the long-term value of mortgages and the benefits of late-mover advantage for emerging european...

The Long-Term Value of Mortgages and the Benefits of Late-Mover advantage for Emerging European

Markets

TONI MOSS / EuroCatalyst BV

Bucharest 22 September 2004

BUCHAREST 22 SEPT 2004 THE REAL ESTATE FORUM - THIRD EDITION / TONI MOSS – EUROCATALYST BV

Who is EuroCatalyst

Toni Moss: American citizen, Dutch residentEducation: B.A. Women’s Studies and Psychology (SDSU)Professional background: Corporate intelligence, investment banking (securitisation, non-performing loans and asset disposition, servicing and asset management)

Shirley Jackson: Canadian citizen, Tokyo residentEducation: Master’s degree, International Relations andMiddle Eastern studies (Georgetown)Professional background: Editor, The Japan Times (20 years)


What is EuroCatalyst?

Dutch-based advisory, market positioning and investor relations firm

Work with clients whose activities span the mortgage value chain

Global reach (US/Asia/Europe) local focus (Europe)

Generate, brand and position new ideas for housing finance and property development


We have an image problem:What other people call us

A venture capital firm…without the capital - Carlyle

Group A think tank…without the academics - Alexander Batchvarov,

Merrill Lynch, Iain Barbour, Commerzbank Securities

A walking idea laboratory - Alan Paterson, Citigroup

The Davos of the mortgage industry - Genworth Financial Services

Community architects - Esther Dyson

Utopian - Jon Hay, Structured Finance International

The gals that made covered bonds sexy – Ian Kerr, EuroWeek

The Tipping Point - Mark Thompson, e-Schwab

Hopeless workaholics - our mothers


Where did I get these crazy ideas in the first place?


What are our activities…

1. We bring together the most important CONTENT relating to mortgage markets

2. We identify and interpret the most important CONTEXT for understanding the markets

3. We facilitate COMMUNICATION across, within and among market sectors

4. We establish CONNECTIONS between ideas, individuals and institutions

5. We build COMMUNITY between market players

6. We accelerate CONVERGENCE within and outside of the sector


…and how do they impact European mortgage markets?

We are the founders, executive producers

and co-sponsors of a pan-European

peer-to-peer mortgage industry “think tank”.

The event acts as a catalyst to: reposition the role and importance of European mortgage markets; build an independent, neutral community of market participants to

exchange ideas and explore new possibilities and survival strategies Focus on commercial possibilities and realities – leave political

implications to the political process Drive markets toward best products and practices and establish a new community of market participants upon which

the pan-European industry would develop


What fundamental assumptions drove the event?

An idea has no power without a context.The context for understanding European mortgage markets is

globalisation – it is the missing dialogue.One is neither for not against globalisation – it is no longer a choice.

Housing is local, yet funding is global. The global aspect will not change.

Therefore, the local aspects must change.If they don’t change, local markets will be left behind

(economic dislocation)The more economies localise, the more politics localise.

Regulation cannot possibly keep up with the pace of change - so it is up to market players to find their own solutions until regulators

catch up.Globalisation demands integration, not isolation.


EU mortgage market integration

In 2001, we invited key market players to join us in a neutral and independent dialogue…

1. We chose Madrid for the location of the event, which was held in September, 2002 and themed, “Will European mortgage markets survive globalisation?”

2. We posed the question, “…suppose one could integrate European mortgage markets – what might that look like?”

3. We pointed out similarities between markets rather than argue their differences, and systematically showed how mortgage markets vary in form but not function.

4. The event focus was on the entire value chain – it was not a capital markets event.

5. Within the value chain, we incorporated all funding tools (covered bonds, securitisation and whole loan sales and trades)

6. We knew that funding was the pressure point holding back the industry (the battle of the bonds)


The original community: EuroCatalyst 2002 Madrid

We brought everyone together in one place, at one time, for the first time, on an equal and level playing field:

EMF - European Mortgage Federation

CML - Council of Mortgage Lenders (UK)

BSA - Building Societies Association (UK)

VDH - Association of German Mortgage Banks

CECA – Association of Spanish Mortgage Banks

AHE – Association of Spanish Mortgage lenders

Realkreditraedet – the Association of Danish Mortgage Banks

TeGOVA – The European Group of Valuers

IUHF – International Union of Housing Finance

All three rating agencies: Standard & Poor’s, Moody’s Investors Services, FitchRatings

All investment Banks

Central Bankers

Regulators

Market players (banks, insurance companies, lenders)

Covered bond issuers, mortgage bond issuers and issuers of Mortgage-Backed Securities

Their respective investors

Key service providers (Intermediaries, Servicers, Advisors, Structurers and Arrangers)

Credit enhancers and Title insurers

All related trade publications in all EU countries

and we emphasized a pan-European mortgage community, not a pan European industry (it does not exist).


What did our audience response tell us?

Does globalisation have an impacton European mortgage markets

Do you consider servicing a strategic asset or competitive advantage?

Will European mortgage markets survive globalisation?

How long will it take to achieve cross-border lending?

Is secondary market integration Possible?

Will securitisation become a viable funding tool in Europe?

Would you return to this event again?

Yes: 2% No: 98%

Yes: 4% No: 96%

Yes: 100%

Never: 20% 10 yrs: 30%

Yes: 8% No: 92%

Yes: 12% No: 78%

Out of 275 participants, 203 responded. Of the 203 responses, 202 checked “definitely”


What happened afterwards?

The following month The Economist wrote an extensive article entitled, “The Property Bubble?” citing the disconnect between housing as a local activity and its funding as a global activity to illustrate inflationary concerns on housing prices and its potential impact

3 months later the EU DG Internal Markets formed a study group on European mortgage markets to inventory obstacles to cross-border lending

6 months later the European Mortgage Federation commissioned the Mercer Oliver Wyman study on European mortgage market integration

7 months later the European Mortgage Federation created a new conference on European Mortgage Markets (aimed at regulatory issues), every trade organisation supplemented their national market events with “pan-European” or international focus; and every national banking association dedicated sections of their general banking event to mortgage-related topics.

1 year later EuroMoney Conferences created a pan-European event on covered bonds

Today there are more than 8 “pan-European” events on mortgage-related topics


Benefits of late-mover advantage

Playing scrabble without the vowels – you haven’t missed much Ratings criteria is more well-defined We know which products work well and how to fund them The benefit of hindsight with regard to frameworks Global investor base is well-developed and continues to grow (fixed-

income is awash with capital) The understanding and management of risk is far more advanced

with cost-effective tools now available The flow of good information is now open and improving every day Trade organisations now address the entire value chain Now two strong capital market lobbies representing the markets (the

ESF and the EMF) Minimal legacy technology to contend with – can build more cheaply

today or acquire affordable and reliable systems


Where are we today

Move the event each year according to what we believe is the market most representing change or opportunity

2003 was held in Lisbon, the theme was “Competition and Convergence in European mortgage markets and products”

2004: Live from Berlin on October 11 – 13 Theme: Growth, Integration and Differentiation New issues: Master servicing, non-performing

loans and aset disposition


GLOBALISATION

“If globalisation were a sport, it would be the 100-meter dash over, and over, and over.

And no matter how many times you race, you will have to race again the next day.”

Thomas Friedman, The Lexus and the Olive Tree


FACTORS OF CHANGE / TRENDS IN EUROPE:

SERVICING


The Euro in context

Why was the Euro created? A response to globalisation The need to gain economies of scale The only currency without a nation associated with

it ($ £¥) They built the roof first – and now struggle to build

the foundation underneath


The role of a bank, and the long-term value of mortgages


The historic role of a bank


The current role of a bank


The role of servicing


… the axis of lending activities

A model from nature A model to implement


Outsourcing and Third-Party Administration


Cross-Border Administration: Initial Attempts


World-Class: Models to learn from

FundingThe Danish market model

(good for society, difficult to make profits, world-class ALM)

Healthy CompetitionThe UK and Dutch mortgage market

DistributionThe US Market

Servicing as a national market utility / Straight through processingVP Denmark

Servicing as an individual lender: EfficiencyEurope: BHW Bausparkasse / US: Countrywide

Working around legislation and making a marketUK structured covered bonds / Bank of Ireland

Mortgage product innovationAustralia


A prediction for Romania: 2008


CAPITAL DARWINISM

“It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change.”

Charles Darwin (1809-1882)


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the long-term value of mortgages and the benefits of late-mover advantage for emerging european...

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