ICO guarantee to have twofold effect

Abanca and Banco Santander are among the first lenders to sign up to the Official Credit Institute (ICO)’s new Mortgage Guarantee Programme, which promotes mortgage loan origination for young people in Spain. The programme is set to increase home ownership and support house prices, but it could result in higher default risk if guaranteed loans are included in RMBS pools.

The ICO programme, to which €2.5bn has been allocated by the Spanish government, will guarantee up to 20% of a mortgage loan for the purchase of a first home or 25% if the property to be financed is sufficiently energy efficient. As such, the guarantee will incentivise the origination of high LTV mortgage loans, as it is only available for mortgage loans with LTVs higher than 80% and up to 100%.

The programme targets people aged up to 35 and families with young children that might be able to afford a mortgage but may not have enough savings for a down payment. The guarantee will be free for borrowers and the lenders adhering to the programme.

A recent Morningstar DBRS commentary suggests that given the measure could increase home ownership within the younger population and create more demand, it could therefore be positive for Spanish residential property prices. “While higher prices would worsen affordability for new buyers, they would be beneficial for outstanding RMBS and covered bond transactions, as higher prices of assets backing mortgage loans could reduce the likelihood of borrowers defaulting on their debt payments and increase the recovery amounts in case a borrower ceases debt repayment. However, these measures could also result in a more indebted younger population in Spain,” it states.

Morningstar DBRS also warns that future RMBS transactions could have lower credit quality if loans made under the ICO programme are included in those portfolios, considering the type of borrowers eligible for the guarantee and the rating agency’s view that mortgages with LTVs higher than 80% carry increased default risk. “The loans could also experience higher loss given default, as the ICO-sponsored guarantee will cover only up to 20% to 25% of the potential loss assumed by the lender if foreclosed properties do not cover the entire loan balance and because of the guarantee's time limit, which is 10 years from when the mortgage loan is granted.”

Under the programme, the Spanish Ministry of Housing and Urban Agenda will share the risk of up to 20% (or 25%) of each mortgage's principal balance with the lender on equal terms. It will be in force until the end of 2025, although it can be extended until 2027, and the term of the guarantee will be a maximum of 10 years.

Assuming an average guarantee amount of around €50,000, the objective is to facilitate the purchase of approximately 50,000 properties, according to Morningstar DBRS. Eligible borrowers should: have resided in Spain during the last two years; use the mortgage to finance their first and main residence; have a net worth no higher than €100,000; and have a maximum annual salary of €37,800 (or €75,600 for couples), which can increase based on the number of children or in cases of single-parent families.

Corinne Smith