International Mortgage News

The revaluation of an option to acquire the equity of a Swiss National Bank fund UBS sold its mortgage-related problem assets into contributed a small gain to the company during the quarter, but overall it suffered a loss during the period due to other accounting charges. The SNB StabFund revaluation contributed gains of 168 million Swiss francs ($165 million) to UBS in the third quarter, but as a whole UBS took a net loss of 564 million Swiss francs ($554 million). The company said the accounting charges that caused the loss stemmed from tightening in its own credit spreads, a net loss related to a cross-border acquisition and related currency differences, and the conversion of certain mandatory convertible notes.

Employment and business woes in Europe, the Middle East and Africa are continuing to erode the performance of commercial mortgage-backed securities and multifamily transactions in the region even though property values appear to have bottomed out and shown slight improvement, according to a report from Moody's Investors Service's London office. Christian Aufsatz, a Moody's senior vice president and co-author of the report said the rating agency remains skeptical of a recovery and forecasts declines in value "until 2010 in all EMEA CMBS markets." Viola Karoly, a Moody's analyst and co-author of the report, said overall performance deterioration that started in 2008 has so far "continued unabated."

Canada Mortgage and Housing Corp.'s forecast for expected annual Canadian housing starts is more optimistic than it was at the beginning of the third quarter when it comes to 2010, but its outlook for this year remains the same, as CMHC said starts are expected to reach 164,900 by the end of next year, up from its early September estimate of 150,300. The expected total for this year remains at 141,900. "We expect housing markets across Canada to strengthen leading into 2010 as economic conditions improve," said Bob Dugan, CMHC's chief economist. "Demand for existing homes has rebounded since the beginning of the year. In addition, lower inventory levels characterize both the new and existing home sales markets." However, "the strong pace of multiple listing service sales seen in the second and third quarters of this year reflects, in part, activity that was delayed the previous two quarters and is not likely to be sustained," CMHC said.

Troubled assets that are partially real estate-related continued to affect Deutsche Bank AG to some extent in the third quarter but the company as a whole was nevertheless extremely profitable during the period. Deutsche Bank's problem loans increased slightly to 8.7 billion euros ($12.9 billion) in the quarter. Standard & Poor's analysts said the company's losses from erosion in commercial real estate loans and other problem assets are expected to persist into 2011. They left Deutsche Bank's ratings unchanged after reviewing its earnings for the period. Deutsche Bank generated 1.4 billion euros ($2.1 billion) in net income in the third quarter. This was roughly three times the 414 million euros ($615 million) in net income the company generated during the third quarter of last year. The gain in net income largely stemmed from tax benefits.

The European Commission has given the go-ahead to state aid for Northern Rock that the troubled United Kingdom lender said it needs to restructure and be an active player in the U.K. mortgage market. The company hopes to complete restructuring by year-end that would separate it into two entities. One of these would be a new savings and mortgage bank called Northern Rock PLC that would hold some existing mortgage accounts and all savings accounts. The other would be a company called Northern Rock (Asset Management) PLC that would hold and service the balance of the company's existing residential mortgage book. This company would, subject to approval by the U.K.'s Financial Services Authority, be regulated as a mortgage provider rather than a deposit-taking bank. It would not do any new lending, nor would it be considered a "bad bank" since 90% of its loans would be performing assets, according to Northern Rock. The state aid would be received after the restructuring. While the company plans an increase in its level of new mortgage lending it says this will be limited to £4 billion pounds this year, £9 billion in 2010 and £8 billion in 2011. (At the time of this writing the pound-to-dollar exchange rate was such that £9 billion, for example, would be worth about $14.8 billion.)

Moody's Investors Service is divulging some of the criteria in its originator assessments, which are used in conjunction with rating residential mortgage-backed securities transactions in Europe, the Middle East and Asia. Moody's said it primarily is focusing on each originator's origination, underwriting and closing practices and whether they are in line with good loan quality, as well as whether the originator is acting within its stated risk/reward strategy. Shivani Kak, a Moody's assistant vice president, further noted that the OAs focus only "on the originator's policies and practices on the loan performance as opposed to other factors such as the macro-economic environment and servicer performance."

The Dutch central bank, De Nederlandsche Bank NV, has seized Dutch mortgage lender DSB Bank NV due to solvency concerns at the institution. The central bank said it was forced to step in after talks with a consortium of five banks that had considered stepping in to support the institution broke down. Banks were concerned about "uncertainty surrounding possible claims on DSB in relation to excessive loans and failures in fulfilling duty of care, as well as possible losses on issued loans," according to the central bank.

United Kingdom nonconforming residential mortgage-backed securities are expected to continue deteriorating into 2011, according to a recent Moody's Investors Service forecast for asset classes in Europe, the Middle East and Africa. "Although [gross domestic product] growth is expected to turn positive in many countries in EMEA later this year or in early 2010, employment and home prices will continue to deteriorate well into 2010, which will lead to securitized loan losses remaining at elevated levels into 2011 and 2012," Moody's said. "While there appears to be a glimmer of light at the end of the tunnel, it is still too early to interpret improvement of slowed deterioration in a particular section as a sign of recovery," said Frederic Drevon, Moody's head of EMEA securitization. Other securitized residential mortgage markets that may take some time to recover include Spain's, which Moody's senior credit officer and vice president Barbara Rismondo said is "likely to continue to deteriorate into 2011/2012." Ms. Rismondo said there has been a "significant" increase in defaults in this market in the past six months. The Moody's report also indicated that losses in U.K. nonconforming RMBS have accelerated during that time period.

Although some lending constraints persist, housing looks relatively strong and prices have been rising in Australia, where the central bank has raised the cash rate by 25 basis points. "Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months," the Reserve Bank of Australia's governor of monetary policy, Glenn Stevens, said. "Business borrowing has been declining, as companies have sought to reduce leverage in an environment of tighter lending standards. But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk," he said.

Poor asset quality and growing loan loss provisions at Mexican mortgage companies could eventually put further strain on them despite the existence of a government-supported debt substitution plan that is bolstering them in the short term. Standard & Poor's sees asset quality as the major risk to mortgage companies, credit and financial profiles, the rating agency said in a report from its Mexico City office. A debt substitution agreement that Mexico's development bank signed in May with several market participants "has significantly reduced short-term refinancing and liquidity risks, in our view," S&P said. Despite this, the rating agency said it is reviewing individual companies, debt amortization plans for the new debt issued under the agreement to see how their financial profiles are affected. Six mortgage companies signed the agreement with the development bank, Sociedad Hipotecaria Federal SNC. The agreement substitutes market debt maturing this year and next with new debt that has a 65% guarantee from SHF. S&P expects asset quality to erode through next year. The six companies have so far refinanced more than 15.8 billion Mexican pesos ($1.17 billion) in debt.