Securitization of loan portfolios is picking up steam in Greece, at last

Greece’s real estate market has remained robust for more than seven years, boosted by strong mortgage growth loan on the heels of the lowest interest rates in generations. Despite expectations to the contrary, the securitization of mortgage loans has not picked up steam but this is likely to change at last. It was back in early 1970 when the USA’s GNMA (Government National Mortgage Association) or Ginnie Mae created the transaction known as securitization, using a pool of mortgage securities. It took 33 years to come to Greece. Of course, securitization, that is, the packaging of a designated pool of loans or receivables with an appropriate level of credit enhancement for sale to investors had been used by the Greek state early in this decade to cut its budge deficit but left it with a bitter taste after a change in Eurostat’s rules led to a significant deterioration in public finances. In 2002, the country was obliged to restate its budget and public debt figures so as to conform to Eurostat’s new guidelines at the time. Capital transfers, that is, subsidies to state-controlled corporations, were reclassified as expenditures. This increased the budget deficit and the public debt. Some -3.7 billion in proceeds from the securitization of future revenues and receivables from the Third Community Support Framework, the state lottery and other assets were reincluded in the country’s debt. Greece’s new conservative government in 2004 tried to securitize some of the country’s delinquent taxes, counting on Eurostat’s permission to Portugal to use some -1.7 billion raised from the securitization of delinquent taxes in December 2003 to slash its budget deficit. But the European Commission never gave Greece the much-sought green light and the government was forced to give up on this securitization as a deficit reducing measure. Aspis Bank However, this development did not stop a small- to medium-size Greek bank, Aspis Bank, taking advantage of a law passed in the summer of 2003 which gave non-state financial entities the right to proceed with the securitization of their assets. Prior to the law, only the Greek state could conduct these kinds of transactions. Aspis Bank, which was not rated by a major international agency at the time, raised -250 million euros via the securitization of a part of its mortgage portfolio in late 2003. «At the time, we anticipated strong growth in mortgage and consumer loans in the years ahead and decided to proceed with the securitization, becoming the pioneers in the Greek market, not least because funding costs were relatively cheap. Moreover, it allowed us to diversify our funding sources,» recalls Constantine Karatzas, the president and CEO of Aspis Bank who feels vindicated for that decision. Other larger banks followed Aspis’s example in the years with EFG Eurobank Ergasias becoming the most active. Eurobank has set up a securitization program which has raised more than -2.0 billion so far since 2004. Last year, Emporiki Bank raised -1.0 billion by securitizing a small portion of its residential mortgage portfolio while Piraeus Bank raised more than -700 million in 2005. The slow growth in the securitization of Greek mortgages is to be blamed partly on some of the specific characteristics of the local real estate markets that foreign investors find difficult to comprehend. A thorny issue has been the propensity of Greeks to state the so-called «objective» or presumed value of a property (set by the state to calculate taxes) in sale/purchase contracts rather than the much higher actual sale price. This results in the buyer paying much less tax. Poor data Another less important issue has been the poor databases of some banks which go back less than 10 years in some cases, for the simple reason that some banks did not exist previously. However, all these problems appear to have been placed under control as foreigners have come to learn more about the Greek market. Perhaps more importantly, Greek banks see demand for credit remaining strong at home and even stronger in countries where they have expanded their operations, giving them more incentives for seeking additional sources of funding. The goal is to attain cheaper funding costs and diversify their sources of liquidity. With the growth of credit continuing to outpace that of deposits, more and more banks are expected to enter the fray and securitize part of their loan portfolios. Eurobank recently announced its intention to do precisely this and analysts expect some of the other banks to follow suit. Of course some major banks, such as the country’s largest – the National Bank – may still choose to delay making the move in view of their rich deposit base. However, even then, it is unlikely they will continue to resist for long given anticipated future developments relating to their Group loan portfolio growth and the growth of their deposit base. Ultimately, after more than three years since a small- to medium-size private Greek bank issued the first ever security backed by a pool of its mortgage loans, the securitization of different types of loans appears ready to pick up with more banks and bigger issues hitting the market. It is a welcome development for both Greek and international investors on one hand and local banks seeking cheaper funding on the other.

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