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Credit FAQ: How House Price Changes Affect Our EMEA Residential Mortgage Loans Analysis

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Credit FAQ: How House Price Changes Affect Our EMEA Residential Mortgage Loans Analysis

House prices are a crucial input in S&P Global Ratings' credit analysis when evaluating transactions backed by residential assets. The value and stability of house prices significantly influence collateral performance by affecting recovery values, as well as being an influencing factor for a borrower to default. This article addresses key questions raised by market participants in EMEA residential mortgage-backed securities (RMBS) and covered bond markets on our analytical approach in relation to house price considerations.

Frequently Asked Questions

How often do you update the house price index used in your analysis of residential assets?

House price indices are typically published by third-party organizations with a lag that may range from a few days after the month-end to more than two quarters. We generally update our models for indexation purposes annually.

What if the house price index suddenly fluctuates? Do you update it immediately?

If we consider movements to be significant enough to update more frequently than annually, we will do so and communicate this (see "Asset Price Risks: Inflated Property Values Mean Higher Loss Assumptions In European RMBS And Covered Bonds"). However, depending on the circumstances and our forward-looking view on house price volatility, we may not fully reflect all changes immediately. Examples of this include a temporary property tax-related measure which may cause short-term supply and demand imbalances, or the COVID-19 period.

In cases where the originator updates the valuations in the securitized collateral, will you use the current or original valuations in the transaction's rating analysis?

In our credit analysis, loan-to-value (LTV) ratios are a key factor when assessing future mortgage performance. Because the original LTV ratio (original loan balance plus any second lien's exposures whenever applicable, divided by the original property valuation) reflects the borrower's initial equity stake in a financed property and their willingness to repay the mortgage, we typically expect to see original valuations provided as part of a new transaction's data set (see "Credit FAQ: How Much Is Enough? Information Quality Standards For The EMEA RMBS And ABS Rating Process").

Are updated valuations provided by the arranger/originator used in the credit analysis at all?

For calculating a property's recovery proceeds at the time of our analysis (and consequently the pool's weighted-average loss severity [WALS]) we typically index the original valuation provided to us based on publicly available house price indexation data (see table 1).

Generally, we may give credit to updated valuations in certain cases, such as when re-underwriting occurs in product switches or when an updated valuation is processed for nonperforming or reperforming loans at restructuring. In such cases, we typically assess historical property sales data on similar loans and the difference between updated property valuations and indexed original property valuations for pools of comparable assets.

Likewise, we will question and consider in our analysis situations where for a significant portion of the securitized collateral our internal updated valuations differ substantially from the updated valuations.

Why do you use region-level property indexation for some countries and country-level for others?

The indexation we use reflects the availability of public information in each jurisdiction. When deciding if regional indexation is relevant, we also consider if the housing market's performance in a specific region differs significantly to other parts of the country. Similarly, in some jurisdictions we calibrate our jumbo valuation thresholds at the regional or city level reflecting these local housing market idiosyncrasies.

Would you apply an updated HPI indexation to a specific transaction only?

No. Indexation happens at the jurisdiction level by applying the same house price index data set to all our rated and in-flight transactions at the same point in time.

Is the same indexation source used for different collateral types (detached, terraced, flats, houses in multiple occupation, commercial, etc.)?

The availability of robust indexes that differentiate between property types is limited. In our criteria we differentiate between residential properties and other types (typically commercial). The premise of our residential asset analysis is one of diversification. In most RMBS transactions the collateral securitized tends to be pure residential owner-occupied or single-family unit properties. In cases where we see a large proportion of more unusual properties which are not appraised under a market-standard valuation method such as houses in multiple occupation or multi-unit freehold blocks, we may apply haircuts to the valuations. For pools with a large share of commercial assets, we may apply aspects from other criteria in our analysis, rather than applying our global residential loans criteria.

Do you index anything else, such as rental data?

In scenarios where the rental income data is aged and where we have reasonable analytical grounds to consider it materially different to current market values, in some cases we may increase or decrease rental incomes. We may also consider this as a relevant aspect in our originator adjustment.

Table 1a

Summary of property indexation considerations
Factor Austria Belgium Denmark Finland   France Germany Greece Hungary
Indexation source OECD national house price index OECD national house price index OECD national house price index OECD national house price index OECD national house price index OECD national house price index OECD national house price index OECD national house price index
Indexation level Country Country Country Country Country Country Country Country
Indexation range Q1 2000 Q1 1970 Q1 1970 Q1 1970 Q1 1970 Q1 1970 Q1 1997 Q1 2007
Jumbo threshold level Region (Vienna versus rest) Region (Brussels-Capital versus rest) Region (Hovedstaden versus rest) Region (Southern Finland and Aland Islands versus rest) Region (Ile-de-France versus rest) City (Berlin, Munich, Hamburg, Cologne, and Frankfurt versus rest)  Region (Attika versus rest) Country

Table 1b

Summary of property indexation considerations
Factor Ireland Italy Netherlands Norway Portugal Spain Sweden U.K.
Indexation source Central Statistics Office (CSO) OECD national house price index Kadaster OECD national house price index Instituto Nacional de Estatística (National Statistics Institute) Instituto Nacional de Estadística (National Statistics Institute) OECD national house price index U.K. Land Registry
Indexation level Region (Dublin versus rest) Country Region Country Region Region Country Region
Indexation range Q1 1996 Q1 1970 Q1 1995 Q1 1970 Q1 2009 Q1 2007 Q1 1970 Q2 1968
Jumbo threshold level Region (Dublin versus rest) Region (Northern and Central versus Southern Italy) Region (Nord Holland, Zuid Holland and Utrecht versus rest) Region (Oslo-Viken Province versus rest) Country Country Region (Greater Stockholm versus rest) Region
How are covered bond programs affected?

For covered bonds the above points also hold true as the collateral analysis is the same. While we apply the typical original LTV ratio/current LTV (CLTV) ratio for RMBS, in some covered bond jurisdictions, our analysis is based entirely on the CLTV ratio. For such covered bond ratings, we rely fully on valuation information from the issuers. We then consider the LTV ratio based on the CLTV ratio, which we adjust to reflect our view of over/under valuation in the individual market.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Feliciano P Pereira, CFA, Madrid +34 676 751 559;
feliciano.pereira@spglobal.com
Secondary Contacts:Alastair Bigley, London + 44 20 7176 3245;
Alastair.Bigley@spglobal.com
Casper R Andersen, Frankfurt + 49 69 33 999 208;
casper.andersen@spglobal.com

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