Magazine article Mortgage Banking

Mortgage Securitization: Remarkable Opportunities in Europe

Magazine article Mortgage Banking

Mortgage Securitization: Remarkable Opportunities in Europe

Article excerpt

SINCE THE 1970S, MORTGAGE ORIGINA-tors here in the United States have enjoyed the benefits of the government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac and Ginnie Mae--and their issuance of mortgage-backed securities (MBSs). Only a handful of today's mortgage professionals remember the days when there was no large secondary market for mortgage loans.

Over time, I've watched the secondary market mature. Today, it's one of the most powerful and important elements in the nation's economy, and more than 50 percent of all outstanding residential mortgages are securitized.

Mortgage bankers in the United States, such as Countrywide, have become masters of utilizing the secondary market to its best advantage--pooling loans originated into whole-loan sales, MBSs, asset-backed securities (ABSs) and other funding instruments. Now, the expertise we've gained over the years can be leveraged to capitalize on the remarkable opportunities being created by the nascent residential mortgage-backed securities market in Europe.

Current European funding methods

In June 2000, the European Mortgage Federation, Brussels, Belgium--an organization similar to the MBA--reported that as of year-end 1998, funds for European Union (EU) mortgage loans were derived as follows: 62 percent from retail deposits, 19 percent from mortgage bonds and 1 percent from mortgage-backed securities. The remaining 18 percent were funds from other sources.

As these numbers demonstrate, most European mortgage lending is portfolio lending; the loans remain on-balance-sheet and are weighted at 50 to 100 percent. In addition to balance-sheet credits and interest-rate risks, European lenders also face shrinking retail deposits, as mutual funds and other investment vehicles have grown more popular among consumers. Regulatory capital requirements also put constraints on lenders, as have declining interest rates and margins. Finally, there are no government-sponsored enterprises in place in the EU. In fact, one EU law bars state aid in the form of certain types of guarantees to prevent competitive distortion.

In response to these factors and others, including deregulation and consolidation in the European financial services sector, lenders have begun to turn to residential mortgage-backed securities to manage their balance sheets.

European opportunities for U.S. mortgage experts

The European mortgage market is comparable with that of the United States. With a population of approximately 375 million, Europe is larger than the United States, with 267 million people. In 1998, about 4 million housing transactions occurred in Europe, compared with 5.7 million in the United States. The EU is also experiencing a decrease in the number of household members. Low interest rates and other economic improvements over the last decade have made homeownership possible for individuals who previously lived in a dwelling with their extended family.

The market is strong, but the mortgage industry in Europe is highly fractured. Local and national laws and customary business practices have made standardization difficult. European mortgage lenders do not have economies of scale and the reduced funding costs that result from it. More important, without standardization in product offerings, underwriting criteria and other areas, pooling loans into homogenous pools to create MBS funding instruments presents a challenge. …

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