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New insurance product makes a case through CMBS
Asset Securitization Report--SourceMedia (April 2, 2007)
The use of title insurance in Europe has, so far, been limited to a few securitization deals. Some observers do not see its use in a market that they believe already has adequate country-by-country title registration laws. But those who support this product said that a burgeoning pan-European CMBS market creates an ideal opportunity to make a case for title insurance on the continent.
In the U.S., the use of title insurance has gone hand in hand with the CMBS market. When the securitization market was born in the U.S. in the mid-1980s, title insurance was already universally accepted. Europe, however, has a more fragmented approach to title registration that is covered under domestic laws.
"I am not sure what the angle would be for introducing this product as a necessity in European transactions because, in Europe, we already have very good title registration in place and unless the definition of title insurance has increased I doubt market players will find a use for it," a market source said.
To be sure, the product isn't meant to appeal to more stable structures like the more established single-asset U.K. CMBS deals. However, as issuers and investors grasp a more pan-European view of CMBS structuring, the legal variation born from country to country legislation could provide an ideal platform for the product to grow on.
According to Jean-Bernard Wurm, managing director for LandAmerica Commercial Services Europe, aside from LandAmerica, several American title insurance companies and another European firm have recently entered the European market. The new entrants provide coverage similar to American Land Title Association (ALTA) policies in the U.S. These policies not only cover known defects or restrictive use of a property and unexpected issues that crop up at closing. And though the European Securitization Forum (ESF) and Commercial Mortgage Securitization Association (CMSA) have set up procedures/standards, and are active in lobbying the European governments and institutions to create favorable legal frameworks for the securitization market, there are still no European standards for loan documentation or legal due diligence. Issuers have attempted to follow certain formats, but there are still significant differences in the information disclosed to the public for each issue.
"European issuers have not been bothered to create a cookie cutter transaction structure that would make traders feel more comfortable," Wurm said. "The loan standards and the credit standards can vary from deal to deal unlike in the U.S., and the legal aspects of those elements can also vary."
The general lack of standardization for European-based CMBS deals can lead to time consuming situations that keep market players from focusing on some of the more important issues at hand in the development of European CMBS, Wurm said. For example, he believes that in terms of creating secondary liquidity, traders might get more comfortable with deal terms if they were assured that legal documentation from varying countries were correctly translated. Traders are less willing to sell or buy deals that have disparate legal documents or, in many cases, legal documents that are drafted in a native language then translated. They do not trust that translations will be accurate and find the process very time consuming.
However, one market trader said that there are larger issues at hand when it comes to secondary market liquidity. He also doubted whether a significant number of traders are hesitating to enter the market because of the disparity in legal terms.
Nonetheless, Wurm is confident that European attitudes are changing. Two years ago, when he first attended the Information Management Network's London CMBS conference he hardly knew anyone, but since then, he has been asked to speak on panels and has had a well-attended booth at the event. And since setting up shop two years ago, the group has worked on a number of deals. One standout deal that he highlighted is Terra Firma Capital's July 2006 securitization of a 5.4 billion ($7.2 billion) residential portfolio in Germany. The Terra Firma transaction, one of the largest CMBS deals seen to date, included over 7,000 mortgages in the asset pool. "With the amount of mortgages covered in the transaction, it would be impossible for traders and rating agencies to get through each and every single one of them," he said. "By guaranteeing rank and registration for thousands of mortgages, title insurance greatly streamlined and accelerated the legal due diligence process for issuers, ratings agencies and investors."
As the market moves toward a more pan-European view of CMBS structuring it presents an ideal opportunity for pushing the use of title insurance. "Title insurance makes it easier to get these larger deals off the ground, especially if it's not a single asset U.K. deal," he said. "When it comes to multijurisdictional deals, these disclosure documents can get very complicated and we can insure that it's all in order."
Title insurance will prove particularly helpful when it comes to dealing with the emerging Central and Eastern Europe transactions. In Poland, for example, confirmation of title and mortgage registration can take up to 18 months. Title insurance companies provide registration gap coverage, which allows owners and lenders to operate with the assurance of a clean title and mortgage rank as of the day of closing. According to a survey by Jones Lang LaSalle, the worldwide flow of these investments in 2004 reached almost $100 billion. European cross-border transactions grew to $54.1 billion, a 70% increase over a four-year period and those numbers are expected to increase as European dealers move away from a U.K.-centric CMBS market to more pan-European structuring.
"For Pan-European issues, it is much easier to provide rating agencies and investors with a standard title policy that covers all countries, rather than with translations of legal documentation from different jurisdictions, languages and formats," Wurm said.
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