In 2003 we once again undertook a series of national market “road shows” throughout the year to promote the event and discuss its upcoming program topics. EUROCATALYST 2003 was held in Lisbon, Portugal, to highlight the fact that Portugal had the highest volume of mortgage-backed securities issuance in Europe that year. The event theme was “Competition and Convergence in European Housing Finance and Fixed-Income Investments”, and the opening speaker was Karin Lissakers, the former U.S. Executive Director of the International Monetary Fund. Her speech focused on the potential dislocation of mortgage markets in the EU due to unequal capital flows.

In the session, “How Much is Europe at Risk?” we discussed the seven-year rise in house prices, the investor shift from equity losses in the dot.com bust to mortgage assets and the consumer shift in treating their mortgage as a supplementary pension. In the program introduction I wrote, “From an economic perspective, rising house prices have historically offset losses of equity wealth which, in turn, support consumer spending and “prop up” troubled economies. In keeping interest rates low to cushion those economies, some argue that central banks have caused a housing bubble, with EU countries including Britain, Ireland, the Netherlands and Spain most at risk. While bubbles are never identified until after they have burst, the combination of rapidly increasing house prices and leveraged mortgage debt have raised serious concern for the industry.”

One of the most interesting sessions was the very heated Champagne Debate between U.S. and European market players over what entities and which countries should hold authority on global benchmarks. The U.S. team argued that as the largest mortgage market in the world, they set the standards. In turn, Europeans argued that despite the innovation of Silicon Valley, European markets were more technologically advanced with newer operating systems and early online lending adoption. They also cited the longevity, investor security and stability of covered bonds as a superior funding tool to that of “American” securitization. Toward the end of the session, a senior representative of an American mortgage insurer referred to the entrance of non-conforming and sub-prime lending in Europe as not only innovative, but patriotic. He said, “We’re the ones democratizing access to credit.” I responded, “True. But we’re also democratizing the risk.”

That year saw new MBS issuances from 6 EU countries. At this point, standard rating agency practice was to assign “harmonized” ratings on MBS without compensating for the underlying market differences. To their credit, Fitch Ratings did publish regular research on each country that generally described differentiating market dynamics. To their demise, while there was never a conference that did not have a panel of investors complaining about the lack of transparency and sufficient information in MBS transactions, the insufficiencies did not curtail their buying habits. The dirty little secret was this: underlying portfolio information was scarce not because issuers withheld the information. In most cases it was because the servicing was so poor that the information just didn’t exist. In 2003, the majority of our advisory work entailed helping investors understand and differentiate portfolio risk from country to country.

Continue Reading Our History >>>