June 15, 2010 / 12:12 PM / 10 years ago

Wanted: New investors to back Europe's home loans

LONDON (Reuters) - An annual gathering of big names in the securitisation business is likely to attract more than 3,000 delegates on Tuesday but only a sprinkling of real investors as central banks are now the key players in this area, plugging a $1 trillion (678.9 billion pound) funding hole created by the credit crisis.

Apartments are seen for sale in Leicester, central England February 17, 2009. REUTERS/Darren Staples

At the conference in London, keynote speakers will include European Central Bank board member, Jose Manuel Gonzalez-Paramo, and Patrick Pearson, head of Financial Markets Infrastructure at the European Commission, illustrating the importance of securitisation and central banks’ key role.

In the go-go days of the credit boom, securitisation industry luminaries would gather annually in Barcelona’s Arts Hotel to toast their success at extravagant parties with entertainment from the likes of the Sugar Babes and the Gypsy Kings.

There were rarely any appearances by high profile policymakers or central bankers.

“The traditional buyers (of securitised product) in Europe have mostly gone - SIVs, German banks, conduits,” said John Spedding, chief operating officer of BNYMellon.

“There is approximately a $1.2 trillion funding gap that conduits and SIVs (structured investment vehicles) traditionally filled.”

This asset-backed market was part of a so-called “shadow banking system”, where off-balance sheet entities known as conduits or SIVs invested in bonds backed by mortgages.

This all came crashing down during the crisis, tainted by massive defaults on sub-prime mortgage-backed bonds in the U.S.

Pensions funds, asset managers, and insurance companies are potential buyers of securitised issues, but European banks are largely reliant on the ECB and the Bank of England for financing their mortgage lending.

A few banks, including Britain’s Lloyds, Spanish group Santander’s Alliance & Leicester, Dutch Rabobank’s joint-venture Obvion and WestLB have done securitised deals in the past year. But the market lacks depth, because the investor base has shrunk dramatically.

Despite this, banks have continued to securitize mortgage loans. In 2008, they created 842 billion euros (767.2 billion pound) worth of assets, but only 11 billion euros was sold to real third-party investors — a pattern repeated in 2009, according to JP Morgan research.

There has been a sharp decline in securitisation volumes in 2010, to 97 billion euros although the proportion sold to investors increased — to 28 billion euros.

Given that residential mortgage-backed securitisation (RMBS) accounted for as much as 20 percent of mortgage funding in Britain, Spain, Italy and the Netherlands, according to Standard and Poor’s, the scale of the decline points to shrinking bank lending, home loans costs rising and sagging economic growth.

Lloyds managed to sell a 3.4 billion pound RMBS deal in April, which was the most-widely distributed to investors since the collapse of Lehman Brothers in 2008.

But Alliance & Leicester’s $2.1 billion equivalent RMBS at the end of May had to rely on JP Morgan to buy big chunks of the issue because of patchy investor demand.

Since then, a spate of asset-backed issues have been sold as private placements. Lloyds placed more than 1.5 billion pounds of credit card assets with a single investor followed by a $3 billion RMBS sale. Rabobank also did a private deal.

These sales point to a setback for the recovery of the market due to their lack of pricing transparency. It is also the transparency of banks’ underlying mortgage portfolios that worries potential investors.

“People are very concerned about the quality of balance sheets. There is a lack of disclosure and transparency,” said Alain Laurin, European regional credit officer at Moody’s.

The securitised market previously functioned through investors buying bonds because of their high ratings and price stability. It remains unclear whether greater transparency will be enough to entice a new generation of investors.

Securitisations also became tainted during the crisis because of dramatic price falls as conduits and SIVs sold.

Financial regulators are understandably wary of reviving this unregulated shadow banking system.

“The regulators say we need to do something to fill the (financing) gap, but they want it to be put into the regulated environment,” said Spedding. ($1 = 0.7453 euro = 0.6465 pound)

Editing by Elaine Hardcastle

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