In this Italian RMBS primer, S&P Global Ratings provides a comprehensive guide to the fundamentals of both the Italian housing and mortgage markets. We also describe the key features and risks of loan origination, and summarize the Italian securitization legal framework. Finally, we compare the RMBS market with the Italian covered bond market.

Robust Performance Underpinned By Prudent Lending, Low Household Indebtedness, And Government And Bank Support

A strong regulatory environment

Mortgage lending is dominated by few large banking groups. The largest banks in household mortgage lending are Intesa Sanpaolo SpA, UniCredit SpA, Banco BPM, BPER Banca S.p.A., and Gruppo Bancario Cooperativo Iccrea. Banks offering mortgages in Italy effectively form a legal monopoly since nonbanks cannot operate as mortgage lenders for regulatory reasons.

Italian banks' risk appetite is relatively low. Most lenders are traditional banks that grant loans to clients who they know well. They do not typically engage in riskier practices, such as using brokers for the initial underwriting, or expanding into new regions where they have little expertise.

Investment and merchant banking represent a minor portion of the banking system compared with other countries such as the U.K. or France. Moreover, Italian banks benefit from a strong and highly granular retail funding base.

Prudent underwriting criteria

The Italian mortgage market has traditionally been characterized by low LTV ratios and prudent underwriting procedures. LTV ratios on new mortgages were on average 77.6% as of third-quarter 2023, compared with 77.3% in second-quarter 2023, according to the Italian Banking Association's Monthly Outlook from May 2024.

Loans are typically amortizing and not designed for borrowers with weaker credit scores. Buy-to-let loans are not typical in the Italian market, although second homes exist. Borrowers' main use of mortgage debt is to purchase homes, and they do not typically use it for debt consolidation or home equity release. Italy has some of the highest home ownership rates in Europe (see chart 1). It is typical in Italy to own a house rather than rent one.

Chart 1

Robust performance

Italian households' historically low level of indebtedness explains why the Italian RMBS market has maintained a stable performance despite Italy suffering a harsh recession in 2009 and a second recession in 2012 and 2013, followed by a long period of stagnation (see chart 2).

Italian household indicators compare favorably with the rest of the world. Italian households have low indebtedness relative to their peers and are financially sound. Household debt is likely to remain low, at approximately 40% of GDP over 2024 and 2025, about half the eurozone average (see "Banking Industry Country Risk Assessment: Italy," published on June 23, 2023).

With an estimated GDP per capita of $36,500 as of December 2023, we view Italy as a relatively wealthy country. After a one-off drastic decline in 2020, real GDP recovered fully in 2022. Households' financial wealth is roughly double GDP, representing a significant source of support for their creditworthiness in case of difficulties.

Chart 2

Italian banks' loan exposures proved resilient to the COVID-19 pandemic. Italy had one of the highest take-ups of payment holidays in Europe during the pandemic, granted either in accordance with a government scheme or by individual banks. After the experience of the pandemic, Italian banks have been more proactive in supporting vulnerable borrowers. With interest rates rising since the middle of 2022, many banks have acted quickly to address the increase in loan installments for potentially vulnerable borrowers by switching interest rates from floating to fixed or by extending their mortgage terms.

Borrowers experiencing job losses still have the option to benefit from a payment holiday of up to 180 days, subject to certain conditions, as per the Italian government's solidarity fund initiative, Fondo Gasparrini. Furthermore, single banks may grant payment holidays to their clients during a loan's lifetime.

Despite government and bank support, higher interest rates have been weighing on households with floating-rate mortgages. This has contributed to a slight deterioration in asset quality, with household default rates increasing to 0.9% as of December 2023 from 0.5% in the last quarter of 2022, according to the Bank of Italy. Nevertheless, most residential mortgages in Italy have fixed rates on favorable terms because borrowers took them out or renegotiated them when interest rates were low. We see this as supporting the good credit quality of mortgages in Italy while interest rates are high.

A long recovery process

Italy is a full recourse market. Borrowers who default remain liable for their debt even after foreclosure on the property. Lenders have full recourse to a borrower's savings and can also apply to access part of a borrower's income stream, which creates a strong incentive for borrowers to pay. Most mortgages are granted to borrowers to purchase their own homes. Therefore, Italian borrowers tend to repay mortgages to avoid losing their homes. Italy has a longer foreclosure and recovery process than other European banking systems and the repossession process is lengthy, which we see as a weakness.

Loan Origination Volume Evolution

Italy saw an expansion in the supply of mortgage credit following the introduction of the euro, followed by a period of contraction that started in 2008 and continued until 2014, while Italy was in a long and deep recession (see chart 3). From 2015, and with exception of 2020, the low interest rates supported an increase in new mortgages until partway through 2022. In the second half of 2022 and the whole of 2023, rising interest rates and lower consumer confidence reduced the demand for new mortgages.

Chart 3

The evolution of the residential mortgage market mirrors house purchase trends, as Italians typically use mortgage debt to purchase their own homes (see chart 4).

Chart 4

Before the financial crisis in 2009, Italy did not see real estate bubbles like other countries (see charts 5 and 6). This is because Italy did not have a large wave of foreign banks investing in risky retail mortgages in search of high returns, such as in Spain.

Despite the increase in the number of new mortgages since 2015, Italian house prices tend to be stable overall, with no signs of overvaluation. More dynamic economic regions sustain demand and prices, while older homes in the southern regions drag prices down. Even after the recent increase in interest rates, the Italian housing sector is holding up better than in most other European countries because it has not seen prices spike in recent years.

Chart 5

Chart 6

Mortgage Market

LTV ratios

The Italian mortgage market is characterized by low LTV ratios. However, in recent years, the average original LTV ratio has increased. The share of mortgages with a higher LTV ratio at origination than the legal maximum of 80% has also increased, mainly thanks to a government guarantee. Since 2021, the Italian government has offered a guarantee to low-wealth borrowers aged up to 35 years covering 80% of the losses that a lender would bear. This guarantee allows lenders to offer mortgages with LTV ratios exceeding 80% to young people who cannot afford to make a significant upfront payment to buy a house.

Interest rates

Italian mortgages have mainly had a mix of floating and fixed rates for life. Floating-rate mortgages were prevalent in the past (see chart 7). From 2015, while interest rates were decreasing, demand for new fixed-rate loans started rising. At the same time, there was a wave of renegotiations of existing loans from floating to fixed rates on favorable terms, mostly by way of transferring the loan from one lender to another in a process called subrogation.

After a temporary reduction in the supply of fixed-rate loans while interest rates were rising in 2022, most new residential mortgages--as well as the stock of existing mortgages--now have fixed rates. Since 2007, borrowers have had the option to switch lenders without incurring a prepayment fee. This gives them more flexibility to change certain aspects of their loans--such as interest rate and maturity date--by transferring them to a new lender.

Chart 7

Mortgage maturities

The average maturity of new mortgages continues to grow significantly, having exceeded 24 years on average in 2022. The share of mortgages with maturities exceeding 30 years also increased recently after banks started offering mortgages with 40-year maturities to young people. Granting loans with longer terms is one way that banks can limit instalment amounts in a high interest rate environment. Italian banks typically check the borrower's age at maturity to ensure that they will still be able to repay their mortgage at maturity, and eventually with their pensions.

Property valuations and liens

All loans typically entail a full property valuation. Originally, a bank branch manager used to perform the property valuation for small loans with low LTV ratios. Banks can use a multiple of the property value or the loan amount to set the lien (that is, the "ipoteca" value). This is the amount that banks are legally entitled to receive before other creditors in the event of foreclosure, thus securing the loan for the banks' benefit. Second-lien mortgages are not typical in the Italian market.

Green mortgages

Italian banks started offering green mortgages in 2019. Demand for these loans became more relevant in 2023, when it increased to around 10% of new mortgage originations. This was partly due to rising interest rates, as green loans save around 20-30 basis points of interest. Banks offer green mortgages to borrowers acquiring or building a house with an energy performance certificates (EPC) of A or B, or financing the renovation of an existing house to make it more energy efficient. On average, banks grant larger green mortgages than ordinary mortgages. The EPC is mandatory in buying and selling property in an effort to encourage moves to energy-efficient homes.

RMBS Market Overview

The Italian securitization market took off early in 2000 following the enactment of the securitization law in 1999 (Law 130). This gave the banking system a new funding tool that was cheaper than traditional tools. The market developed mostly through the securitization of residential mortgages. However, banks soon appreciated the efficiency of the tool and refinanced many of their outstanding assets through securitizations. In addition to RMBS, consumer and lease asset-backed securities and commercial-backed securities hit the market quite rapidly, making Italy one of the largest securitization markets in Europe.

Following the financial crisis, the investor markets closed in some EU jurisdictions including Italy. Originators then started retaining deals and using them in repo agreements with the European Central Bank (ECB). Now that the ECB has stopped the purchase program, it is likely that securitizations with investor-placed tranches will resume. As of end-2023, the total amount of outstanding Italian RMBS was €33.6 billion, of which about €1.3 billion was investor-placed.

Comparing Italian RMBS With Covered Bonds

In 2005, the Italian government continued supporting securitizations by approving the primary legislation on covered bonds, Law 80/2005. Highly rated Italian banks have two realistic secured funding options: RMBS and covered bonds (see table 1 for a summary of the key differences).

Covered bonds are the most popular secured funding tool in Italy, with large banks preferring to use them rather than RMBS securitizations in recent years. For covered bonds, Law 80/2005 ensures the eligibility of the collateral pool. No such law exists for RMBS, which could contain collateral that is not substitutable and not eligible for covered bond programs under the relevant legal framework.

Table 1

Typical RMBS structures

Before the financial crisis, Italian securitizations used to have full capital structures, with rated notes placed with investors. After 2007, originating banks started to optimize their funding, only retaining senior notes with the highest possible rating and using them in repo transactions with the ECB. These deals may allow turbo redemption of the notes using available excess spread, but without the need to wait for a deterioration in performance.

This mechanism builds up the credit enhancement available to the rated notes from the beginning of the deal. The notes are typically structured without any interest rate swap. In some transactions, interest rate risk is mitigated by a cap on the coupon paid on the liabilities, or by a mix of fixed- and floating-rate notes that mirror the interest rate composition of the underlying portfolios.

Recently, we have seen securitizations backed by legacy portfolios with a full capital structure and some rated notes being placed with investors.

Typically, Italian transactions allow servicers to change the terms of the loans, usually subject to some limits. The two main reasons for such changes are to avoid borrowers becoming delinquent during difficult financial conditions, and to retain good borrowers.

Italian Securitization Law Overview

Italian securitizations are governed by a specific securitization law, Law No. 130 of April 30, 1999. The law's main feature is a "true sale" mechanism, under which ownership of securitized assets transfers from an originator to a special-purpose entity (SPE), a process that removes the assets from the seller's or originator's bankruptcy estate. Law 130 also introduced the concept of statutory segregation, whereby the receivables relating to a securitized transaction are segregated from other assets held by the SPE.

Bankruptcy remoteness

Unlike in other jurisdictions such as Spain, the Italian securitization law does not in and of itself create a bankruptcy-remote SPE. The SPE that owns the assets and issues rated debt typically complies with certain covenants and conditions for us to assess it as a bankruptcy-remote entity under our "Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017.

Commingling risk

Usually, borrowers pay their instalments by direct debit to the servicer into a collection bank account provided by a commercial bank, which is often with the servicer itself. These collections therefore risk being commingled with the servicer's insolvency estate and lost. The amounts at risk depend on both the amounts accumulated in the servicer's collection account before the servicer's insolvency (accumulation risk) and the amounts that may be paid into that account following the servicer's insolvency and before the borrowers are notified to pay into the issuer's account (notification risk).

In Italian RMBS transactions, accumulation risk is typically mitigated by having a cash-sweep frequency of one or two days from the servicer's collection account to the SPE's account. Typically, servicers are the originating banks themselves, for which sudden liquidation is unlikely under the bank regulations. This further mitigates the servicer's insolvency risk.

Setoff risk

Different sources of potential setoff risk could arise if the originator becomes insolvent. Employee setoff risk results from the originator's employees offsetting their loan repayments against salaries due that the originator has not paid. The typical structural remedy for this is to exclude such loans.

Where this is not the case, the risk remains, and we would need to consider it as part of our analysis. Setoff risk can also arise if the seller or originator is a deposit-taking entity. Here, borrowers' deposits could be offset against their loan repayments if the originator becomes insolvent. Nevertheless, there are several mitigating factors, such as the deposit protection scheme.

Claw-back risk

For Italian RMBS, the sale of the portfolio to an SPE is not protected by law from the claw-back risk relating to the seller's insolvency, as in other jurisdictions like Spain. Claw-back risk is typically mitigated by the seller's solvency certificate, a good standing certificate, and a bankruptcy court certificate, when available, unless the seller has an investment-grade rating, which we see as a strong indication of the seller's solvency.

Operational risk

The market of servicers in Italy is mature and deep. In our opinion, several entities could step in if the servicer becomes unable or unwilling to perform its duties during the transaction's life. This is similar for mortgages that require intensive servicing, like the nonperforming loans that Italian banks have sold in recent years and that specialized servicers manage. The variety of specialized servicers with a long track record of acting in the Italian market is wide. Therefore, the potential effect of disruption on the issuer's cash flows is limited.

Related Criteria

• Global Methodology And Assumptions: Assessing Pools Of Residential Loans – Europe Supplement, April 4, 2024
• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
• Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
• Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Principles Of Credit Ratings, Feb. 16, 2011
• Methodology For Servicer Risk Assessment, May 28, 2009

Related Research

• European Structured Finance Outlook 2024, Pushing On Through, Jan. 9, 2024
• European RMBS Index Report Q4 2023, Feb. 9, 2024
• European Housing Markets: Forecast Brightens Amid Ongoing Correction, Jan. 25, 2024
• Cost Of Living Crisis: Southern European RMBS Grapples With Rising Rates, Jan. 25, 2023
• Cost Of Living Crisis: Mapping Exposures In European RMBS And Covered Bond Markets, June 27, 2022
• ESG Industry Report Card: Residential Mortgage-Backed Securities, March 31, 2021
• Spotlight On Italy's Securitization Market On The 20th Anniversary Of Law 130, May 29, 2019
• 2017 EMEA RMBS Scenario And Sensitivity Analysis, July 6, 2017
• Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
• European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
• Banking Industry Country Risk Assessment: Italy, June 23, 2023