GMAC-RFC international(e): around the globe, GMAC-RFC is spreading its sophisticated brand of mortgage market diplomacy. The secondary-market innovator now has beachheads in the U.K., Germany, the Netherlands, Mexico and Australia.

REMEMBER BACK IN SCHOOL WHEN YOU RAISED YOUR hand when the teacher called for volunteers because you thought it sounded neat? Then, a moment later you were not so sure what you'd gotten into? You raised your hand quickly, to beat all the other kids. But when you looked around the class you were surprised to find yours was the lone hand in the air.

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Well, in some sense that's how Christopher Nordeen embarked on his global adventure with Bloomington, Minnesota-based GMAC-RFC. Today Nordeen is president of GMAC-RFC International Business Group, an operation that in just seven years has exported to Great Britain, the Netherlands, Germany, Mexico, Canada and Spain its business-to-business (B2B) model of securitizing mortgages as a private conduit.

But back in 1997 Nordeen--with no prior international business experience--became a mortgage industry diplomat when he raised his hand in a strategy meeting. The question that got his hand in the air was: "Who is willing to go to London?" He then crossed the Atlantic to start up and manage operations in the United Kingdom (U.K.), and a couple of years later directed GMAC-RFC's move into continental Europe.

Nordeen had been immersed in GMAC-RFC's innovative corporate culture since 1990, and helped reconfigure RFC from a flow purchaser of mortgages into more of an investment banker, as it became a broker-dealer selling its own securities. Innovation, Nordeen soon found out, was important to success overseas.

"GMAC-RFC is half mortgage banker and half investment banker," he says. "As a mortgage banker we have product knowledge and distribution experience, and as an investment banker we know the investor side. We can pretend to be either when we enter overseas markets and build our little footprint by introducing an innovation into the market that wasn't there."

The global expedition of GMAC-RFC has been profitable, with international business representing 8 percent of the company's earnings in 2004, according to Nordeen. He anticipates that in 2005 international profits should reach 10 percent to 12 percent of GMAC-RFC's earnings. "We plan to grow it to 20 [percent] to 25 percent. And we started from zero in 1998 when we entered the U.K."

"Conforming the nonconforming" has been the GMAC-RFC mantra since its founding in 1982 as Resolution Funding Corporation, and that concept--modified for each overseas market--so far has worked worldwide.

Ever searching for new markets, GMAC-RFC today is figuring out the most propitious ways of entering Brazil, Chile and Australia, and then possibly India and China. Nordeen points out that the company has entered each of the countries where it is now established differently. For example, it acquired mortgage brokerages in Germany and Canada, bought a distressed loan servicer in Mexico and started from scratch in the Netherlands.

Though GMAC-RFC does not directly lend in foreign markets, it builds its secondary market business overseas by building primary market brands for originators.

"Pioneering is hard work," says Nordeen from his office in Bethesda, Maryland, a suburb of Washington, D.C., a midway point on dry land between Minnesota and the main international offices in London, where he lived for five years.

"I thought that there was nothing harder than competing in the thin margins of American mortgage markets. But I was wrong. It's hard work to commoditize mortgages in multiple jurisdictions. It works best when markets open up to external capital, but it's very difficult in more restricted capital markets like Japan and Germany, which tend to have rules to keep capital home. That's why we discontinued a small Japanese operation we started a few years ago."

Despite the difficulties, Nordeen says, "I haven't seen as many U.S. mortgage companies going overseas as I thought there would be. U.S. investment bankers are the ones competing with us in Europe and Latin America. Actually, it's companies like GE [General Electric Capital] and The Associates. Investment bankers like Morgan Stanley want to buy distressed loans and more mature mortgages, which is not our business.

"But the domestic market in the states is so large, and most mortgage bankers don't have an international parent with a presence in global capital markets like we do," he says. "So I can understand why so few have ventured off our shores. RFC has had to reinvent itself every two to three years in the states as the business changes. That kind of culture has helped us overseas. We've tended to start small, adapt to local cultures and then grow in new countries. We haven't been buying earnings overseas, but rather changing the way markets act through innovation."

GMAC-RFC is a top-five issuer of private-label mortgage-backed securities (MBS) and asset-backed securities (ABS) as of Dec. 31, 2004, according to Inside Mortgage Finance, and the No. 1 warehouse lender and a top-15 servicer in the United States, also as of Dec. 31, 2004, according to SourceMedia Inc., New York. So why did it get the itch to explore overseas? By being practical. Nordeen says the idea germinated back in 1996 when parent GMAC Financial Services wanted GMAC-RFC to grow its net income.

"We were coming off the credit downturn that began in 1994; markets were starting to move up at the time, and we faced the aggressive growth of Fannie Mae and Freddie Mac," he says. "We wondered: Where the heck can't they go? They were expanding in a variety of areas--loan size, higher loan-to-values [LTVs], alternative products. But they can't go international, or into construction lending, or health-care and resort financing.

"GM and GMAC had global brands in place, capacity of funding in foreign debt markets and legal experience overseas," Nordeen says. "Most American mortgage bankers don't have that within their organizations. Also, we had the experience of competing with big players in the U.S. and learned to be nimble and pick market niches. Though, initially, we underestimated the difficulty of it all internationally."

Thus, the global quest began. By 1998 GMAC-RFC had acquired three U.K. mortgage companies and merged them in the city of Bracknell, west of London near Windsor Castle, creating the front, middle and back ends similar to the setup of a U.S. mortgage banking firm, according to Nordeen. One was Private Label, the largest private distributor of mortgages in Britain, whose founder, Stephen Knight, stayed on and now is executive chairman of GMAC-RFC Limited, the U.K. division.

GMAC-RFC entered the country with a strategy to securitize nonconforming mortgages, including subprime. Not many U.K. lenders were in the subprime sector at the time. The division eventually spread into nearly all sectors of the mortgage market.

"Many in the U.S. didn't think a 'create and trade' mortgage strategy would work in the U.K., but it has fantastically," Knight says. The division celebrated its seventh anniversary in March, and its numbers have been jolly good. GMAC-RFC is the No. 1 nonconforming lender in the United Kingdom, based on statistics from The Royal Bank of Scotland, Edinburgh, Scotland, and the 11th-largest overall lender, according to the Council of Mortgage Lenders, London, and most likely will be in the top 10 this year based on its 32 percent growth rate last year, Knight and Nordeen say. The company, through its multiple distribution channels, originated about $12 billion (6.3 billion pounds sterling) in 2004 and a company official estimated nearly $14 billion (7 billion pounds sterling) as the overall market slows. It is the No. 1 securitizer in Britain of nonconforming B and C mortgages, and has issued $19 billion in MBS from 1999 through June 2004, according to GMAC-RFC statistics.

"In the past five years, the U.K. mortgage market has grown by 170 percent, while we've grown by 1,700 percent," Knight says. "We've outperformed the market by 10 times. And the U.K. market is the fastest growing in Europe. What's amazing in our seven years of existence is our performance versus our leading competitors, who've been in business 200 years"--competitors such as Abbey National plc, Northern Rock plc and Halifax Building Society.

Knight's assessment of GMAC-RFC's splendid run in the United Kingdom is echoed in the company's offices around the globe: "RFC has a tried-and-tested business model adapted in each country in which it operates with local cultural adjustments," he says.

According to Nordeen, "The key to this job is finding good, smart people in local markets overseas and then stay[ing] out of their way." Provide them with the principles of GMAC-RFC's business model and then let them execute it, he says.

"As we've studied overseas markets, first the U.K. and then the Netherlands, Mexico and so on, we try to figure out how a company like ours fits in the market, and then who should be our partners," he adds. "We try to find locals who understand our ideas, and then we can move our intellectual property through them.

"The corporate culture, values, vision, operating principles, commitment and approach overseas should be the same as those in Minnesota," he says. "But the products and techniques are local. We attempt to make bets on people around the world. In our Dutch operation the key people are Dutch, in Germany they're German and in Britain they're British, except for a few ex-pat Americans."

Jeff Knight, head of marketing services for GMAC-RFC Ltd. in Bracknell, simply says, "RFC in the U.S. lets us get on with it. They give us skills and knowledge and then let us make decisions locally." The result is "a U.K.-evolved mortgage company," Nordeen says.

After merging the three British companies acquired in 1998, Nordeen says, the American parent let the locals run the new operation, which today has 900 employees, choose which U.S.-developed features--such as automated underwriting, warehouse lending and longer loan terms--would work best in the British market. This formula has been introduced in all the company's overseas markets.

"Point-of-sale [POS] decisioning and correspondent lending are the two big strategic items we exported to the U.K. after we entered the nonconforming market seven years ago," Nordeen says. "We added credibility to the British nonconforming market and expanded our market share. The big lenders, including American investment bankers, scoffed at us and said they were not after that business. Today, however, all the big guys are in the nonconforming market." Nonconforming, which is similar but not identical to subprime in the United States, represents about 45 percent of GMAC-RFC's U.K. business. "Nonconforming customers in the U.K. are broadly interpreted as borrowers who would not normally be able to get a 'High Street' [bank] mortgage," Nordeen says.

"We anglicized GMAC-RFC's Assetwise[sm] [POS] system to reflect how the mortgage brokerage system works in the U.K.," Jeff Knight says. The online system requires brokers to ask borrowers 14 questions, which takes about 15 minutes. Then, after submitting the answers, a firm loan decision comes back in 35 seconds. "When we say 'yes' we mean it, and that was innovative because on other systems 'yes' means 'maybe,'" he says. "It's binding and only subject to the valuation [appraisal] of the property." Ninety-six percent of GMAC-RFC's customers are approved online in Britain.

"It has improved our credit quality," Stephen Knight says, "and cut down on mortgage fraud. It has really transformed the market, because our competitors lace their decisions with caveats."

The company also introduced into Britain the marketing innovation of one brand--GMAC Residential Funding: "Mortgages for Everyone"--across the loan spectrum. "In the mainstream we compete with the High Street lender with the same brand name we use in B and C subprime," Stephen Knight says. "A-minus and alt-A is a best-branded business. Typically, the cultural view of the U.K. lender is to have different brands for each sector. But one brand gives us more bang for the buck in customer recognition, especially in our business with the large mortgage distributors."

"What has proven fairly universal is that brokers and specialty originators have grown steadily in market share in all the countries that we're in, because they are the closest to the consumer," Nordeen says. "In Britain brokers are dominant, and in the Netherlands they are around 60 percent of the market. We enable brokers to offer multiple mortgage products."

GMAC-RFC also works with large mortgage packagers that have networks of lender representatives. "We let the lender close in its own name and then we table-fund the next minute, and immediately the loan is transferred to us. Real estate agents make up a distribution channel in the U.K.," Nordeen says. "We pay them a fee for mortgages. They make lower sales commissions than their U.S. counterparts, and are likely to spend more time on the mortgage process."

Product preferences

Product-wise, GMAC-RFC has to be culturally attuned to its market. Thinking that a low-interest-rate environment is conducive to long-term fixed-rate mortgages--as any American would--does not cut it in Britain. "The key is spotting what won't work. Recently we created a 25-year mortgage product, and there was absolutely little take-up. We did maybe 40 loans," Stephen Knight says.

"Eighty percent of the fixed rates in the U.K. are for two years or less. About 60 percent of the business is variable-rate but not calculated like an ARM [adjustable-rate mortgage]. The rate is varied at the discretion of the lender, and is not linked to an index." It's no surprise, then, that GMAC-RFC's mainstream products are two-year fixed-rate loans that convert to variable-rate.

Mortgages in Britain, as in continental Europe, come with redemption (or prepayment) penalties, which are charged in the first two years in the typical fixed-rate product and then fall away when it becomes variable, Stephen Knight says. "Redemption penalties work in our favor in creating more predictable cash flows from securitization."

Nordeen adds, "We get better pricing and execution for MBS with prepayment penalties because it creates more certainty. It would be fun to offer that in the U.S. and see what happens--half-point lower mortgages with prepayment penalties."

At the back end in Britain, GMAC-RFC likes its flexibility, selling 60 percent of its assets as whole loans to large and medium-sized lenders to top up their quarterly portfolios and securitizing the remaining 40 percent. As on the front end, the company has transformed the secondary market. "When I first arrived in the U.K., the securitization market was small with light volume, made up of specialty-mortgage securitizers," Nordeen says. Traditional lenders like the building societies enjoyed a low cost of funds and floating-rate assets, and found it costlier to securitize.

"Securitization was perceived as a negative," Nordeen says. "It used to be that if you sold whole loans or securitized in Britain, the market saw that as the last step before selling the company or before it folded. Now it is viewed as a business discipline and positive funding strategy. It improves our ability to tell the market what the company is doing and how much that is valued. Our conduit business helped change attitudes.

"What Fannie Mae and Freddie Mac did, besides expanding the scope of their charters, is develop consistent secondary market disclosures and documents, which created standards in the U.S.," Nordeen says. "In Europe standards didn't exist, and the markets had to create them. We've taken the view to provide as much data as we can for investor reporting [for] the long-term health of the market. I don't think the European Union [E.U.] will be the driver for further standardization--it's the markets. If you can get 2 basis points on an execution, you can get there a lot quicker than reading an E.U. directive."

The company issues MBS in Britain in multiple currencies--pounds sterling, dollars and euros--and sells them to British, American and pan-European investors. As in all overseas jurisdictions in which it operates, GMAC-RFC outsources its servicing. Home Loan Management in Lancashire services its 20 billion pounds sterling (nearly $40 billion) portfolio of assets.

Dutch and German endeavors

In 2000 GMAC-RFC started up an operation de novo in the Netherlands after determining that the market components were in place there for its business model. GMAC-RFC Nederland, located in The Hague, is the 11th-largest lender in Holland, originating through its lender network $1.6 billion in 2004 and securitizing $1.2 billion, according to company statistics. A Royal Bank of Scotland survey for 2004 points out that if GMAC-RFC's Dutch business is added to its U.K. volume, the company is the third-largest residential mortgage securitizer in Europe. From 2002 through 2004, it has issued 3.3 billion euros ($4.25 billion) in MBS. The company introduced risk-based pricing into Holland, adding shades of gray to a market that had been just black-and-white mortgages.

Then came Germany, the market in Europe that offers the most potential. In 2002 GMAC-RFC bought Credit Web, a German mortgage brokerage with online technology, and began building the infrastructure for its business. Credit Web, with five branches in Germany, is an independent brokerage, and its product line is not exclusive to GMAC-RFC. For regulatory purposes, GMAC-RFC then acquired a bank, renamed GMAC-RFC Bank GmbH, through which to offer and fund its mortgage products, beginning in January 2004.

"We're the first in Germany with the mortgage-conduit approach," says Dennis Sheehan, managing director, continental Europe, for GMAC-RFC, who works out of London. GMAC-RFC Germany is based in Wiesbaden.

Germany historically has had a low homeownership rate, hovering around 40 percent. The German government created tax incentives for rental property after World War II to aid rebuilding efforts. But GMAC-RFC offers buy-to-let mortgages and can tap into this market. "Germany is an underestimated mortgage market," Nordeen says. Sheehan adds, "Mortgage markets in Germany are not proportionate to the country's economic measures, to its population. The markets are small compared to Germany's economy." He thinks they could double in size in 10 years.

Crafting the back end to GMAC-RFC's operation in Germany has required a lot more engineering work than in the Netherlands. Unlike Holland's, Germany's secondary market is mortgage bond-based, not MBS-based. In June, GMAC-RFC issued the first true-sale residential MBS in Germany since 1998, a 301.5 million euro ($364 million) deal backed by mortgages originated by its German platform, GMAC-RFC Bank GmbH, according to a company statement. Deutsche Bank was the lead manager of the offering, and Aareal Hypotheken-Management GmbH, Weisbaden, Germany, is the servicer.

"There had been synthetic MBS deals for regulatory-relief purposes," says Ferdinand Veenman, managing director, capital markets, for GMAC-RFC Nederland, who overseas European securitization. "No cash-funded deal had come out of Germany in some time. In ours, the embedded risk is transferred to investors. It's a funding."

GMAC-RFC had to "circumvent" the regulatory structure in the MBS design, "with loan conditions specifically tailored to securitization in a special purpose vehicle," he says. "By setting this example, I think we'll see banks starting to do it and adjust the front-end documents for the back end. Then we'll get more standardization in Germany and better pricing."

Nordeen says, "We're offering the first third-party MBS structure to the German market." The previous true-sale MBS in 1998 was brought to market by Deutsche Bank, the underwriter and issuer of the deal. "But it was based on inter-company connectivity," he says, "with swaps between counterparties within the bank."

"We are unique in Europe," Veenman says. "We're becoming a pan-European mortgage investor and MBS issuer."

Sheehan points out that GMAC-RFC is the only company with a variety of originators in Europe, with only one back-end operation. "We're starting to sell this concept to banks in Europe: You keep the servicing, but we want the cash flows," he says.

Mexican ventures

Meanwhile, on a parallel track back in North America, GMAC-RFC entered Mexico in 1998 when it acquired Auritec, a servicing platform for distressed loans. Back in 1994 at the Mortgage Bankers Association's (MBA's) first international mortgage conference, Jose Landa Alvarez, an executive with a Mexican mortgage company, or sofol, announced that the first residential MBS in Mexico would be issued in three months.

"Then nine years later the first MBS was issued in Mexico by us, after the peso crisis and bank recovery," says Landa, who today is managing director, Latin America GMAC-RFC. It was in December 2003 when the Mexico City-based division securitized $50 million of performing mortgages and sold the MBS to institutional investors in Mexico. Subsequently, the company has securitized another $200 million.

GMAC-RFC had to adapt its business model to encompass inflation-hedging instruments in Mexico. Landa points out that mortgages--usually 20- to 30-year terms with 80 percent LTV--and MBS are denominated in UDIs (pronounced "oodees") a special financial currency that is indexed to inflation. "We have a swap mechanism with the mortgages," he says. "The borrower's mortgage in UDIs is swapped into a loan payment that is tied to the wage index. There is also adjustability in the rate for investors."

A branch of the World Bank, the International Finance Corporation (IFC) helps to structure MBS deals by providing a credit enhancement, which makes the securities more attractive to investors, according to Nordeen. "They bring discipline to the table," he says. A Mexican government housing bank, Sociedad Hipotecaria Federal, also provides financial swaps to facilitate securitization.

Landa also is chairman and president of two sofoles started up by GMAC-RFC: GMAC Financiera and GMAC Hipotecaria. The former makes loans directly to housing developers, while the latter is a warehouse and construction lender to other sofoles. "Their main purpose is to act as conduits," he says. "Construction lending is a good business for us, and it of course leads to more mortgage product. We also lend to large developers like we do in the U.S."

The company's market in Mexico is middle- to lower-middle-income, Landa says. The average loan size is $30,000 to $40,000. "The trend is young people moving to higher balances. Just a couple of years ago our average balance was $25,000," he says. Mexico is an underhoused nation, but construction is gaining, with an estimated 600,000 homes built in 2004, he says.

"Mexico has been like an RTC [Resolution Trust Corporation] play, and then on back of that we're building a mortgage company," Nordeen says. "Our margins are better in Mexico than in Europe. We're paid for the currency and country risks."

Marshall Taylor is a freelance writer based in Annapolis, Maryland, and is the former editor of Real Estate Finance Today (REFT). He can be reached at [e-mail].

RELATED ARTICLE: IN A LAND DOWN UNDER

GOOD ON YA, MATE. IS THIS A COOL JOB OR WHAT? NEIL SINDEN shipped off from England to the land Down Under "to get to grips with the Australian market as quickly as possible, to find out where we can add value," he says. The managing director of Australia for Bloomington, Minnesota-based GMAC-RFC landed in Sydney with his family in April on a two- to three-year stint to get a mortgage conduit up and running.

Sinden, a Briton, has the right credentials for the job, having managed GMAC-RFC's business development in the Netherlands and Germany. He joined the firm in 1998 in the mergers and acquisition strategy arena, and aided in the acquisitions that crafted GMAC-RFC's infrastructure in Britain.

"Recently we did a piece of research on 25 different countries, looking at their origination and distribution channels, capital markets, foreclosure law and corruption tendencies, and came up with a list of countries to check out for business," says Christopher Nordeen, president of GMAC-RFC International Business Group. "Australia topped the list. Its primary and secondary markets are as developed and sophisticated as in the U.S., if not more so. So, I sent our business-development guy there for a couple of years to figure it out."

Although once you've settled in Sydney, you might want to take a little more time to figure it out. It takes time to figure out which laid-back northern Sydney beach town--Dee Why, Curl Curl or Manly--makes for the best commute to downtown (via the Sydney Harbor ferry).

"We've found that we can make money more efficiently and quickly if the structure of a new market suits our business model," Sinden says. "Australia lines up quite nicely with it, like the Netherlands in its secondary market structure. It has strong intermediaries, the brokers and an active securitization market."

Mortgage brokers account for about 35 percent of originations in Australia, he says, compared with 65 percent in Holland and 55 percent in the United Kingdom (U.K.). Brokers tend to be organized in national and regional chains.

"It's a floating-rate market, much like the U.K.," Sinden says, "with three- to five-year terms and 20- to 25-year amortizations. We like the very high homeownership rate in Australia as well."

Sinden points out the key elements to starting up a conduit business in Australia or on other foreign shores: "You hire people who know a lot about local markets, but also who can pick up the core competencies of GMAC-RFC. They must understand the skills and innovations we bring to bear to the market," he says.

Sinden says, "I'll hire some locals pretty quickly so we can determine the best way to enter the market, whether de novo; from scratch, as we did in the Netherlands--I hired people from another financial institution; or buying a small firm or two, as in the U.K. The RFC approach is to buy small and grow.

"Initially, we'll try to leverage off our GMAC and GM relationships when we can in new countries, like in the capital markets, though generally GMAC doesn't operate in the same parts of the market as we do," Sinden says. "But I am using the relationship in a small way by sharing office space with a GM subsidiary."

Geographically, Australia is the same size as the continental United States--but its population is only 20 million. "There are relatively few big cities, like Perth, Adelaide, Darwin, Brisbane, Sydney and Melbourne, so the market is based on regional coverage," Sinden says. And GMAC-RFC chose Sydney as its base because it is the financial center of Australia, home to the majority of investment bankers and commercial banks. Two out of the three ratings agencies in country are there, too. Melbourne, to the south, also has a strong financial community, as well as great beaches to the west.

GMAC-RFC has its eye on another anglicized country, though a tad more exotic. "It's hard to ignore India because of its huge potential," Nordeen says. "In legal structure, India is close to the U.S. and U.K. as a common-law country. If we can fathom--as we study India--that its mortgage markets are changing in a manner consistent with our business model, we'll try to enter. The mortgage market is maturing quickly in India."

"India's population is so large that you could open 1,000 branches just in the city of Mumbai and not touch all segments of the market," he says. "I think there are half a billion folks in India that could potentially make up the market."

Nordeen points out: "It's sort of an inverted learning curve when looking at new foreign markets. You figure out how people gain access to financial services and then how we can help them or not. The challenge in India is the secondary market--the capital markets need help with liquidity, derivatives, etc.--and how to turbo the front-end originators."

Being a global enterprise has its advantages. "India and Mexico have similar mortgage markets, so we can take ideas from our operation in Mexico and drop them into India," says Nordeen. "I think that makes a difference."