Pfandbriefe/Covered Bonds 2005 - Globally covered
Toni Moss and Shirley Jackson, founders of independent advisory and market-positioning firm EuroCatalyst, launched a think tank in 2002 to accelerate the development of European mortgage markets in the context of globalisation. IFR’s William Thornhill met up with them.
What exactly prompted you to establish the think tank?
Although it is still difficult today, three years ago it was impossible to discuss “pan-European” mortgage markets even from a basic organisational perspective. On the primary side, markets were distinctly national, with local champions heavily vested in the differences of their products, processes and practices. On the secondary side, the entire industry – from lobby groups to investment banks to rating agencies – were divided over funding in a way that would inevitably collide.
Few were looking at the complete picture of the overall mortgage value chain, which varies in form but not function throughout the world. When discussed in the context of globalisation, housing finance is an oxymoron since housing is a fundamentally local activity and its funding is increasingly global. The question of which one is more likely to change tends to get people focused on the real issues – and this was urgently missing from existing discussions on both sides of the funding equation.
EuroCatalyst took on the challenge of aggregating key players throughout the value chain, while many trade organisations helped get member participation from national markets. It was a historic collaboration that brought together all of the players from all sectors in all of the markets at one time – for the first time.
What was the reaction from 2002 that is being played out today?
As expected, most on the Structured Finance side at EuroCatalyst 2002 in Madrid didn’t understand what a covered bond was, and those in covered bonds were visibly disgruntled by sessions on securitisation – citing its “insignificance” in the larger picture of European mortgage funding.
Other than mortgage insurers, the rest of the audience along the value chain were intrigued – but puzzled – by the emphasis on the integration of funding tools as the foundation for a pan-European mortgage industry, and there was almost a universal disinterest in the role of servicing.
The event was a steep learning curve for everyone but it broke through the “closed club” atmosphere that prevented the kind of dialogue needed to move markets forward, and everyone recognised that something important had happened. What we see today is a struggle to contain and control the dialogue by those who have been displaced or rendered irrelevant in the wake of change.
How has the context of globalisation changed covered bonds?
The more economies globalise, the more politics and regulation will localise to rationalise the change. While “pure” covered bonds have existed for centuries, capital market innovation renders history nothing more than nostalgia when others have equal access to the same funding tools.
Challenges for covered bonds will come from how they are defined –and more importantly, what’s been left out of that definition; how they are regulated and by whom; how they can be represented through a single platform yet differentiated for investor appeal; and how market making will evolve as the issuer base goes global.
What are the defining characteristics of the winners and losers in this race?
The winners are world-class and the losers are local. World-class are players who focus on their core strength and embrace change by leveraging all knowledge and relationships throughout a continually optimised value chain. The losers will be those who remain local and isolated due to an unwillingness or inability to adapt to change quickly enough.
Why does the future of European lending lie with servicing? Aren’t other factors such as legislation, local practices and customs important?
Because my professional background is in non-performing loans, I will always look at the risk/reward equation more cautiously and regard servicing as the crucial link in portfolio performance. European mortgage markets are only as strong as their servicing because that’s where the majority of costs and problems occur.
Servicing/administration is the bridge between primary and secondary market activities and is the vault where data is ultimately stored. Servicers keep the cumulative record that tracks relevant details about the loan and related collateral that in turn affects the collection of payments. Future growth in European markets will come from more high-risk loans which require greater documentation and surveillance. This will finally bring servicing to the forefront in terms of maximising growth, minimising risk and recovering asset value.
What will it take to get European issuers to improve investor reporting and share portfolio information? Is it enough to allow the market to reward those who share information and punish those who don’t, or should there be a set of voluntary standards that oblige companies to adhere to uniform standards?
Part of the problem of sub-standard investor reporting is the fact that some issuers simply don’t have the required information. Most of their operations have been decentralised – with decisions made in the field and no systems in place to streamline results to a centralised repository. Their staff are narrowly focused on pieces of the process, with no understanding of how the whole process works and no incentive to learn it.
Management lacks the decision-making structure and collaboration of knowledge required to create a workable platform – much less fund its cost. All European markets need new lending platforms to make the leap from legacy to leadership, yet even technology providers are unwilling to fund it without advanced commitment from large clients.
One would hope that issuers voluntarily enter the 21st century and meet the investor reporting standards required by a global marketplace. In lieu of volunteers, regulators and rating agencies should gauge standards to the highest common denominators and not stoop to the lowest no matter how much whining goes on.