Italy RMBS prepayment rates at all-time low

Prepayment rates on Italian RMBS have hit an all-time low and are unlikely to increase in the near future because of tight credit conditions, says Fitch Ratings.

Fitch said that tightening credit and ongoinglow interest rates reduce borrowers’ ability and incentive to refinance in the mortgage market.

“The weighted average prepayment rate of the outstanding Fitch-rated transactions hit an unprecedented low of 1.7% in the fourth quarter of 2012, down from 3.8% in the same quarter of 2011. The minimum level of voluntary prepayments in Italian RMBS deals has historically been around 4%. We expect prepayments to remain near their current low levels during the remainder of 2013 and 2014,” Fitch noted.

Low prepayment rates can increase the risk of underlying residential pools being exposed to shocks. But, Fitch added that features that Italian RMBS have in common mean it does not expect a material impact from falling prepayments on outstanding deals.

“A slower-than-expected repayment profile of the underlying portfolio is typically detrimental for the noteholders when the cost of the notes is higher than the yield of the collateral, increasing negative carry. This may happen in very seasoned deals where only the most expensive tranches are left outstanding. However such deals typically benefit from very strong credit enhancement, which is able to absorb the negative carry costs.”

Fitch added: “The proportion of loans in Italian RMBS portfolios affected by severe interest-rate type mismatches is typically very low, and only minor basis or reset risks are commonly left unhedged in the transactions, which are thus less exposed to low prepayments.”


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