U.S. mortgage companies are looking toward Great Britain's burgeoning secondary mortgage and servicing markets as a gateway to overseas opportunities.
England, which has no equivalent to Fannie Mae or Freddie Mac, has had huge growth in its secondary home loan market recently - last year $22.3 billion of mortgage-backed securities were issued there. U.S. companies are setting up shop to create investment bonds backed by British mortgages and operations to service those loans, and a few have even entered the retail mortgage lending market.
"There are a lot of opportunities," said Chris Nordeen, the president of GMAC-RFC's international business group, in London.
U.S. players with operations in England include Countrywide Credit Industries Inc., Electronic Data Systems Ltd., GMAC-RFC (for residential funding corporation), Alltel Corp., and GE Mortgage Insurance.
Countrywide runs several businesses in England, including units to service loans, outsource mortgage origination services, and distribute U.S. asset-backed securities to European investors.
Alltel created Alltel Mortgage Solutions Ltd., a joint venture with Bradford & Bingley, to provide outsourced origination and servicing; Electronic Data Systems formed a joint venture with Abbey National PLC to service mortgages; GMAC RFC is issuing mortgage bonds and directly originating some mortgages; and GE Mortgage Insurance is insuring U.K. mortgage loans and plans to enter the mortgage-backed securities market in the coming months.
England's loan servicing business is similar to that of the United States, but its mortgage-backeds market essentially has to be built from the ground up. For that reason, several sources said, it offers tremendous upside.
Several observers said that the secondary market has developed slowly in England because until recently most lenders had no use for it. Home lending in England is led by "building societies," thrift-like outfits that fund mortgages through retail deposits and then hold the loans in portfolio.
Michael Lea, the president of Countrywide International Consulting Services Inc., said British lenders are "relatively well capitalized" and have not had a compelling reason to sell their loans. "Funding has been cheaper for them," he said. "They haven't seen a need for securitization."
Another growth impediment is that banks have little motivation to get rid of the loans. Practically all mortgages originated in England are variable-rate loans, so their rates oscillate with bank rates; also, they contain prepayment penalties. As a result, British borrowers are less apt than Americans to prepay.
British mortgages are "easier to manage from an asset liability standpoint," Mr. Lea said. "There is not much incentive for lenders to sell loans for asset management purposes."
Yet most observers said they expect the British secondary market to have healthy growth; and mortgage bonds have found an audience on the Continent.
"The advantage with a mortgage security is that there is no corporate event risk," Mr. Nordeen said. "We have been able to benefit from European investors who want to avoid event risk with corporate bonds."
And though the absence of a government agency like Fannie and Freddie has hindered standards uniformity in England - and thus, the secondary market - it has encouraged U.S. companies to spur development of the business, so far with success.
GMAC RFC was drawn to England because it wanted to expand into areas where it could issue securities and not have to compete directly with Fannie Mae or Freddie Mac, Mr. Nordeen said. Fannie and Freddie do what they want in the United States "and we do business around the edges," he said. "We're comfortable with that. We'd like to see them more restrained in their growth, but that doesn't happen."
The growing popularity of British mortgage bonds has been a boon for GMAC RFC UK Ltd., which was established in 1998. The subsidiary's mortgage-backed security issuance went from $330 million in 1999 to $1.525 billion last year.
Brian Hurley, senior vice president of international operations for GE Mortgage, said his company has been providing mortgage insurance in England since 1994 and that it plans to enter the mortgage-backeds sector by the end of the first quarter.
"People in the U.K. are starting to appreciate mortgage bonds," Mr. Hurley said. "It is something they are becoming more comfortable with every month. I think it will be a strong market."
American firms such as Countrywide are eager to enter the MBS market but have put a toe in the water instead of plunging right in. Countrywide, for instance, entering the more established servicing sector to get a feel for the market before going on to other things.
Instead, Countrywide started Global Home Loans with Barclays Bank PLC, which provides origination and servicing support to the two-year-old venture. Global Home Loans processes 10,000 originations a month for Barclays and manages a servicing portfolio of more than 700,000 loans.
"We really developed an expertise in managing the back office - and we found that to be exportable," Mr. Lea said.
David Basra, Salomon Smith Barney's director of European securitization, said American firms have handled practically all sales of British mortgage-backeds to the U.S. market and have become a force in the structuring of the bonds.
The U.S. companies "really have had the expertise and the understanding of securitization and the underlying collateral," he said. "I'm sure that some U.K. banks will get on to these kinds of transactions, but U.S. firms will continue to dominate."
Mr. Nordeen and Dr. Lea said mortgage-backeds' growth has been fueled by a recent expansion by many banks into originating subprime loans in England - a niche that both say is now dominated by American firms.
GMAC's first originations in England were in the subprime market, which served as the company's springboard there.
"Loans that would be considered conforming in the U.S. would be looked upon as 'nonstandard' in the U.K.," Mr. Nordeen said. "Things that were on the edges, niches available to just small lenders, that is how we started."
He said GMAC RFC has since expanded into the prime markets in both origination and mortgage-backeds. It originated $2.6 billion of mortgages in 2001 and plans to reach $3 billion in volume this year. GE Capital has also eyed the subprime sector as a means of entering England's mortgage-backeds market.
Like most U.S. companies moving in to England, Mr. Nordeen said, GMAC RFC plans to use it as a beachhead.
"We go to countries where there are very developed capital markets, where the markets are mature," he said. It plans to expand in Europe and eventually to expand its businesses in the Netherlands, Germany, Mexico, and Brazil.
And more important, Mr. Nordeen said, GMAC will "go to places that we believe that Fannie's and Freddie's charter can't extend."
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