OREANDA-NEWS. September 15, 2015. Recent data suggests that the decline in Spanish home prices has bottomed out, but the persistently low level of recoveries from properties taken into possession by lenders supports our view that national home price growth will be slow and uneven, Fitch Ratings says.

The Spanish National Institute of Statistics (INE) said this week that the Spanish Housing Price Index (HPI) rose by 4% yoy in 2Q15 - the biggest increase since 2007. The HPI has now shown annual growth for five consecutive quarters, in line with our long-held view that Spanish residential property prices would stabilise in 2014-2015 after seven years of decline. The recent fall in mortgage costs suggests the return of credit flows to households will support a gradual recovery of property prices.

Nevertheless, the average difference between the value of a property at loan origination and the price at which the lender can sell it after it has been taken into possession, remains close to 70% of the initial property valuation. This ratio has been broadly unchanged since 1Q13. Persistent low recoveries point to fundamental weaknesses in the Spanish residential property market, including a large overhang of between 500,000 and 600,000 empty new homes, high unemployment and demand constraints for a large portion of the population with low salaries. These are the key reasons we think that a national recovery in home prices will be limited this year, with significant regional variations and a portion of the market still distressed.

As of July 2015, only 16% of RMBS transactions in our Spanish Mortgage Market Index reported a decline in the level of outstanding defaults compared to a year ago and the total volume of outstanding defaults for the sector had increased slightly to 4.9% from 4.5%, as recovery income remains elusive.

We think collateral servicers will continue to aim for out-of-court settlements with distressed borrowers rather than traditional legal proceedings, to achieve faster recoveries and better outcomes. This trend may be boosted by changes to Spain's personal insolvency regime enacted earlier this year that formalise the adoption of some practices already widely used, such as maturity extensions and principal write-downs.

We will present a detailed discussion of trends in the Spanish RMBS market in our "Mortgage Market Index - Spain" for 3Q15, which will be available at www.fitchratings.com next week. We will also examine property market dynamics in our next Spanish Repossession Analysis report, to be released in October.