Agencies wary of European mortgages

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Rating agencies are taking negative views on European mortgages even when borrowers remain in good economic health because of the risk that banks could default or governments could come under pressure in bond markets.

Only 15 per cent of downgrades of European mortgage-backed securities in the first quarter by Standard & Poor’s were due to concerns about the creditworthiness of home loans, according to the agency.

The remainder resulted from concerns about the banks that act as counterparties to such securities or the countries the mortgages are made in.

Downgrades might affect borrowing costs for otherwise creditworthy home buyers in countries such as the UK, Portugal and Italy, because investors demand higher returns to hold low-rated securities, driving up banks’ funding costs.

“It is becoming increasingly difficult to attain top credit ratings on new mortgage-backed securities,” said Andrew South at S&P.

Banks can sell highly rated residential MBS or swap them with central banks for cash.

But rating agencies downgraded many senior RMBS in 2011 and this year, as the euro crisis gathered pace.

S&P will not rate RMBS more than six notches higher than the government of the country they are from.

Almost half of outstanding Portuguese and Italian RMBS tranches are rated at the highest level permitted by S&P given their sovereigns’ ratings, meaning further sovereign downgrades would have a large impact on RMBS ratings.

“We are comfortable up to a point rating RMBS higher than the sovereign because a government’s ability to repay does not directly translate to mortgages,” said Mark Boyce at S&P. “But there comes a point where there can’t be too big a disconnect.”

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