This February 2021 RMBS COVID-19 Tracker focuses exclusively on our mortgage data. In terms of delinquencies, the impact of the crisis on mortgages is muted overall, with a visible increase in delinquencies in Q2 2020, followed by a return to pre-crisis levels for Q3 and Q4 2020. In some countries, values can be significantly different and show different trends. In any case, we do not see a surge of similar magnitude as that observed during the financial crisis of 2008-2009.

Early in the pandemic, substantial governmental support was provided to make up for lost income, and lenders were quick to modify the mortgages to avoid a wave of defaults. Loan modifications have thus prevented delinquencies so far.

Specific flags are available to identify the modified loans (see our blog Special Reporting Guidelines: How to Report Data to Reflect Covid-19) but these were not always used, and we therefore had to use other criteria to identify modified loans. We looked for “implied payment holidays”, which are loan modifications meant to temporarily lower or suspend the repayments.

This kind of change materialises in three main ways in our database 1) The maturity of the loan is increased and/or 2) The monthly instalment is brought to zero or reduced (we selected a 50% reduction at least in instalment amount) and/or 3) the arrears or unpaid amounts are capitalised, which results in an increase in the loan amount after modification (if the borrower pays “interest only”, the loan’s principal amount stops amortising). We consider a loan to have an “implied payment holiday” if any of these three modifications have been seen for the first time since March 2020.

If we had used another definition, for instance a decrease of 30% at least of the instalment amount, we would have found higher levels of loan modifications. Had we only looked for loans where the amount due had been reduced to zero, we would have found lower instances of implied payment holidays.

In the chart below, we see that the implied payment holidays found using either a “static or increasing current balance” or any of the two other criteria (see “Any of 3”) are quite similar to the results found when tracking an increasing current balance and the two other criteria (“Any of 3_B”). We believe that an increasing current balance, implying capitalisation of interest is a clearer sign of loan modification, than a static current balance, which can also happen with a loan in arrears, and we therefore focused on “increasing current balance” as a sign of payment holiday.

In any case, all measures show a similar pattern, with a peak in April/May 2020. The “Any of 3” measures are higher than the values found for the other values separately, which indicates that for a modified loan, all three flags are not necessarily raised. We see also on the other hand, that the redemptions do not seem to have reacted much over this period, and that repurchases do not show the sort of pattern visible for the loan modification flags.

Periodic loan modifications peaked in March/April/May 2020 and decreased over the summer. It is important to note that loan modifications were already happening, although at lower levels, in most countries, prior to March 2020. As of September 2020, loan modifications were trending back towards pre-pandemic levels. Please note that because the reporting is quarterly, the cumulative figure cannot simply be calculated by adding the monthly values. Each month we use the data received with an “as of” date in that month. A deal reporting quarterly is therefore reflected in the statistics once every three months.

 

Overall, we find that cumulative payment holidays differ widely across European countries, probably reflecting the effect of the severity of the crisis and the measures used to counter its effects. Germany and Netherlands suffered relatively less in terms of casualties than the UK and Portugal, for instance. UK, Portugal and Italy, which suffered more, enacted prescriptive laws that made it easy for borrowers to obtain a payment holiday when their ability to repay their loans was impaired due to COVID-19.

In the Excel version of our COVID Tracker, for every country, we show six charts namely 1) The % of loans in each loan status category (field AR166) using last available data 2) Periodic implied loan holidays by modification type 3) Cumulative “implied payment holidays” by modification type 4) % of maturity extensions for the loans with a maturity extension 5) Loans in arrears 6) Available data in terms of number of deals and outstanding amount.

To learn more, please join our webinar on 24 February at 16:00. Please do not hesitate to contact us at enquiries@eurodw.eu if you have questions.