Germany's true-sale legislation finally received its seal of approval last week, as legislators unexpectedly passed the new refinance register for German true sale ahead of the summer parliamentary break. The new law is expected to come into effect Tuesday.

"There were some concerns that the legislation would be delayed until after the elections [this year]," said TSI's Business Manager, Hartmut Bechtold. "We are quite happy that we got it at the time we did, it was the last law parliament passed before the summer break. A change in government could have delayed implementation of this law."

To date, only synthetic and true sale of certified mortgage securitizations were possible. GMAC priced its 300 million ($365 million) true-sale deal backed by such certified mortgages in June. According to Mayer, Brown, Rowe & Maw Partner Ralf Hesdahl, German law was amended for the further promotion of true sale securitizations.

The new law grants insolvency proof access to a seller's assets and collaterals if the SPVs claim to these assets are listed on one of the finance registers. Land charges, mortgages and liens on aircraft, are among the receivables eligible under the new law, irrespective of whether the rights are subject to German law or those of another jurisdiction.

"It basically makes true-sale MBS much easier, because you don't have to transfer each individual mortgage to a SPV. It achieves insolvency remoteness in a much easier and less expensive way," said Nico Trautwein at Commerzbank. The parties involved in a securitization are longer required to perfect the transfer of the relevant collateral in order to protect the beneficiary in the event of the seller's insolvency, explained Hesdahl, which cuts both the time and costs involved in setting up the structure.

TSI's Bechtold said that there was no disgreement over the terms of the new legiuslation and that all parties stood in favor of the new law. The next stage is for regulators at the BAFIN to implement the new law, which is expected after the summer with the first true-sale RMBS structure expected to emerge during the first half of 2006.

As to how much potential there is for this product, Bechtold reported that there has been interest from a number of banks, adding that 50% to 60% of securitizable bank assets are real-estate loans. But Commerzbank's Trautwein countered that while the changes are generally positive for the progress of the market he doubts there will be a flood of German RMBS paper to hit the market in the short-term, primarily because issuers still have t cheaper funding options via the Pfandbriefe market.

And it's the same for other European markets growing their nascent covered bond markets that have begun pressuring RMBS volumes. "The refinancing aspect is not an important issue anymore, most of the larger banks will often opt to issue Pfandbriefe as opposed to MBS for funding," Trautwein said. "I would say that RMBS issuance is slow in general throughout Europe because the covered bond markets give you efficient funding."

Trautwein said that under BASEL II the capital charges for residential mortgage loans are quite low and as such do not offer a real possibility for capital arbitrage so there is no real need to do a securitization. "It's less appealing than it has been in the past, so there less incentive to come to market," he said.

In Germany, smaller banks that historically were barred access to covered bonds now have all the pieces in place to seriously look at entering the Pfandbriefe market. In June, Germany passed legislation that now permits every bank the right to issue covered bonds, but smaller banks still don't have the critical mass required to make issuing Pfandbriefe a viable alternative. The second pillar of the legislation deals with the Insolvency proof trust solution for covered bonds pooling. "Landesbanks and co-op head banks needed the new law to pool mortgages together for Pfandbriefe issuance," said Bechtold.

For banks looking at, at least two of three objectives, such as, capital relief, funding and risk transfer the securitization market offers a more efficient funding alternatice. "Some banks are going to use true-sale RMBS as a means," noted Trautwein. BHW is one issuer that is looking at true-sale RMBS to achieve capital relief and attractive funding but, Trautwein added, other, more specialized, lenders would also look to issue true-sale RMBS. Bechtold added that for the big banks and building societies, true-sale RMBS structures can provide a welcome diversification tool from Pfandbriefe issuance - which is limited to loans with LTVs 60% or lower.

"TSI was looking for the possibility of assets being transferred free of set-off risks, but that request was not approved, the regulators didn't agree and it has not been implemented under the true-sale legislation," Trautwein added. "It would have made the market more appealing."

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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