A proposed mortgage foreclosure law approved by Romania’s parliament last week could have a negative impact on prospective covered bond issuance from the country by hitting lenders’ recourse to borrowers, and the Romanian Banking Association is challenging the law.

Only last week an update of Romania’s covered bond law passed its final legislative hurdle, raising hopes for issuance from the country. The law is due to enter into force within 90 days of Thursday of last week (26 November), when it was approved by the country’s president, with the National Bank of Romania obliged to prepare secondary legislation for the law’s application within this period.

However, a foreclosure law was passed by the lower house of Romania’s parliament on Wednesday of last week that would give retail borrowers the right to pay off their mortgage loans by transferring ownership over the mortgaged properties to the lender. Subsequently, the lender would no longer be allowed to ask for any additional amounts of money.

The law must be passed by the president before it can take effect, and would apply to both existing and future mortgage loans.

A person close to the matter said the law “could throw a spanner into the works” for covered bonds in Romania.

“Obviously depending on the severity of the conditions this will have an impact,” he said. “If promulgated by the president it will be challenged in the constitutional court, but it does create an issue with mortgage collateral.”

Madalina Rachieru, head of the Bucharest Capital Markets Practice at Clifford Chance Badea, agreed the law could be detrimental to issuance.

“This law obviously impacts potential cover pools, but it has not entered into force yet,” she said. “By the time the secondary legislation on covered bonds is implemented by the Romanian central bank, there should be more clarity regarding this new law and how it applies.”

“If it remains in the current form, it will definitely impact covered bonds issuance.”

The Romanian Banking Association said the law, as currently proposed, would have a detrimental impact on borrowers’ access to housing finance and increase systemic risk in the banking sector, and has asked for it to be reviewed. It is understood that the National Bank will also challenge the law.

Changes to Romania’s Mortgage Bond Law of 2006 were proposed by the Ministry of Finance in April 2014 with the aim of opening up the market for mortgage-backed covered bonds in the country.

Before amendments were made to the covered bond law ahead of its final approval, Moody’s in October had highlighted two areas in which the proposed framework was weaker than legislation found in more established markets: the subordination of swap counterparties to covered bond investors, and the provision of only limited options for a cover pool administrator options to fulfil its function in the event of a default.

Moody’s analysts said these issues appear to have been addressed in the amended version of the law. However, they noted there are still certain key aspects that must be defined in the secondary legislation to be drafted by the central bank.

“There are some quite important aspects still to be decided that will determine how the law works in practice,” said Alexander Zeidler, senior analyst at Moody’s. “It will be interesting to see how it develops.”