OREANDA-NEWS. Increased competition in the Italian mortgage market is likely to raise prepayment rates and make the renegotiation of mortgage terms more common, Fitch Ratings says.

Data this month from banking credit information company CRIF shows new residential mortgage originations in Italy increased 15% yoy in the first nine months of 2014. This rise in originations is largely due to a surge in refinancings ("surroghe") as banks resume mortgage lending with low-risk-profile clientele. Italian lenders are willing to compete for new borrowers, including those who are remortgaging, despite the gradual erosion of spreads.

Most of the new originations will therefore contain more favourable terms for residential borrowers. Higher prepayment rates for existing mortgage pools will result if this trend persists. We expect the constant prepayment rate in Italian RMBS transactions to converge toward its pre-2007 level, up from its historical lows since 2013.

We expect new deals to have more accommodating thresholds for renegotiations than the strict ones in the most recent transactions because originators would like to retain the flexibility to compete with other lenders. Margin reductions are likely to be the main focus of renegotiations in Fitch-rated Italian RMBS deals in the short to medium term. The re-mortgaging trend could also increase tenor extensions, and we believe originators are likely to extend the term of a mortgage to relieve troubled borrowers as an alternative to the government-sponsored payment suspension schemes of the recent past.

We will analyse whether the credit quality of loans originated to refinance existing debt differs from that of loans originated on the same terms to purchase properties. But even if the trend for more refinancings continues the overall consequences for new and existing Italian RMBS transaction ratings and performance are likely to be limited.

Our full report "Italian Mortgage Refinancing Pick-Up Likely To Lift Prepayment Rates" is available to subscribers at www.fitchratings.com or by clicking the link.