OREANDA-NEWS. Fitch Ratings says the volume of defaulted Portuguese residential loans has reached a new high, but the rate of increase has slowed and new arrears cases are at their lowest level for a decade.

There are signs that the fragile economic recovery and low interest rate environment are reducing the stress on the Portuguese mortgage market. The proportion of loans in early-stage arrears fell to 0.5% in 2H14, the lowest level seen in the past 10 years and less than half of the peak figures of 2008-9. Late-stage arrears are also down on peak levels and remained at around 1% during 2014.

The pace of new defaults has also slowed so that the constant default rate stood at 0.5% in 4Q14, down from 1.5% two years earlier, but this did not prevent the total stock of defaulted loans from reaching a record high. The slow pace of recoveries on defaulted loans means that the outstanding net defaults reached 3.9% of the overall portfolio balance.

Properties sold following lender enforcement have achieved average prices 30% below their original valuations. There are signs that the market has become more liquid with smaller distressed sales discounts now expected than in the trough of the economic downturn in 2012.

Portuguese home prices have been broadly flat, although indices report quarter-on-quarter fluctuations, including a 2.3% decline in 4Q14. The Algarve region is experiencing the largest correction with prices falling a further 5.4% during 2014. Demand for housing is limited but constrained supply of mortgages is also weighing on the market. New mortgage lending in Portugal remains depressed at around 10% of pre-crisis highs.

Fitch's 'Mortgage Market Index - Portugal' is part of the agency's quarterly series of index reports. It includes information on the performance of residential mortgages, predominantly from RMBS transactions, but also those held on bank balance sheets. The report sets the housing market against the macroeconomic background and provides commentary on the emerging trends. The report, 'Mortgage Market Index - Portugal 1Q15', is available on www.fitchratings.com or by clicking the link above.

The data behind the Mortgage Market Index report is also shown in the RMBS Compare which is an Excel-based tool for displaying the performance of individual transactions against each other and Fitch's benchmark indices. It also includes indicators of the broader mortgage markets, home prices and macro-economic background.