Political considerations will increasingly influence the performance of mortgage markets in some European countries in 2013 and may undermine their full-recourse nature, Fitch Ratings says. The considerations include pressure to limit the impact of foreclosures or unsupportable debts on homeowners.
Political pressure is evident in those peripheral Eurozone countries that have already experienced some of the sharpest housing market corrections and slumps in mortgage performance, namely Ireland and Greece. Along with a continuation of the economic pressures that have also driven rises in arrears, this contributes to our gloomy view on these markets, where we expect significant further deterioration in mortgage performance.
The continued rise in arrears in Ireland is, in our opinion, to an extent driven by the imminent introduction of policy measures relating to debt forgiveness. Lenders are constrained from, or have been unwilling to undertake, large-scale repossessions. Coupled with borrowers in arrears potentially benefitting from debt write-downs this has increased moral hazard.
Similarly in Greece, mortgage arrears have increased substantially since 2010 when auctions were suspended on properties worth less than EUR300,000 (although lender support is keeping arrears in RMBS below the market average). To be sure, a sharp GDP contraction and unemployment shock certainly have contributed to the doubling of Greek market-wide mortgage arrears (including defaults) since end-2010 to almost 20% as of end-Q212. However, we believe that policy measures have also had a considerable impact on borrower behaviour.
The Spanish mortgage market will also merit close attention, following the introduction of Royal Decree 27/2012, suspending evictions for two years for certain Spanish residential borrowers. While the scope of the decree seems limited – we expect only a relatively small proportion of borrowers will qualify – it raises concerns that further restrictions on mortgage enforcement or explicit debt forgiveness measures could be introduced in the future, undermining willingness to pay. More broadly, austerity measures are being proposed or coming into effect around Europe. In the Netherlands, for example, these include the reduction of mortgage tax relief, although the phased nature of this move means it may affect house prices more than debt service affordability and thereby mortgage performance.
The importance of state intervention is one of the issues discussed in our global outlook for housing and mortgage lending, published today.
