A flowering of opportunities.

Author:Erb, Debra
Position:Mortgage securitization; international mortgage lending

Mortgage securitization is a sector of financial services that is ripe for export. Mortgage market expertise, honed in the United States in a mature MBS market environment, is facing a tremendous window of opportunity as global housing markets awake to the benefits of securitization.

The recent acquisition of Homeside Lending, Inc., Jacksonville, Florida, by the National Australia Bank (NAB) has brought the potential for the long-term export of U.S. mortgage banking services into sudden focus.

Admittedly, Australia is not representative of the majority of countries working on developing their housing finance markets. The Australian market has grown greatly in size and sophistication during the past 10 years. And Australian mortgage bankers have been studying the U.S. market for some time in search of information that might further foster their market's development. Many Australian mortgage lenders have been visiting the United States in search of partners for a variety of joint ventures, mostly small in size and limited in scope. That is, until the HomeSide deal came along.

On the other side of the globe, several U.S. mortgage service providers have been working in Australia to help enhance the production and operational capacity of local companies. It has taken more than 10 years to lay the groundwork for deals like the one National Australia Bank is doing with HomeSide. During those 10 years, incredible changes in global information exchange have occurred.

Many countries have been studying other markets, working with investment banks, consultants and international financial institutions to develop their version of a secondary market for mortgages. Economic and political conditions have slowed things down for several countries, but those circumstances will change. It makes sense for the U.S. real estate finance industry to become prepared to be a part of that change.

The NAB deal has implications for the competition in both the U.S. and Australian markets. The dramatic increase in origination, and primarily servicing, capacity for NAB that the HomeSide merger brings will give NAB a competitive advantage in its home market. The potential impact in the United States is less clear, but certainly an opportunity exists for the introduction of new products and services and possibly for greater competitiveness.

One less obvious aspect of this deal for U.S. lenders is that an opportunity for exporting American mortgage market expertise may have been lost. By acquiring HomeSide, NAB also has acquired a piece of U.S. mortgage lending technology. It no longer belongs exclusively to domestic industry players. Nothing prevents the Australian bank from expanding its operations into still other countries, providing the expertise and technology those countries need to develop their markets with essentially American-bred solutions. In effect, NAB could choose to do the exporting for us, if we ignore the opportunities.

The U.S. mortgage banker is a unique animal by global standards. Like the lemur from Madagascar, we have evolved in isolation. We are the product of our unique secondary market environment, which encourages us to rely extensively on securitization to attract capital. And, as the years have passed by, we have become more specialized and even more closely adapted to our environment.

We are extremely good at foraging for and processing the "raw material" of loan applications into finished investments for the capital markets. We have learned how to manage the financial risk incurred when we make pricing promises to new borrowers to entice their business, while at the same time making promises to investors to deliver a finished product by a specific date. We have learned how to survive by maximizing the meager residual income we retain when we transfer the finished product, because we have figured out how to keep waste to a minimum and how to assign value to each component of the product.

This level of specialization also can mean that the industry is more vulnerable to extinction when the environment changes more rapidly than the industry can adapt. International activities provide a platform for the incorporation of new perspectives and ideas while at the same time facing the challenge of adapting practices to a completely new environment. It can help keep an organization or an industry strong and dynamic. Not everyone needs to become an exporter of mortgage services - when several players in the market adopt a new strategy, the rest must respond to stay competitive and the entire industry is strengthened as a result.

Exportable products

Anyone involved in the real estate finance system in the United States is in the service business. It's a service business to the extent that we provide a conduit for connecting borrowers' funding needs with investors' needs to obtain an acceptable return on their capital. The advent of securitization as one of the mechanisms for attracting capital to the real estate sector has dramatically affected how we go about providing this service.

Commercial lenders are now experiencing the competitive and operational challenges of a secondary market that has mushroomed because of the introduction and market acceptance of commercial mortgage-backed securities (CMBS). The single-family sector is struggling with the various technology advancements that will allow it to manage costs more effectively, but that are also forcing it to face an evolutionary leap in the very structure of the industry.

Other countries - both developed and developing - are just beginning to address the challenges of adopting mortgage securitization. They are observing the U.S. market as one might observe the behavior of a rare species in its natural habitat, hoping to learn something from its special adaptations that could be useful in their own environments.

Imagine being able to fast forward history to observe the future of your mortgage industry and trace the developments of its strengths and weaknesses during a 60-year...

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