BBVA has become the first Spanish entity to start updating LTV ratios of mortgages backing covered bonds, according to Moody’s, which today (Wednesday) said the move will improve the credit quality of cover pools and their transparency.

The rating agency said that to its knowledge Banco Bilbao Vizcaya Argentaria (BBVA) is the only Spanish bank to have begun the change. BBVA has begun updating the value of properties, and thus loan-to-value (LTV) ratios, that back the mortgage loans in its covered bond cover pool to reflect house price decreases in recent years, said Moody’s.

“An update in loan-to-value ratios for Spanish covered bonds will lead to a drastic reduction in the size of the eligible pool,” it said, “which is credit positive for investors because it improves the quality of eligible assets against which bonds can be issued, without reducing the total amount of protection from cover assets.”

Spanish covered bond issuers are not legally obliged to update property values and, now, except for BBVA, report LTV ratios using original appraisal valuations, according to the rating agency.

This masks sharp house price declines in Spain since 2008, it added, highlighting the positive implications of a switch to updating LTV ratios.

“If issuers start to update property values, and thus LTVs, it will yield information that will allow a more precise assessment of the cover pool’s quality,” said Moody’s.

Using updated LTV ratios also means that the volume of cover pool eligible loans will fall because some loans will no longer match eligibility criteria, which will strengthen a cover pool’s credit quality, according to the rating agency.

It said that the practice of updating LTV ratios would not affect Moody’s ratings of Spanish mortgage covered bonds because the rating agency already updates the property values in its models and uses stresses to reflect volatility in house prices.