After at least four years of waiting, the German securitisation market finally looks set to take off. Volumes are likely to be dominated by CMBS conduits, and following the legal passage of the refinancing register last year, multi-family residential and RMBS should follow. William Thornhill looks at the developing scene.
Speaking at the March 2006 European Securitisation Forum conference in Venice, Fitch Ratings' Stefan Bund noted that overall German structured finance volume had quadrupled last year compared to 2004, and that he expected this rate to continue into 2006. A swathe of multi-family home deals are in the pipeline, and if all goes according to plan, 2006 could see as much as €10bn of multi-family unit issuance.
Deutsche Bank research suggests that since the year 2000, 32 entities have sold a total of 620,263 multi-family units at an average cost of €48,862 per unit. Though, not all of these assets will find their exit via a securitisation, a good proportion of them will.
The advent of Basel II, the CRD and IAS39 will all focus attention on balance sheet efficiency. Going forward, originators at capital-intensive banks are more likely to consider the benefits of securitisation or an "open architecture" model. The latter is where banks act as an intermediate for other entities – typically they might originate mortgage loans but employ a conduit "produce provider" to securitise the assets.
While regional savings banks would typically fund from their balance sheet, they are at risk of coming up against concentration risk – holding too much mortgage collateral in their local area. Faced with this, they might stop granting mortgages, but by considering an open architecture model, they could continue to originate.
According to lender GMAC RFC, the first genuine true sale securitisation – one that involved a full transfer of a closed pool of mortgage loans to investors from the outset – was its own EMAC DE 2005-1, via Deutsche Bank. According to GMAC, in the previous true sale (Deutsche Bank's Haus 2000-1 five years earlier), the transfer of mortgages was contingent on rating triggers. Furthermore, while Haus had no back-up servicing provision, servicing for EMAC is outsourced.
As such, EMAC is "the first true sale that's fully de-linked from the originator," said GMAC RFC's managing director Ferdinand Veenman. It is perhaps perverse, but this vibrant off-shoot of an ailing American motor manufacturer is leading the charge into German residential securitisation, a development that may well help to breath life back into this lacklustre economy.
At 41%, German home ownership is considerably below the US (67%), the UK, Ireland and Spain, but that percentage looks set to increase as the right-to-buy revolution begins to take effect. Along with the securitisation of multi-family units, GMAC RFC is in the business of providing non-standard, prime-niche mortgages. These are typically high LTV loans of around 100% compared to the less flexible 60% pre-ordained by pfandbriefe legislation.
The economics of residential home ownership are compelling for buyers, once they have the opportunity. If a tenant's outgoing monthly payments are the same as or lower than his rental payments, it is irrational to remain a tenant. Furthermore, the residential unit that the former tenant owns can be a useful asset for retirement, especially in the context of the erosion of state benefits.
Contrary to comments from some politicians, the influx of foreign capital that is driving residential investment in Germany is not the result of a plague of foreign locusts, but attracted by the willingness of sellers, whether at the public or private level. Public entities are looking to realise assets and move costs off balance sheet to help lower costs and tighten the budget shortfalls, while at a corporate level, sellers such as the Red Cross and the railway firms are increasingly realising that real estate ownership and maintenance is not part of their core business.
Although the existing tenants of multi-family units do not have a mortgage payment history, they can have a positive rental payment history. "If a tenant has paid his rent for the last 10 years, then you have positive data. There are no assumptions involved in getting this credit history," said GMAC's RFC's Franz Schmidpeter.
The fact that GMAC RFC was able to bring a securitisation where others had not is partly due to the fact that as a new-starter in mortgage lending, it was able to originate deals with a view to securitising them. Its business model draws on the use of transferable certified mortgages (briefgundschelden) that contain the necessary consents to effect full legal transfer. By contrast, many older mortgages did not have this provision, so loans could not be sold without specific consent from the borrower.