BARCELONA - Alas, a multinational residential mortgage securitizations still only exists in the dreams of nail-biting-real-estate-bubble-phobes in search of the ultimate in geographically diverse loan pools. Such a concept may only be a pipe dream, despite anticipated growth in pan-European lenders, as the concept of cross-jurisdictional securitization is "fraught with difficulty," primarily because of numerous legal and regulatory hurdles that stretch from borrower, to issuer, to investor and back again several times over, according to panelists at this year's Global ABS Conference' held here last week.
The idea could be an enticing one in the case of countries with either little or no issuance in the sector. Such offerings would likely have greater yields than other RMBS offerings as of late, which are at historically tight spreads in the U.S., and in Europe. Cross-jurisdictional securitization could also add much needed liquidity to the European housing market, investors said, but the benefits don't look like they are outweighing the detriments just yet.
"Cross border deals frighten some investors," said Kevin McGovern, a senior dealer at Nationwide Building Society. McGovern said the legal differences between jurisdictions, particularly in regard to the borrower availability, asset information and debt collection pose a challenge to anyone trying to determine the risks involved in such a deal.
David Barton, head of structured finance at West Bromwich Building Society, the largest building society in the U.K., said a main concern was the ability for investors to recover their money in the event of borrower default or foreclosure. Laws governing residential mortgage foreclosure in Scotland, for example, make it "very difficult to realize assets in foreclosure," he added.
And if one country suffers from a negative political climate, assets from other countries placed in securitizations out of the aforementioned country could suffer in the form of ratings downgrades or heightened credit enhancement requirements.
"My prejudice is, in Eastern Europe, there will be some countries better run than others," said Paul Jenison, a senior managing director at Riviere Jenison Securities Ltd. "I'd say beware. If I were an investor, I would not be enthusiastic. Bad countries just lower the common denominator."
Jenison pointed to the likelihood that investors would require fatter spreads on the yet-untested deals as another flaw in the deals. The time and money spent on increased due diligence before the deal hits the market creates a negligible outcome for post-securitization profit margins for sellers. "The bottom line is, can you sell it, and at what price," Jenison said.
While industry participants are anticipating a proliferation of pan-European residential mortgage lenders, such as GMAC-RFC and G&E, the chances of those companies issuing mixed securitizations are not good, said Brent Williams, an executive director at Morgan Stanley. "We don't necessarily see the pan-Euro securitization coming in 2006," he said.
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