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Caja Madrid May Signal Halt in Spanish Mortgage Bond Payments

By Esteban Duarte and Neil Unmack

April 6 (Bloomberg) -- Caja Madrid may be the first Spanish bank to stop interest payments to mortgage-backed bond investors as loan defaults soar, according to Standard & Poor’s.

Defaults on mortgages in the bank’s 1.8 billion-euro ($2.4 billion) Madrid RMBS II FTA bond rose to almost 7 percent in December, close to the 8 percent level that will force the lender to halt payments to junior debt holders, S&P said. Other securities in the 163 billion-euro mortgage-bond market may also miss payments after arrears doubled in the past year, S&P said in a report last week.

Spain’s recession will linger into 2010 and unemployment will increase to 19 percent from 14 percent, the highest in the 27-member European Union, according to a central bank forecast on April 3. Homeowners lagged behind on repayments on 72 billion euros of mortgages as of January, Bank of Spain data show, after the credit crisis halted a real-estate boom.

“A number of deals” may have to defer interest, said Dipesh Mehta, an asset-backed debt analyst at Barclays Capital in London. “Unemployment is the biggest risk” to Spanish mortgage bonds, he said.

A Caja Madrid spokesman, who declined to be identified citing bank policy, wouldn’t comment.

Home-loan arrears, a leading indicator of defaults, have doubled from 12 months ago to 6.7 percent in Spain, surpassing the U.K., Germany and Italy, S&P data show. House prices in the country fell 3.1 percent in the fourth quarter, the National Statistics Institute in Madrid said on March 31. The government seized Caja Castilla-La Mancha last week, in Spain’s first major bank rescue for 16 years.

Recession to Linger

With loan defaults forecast to increase as Spain’s economic slump deepens, investors in other mortgage-backed bonds may be hurt, according to S&P. More than half of the transactions rated by S&P include interest-deferral triggers that act as safeguards to protect the most senior notes, the ratings firm said.

Holders of some U.K. bonds are also being affected, with so-called deferrable-interest notes tied to British subprime mortgages having missed payments.

Also in Spain, S&P downgraded junior portions of three transactions sold by Banco Santander SA, the country’s largest lender, on April 1. Ninety-day arrears on loans packaged in one of the notes, Santander Hipotecario 4, climbed four-fold in the last quarter to 10.3 percent, S&P said. Interest payments on the junior notes stop when 18-month arrears surpass 7.7 percent, according to a Jan. 15 Santander report.

In Default

Caja Madrid issued its MADRID RMBS II bonds in 2006 in seven portions, rated from the top AAA down to BB, two steps below investment grade. About 12 percent of the underlying mortgages are now either in arrears by more than 90 days or have already defaulted.

When defaults reach 8 percent, investors in 18.9 million euros of junior notes will stop receiving interest and any excess cash will be used to repay senior bond holders, according to the terms of the transaction. As defaults reach 18.3 percent, all investors except for those in the highest-ranked notes will be cut off, S&P said.

Caja Madrid’s mortgage-backed securities may be more likely to defer interest payments because their terms are “more conservative” than deals structured by other Spanish banks, according to Jose Tora, a Madrid-based S&P analyst. Caja Madrid’s notes classify home loans as being in default after six months of non-payment, compared with as long as 18 months in other deals, Tora said.

Caja Madrid has sold 9.2 billion euros of mortgage-backed bonds since 2006 in four transactions, according to data compiled by Bloomberg. The lender packaged home loans it made to borrowers at the peak of Spain’s 14-year real-estate boom.

To contact the reporters for this story: Esteban Duarte in London eduarterubia@bloomberg.net

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