European mortgage lenders seeking diversified capital market funding will increasingly turn to whole loan sales as an alternative to securitization, which, like in the U.S., is likely to lead to even higher levels of residential mortgage loan securitizations in Europe, said a Standard & Poor's report.
"From a buyer's perspective, whole-loan products can help banks maintain asset/liability management flexibility because these products do not have to be marked-to-market," said the S&P report. "The new IAS 39 rule could spark a similar boost to the whole loan sales market in Europe, as originators will be required to recognize securitized assets on their balance sheets in certain circumstances, although it should be noted that the new rule is by no means considered to seriously curtail securitization in Europe."
Analysts said that a vigorous whole loan markets is likely to generate higher levels of European RMBS. "In a whole loan sale, an originator will sell a pool of loans directly to another institution, rather than securitizing the mortgages by issuing RMBS," explained the report. "On the other side of the sale, an investment bank might pay an originator face value plus a premium for this pool, which it then either holds itself, or securitizes."
Mortgage originators are the key players looking to sell loans in this growing market. The market offers originators an immediate cash line as opposed to the time it takes to structure a securitization. Originators sell risk and ownership transfer of mortgages for a price greater than face value. Buyers pay this premium and turn to the capital markets to earn a return. "Investment banks have established origination teams and built up a franchise and an expertise in this area by structuring the mortgage banks' own securitizations and it is now possible for investment banks to own these loans, where they can further benefit from sophisticated restructuring and repackaging," said S&P analysts.
The U.K. has been at the forefront of both RMBS and whole loan sales. The U.K. RMBS market, which quadrupled to GBP82.2 billion ($149.9 billion) over the five-year period ending at the start of 2005, has already posted GBP27 billion of deals from January through May, according to S&P. GMAC-RFC, the 12th largest mortgage lender in the U.K., has been an active seller of home loans since 2000. In 2004, GMAC sold GBP2.6 billion of mortgage loans to other lenders via the whole loan sales market. According to S&P, between January 2000 and February 2005, GMAC sold GBP570 million of debt to Amber Homeloans. S&P said that some small and midsize building societies in the U.K. have sought to purchase portfolios of these loans in an attempt to increase their assets under management and build their market share or create cross-selling opportunities. Analysts estimate that sales per year have reached between GBP10 billion to GBP20 billion in the U.K.
S&P said whole loan sales growth in Italy, Germany and the Netherlands is likely to speed up. The Dutch market - where insurance companies are the key sellers - is already one of the most advanced. In Italy, plans to create trading platforms in Italian mortgages are in the works. In Germany, where nonperforming loans have in recent years dominated portfolio sales, whole loan sales activity is expected to increase through U.S. market players seeking arbitrage opportunities and higher market share in the country.
"The whole loan sales market is firmly established in the U.S., and signs of growth have recently emerged in Europe, though there are some challenges to be addressed before this market can take hold here as it has on the other side of the Atlantic," reported S&P analysts. "In Europe, data availability is more variable and credit scoring systems are far from the standard, established scoring system that exists in the U.S."
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