1. Spain's New Mortgage Laws And Bank
Guidelines Could Push Up RMBS
Losses But Improve Transparency
Primary Credit Analysts:
Mark S Boyce, London 02071768397; mark.boyce@standardandpoors.com
Rocio Romero, Madrid (34) 91-389-6968; rocio.romero@standardandpoors.com
Secondary Contact:
Virginie Couchet, Madrid (34) 91-389-6959; virginie.couchet@standardandpoors.com
Table Of Contents
Ley 1/2013 Could Lengthen Recovery Periods And Increase Losses On
Defaulted Mortgages
The Central Government May Challenge Andalucía's Moves To Expropriate
Property
New Loan Classification Criteria Could Improve Securitizations' Asset
Transparency
Spain's Mortgage Legislation Has Become More Borrower-Friendly
Related Research
STRUCTURED
FINANCE
RESEARCH
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2. Spain's New Mortgage Laws And Bank Guidelines
Could Push Up RMBS Losses But Improve
Transparency
New Spanish mortgage legislation and changes to loan restructuring guidelines for banks could have ripple effects on
securitizations from the country, in Standard & Poor's Ratings Services' view. Two laws aiming, in part, to prevent
evictions of vulnerable borrowers recently went into effect: "Ley 1/2013," which modifies existing Spanish mortgage
legislation and introduces new rules to protect at-risk borrowers, became effective on May 15, and on April 9, the
regional parliament of Andalucía approved "Decreto Ley 6/2013," a set of housing regulations allowing the regional
government to take possession of properties from lenders in some cases. Furthermore, on April 30, 2013, the Bank of
Spain released new criteria that banks must apply when making decisions on loan restructurings and refinancings, and
when classifying such loans in their financial statements.
In our view, Ley 1/2013 and Decreto Ley 6/2013 may further restrict mortgage lenders' ability to repossess properties
in a timely manner, and could also depress ultimate recoveries on defaulted loans. However, we expect the
incremental credit deterioration in outstanding Spanish residential mortgage-backed securities (RMBS) transactions to
be small. Possible governmental expropriations of bank-owned properties in Andalucía under Decreto Ley 6/2013
could also lower investor confidence in the local legislative regime, which could in turn hurt property investment and
house prices, in our opinion. The move may also set a precedent for other Spanish regions. That said, we expect the
central government to challenge the law before the Constitutional Court of Spain, so it's unclear to us whether and for
how long the new rules will remain in force.
Overview
• In April and May 2013, the regional government of Andalucía and the central Spanish government introduced
changes to mortgage laws, partly to prevent evictions of at-risk borrowers.
• In April 2013, the Bank of Spain released guidelines governing banks' loan restructuring decisions and
classification of restructured loans for reporting purposes.
• In our view, the recent mortgage law changes could lengthen loan repossession periods and reduce ultimate
recoveries on defaulted loans--a potential credit negative for RMBS transactions, although we expect the
impact to be modest.
• We believe that the new loan restructuring requirements could lead to greater transparency for some Spanish
securitizations' collateral quality, potentially pushing up investor confidence over time.
The new criteria that banks must employ when deciding on loan restructurings and refinancings, and when classifying
such loans for reporting purposes, may make lenders' asset quality more transparent, in our view. Reported collateral
data in RMBS and asset-backed securities (ABS) backed by loans to small and midsize enterprises (SMEs) might
benefit from this improved transparency, if lenders change their securitizations' servicing statements to maintain
consistency with their broader financial reporting. In this case, however, the reported performing collateral balance in
some Spanish securitizations could decline in the coming months.
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3. Ley 1/2013 Could Lengthen Recovery Periods And Increase Losses On
Defaulted Mortgages
Ley 1/2013 introduced several changes to Spanish mortgage legislation. Broadly, these changes fall into four
categories:
• The temporary suspension of evictions for particularly vulnerable borrowers;
• The possible suspension of extrajudicial sales of foreclosed properties for which the mortgage contract contains
abusive clauses;
• Modifications to auction rules for foreclosed properties; and
• Changes to measures introduced in 2012 aimed at protecting some at-risk mortgage borrowers, including widening
borrower eligibility for loan restructurings and write-offs.
The new law stipulates that lenders cannot evict "particularly vulnerable" groups for the two years beginning May 15,
2013. The law defines such groups as:
• "Large" households (broadly, those with one or two parents, and three or more children), single-parent households
with two children, or households with children under three years old;
• Households with disabled persons, or persons with a dependency or illness that renders them permanently unable
to work;
• Households where the mortgage borrower is unemployed and has exhausted their unemployment benefit; and
• Households with victims of gender violence.
Such groups are eligible for protection under the law provided that:
• Joint household income is less than three times the "Indicador Público de Renta de Efectos Múltiple" (IPREM)—the
Spanish reference index for benefit payments—currently €6,400 annually;
• In the past four years, the mortgage payment as a proportion of household income has increased by 1.5 times;
• The mortgage payment represents more than 50% of net household income; and
• The mortgage is secured on the borrower's only property.
The second part of Ley 1/2013 amends existing rules partly to resolve conflicts between Spanish and European Union
legislation. The legislation empowers notaries to suspend extrajudicial house sales when the borrower has claimed
before a judge that the mortgage contract contains abusive clauses. The new rules also stipulate that mortgage arrears'
interest (where the securing property is the borrower's residence) cannot exceed three times the legal rate of interest
(currently 4%), and that such interest cannot be capitalized.
The third part of the law makes several changes to the rules that apply to the auction process for foreclosed properties.
For example, where the auctioned property is the main residence of the borrower:
• Auction bidders cannot buy the property for less than 75% of its original valuation. Previously, there was no such
threshold.
• If there are no bidders at the auction, the lender can acquire the property for no less than 70% of the auction
valuation (assuming that the borrower owes more than this percentage)—up from 60% under the previous rules.
• Borrowers can pay off 65% of the amount they owe within five years of the auction, or 80% within 10 years, with the
lender obliged to write off the remainder.
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Spain's New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency

4. • If the lender buys the property at auction and sells it at a profit within 10 years, the amount that the borrower owes
drops by 50% of the profit.
Finally, Ley 1/2013 amends "Real Decreto Ley 6/2012," which the government introduced in March 2012 to protect
borrowers already in arrears, or at risk of falling into arrears. Under Real Decreto Ley 6/2012, struggling borrowers
that satisfy certain criteria could request loan restructuring packages and partial principal write-offs, and in some cases
opt to return the property to the lender and cancel the outstanding balance (a so-called "dación en pago"), assuming
that the lender subscribed to a new banking "Code of Best Practice" (see "How Spain's New Best Practices For
Mortgage Lenders Could Affect RMBS Credit Quality," published on March 22, 2012).
The new rules broaden eligibility for loan restructurings, partial write-offs, and dación en pago to varying degrees. For
all three, Ley 1/2013 removes the requirement that all household members be unemployed, and lowers the income
requirement: The mortgage payment must now account for more than 50% of net household income in most cases,
down from 60% under previous rules. Eligibility requirements for loan restructurings have loosened more than for
partial write-offs and dación en pago, since borrowers no longer need to prove that any state benefits that they receive
are insufficient to meet the mortgage installment, and they are now eligible for loan restructuring even if the property
is not their only home.
We summarize some of the main changes to these rules in Table 1.
Table 1
Modifications To Real Decreto Ley 6/2012 Under Ley 1/2013
Real Decreto Ley 6/2012 Ley 1/2013
Borrower eligibility
requirements for loan
restructurings
1) Mortgage installments must account for more
than 60% of the borrower's net household income
2) The maximum original property price ranges
between €120,000 and €200,000, with the exact
figure depending on location 3) The mortgage
loan is for the borrower's sole property 4)
Household members and mortgage co-signers
receive no work-related income, and do not
receive state benefits sufficient to meet their
mortgage payment installments
1) Household income is less than three times the IPREM (or up to
five times, in cases where a member of the household has a severe
disability) 2) In the past four years, the mortgage payment as a
proportion of household income has increased by 1.5 times, or the
household became "particularly vulnerable"* over the period 3)
Mortgage installments account for more than 50% of net household
income (or 40%, if the household contains disabled persons, or those
with a dependency or illness that renders them permanently unable
to work) 4) The maximum original property price ranges between
€150,000 and €400,000, with the exact figure depending on location
and the number of dependents
Borrower eligibility
requirements for
partial loan write-offs
Same as for loan restructurings Requirements for loan restructurings, plus: 5) The mortgage loan is
for the borrower's sole property 6) Household members and
mortgage co-signers do not receive state benefits sufficient to meet
the mortgage payment installments
Borrower eligibility
requirements for
"dación en pago"
Same as for loan restructurings Requirements for partial loan write-offs, but replacing point 4 with: 4)
The maximum original property price ranges between €120,000 and
€200,000, with the exact figure depending on location
Maximum mortgage
loan interest rate after
the borrower proves
eligibility
The contractual mortgage interest rate plus 2.5% The contractual mortgage interest rate plus 2.0%
Loan restructuring
package lenders must
offer to eligible
borrowers
1) A four-year capital repayment holiday 2) An
interest rate reduction on the loan to EURIBOR
plus 25 basis points annually over the four-year
period 3) An extension of the mortgage loan term
to a maximum of 40 years
1) A five-year capital repayment holiday 2) An interest rate reduction
on the loan to EURIBOR plus 25 basis points annually over the
five-year period 3) An extension of the mortgage loan term to a
maximum of 40 years
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Spain's New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency

5. Table 1
Modifications To Real Decreto Ley 6/2012 Under Ley 1/2013 (cont.)
Mortgage payment
threshold for
considering loan
restructuring package
to be "inviable"
Mortgage payments exceed 60% of net household
income
Mortgage payments exceed 50% of net household income
Dación en pago
conditions
After the "dación en pago", the borrower may
remain in the property for up to two years, paying
annual rent equivalent to 3% of the outstanding
mortgage balance. During this time, the annual
interest rate on unpaid rent amounts will be 20%
After the "dación en pago", the borrower may remain in the property
for up to two years, paying annual rent equivalent to 3% of the
outstanding mortgage balance. During this time, the annual interest
rate on unpaid rent amounts will be 10%
IPREM--Indicador Público de Renta de Efectos Múltiple. *The household is large, consists of a single parent with two children, contains a member
under three years old, or contains disabled persons, or persons with a dependency or illness that renders them permanently unable to work.
Source: Standard & Poor's.
Overall, we expect that Ley 1/2013 may cause ultimate losses on defaulted mortgage loans to increase modestly—a
small credit negative for RMBS. Loan restructuring requests under the Code of Best Practice have accelerated since its
introduction—with borrowers initiating 44% of requests since March 2012 in first-quarter 2013 alone—and borrowers'
new broader eligibility for protection under the code could cause applications to rise further. Loan restructurings could
pick up as a result, potentially pushing up long-term arrears in RMBS pools. Even so, we note that lenders rejected
about two-thirds of applications in the 12 months through first-quarter 2013, mainly because applicants did not meet
the eligibility requirements. Less than 10% of cases—about 300 of the 3,300 requests lenders handled—resulted in a
dación en pago. Considering that there were more than 14,000 instances of dación en pago in 2012, the impact of the
Code of Best Practice on mortgage losses remains low, in our view.
The impact of changes to auction processes on Spanish RMBS is unclear, in our view. On the one hand, the higher
minimum purchase price for auctioned properties (for the winning bidder or for the lender, if there are no bidders)
could increase loan recovery amounts for RMBS. On the other hand, borrowers' new ability to write off part of the
outstanding loan amount within 10 years of the auction, and to share in the potential profit of the lender's subsequent
sale of the property, could reduce future recoveries from defaulted loans. However, we would expect such future
recoveries to be small.
While we don't know how many borrowers will qualify for two-year eviction relief under the new temporary measures,
we believe that the legislation could further lengthen repossession periods for some mortgage loans. Given falling
house prices in Spain, this could push up ultimate losses. This is already the case, in theory, for dación en pago under
the Code of Best Practice—where lenders must allow borrowers to remain in the property for two years—but such
instances remain scarce. The new rules could make this phenomenon more widespread, in our opinion, although we
expect the incremental impact to be small.
Indeed, it's possible that measures preventing borrowers' eviction could push down house prices further, in our view.
Under Ley 1/2013, a lender can still sell such a property, but the buyer would be unable to evict the borrower. Since
the borrower pays no rent over the moratorium period, such properties may see some value declines.
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Spain's New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency

6. The Central Government May Challenge Andalucía's Moves To Expropriate
Property
The regional government of Andalucía's April 9 approval of Decreto Ley 6/2013 allows the state to expropriate certain
properties for a maximum term of three years if the borrower is at risk of eviction. To qualify, the borrower must
satisfy the following requirements:
• The house must be the borrower's main residence, and no household member must own another property;
• The eviction could lead to a situation of emergency or "social exclusion" for the borrower;
• The mortgage payment as a proportion of household income has increased by 1.5 times since the mortgage loan
was granted;
• The mortgage payment accounts for more than one-third of household income; and
• Household income is not more than three times the IPREM.
The regional government would charge the borrower an amount not more than 25% of net household income per year
for the use of the property, transferring this rental amount to the lender. The regional government would also pay the
lender annually the difference between 2% of the property value and the rent that the borrower pays. (We note that in
this respect, the regional law is more respectful of property rights than the temporary moratorium on evictions under
the state law, where the borrower pays no rent for two years.) If, during the three-year period, the borrower is able to
access similar quality housing to that of the property, the lender would be able to retake possession.
As with the central government's measure to stop temporary evictions, we expect that Decreto Ley 6/2013 could
increase the time-to-recovery for defaulted mortgage loans and increase mortgage losses, although we don't know how
many borrowers will qualify for protection under the law. More broadly, the new legislation could weaken investors'
confidence in property rights under the local legislative regime, potentially leading to lower investment, and possibly
dragging house prices down further. Andalucía may also set a precedent for other regions: For example, the Canary
Islands are reportedly considering similar legislation.
That said, we expect the central government to challenge the law before Spain's Constitutional Court. We also
understand that the European Commission has suggested that the legislation may be incompatible with the terms of
Spain's recent banking bailout. As a result, it's unclear whether and for how long Decreto Ley 6/2013 will remain in
effect, but we will continue to monitor its progress.
New Loan Classification Criteria Could Improve Securitizations' Asset
Transparency
In April 2013, the Bank of Spain released criteria that banks must use when making decisions on loan refinancings and
restructurings. The criteria also stipulate how banks must report on such loans in their financial statements.
In particular, for refinancings and restructurings, banks must:
• Base their decisions on individual analysis of the borrower's income and ability to repay;
• Base specific loan conditions—such as interest rate, term, and grace period—on realistic payment arrangements;
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7. • Use updated collateral valuations; and
• Periodically review refinancing and restructuring policies to validate their effectiveness.
Furthermore, banks will have to classify such loans as "doubtful," "substandard," or "standard" in their financial
statements. Standard loans are those for which there is evidence that amounts due will likely be recovered (including
the inexistence of long grace periods, the existence of a repayment plan that ensures adaptation to the borrower's net
income, and the presence of guarantors of high credit quality). Doubtful loans are those for which there is evidence
that the borrower's ability to repay is weak. Substandard loans are of a quality between "doubtful" and "standard."
Banks must categorize restructured and refinanced loans as "substandard" by default, unless there is sufficient
evidence to suggest reclassification. Subsequently, they may only reclassify loans as "standard" if the borrower has met
contractual loan commitments over a certain period (generally more than six months) and analysis shows an
improvement in the borrower's ability to pay. Banks must review their refinanced and restructured portfolios and
report any changes in classification to the Bank of Spain by Sept. 30, 2013.
If lenders that issue securitizations—which also generally act as servicers to such transactions—opt to update the
transactions' servicing statements to reflect the changes in their reporting methodologies, some securitizations'
investor reports (notably, RMBS and SME ABS) could begin to provide useful information to investors about the levels
of restructured loans. We believe that this could lead investors to have more faith in the accuracy of collateral data
over time. In the short term, however, such a change may well lead to a decrease in the reported performing collateral
balance in some transactions.
Spain's Mortgage Legislation Has Become More Borrower-Friendly
While we continue to view Spanish mortgage loans as full-recourse instruments, recent legislative changes have
weakened banks' ability to enforce secured collateral, in our view. Furthermore, borrowers' broader eligibility for
mortgage loan restructurings under the banking Code of Best Practice mean that loan modifications will likely continue
to rise in the coming quarters, delaying foreclosures in some cases.
We expect these measures, in their current form, to have only a limited impact on RMBS transactions' asset credit
quality. As a result, we do not currently apply higher RMBS rating stresses to account for these changes.
However, we note the move toward a more borrower-friendly legislative regime, both regionally and for the central
government. The Spanish government may also find it necessary to further broaden the scope or extend the
applicability period of existing measures—for example, if borrowers currently at risk of eviction remain in the same
position in a couple of years. If temporary measures to help at-risk borrowers become more permanent, we could
consider changing the stresses that we assume in our Spanish RMBS rating analysis.
Related Research
• How Spain's New Best Practices For Mortgage Lenders Could Affect RMBS Credit Quality, March 22, 2012
• Spanish RMBS index report, published quarterly
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Spain's New Mortgage Laws And Bank Guidelines Could Push Up RMBS Losses But Improve Transparency

8. Additional Contact:
Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com
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