A 30 year maturity cap on cover pool-eligible assets proposed by Spanish authorities last month is expected to apply to only new mortgages , without triggering a drop in cédulas overcollateralisation levels, said Fitch today (Tuesday), citing discussions with the ministry of finance.

The proposal to limit to 30 years the maturity of mortgages eligible as cover assets for cédulas was announced as part of a package of reforms to the Spanish mortgage market by Spain’s ministry for economy and competitiveness on 30 January.

Observers including Moody’s and DBRS highlighted that it was unclear whether the cap would be imposed on new or existing loans, and warned that if the latter happened, the measure would cause a dramatic drop in overcollateralisation levels.

However, Fitch said today that after talking to the Spanish ministry of finance it understands that if the 30 year cap is implemented it would only apply to new mortgages.

“Following our discussions with the Ministry of Finance, we believe this rule will only apply to newly originated mortgages,” said Fitch.

“Existing loans with an original maturity over 30 years are not excluded from the eligible loan books, and banks – many of which are near their regulatory limits for total outstanding covered bond issuance – will not have to buy back bonds to satisfy the legal limits,” it said.

Fitch therefore said that the measure will not trigger a drop in the overcollateralisation levels of Spanish covered bond programmes.

Another unclear element highlighted by some rating agencies was whether mortgages with a maturity exceeding 30 years would be excluded from the eligible cover pool upon which mandatory 25% overcollateralisation is determined, or from the entire mortgage book backing cédulas.

Fitch said that loans exceeding 30 years “will not be included as part of the eligible cover pool, which determines the maximum legal amount of covered bonds that can be issued by a bank,” and that this would be “the most significant impact of the rules”.

However, because the rule would only apply to new mortgages the measure would be neutral for Spanish covered bond overcollateralisation, said Fitch.

Among the reforms to the Spanish mortgage market there were also measures that could weaken full recourse rules, such as partial debt forgiveness for troubled borrowers able to pay 65% of the outstanding debt within four years of foreclosure (other rating agencies have referred to a five year period).

Fitch said that the number of borrowers that would benefit from such rules is limited so the reforms should have limited impact on banks, covered bonds and residential mortgage backed securitisation. However, the rating agency said that it is unclear whether the measures would apply to primary residences only.

“The disincentives to default on a mortgage are strongest for primary residences so it will be important to see whether the new set of laws and procedures will only be applied to first residences or will be applied to all mortgages loans,” it said.

The rating agency cautioned that it is still too early to measure the complete impact of the proposed rules as they have not become law, but noted that there has been a raft of mortgage market reforms since 2011, “many of which have started to chip away at Spain’s extremely strong recourse rules”.