Legislation intended to give new life to the French mortgage bond market was passed by the country's parliament in mid-June, and the new system is expected to be up and running by the fall. However, securitization experts do not expect it to have much impact on mortgage-backed securitization volumes in the short term.

The legislation enables French financial institutions to establish companies called Societes de Credit Foncier, which will issue mortgage bonds, called Obligation Fonciers, similar to German pfandbriefe.

"In the best case it will take four to five years [before the system is established], in the worst case it will take a generation," said Olivier Rodriguez, head of securitization at Paribas. "Setting up a Fonds Commun de Creances [a French securitization S.P.V.] is very easy you can do it in two or three months but to establish a Societe de Credit Foncier you would have to set up something like a bank with its own computer systems, staff and all the rest; that is a very long and heavy process."

Richard Weiss, from French rating agency and advisors Gestion et Titrisation Internationales, also expressed what he called "politically incorrect" doubts about the system, questioning whether the French mortgage system would be able to write enough mortgages of the kind that would be eligible as collateral for Obligations Fonciers. "It is going to be very difficult in France to create the kind of standardized market necessary, because there is such a great diversity of mortgage loans," he said.

Other market watchers pointed out that the French government had another motive for passing the new legislation to pave the way for privatization of Credit Foncier de France (CFF), an institution that has been issuing the old-style French mortgage bonds since the early 19th century. (The German pfandbriefe system was originally copied from the French example).

However, CFF was hit by major losses in the mid-1990s, and spreads on its paper widened from the mid-teens over Pibor to nearly 300 over. The government believes that with the new system in place, the institution will again be a viable business and possible to privatize.

In the meantime, Rodriguez counselled those with an interest in MBS not to worry. "I'm very optimistic about the future of mortgage securitization in France," he said, adding that Paribas had no plans to establish a Societes de Credit Foncier. - MD

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