The new Colombian Housing and Habitat Law (Ley de Vivienda y Habitat) enacted on January 15 will drive greater mortgage originations, increasing demand for housing that could increase house prices and boost new residential mortgage-backed securities (RMBS) activity, Fitch Ratings says.
The law is not expected to materially affect the performance of Fitch’s RMBS portfolio given that rated transactions are static. Prepayments may increase as market activity increases, although this is not expected to affect the credit quality of Fitch’s rated portfolio.
Through the new law the Colombian government is seeking to reduce the country’s housing deficit by increasing access to government housing subsidies and expanding the mortgage market by relaxing current conservative origination and underwriting practices in place since the last mortgage crisis of 1998-2002.
During the current economic environment, banks have shown low appetite for risk, but seem to be more willing to lend when loans are subsidized by the government. This was seen in 2020 when social housing loans increased 16% compared with 2019, supported by major government subsidies programs such as “Mi Casa Ya” or “My House Already”. Subsidized mortgages represented 33.7% of the total banks’ mortgage loan portfolios.
More flexible origination standards and broadening the tradition profile of mortgage debtors could result in loan quality deterioration. However, it is important to recognize that in the last decade, subsidized loans have shown adequate performance, provided the granting of the subsidy was subject to the fulfilment of payments by the debtor.
This highlights the importance of the government’s parameters in granting subsidies, as these will determine the effect of the new law on new RMBS portfolio performance.
The new regulation will allow originators to underwrite social housing loans with terms longer than 30 years and allow borrowers to receive multiple subsidies on loans, such as for home renovation, when previously only one subsidy per family was allowed, resulting in increased loan volume.
Additionally, the new regulation allows for the possibility of selling subsidized houses and housing that was paid for by the government after five years, which is expected to promote turnover in the existing and second home markets.
Prepayments are likely to increase, which could result in senior tranches amortizing faster in RMBS with traditional structures, negatively affecting subordinated tranches in newer transactions that have not built up sufficient overcollateralization.
However, we do not expect this to affect most Fitch-rated transactions, the vast majority of which are mature and have high overcollateralization levels. Notably, prepayments have been very low during the coronavirus pandemic, even with the central bank lowering interest rates.
Fitch believes the law could lead to demand that outstrips supply in the medium term, leading to an increase in housing prices. This is particularly the case since the housing inventory in Colombia is not deep, as most housing projects do not start until a designated percentage is sold.
Additionally, during the coronavirus pandemic, large developers were able to resume their projects, but several ongoing projects have stalled, and the number of halted projects has increased.