OREANDA-NEWS. Fitch Ratings says in a new report that the features of new RMBS out of Italy, Spain and Ireland - the only three peripheral eurozone countries that have seen primary market activity since the onset of the financial crisis - have strengthened thanks to improved credit standards of their underlying portfolios and simpler capital structures which have better alignment of interest between issuers and investors. However, uncertainties remain regarding ongoing legislative changes and implications of an evolving interest rate environment.

More stringent underwriting standards by lenders have improved the quality of new mortgage origination over the past few years. In Ireland, recent regulatory changes restrict the proportion of loans with original loan-to-value ratios above 80% (70% for investment loans). In Italy, "big tickets", very long tenors and broker-originated loans have almost disappeared. In Spain, lenders are focusing on plain vanilla prime residential mortgages. Overall, these improved underwriting standards should turn into future positive collateral selection for new RMBS transactions.

Capital structures are simpler, to maximise the amount of senior notes used for repo operations with the ECB. The alignment of interest between issuers and investors has also improved. EU regulation has required issuers to retain a 5% interest in the transactions they originate and other improvements include provisioning for defaults rather than for losses in post-crisis Irish transactions.

However, there are some uncertainties- in particular around the impact of ongoing legislative changes. In Spain, parliament introduced debt forgiveness into the personal insolvency regime. Ireland has a detailed process for dealing with distressed borrowers, including debt restructuring, and has removed legal obstacles to repossession. In Italy, the continued lengthy foreclosure process calls for improvement. Fitch does not believe that these changes will materially affect borrowers' willingness to pay.

Finally, while current low interest rates are supporting performance across all three countries, in the longer term, rate rises represent a potential threat to borrower affordability, and therefore to residential mortgages performance. This is particularly the case in Spain and Italy as most originators do not consider a stressed interest rate when measuring borrower payment capacity at origination. On the other hand, if Euribor slips deeper into negative territory, unless mortgage rates are floored at zero, borrower affordability could improve but excess spread could be reduced if there is no downwards adjustment to swap rates, and negative yields can affect cash reserves in structured finance transactions.