and risks of loan origination, and summarize the Spanish securitization legal framework. Finally, we compare the features of prime and reperforming RMBS transactions and compare the RMBS market with the Spanish covered bond market.

Housing And Home Loan Market Overview

As chart 1 highlights, the Spanish mortgage market has been on a rollercoaster ride over the past 20 years. Three phases stand out: An expansion in mortgage credit supply following the introduction of the euro, which lasted until the financial crisis. The second phase was a period of falling house prices and contracting mortgage credit, and beyond this, a period of modest recovery as the mortgage market entered what might be perceived as a more normal phase.

Chart 1

Main market participants

Currently the Spanish mortgage market is dominated by a few large banks, although this has not always been the case (see chart 2). In the run-up to the financial crisis, Spanish banking was dominated by savings banks. These banks had a social focus and used their profits to fund social action programs, while promoting savings and credit to their communities. Before 2008 these banks sought growth and changed their risk appetite significantly. As well as financing property developers, several savings banks became involved in riskier lending practices such as using brokers not only to introduce new business but to also underwrite it partially. They also became involved in lending to new regions and demographics that institutionally they had little expertise in. Notably, for many savings banks securitization became an originate-to-securitize model, rather than a funding tool. The absence of risk retention rules caused poor risk alignment between investors and originators. Savings banks' significant exposure to real estate together with governance and management issues resulted in many of them requiring emergency mergers with larger commercial banks.

Chart 2

This background explains the very uneven asset performance prevalent in Spanish RMBS transactions. Although aligned with other Southern European markets, the Spanish RMBS market has generally performed worse than other euro-denominated RMBS markets (see chart 3). Currently, transactions range from prime demonstrating consistently good performance to underperforming portfolios with delinquencies exceeding 50%.

Chart 3

Mortgage lending is now dominated by the largest banks, Banco Santander, BBVA, and CaixaBank. Banks now tend to use securitization as part of a medium- to long-term tool in their treasury operations either for funding or, in the case of significant risk transfer securitizations, capital optimization. Nonbank lenders active in securitization operate in small niche markets.

The impact of high origination in the first decade of the century is still being felt. Banks have needed to release capital-intensive assets from their balance sheets, leading to widespread mortgage portfolio sales of delinquent assets. Improving macroeconomic conditions and rising house prices means that these portfolio acquisitions are now being recycled into reperforming RMBS transactions.

Strong housing market fundamentals support Spanish RMBS

Spain has some of the highest home ownership rates in Europe (see chart 4). This can be attributed to almost non-existent social and institutional rental housing compared to other European countries.

Chart 4

Unemployment has steadily declined since the financial crisis, underpinning strong performance for most Spanish mortgage collateral (see chart 5).

Chart 5

Banks' lending exposures proved resilient to the COVID-19 pandemic and more recently to the energy crisis. At the end of 2022, the nonperforming loans (NPLs) stock reached its lowest point in more than nine years, partly due to substantial government support to borrowers and an extremely accommodative monetary policy stance.

The market is characterized by a lack of product innovation which limits the complexity of mortgage products and significant risk layering. For example, almost all loans are amortizing, there is no buy-to-let market (although second homes exist), products are not designed to target borrowers with weaker credit scores, and all loans must have a full valuation of the security by a valuer authorized by the bank of Spain.

The main use of mortgage debt is for borrowers to purchase homes and it is not typically used for debt consolidation or home equity release. After the financial crisis, the Bank Of Spain limited the loan-to-value (LTV) ratio, at typically 80% for a new loan. Loans with an LTV ratio exceeding 80% were relatively common before the financial crisis. Spanish lenders grant home loans to self-employed borrowers if they have a sufficient track record of stable revenues, but no self-certified loans are available.

The average mortgage maturity is about 25 years. That said, it is not uncommon to have up to a 30-year maturity, depending on the borrower's age, and given the need to lower monthly payments given rising interest rates. Contractual grace periods and payment holidays are not market standard.

Spanish banks are progressively collecting energy performance certificates (EPCs). As this is mandatory when selling or renting a property, they typically offer margin bonifications if the rating is high. Currently the renting of properties with low EPC ratings is not banned, however this might change following European regulation starting in 2030 stipulating all existing properties should have a minimum EPC rating.

Fixed-for-life loan products have dominated most recent new lending, but this has not always been the case (see chart 6). Most loans backing RMBS that we rate are linked to a floating interest rate benchmark, and borrowers are therefore directly exposed to rate rises. Mixed interest rate products (loans with an initial fixed-rate period that then switch to floating-rate) have gained popularity.

Chart 6

Spain is a full recourse market (lenders have typically full recourse to all assets of a defaulting borrower) and typically any mortgage shortfalls are vigorously pursued, which creates strong incentives for borrowers to pay. However, the repossession process is lengthy and certain borrowers are afforded additional protections (see "Code of Good Practice" for more details).

Comparing Spanish RMBS With Covered Bonds

Highly-rated Spanish banks have two realistic secured funding options: RMBS and covered bonds. Table 1 summarizes the key differences between Spanish RMBS and covered bonds. Covered bonds are currently the most popular secured funding tool in Spain. A specific covered bond law ensures eligibility of the collateral pool, but no such law exists for RMBS. RMBS transactions could contain negatively selected collateral that is not eligible for covered bond programs under the covered bond legal framework.

Table 1

RMBS Market Overview

Spain's recent RMBS investor-placed issuance volumes are low. However, Bank of Spain data cite about 50% of securitizations originated between 2019 and 2023 were placed with investors. The remainder were used as collateral for repo transactions with the Eurosystem. Spanish investor-placed transactions in 2023 were reperforming portfolios and a prime portfolio issued by Unión de Créditos Inmobiliarios.

Chart 7

Reperforming RMBS transactions

Most recent investor-placed RMBS transactions have been "reperforming". Although there is not a consensus on the definition of reperforming mortgages, these transactions are backed by assets acquired from the original originator that were significantly delinquent. Improvements in both servicing as well as the wider economy mean that some of these assets are now performing. The primary risk associated with these portfolios is their selection process, which is not based on a random selection from the originator's mortgage book, which could lead to adverse performance selection.

Typical RMBS structures

Spanish RMBS transactions are typically structured with multiple floating-rate tranches rated from a senior class, often rated 'AAA', to speculative-grade ratings. Most securitizations share features such as a combined priority of payments (where interest can be used to pay principal), or interest deferral triggers, where interest is not paid to junior notes when arrears breach a certain level and is instead used to amortize the then most senior tranche.

Often issuers enter hedging agreements to cover interest rate and basis risk, and sometimes other risks such as the potential costs of servicer replacement. Revolving portfolios are rare. Pro rata amortization--common in the lead-up to the financial crisis--has not been a common feature in recent transactions.

Spanish Securitization Law Overview

Spanish securitizations are governed by a specific seciritization law. The law "Ley 5/2015 de Fomento de Financiación Empresarial" establishes the general framework for securitizations, consolidating all previous scattered regulations into one single law. Although originally there were two types of vehicles based on the type and quality of assets securitized, Fondos de Titulización Hipotecaria (FTH; mortgage-backed securitization funds) and Fondos de Titulización de Activos (FTA; asset-backed securitization funds), the current law eliminated the distinction, now all being "Fondos de Titulización" (FTs). FTHs were used to securitize eligible mortgage loans compliant with certain quality requirements, while FTAs were used to securitize any other type of receivable (including mortgage loans that do not meet the minimum quality requirements).

Bankruptcy remoteness

Spanish securitization entities are bankruptcy remote as they are special-purpose entities (SPEs) with no legal framework, and therefore cannot be declared insolvent under the insolvency law. The Sociedad Gestora (trustee) constitutes, manages, and legally represents the SPEs.

Commingling risk

Usually, borrowers pay their installments by direct debit to a collection bank account provided by a commercial bank, which for bank originated transactions may be the same as the originator. Therefore, these collections could risk being commingled with the servicer's insolvency estate and lost. The amounts at risk depend on 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).

Spanish RMBS transactions structurally mitigate commingling risk by using bank accounts with appropriately rated banks. To reduce the cash sweep frequency, they include external support such as a collateral reserve and/or the servicer entering into a pledge agreement, under which all cash from the securitized assets is pledged in the issuer's favor.

Setoff risk

Different sources of potential setoff risk could arise if the originator becomes insolvent. Employee setoff risk results from the originator's employees offsetting their loan repayments against salaries due and unpaid by the originator. The typical structural remedy for this is to exclude such loans. Where this is not the case then the risk remains and would need to be considered as part of our analysis. Setoff risk can also arise if the seller/originator is a deposit-taking entity. Here, borrower deposits could be offset against their loan repayments if the originator becomes insolvent. Nevertheless, in accordance with the Spanish Civil Code, and the legal setoff risk provisions it defines, we consider setoff risk to be highly unlikely in Spanish RMBS transactions and reflect this in our analysis.

Claw-back risk

For Spanish RMBS, the sale of the portfolio to a FT (securitization entity) may not be subject to claw-back risk. In accordance with the Spanish law, the acquisition of mortgage certificates and their ancillary rights by the securitization entity is a true sale and cannot be challenged for the benefit of the seller's insolvency estate. Therefore, any payments made to the seller for mortgages certificates assigned before an insolvency will not form part of the seller's insolvency estate even when the term of the certificates falls after the date of the declaration of the assignor's insolvency.

Operational Risk

Within the universe of Spanish mortgages, we distinguish prime home loans that do not require intensive servicing, and reperforming or restructured home loans that require not only intensive, but also specialized servicing. In our opinion, several entities could step in if the servicer becomes unable or unwilling to perform its duties during the transaction's life. This is similar for mortgages that require intensive servicing. The variety of specialized servicers with long track record of experience acting in the Spanish market is wide. Therefore, the potential effect of disruption on the issuer's cash flows is limited.

Regulatory Environment

Spain may be considered more borrower-friendly than some other European countries. Even for borrowers who are not considered vulnerable, the Spanish repossession process is much longer than seen in the U.K. or the Netherlands. It would typically take a from 24 to 48 months to repossess a property in Spain. The exact time is heavily correlated with the court's location. Furthermore, various legislative initiatives have recently been introduced aimed at protecting vulnerable borrowers. These initiatives started following the financial crisis and have been reinforced over time to address borrowers' challenges. Given the long timeframe, banks focus on the early stages of the recovery process, which generally proceeds as follows:

• The bank will try to negotiate restructuring of the mortgage with the borrower (i.e., using a term extension, interest-only periods, etc.) to reach an amicable agreement.
• In parallel and to leverage these negotiations with the borrower, it is standard practice for the bank to initiate foreclosure proceedings according to the terms defined by law.
• If, in spite all these efforts, the mortgage repayment appears too difficult for an amicable agreement to be reached, the loan is accelerated, triggering the recovery of the full mortgage 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. At the end of the foreclosure process, the secured property is executed, and it is mandatorily subject to an auction.

Other examples which may be considered creditor-friendly are clauses that prohibit interest rate floors and sets ceiling interest rates for vulnerable borrowers.

The current mortgage law (Law 5/2019) extended the timing for starting foreclosure procedures. Previously, the Civil Procedure Act permitted the lender to start foreclosure proceedings if the borrower was in arrears for more than three months. The current regulation expanded this period to 12 months in arrears or when 3% of the initial loan balance is due and unpaid in the first half of the loan's life, or 15 months in arrears when 7% of the initial loan balance is due and unpaid in the second half of the loan's life.

Code of Good Practice

The Spanish Code of Good Practices (Spanish CGP) was implemented to protect vulnerable mortgage borrowers, those considered at risk of social exclusion. Qualifying borrowers can benefit from several measures until loan maturity. The measures will vary depending on the deterioration of the borrower's financial condition.

Mortgages compliant with the CGP tend to be of lower credit quality and introduce further risks in a securitization. In addition to the lower credit quality of qualifying borrowers together with the long principal grace periods, time to repossess the property could also extend given that the property may be rented to the borrower and repossession may not be executed if the borrower is vulnerable under the applicable laws (see "Does The Spanish Code Of Good Practices Increase Risk In Spanish RMBS?," published on June 27, 2023).

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

Related Research

• European Structured Finance Outlook 2024, Pushing On Through, Jan. 9, 2024
• European RMBS Index Report Q3 2023, Nov. 21, 2023
• Does The Spanish Judicial Strike Pose A Risk To Securitizations?, July 13, 2023
• Does The Spanish Code Of Good Practices Increase Risk In Spanish RMBS?, June 27, 2023
• Cost Of Living Crisis: Mapping Exposures In European RMBS And Covered Bond Markets, June 27, 2022
• Implications Of The ECB's Policy Normalization For Interest Rates, The Balance Sheet, And Yields, June 9, 2022
• Asset Price Risks: Inflated Property Values Mean Higher Loss Assumptions In European RMBS And Covered Bonds, March 21, 2022
• ESG Industry Report Card: Residential Mortgage-Backed Securities, March 31, 2021
• Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic Forecasts, May 1, 2020
• 2017 EMEA RMBS Scenario And Sensitivity Analysis, July 6, 2017
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
• European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016