Europace Sets a Standard
in Mortgage Brokerage
Thomas Kretschmar and Georges Ruchti
THE DEVELOPMENT OF THE GERMAN
MARKET FOR RESIDENTIAL We anticipate that in Germany the mortgage
MORTGAGES process will be segmented into originator/
The long expected breakup of the
value chain in real estate finance has
lendor/investor (versus U.S./U.K. system of
now become reality in Germany.
Not very long ago, we only had
abstract ideas about the structure
of a residential mortgage market.
Looking across the Atlantic, we saw
• Legal requirement to hold a banking or life insurance
license for the business unit that issues loan contracts and
the market could be segregated into: initially books the loans.
• An originator giving loans, • Tight integration of loan servicing and the loan issuer who
takes responsibility for operational risk and fulfillment of
• A non-bank servicer delivering loan regulatory requirements.
Ruchti • Concentration on the origination side on cooperative
• An investor providing finance banks, savings banks, private banks and large brokers.
and taking credit risk.
• Compensation of the origination activity by the lending
However, the detailed structure of the German business bank (commissions) and client pricing by the originator
system looks quite different than that of the U.S. This is on (commission management).
the one hand determined by the fact that we can learn from
more than 20 years of securitization history and thus are able • Limited product diversity with a strong focus on long-term
to avoid mistakes made elsewhere. In fact, we have a chance annuity loans.
to pioneer innovative ways based on new age process
management and technology. On the other hand, regulation, We anticipate that in Germany the mortgage process
established best practice and conventions, as well as rating will be segmented into originator/lender/investor (versus
issues; dictate a different approach. U.S./U.K. system of originator/servicer/investor). We
thereby expect a number of institutions to play at least
Developments in Germany comparable with the U.S. two roles under one umbrella. However, it will be
(and, to some degree, the U.K.) are: increasingly difficult to devote management capacity to
all three disciplines and assure professional execution in
• The separation of origination and refinancing. one institution, as it had been done by the classic
mortgage banks in the past. The trend towards
• Concentration of financing banks on a limited number of specialization can be clearly seen in today’s market.
dominating originators (consolidation). AHBR (Allgemeine Hypothekenbank Rheinboden), for
instance, is concentrating on lending and portfolio
• Incorporation of servicers (e.g. VR Kreditwerk, Prompter, management and originates exclusively through brokers.
DePfa Hypothekenmanagement). At the same time, SEB and Citibank, both leading retail
banks, are focusing on loan origination. Some mortgage
• Reorientation of lending criteria to match the banks have adopted similar strategies. They offer loans
requirements of investors and rating agencies. from different lenders and sometimes distribute loans
through multi-tier broker networks. A similar
Developments in Germany not comparable with the U.S. segmentation had been established by savings banks and
(and, to some degree, the U.K.) are cooperative banks long ago
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Europace Sets a Standard in Mortgage Brokerage (cont.)
Europace Rationalizes Contact Management and Workflow
2nd Tier Distributors Qualified Brokers Lenders Investors
Developer Bank Bank Corporate
Broker Europace Insurance Insurance Fund
Advisor Broker Mortgage Bk. Insurance
Local Bank ... Build. Soc. Bank
... Europace ... ... Coop.
... ... ... ...
Between the specialists in each business segment, a huge name Europace. A Europace corporation was set up in
brokerage potential is building up. The potential of that Westport, Ireland, taking over the role of a central exchange
market encompasses the entire new business volume of and making the necessary systems (B2B platform) available.
approximately €200 billion. This market has two main In the past 20 months, leading mortgage brokers and lending
subsets: (1) the brokerage of whole loans between banks have perpetuated the standard, accommodated their
originators and lenders, and (2) the brokerage of pools, funds individual requirements, organized the utilization of the
and credit risk between lenders and investors and possibly B2B platform, and executed the first series of trades. In order
among each other. to achieve a deep market penetration, the system has an
open design. Any market player can use Europace as long as
Although today the first subset has more practical he fulfills basic eligibility criteria. Furthermore, any user
relevance, the two areas of brokerage cannot be separated. willing to commit to predefined utilization volumes can
The quality of loan origination and credit decision processes participate in the Europace corporation’s equity.
already has an influence on the valuation and rating of loan
portfolios. At the same time, investor requirements start to A further measure to support standardization and market
influence the loan data generation, credit decisions and, penetration is the pricing mechanism. The commissions for
most of all, the loan pricing. utilization of the platform/exchange are fixed at 0.01% of the
nominal loan value. Any one of the partners would have
THE DEVELOPMENT OF THE EUROPACE STANDARD spent substantially more on the development of proprietary
In a growing broker market, all participants systems and workflows. Avoiding additional fixed costs and
(originators/lenders/investors) require uniform standards. access fees is expected to accelerate the introduction of the
Let’s assume we have 20 originators and 20 lenders in a Europace standard.
market who all work together. They would entertain 400
business relationships that, in the absence of standards, • 2nd Tier Distributors are sales organizations and financial
require bilateral broker agreements, compensation schemes, advisory firms who offer client access but do not fulfill
IT-interfaces, servicing agreements and integrated workflow minimum requirements in terms of process quality and/or
arrangements. As soon as all 40 partners agree on a common transaction volume to transfer loans directly to lenders.
standard and a central exchange, however, every originator
and lender only needs one business relationship to the • Qualified brokers fulfill all requirements and usually
central exchange. This rationalization of contact manage- operate networks of 2nd Tier Distributors. They deliver
ment and workflow is perpetuated into the relationships ready-made loan documentation including loan request,
between brokers and second tier distributors and between credit verification and contract documents to the lenders
lenders and investors (see diagram above).
• Lenders are responsible for the credit decision and take
The idea to standardize and incorporate central loans on their books. They may trade credit risk and
exchanges in the mortgage business was pioneered by Freie securities portfolios.
Hypo AG in 1999. In 2000, a first standard for IT-
functionality, interfaces, process management and terms of • Investors provide finance to the lenders (by means of
business for a central exchange were introduced under the Pfandbriefe (mortgage bonds), mortgage-backed securities
WINTER 2002 59
SM Europace Sets a Standard in Mortgage Brokerage (cont.)
(MBS), bonds or deposits) and assume varying levels of • Multi-currency capability.
• Internet capability in order to allow a ring-fenced group
As of today, the following functionalities are available on of members (not end users) an easy access to the
the Europace platform for real estate finance: system.
1) Origination functionality for banks, brokers and other • High security data transfer.
providers of financial services:
• Web-based data input facilities for client and • Commission accounting and collection for all partners.
• Pooling of communication lines onto one exchange.
• Functionalities to capture special cases (land-lease,
refurbishment, multiple borrower and multiple FURTHER DEVELOPMENT
property functions, etc.). The strong demand for market standardization has made
a quick implementation of Europace across all major
• Document due diligence and financial analysis. German property financing sectors possible.
• Comparison of different loan options. A major challenge of the Europace business partners will
be to establish the Europace Standard (systems, interfaces,
• Multi-product capability (annuities, fixed rate, procedures, terms of business) in the entire property finance
prepayment options, variable rate, second mortgages, market. This will achieved by:
prefinancing of government subsidies, etc.).
• Attractive pricing of the Europace service,
• LTV (loan to value) calculations according to
proprietary guidelines of individual banks. • Efficient netting possibilities for partners,
• Automated pre-selection of loan requests based on • Access for medium size partners with a new loan potential
proprietary credit scoring models of individual banks. between €250 million and €2.5 billion,
2) Functionalities for lending banks: • Access for smaller market players through qualified
• Portfolio selection based on credit scoring. brokers,
• Monitoring of eligibility criteria during the pooling • Marketing campaigns,
• Conferences and seminars,
• Dynamic adaptation of loan request procedures (data
collection procedures, feasibility, pricing) without extra • Addition of functionalities for refinancing and
programming effort in order to adapt to changing securitization, and
• Equity participation for partners with guaranteed business
• Preparation of credit documents for the lending bank. volumes.
• Online decision-making procedures. An adaptation of the concept to other markets (e.g.
commercial mortgages), products and countries is possible.
• Preparation of individualized loan contracts (white As the German residential mortgage market dominates in
labeling). terms of size and standardization potential, the focus will be
on that segment for the time being. ❑
• Electronic contract delivery to the point of sale.
• Monitoring of conditions precedent. Professor Dr. Thomas Kretschmar is a Consultant and Chairman
of the Supervisory Board of Freie Hypo AG, Berlin. He is
3) General Functionality: Germany’s only professor of property finance technology.
• Multi-partner capability and pool trading functions
(B2B)—all partners use one physical system. Georges Ruchti is Managing Director of Eastec AG, Germany’s first
specialized consultancy for securitization technology. He also co-
• Multi-lingual capabilities for cross-border trading. chairs the European Chapter of CMSA .
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