Europe at 'Interesting Crossroads' in Servicing

Europe is at an "interesting crossroads" when it comes to servicing, according to Michael Gutierrez, head of Standard & Poor's servicer evaluations group.

Mr. Gutierrez, who has been observing the market since S&P began expanding its servicing evaluations there in 1997, said during a webcast conference call that he considers the market to be similar to the United States' before the government-sponsored secondary market agencies Fannie Mae and Freddie Mac entered the market.

The S&P credit analyst said that if Europe follows the United States' example to a certain extent by continuing on its current path away from being dominated by markets in which portfolio lending prevails and toward securitization, it may want to avoid some of the U.S. market's mistakes.

Among other things, Mr. Gutierrez said he would advise European servicing market participants to think carefully about structuring their fees to make sure they are adequate for all market requirements and contingencies.

Mr. Gutierrez said the "squeeze" in U.S. residential and commercial servicing profits, particularly the latter, has been a real concern - one that he hopes the European markets will be able to avoid. He cited as an example an instance where a "highly known" manufactured housing servicer's 50-basis-point fee became inadequate when bankruptcy occurred and no replacement servicer could be found with the ability to handle that particular volume in that particular asset class. As a result, the whole deal had to be "re-engineered" with a 125-basis-point fee, he said. If fees are too low, as Mr. Gutierrez feels they are in many cases in the United States, servicers may feel pressured to, for example, impose late charges or forbearance plan fees that may or may not be "reasonable," he said.

For "certain asset classes" in the United States, there have been "extreme pressures to minimize loss severities" and loss mitigation and default management efforts "more aggressive than what regulatory landscape would allow for," Mr. Gutierrez said.

He said that has drawn regulatory attention and put even more compliance and investor reporting burdens on servicers. This has strained not only new issue U.S. securitizations, but old ones in which fees were set at a time before current reporting and regulatory requirements were in place, Mr. Gutierrez said.

Thus, European market participants may want to take steps to avoid allegations of "predatory servicing" that have occurred in the United States due to the "alleged abuse of certain rights by certain servicers, mostly subprime."

Because European countries to date have not had much servicing regulation and have no servicing trade group, per se, he recommended that the United Kingdom's Council of Mortgage Lenders draw up a report that sets best practices for servicing.

Currently there are 18 "ranked" servicers in Europe tracked by S&P and the rating agency, since 1997, has seen in servicing evaluations gain a certain amount of traction there, first in the United Kingdom, then in Italy and later on in France.

In a question-and-answer period that followed the S&P conference call, S&P credit analysts noted that securitization is advancing in fits and starts in some cases in Europe and faces challenges related to its specific markets. In Italy, for example, the commercial mortgage-backed securities market has slowed as there has been a moratorium on original securitization legislation there designed to help financial institutions get nonperforming loans off their books. The country has been awaiting the passage of new legislation to take its place, according to S&P.

Currently, the United Kingdom is the biggest CMBS market in Europe, S&P credit analysts participating in the call said. They said they expect that Germany is likely to be the next to develop a more notable CMBS market.

Most servicing markets in Europe have, to date, required a country-specific, localized presence, the analysts said. However, they noted that some market participants are affiliates of companies based outside the country in which they are operating and that some functions, such as information technology, can be centralized for companies that operate in more than one market.

Standard & Poor's is a provider of independent credit ratins, indices, risk evaluation, investment research, data and valuations. The company was acquired by The McGraw-Hill Companies in 1966.

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