RMBS: The Use of Third-Party Guarantees in French Home Loans

This commentary covers a specific feature of the French home loans market, the use of third-party guarantees, as well as credit considerations for such loans that DBRS Morningstar takes into account when rating French residential mortgage-backed securities (RMBS) transactions and covered bonds.

Summary highlights include:
-- Third-party guarantees for home loans are the most common form of financing a house purchase in France. This has advantages for both lenders and borrowers, such as improved recovery prospects for the former and access to a price-competitive home loan product for the latter.
-- The providers of such guarantees may be either credit or insurance institutions. From the former, Crédit Logement is the largest provider in the market while, for the latter, Caisse d’Assurances Mutuelles du Crédit Agricole (CAMCA) and Compagnie Européenne de Garanties et Cautions (CEGC) stand out.
-- DBRS Morningstar analysed portfolios that benefit from third-party guarantees. Depending on the mechanism and operational setup of these schemes as well as observed performance data, DBRS Morningstar found them to be credit positive for securitisation transactions more often than not.

“When analysing the performance data provided within RMBS transactions, such as cumulative default data, DBRS Morningstar observes that loans guaranteed by third-party guarantees such as Crédit Logement or CAMCA show a better performance over the life of the loan compared with home loans with a mortgage. On a weighted-average basis, the cumulative default rate over a two-year period for a mortgage loan tends to be approximately 40 basis points higher”, said André Soutinho, Senior Analyst of European RMBS and Covered Bonds at DBRS Morningstar.