At ASF, European banks set sights on selling covered bonds to U.S. investors
It may be the annual meeting of the American Securitization Forum conference here in Orlando, Fla., with the expected panels and proceedings. But there is a palatable undercurrent of something dynamic and unusual blowing beneath the palm trees. While experts talk about mortgage servicing rights and the future without Fannie Mae and Freddie Mac, it is the alternatives to the bread and butter residential mortgage-backed securitization that are getting the real attention. After covering a similar conference in Europe for many years, leading up to the bust and immediately after, I am pleased to report seeing many familiar faces. European banks, it seems, have their sights set on American household money. Former sources from French banks, Dutch banks, Danish banks and even the Swiss are here — and they have big plans. "What the banks of Europe need is liquidity and traditional investors there are sitting on their hands waiting for some kind of bailout," said a credit analyst for a French bank. "French banks are setting up dollar denominated covered bonds to sell in the U.S., using French assets, which don't have as high a rate of default, as collateral." A covered bond is a mortgage-backed security but the issuer, not the investor, covers any losses. When asked which French banks, the source responded: "All of them." His bank, he added, was ramping up staff in New York big time, readying itself for the offensive. Indeed, some of Europe's banks have booths here at the ASF. Promotional materials show how the U.S. will likely lose its triple-A credit rating. Graphs show the U.S. debt ceiling reaching unsustainable heights. One chart is tellingly titled, "Who will buy new Treasury debt?" "Households were big buyers in 2009-2010, but have reduced purchases recently as the savings rate eased off its peak and as risk appetite has improved," reads the research. "Eventually, households and banks will have to buy even more." Reading between the lines, Europe is strategizing that American investors are fed-up with Fannie Mae, Freddie Mac and Ginnie Mae being the only players in the mortgage bond market. They hope to bank on the frustration that private-label, residential mortgage-backed securities has not picked up any steam in the last year. "We have the green light, it's official," say another source for a Dutch bank, "residential mortgages in America are not going to be as attractive for a while," he said in reference to the implementation of financial reform and struggles to align incentives between mortgage servicers and investors' interests. "We are putting in place currency swaps, which some thought would make for a challenge, and we think we will have an alternative product to rival U.K. Master Trusts," he added. Several countries in Europe, they say, are passing legislation allowing for freer trade with the United States. In January, the French government passed a law allowing for any secured loan to be bonded. This will offer an alternative to Obligation Foncieres, the French covered bond program that only allows residential, commercial and municipal-backed debt to be bonded with a dual recourse structure. But, the devil remains in the details. Talk is talk, after all. And just how competitive will these structures be? The hopes of the French banks hinge on the passage of covered bond legislation in the United States, which would likely allow for the unusual inclusion of student loans, car loans and other loans as collateral. Another clear problem is cost efficiencies. Covered bonds, for example, are pricey to maintain. A huge draw of traditional securitization was that it was cheap financing. But still, the irony is notable. Back in August 2007, BNP Paribas pulled out their huge holding of Wall Street subprime investments en masse when the defaults began to peak, sparking the European mezzanine flight to quality that arguably started the pro-cyclical collapse of Western economies. Now it's Europe's big banks courting the U.S. mezzanine investor. It does not represent a sea change, but it does make for an electric environment at this year's ASF. And despite the "whole new world" tone of this article, one could also add that the "more things change, the more they stay the same." In discussing the above with the issuers of one of Denmark's largest RMBS platforms, one of the analysts responded along the familiar lines of Europe's sovereign ranking mentality. "That's the problem with the French," he said, taking two fingers and pushing up the tip of his nose in a familiar, if derogatory, European gesture, "they think too much of themselves, of their products." "Forget Greece, Ireland or even Spain," he added, referring to those nation's financial woes. "France is next." Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.