Journey of Nonperforming Loans—Structured Finance Roadmap

In this commentary, DBRS Morningstar analyses the recent trends in the nonperforming loans (NPL) servicing market and discusses the rating considerations for securitisations of specialised portfolios (such as reperforming mortgage-backed loans, other reperforming loans, unsecured portfolios, smaller NPL portfolios outside Hercules Asset Protection Scheme (HAPS) and Garanzia sulla Cartolarizzazione delle Sofferenze (GACS), unlikeliness to pay (UTP) loans, and real estate owned (REO) asset pools) that continue to change hands.

Summary highlights include:
-- As of the last interest payment dates, 54% of the latest business plans for the 35 Italian NPL transactions rated by DBRS Morningstar were not yet worked out. Another European data point is from the Bank of Greece's quarterly publication of loans serviced by credit servicing firms, which suggests that, assuming no new additions, 81% of the loans serviced at peak had not yet been worked out at the end of March 2023.
-- Any new wave of NPLs has so far remained at bay while the workout of the old, post-global financial crisis wave of NPLs is still ongoing. First transferred in bulk to a small number of experienced third-party servicers, the multifaceted portfolios will be sorted and sold in pieces to sponsors working with a larger number of specialised servicers well equipped to work out that particular segment.

“As portfolios continue to change hands, there is potential for securitisation for NPLs outside the asset protection programmes, for reperforming loans, for REO assets, and for UTP loans. The potential rating analysis for such securitised portfolios depends on the specific portfolio characteristics and could span several rating methodologies”, stated Sinem Erol-Aziz, Vice President of European NPLs at DBRS Morningstar.