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Three hundred leaders representing all sectors of the U.S. housing finance industry gathered for three days in November 2009 to participate in Distressed Servicing 2009 | EuroCatalyst 2009: Live from Austin.

The event was a huge success and marked the eighth installment of EuroCatalyst's groundbreaking dialogue that began in 2002 to discuss the evolution of housing finance in the context of globalization. Coinciding with the 2002 launch of the euro and efforts to create a single market for financial services across the euro zone, the EuroCatalyst event focused on the single greatest obstacle to that goal: harmonization of national mortgage markets. Our purpose was to bring attention to the unique importance of mortgage markets and their role as the epicenter of the global economy, and how the accelerating forces of globalization on housing finance could possibly rupture the global economic fault line. Each year the dialogue was held in the national European market undergoing changes that best illustrated our point: Madrid (twice), Lisbon, Berlin, Rome, Amsterdam and London (twice).

We brought the EuroCatalyst event to the United States in 2009, adding the secondary title "Distressed Servicing". This highly editorialized tag directly referenced the marginalized role of servicers and our efforts to reposition their importance as articulated in our opening statement, "we are all servicers now".

From the moment the event opened with our signature multimedia sequence and theme song "Burning Down the House", the audience soon realized that they were in for something entirely different. Our first session, "Apocalypse Now", picked up from where we ended in London in 2008 ("Blowup: When Servicing Counts"), as the event storyline progressed from the global macroeconomic picture to the most relevant issues disrupting market functionality, ending with "Thinking the Unthinkable - Recalibrating risk and opportunity", where we will begin the 2010 dialogue.

The audience joined in the onstage dialogue using our electronic interactivity system from their tables, adding more depth to the extremely lively debate of the panels and proving once again that the caliber of our panelists was equally matched by the high caliber of the audience.

After Day One ended at 6 pm with our classic "Champagne Debate", we were genuinely shocked to see the room packed for the opening comments at 8 the next morning. As many high-profile participants began to cancel prearranged flights that morning to stay until the conclusion (telling us, "Well, I didn't know it would be this interesting,"), we negotiated on-the-spot late checkouts for a remaining audience much larger than we had anticipated. An hour after closing comments as various group shuttles headed for the airport, Toni received a text message from Jeff Hoberman - one of the most memorable (and hilarious) panelists - who summed up the enthusiasm that had been expressed throughout the event. The text read, "Everyone on the Happy Bus want you to know this was the best experience ever."

Honestly, we can't even make this stuff up.

The success of the event was due, in no small part, to the strong and active participation of the event's underwriters, Field Asset Services, First American, Butler & Hosch, PCV Murcor, LPS, NCCI, Safeguard, Hudson & Marshall, FitchRatings and Standard & Poor's. These companies threw their financial and intellectual support behind us as we spent countless hours, days and weeks creating the program.

We are grateful to our supporting partner HousingWire, for recognizing the importance and history of our event, respecting our philosophy of prioritizing its purpose over profit, and for doing a fantastic job driving sponsorship sales and providing back office administration for the event.

We are also grateful to Linda Lowell, a legend in the industry and key member of HousingWire's brain trust, for her assistance in and assisting with session design and topics.

THE PROGRAM

DAY ONE AGENDA (NOVEMBER 16)

Behavioral economist Andrew Lo describes the current crisis "an unavoidable aspect of modern capitalism, a consequence of the interactions between hardwired human behavior and the unfettered ability to innovate, compete and evolve." This session refers to that "unfettered ability", as globalization and its forces have exponentially accelerated and magnified risk, introducing new kinds of unpredictability, risk and uncertainty, not only to financial markets, but to every aspect of our lives, in particular, how we live, where we live and how we finance our lifestyles.

In this context, it should be no surprise that this crisis originated in the housing finance sector. A mortgage is generally the centerpiece of every homeowner's financial portfolio. It is the anchor product for most financial institutions. As an industry, mortgage markets continue to comprise the largest ratio of GDP in most countries. And the housing finance and real estate sector has been the single largest asset class in global capital markets. In the context of globalization, the implosion of mortgage markets occurred at a speed that no one could predict, and was magnified in proportions that no one could have anticipated. Ironically, the uncertainties today came from the very sources that were supposed to make the world predictable. This is why we so often hear the phrase, "unintended consequences".

With no historic precedent upon which to guide our future, we are left with nothing more and nothing less than a grand social experiment, one worth pursuing but one with an unpredictable outcome. Experts do not have the answers, which is why every individual has a role to play in its outcome. Perhaps the beginning of the solution is to change the way that we think about mortgage markets and embrace the idea that the world has permanently changed, or what Bill Gross calls, "The New Normal".

We now know that mortgage markets around the world vary in form but not function. We also know that although housing is local, its funding is a global activity indifferent to national borders. And we now know that housing finance is the epicenter of the global economic fault-line.

This session takes a wider view of the complex issues occurring around the world from the magnification of systemic risk generated by the housing finance sector, to growing fears that the U.S. dollar is headed for a sharp decline, to changing the incentive structure that has driven the industry, to calculating the costs of the crisis, to threats to existing structures that could provide a way out of the crisis, to best guesses on navigating the way forward. The question is whether the mindset of the housing finance industry will change, which is crucial to avoid repeating the same mistakes.

When all loss mitigation efforts fail and foreclosure occurs, servicers - operating from a loss management position - navigate a minefield of obligations and increasing regulatory obstacles to reach the final goal of asset liquidation and limited investment recovery. No longer a loan, the underlying asset is now real estate, management of which requires an entirely different set of skills different from traditional loan servicing. And it's this unique skill set that tends to explain why outsourcing is far more prevalent in this sector of the mortgage value chain than at any other point in the process.

Part 1 - Risky Business. REO sales aren't about profit, after all; they are about limiting an assured loss, especially in markets where home prices have been hit hardest. This session will take a look at key issues relevant to the risk holder and risk manager alike - How can success be measured and monitored? What strategies are best for managing risk? Where are REO property volumes headed in the next year?

Part 2 - Crowded Houses. We also provide an update on the impact of increased regulatory activities, both at the Federal and more localized level; in particular, we address the impact of a recent law that now requires a servicer to work with tenants living in recently foreclosed properties (Protecting Tenants at Foreclosure Act of 2009). We also look at the issue of community stabilization within the context of occupied versus vacant real estate.

Part 3 - If It's Broke, How Do We Fix It? Lastly, we ask a more general question: is the REO sales process broken? If so, where and what can be done to fix it? After all, much of the existing process used to sell bank-owned real estate arose during the last real estate crisis in the late 1980s and early 1990s. Are the models we use today, and have developed in previous eras of real estate turmoil, applicable to the distress we're now seeing in many real estate markets? Or are other approaches needed?

Foreclosures are depriving families of their homes, destabilizing property values and adversely affecting economies at the local, state and national levels. For servicers and investors, loan modifications are the most dynamic, complex and problematic issue of the mortgage crisis today. For regulators and homeowners, federally mandated loan modification programs including HAMP/MHA and Hope for Homeowners (H4H) appear to be regarded as the only remaining alternative to foreclosure.

Most social and political initiatives are beyond investor control. They also affect servicers caught between conflicting responsibilities to shareholders, securities investors, and borrowers; compliance with increasing regulation at city, state and federal levels as well as executing federally mandated modification programs on an unprecedented scale. The widespread use of loan modifications overall - and the type of modification executed - has introduced massive conflicts of interest between parties in securitization transactions to such a degree that many refer to it as "bare-knuckle tranche warfare". Meanwhile, the threat of judicially ordered cramdowns has returned, providing a greater impetus for servicers to modify loans collateralizing securities through principal forgiveness. And lest we forget, borrower equity is a major driver of credit performance - and the majority of borrowers are in a negative equity position based on mark to market CLTVs.

The economies of scale that drove record servicing revenues prior to the crisis have turned into dis-economies of scale as servicers lack the volume of staff and training needed to comply with evolving federal mandates and different guidelines and requirements for Fannie, Freddie, non-GSE and FHA borrowers. [Warning - plot spoiler]: Industry statistics showing high re-default rates on modified loans to date, as well as increasing negative equity due to continuing house price declines, have convinced most industry participants that loan modification programs in their current form are just not working. The pull-through rate of most government programs are between 3% and 8%, leaving almost 90% of the problem unsolved. At stake is the threat of 10 to 13 million foreclosures through 2012 with an incalculable impact on the social, structural and economic stability of the U.S. as well as the global economy.

This session focuses on foreclosure prevention options with an emphasis on loan modifications and their impact on borrower psychology and behavior, investor value and servicer capabilities and capacity. In particular, we focus on the increasing volume of current federally mandated loan modification and refinance initiatives*, the impact of Treasury and industry scorecards and how servicers are changing operational and vendor strategies to cope with these demands. As the pressure to turn distressed borrowers into successful homeowners increases, we will show the impact of that pressure at the GSE level as they begin to buy back loans and transfer servicing to redistribute capacity and effectiveness. We also discuss a change in mindset to credit risk by showing how the asset value of borrowers can be quantified similarly to the asset value of real estate collateral. At the ground level, we discuss the psychology and behavior of homeowners facing foreclosure based on the experience of service providers knocking on doors in the field.

* HAMP / MHA, Hope For Homeowners (H4H), The Homeowner Affordability and Stability Plan and the "Helping Families Save Their Homes Act of 2009" and the Preserving Homes and Communities Act of 2009, Treasury scorecard

At EuroCatalyst 2005 in Rome, Alan Boyce of The Soros Group made an astute prediction about the U.S. subprime sector and the state of U.S. mortgage market investments: "By the first quarter of 2007, the sh*t will really hit the fan!" And so it did.

Mid-2007 brought the first round of distressed selling, which was brought on by deleveraging, extreme mark-to-market volatility, forced liquidations and redemptions, which in turn led to a significant increase in risk premiums. With risk premiums and risk aversion both at unprecedented highs, the non-agency residential mortgage securitization market literally shut down.

Today, secondary trading volume remains high from forced selling, but marginal buyers are scarce. In many cases, technical pressures (including more broad and severe rating agency actions) have lead to valuations that are dislocated from asset quality and fundamental performance, presenting a unique opportunity for investors to earn attractive yields by buying distressed RMBS at prices far below their fundamental intrinsic values. Despite the clear government intent to support the housing market to recovery, the timing of their implementation calls for caution. On the other hand, RMBS have progressed further through the credit cycle versus other asset types, but as the previous session will have shown, loan modifications play a significant role in the relative value of distressed RMBS and whole loans.

This session looks at options and opportunities for investors across the spectrum of distressed mortgage markets including undervalued RMBS assets vs. whole loans vs. bulk REO purchases. In the current "moving target" environment, the problem of valuing the assets is more crucial now than at any other time in history. For lower tranche buyers, one thing is certain - you must know who your servicers are, and monitor them closely.

When it comes to servicing homeowners in distress, loans in arrears and default, and managing REO properties to disposition, there is no precedent to follow. Today's special servicers are in a league of their own. As mentioned earlier in the program, the largest servicers who benefited from industry-wide consolidation are now overwhelmed by organizational dis-economies of scale. To calibrate the degree of resources and attention required to effectively service "high touch" distressed portfolios, most of the large servicers are turning traditional vendors into key outsourcing partners. Investors poised to capitalize on the crisis have begun acquiring their own servicers.

Whether it is necessary to have complete control or simply form the right partnerships to realize one's aims, that is what we will attempt to answer.

Distressed asset investors no longer want to go along for the servicing ride, they want to manage specific portfolio strategies and take an active role in the day-to-day management of their assets. In order to realize their projected yields, investors must have a view on how to squeeze out value. Without the right partnerships, it is impossible to make it happen. Does this level of influence require outright ownership of a servicer? Does this even make economic sense? Or, is the right servicing partner out there to effectuate the desired results? If so, who are the new breed of special servicers and what do they do differently?

This session debates the continuum of optimal servicing options for distressed assets from building to buying to insourcing to outsourcing the management and disposition of distressed assets.

DAY TWO AGENDA (NOVEMBER 17)

The increase in uncertainty, unpredictability and risk introduced by globalization doesn't mean giving up hope to influence, shape and control it. As globalization increasingly transforms our nations, basic institutions, and personal lives, expect government to play a much larger, rather than lesser role through regulation designed to manage and control risk on behalf of its citizens.

In 1971 U.S. President Richard Nixon effectively replaced the "gold standard" with a new "information standard". Within a short period of time all fiat currencies were no longer based on tangible commodities but on intangible information flowing about a currency to support its value. Propelled by the rise of the information age, electronic currency has flowed across and beyond national borders at the speed of a mouse click, going, as former Citibank CEO Walter Wriston famously stated, "where it is wanted and is well-treated". If free market enterprise is the virus, the Internet is the host. Thus the free flow of information has transcended national boundaries, forcing nations to reinvent their identity by asserting their authority. Today, we see governments asserting their authority to gain control over economic boundaries that have been exposed and exploited by all of the unknowns of the shadow banking system.

Because the housing finance crisis has been close to catastrophic on a global scale, most Western governments have become lenders to and investors in most systemically significant financial institutions, creating a new reality in which these institutions now benefit from an implicit federal government guarantee. With no "exit plans" in sight, we should expect these guarantees and oversight of them to continue long after the immediate crisis has passed. This past June the Obama Administration announced its intent to create a "21st century regulatory regime" sophisticated enough to address a globalized economy to prevent further crises. But consider the fact that the same power that allows governments to compel, withhold, and tax also allows them to spread risks broadly (even onto generations that have not yet been born) and overcome failures in the private marketplace. Therefore, the role that governments play is really that of the ultimate risk manager, when everyone else fails.

This session provides an update of current government and regulatory intervention and increased prudential regulation in capital markets, and how they impact current programs targeted to address the U.S. housing finance crisis. In addition to a detailed analysis of current U.S. programs that impact liquidity (TARP, TALF, PPIP, CPP), we take a close look at HAMP, MHA and other programs and the opportunities - and obstacles - they present. Finally, we consider programs yet to be announced and discuss ideas for programs that could work more effectively to bring investors and stability back into the markets.

By introducing new sources of capital to finance types of borrowing that were once the exclusive province of banks, securitization has driven a significant fraction of the liquidity needs of the global economy over the past two decades, supporting the growth and prosperity that we enjoyed until recently. In theory, the benefits of securitization - the more efficient allocation of credit, the transfer of credit risk away from the banking sector to more diversified sectors and the ability to calibrate risk and equivalent reward to end investors - were simple. In practice, they were undermined by misaligned incentives across all sectors and among virtually all parties in the industry that had a catastrophic impact across the entire mortgage life cycle.

Efforts are currently underway to revive securitization markets by restoring investor confidence and reducing systemic risks through measures to revive and strengthen the structural weaknesses in the securitization process.

One of the most promising alternatives is the potential for U.S. banks to issue covered bonds. Covered bonds are full recourse debt obligations of the issuing financial institution, secured by a pool of performing eligible assets that remains on the balance sheet of the issuer. If the issuer becomes insolvent, the cover pool is separated from the issuer's other assets for the benefit of the covered bondholders.

However, if secondary markets are to continue to provide the foundation for the promotion of the "American dream," then portfolio funding considerations must be approached from an entirely holistic perspective.

How best can mortgage assets based on any national market be structured, funded and leveraged, from cash securitization to structured covered bonds, covered bonds and senior debt, and incorporating wholesale and retail markets, on and off-balance sheet funding, risk transfer and Basle II?

This session focuses on the prospects of the return of securitization and the entry of covered bonds (or structured covered bonds) as funding tools for mortgages and poses the ultimate question, "will there ever be a private market for mortgage funding again?"

While blame for the current crisis continues to shift among policymakers and the general public, one thing is clear: The crisis gained traction when house price appreciation ground to a halt. Although we know that the most important variable in the entire lending process is the valuation of collateral and the surveillance of collateral risk, we also know that despite the most advanced technology and modeling techniques, all valuation is subject to human behavior and opinion.

The ultimate "price" is the price that a potential buyer is willing to pay for it. Thus, the value of house prices is relative to your position in the market. In particular, which side of the risk you are on - the buy side or the sell side? Of the many factors that add fuel to the current fire, the increase in the number of homeowners in negative equity positions directly impacts prospects for house price recovery. How will the inevitable rise in the number of foreclosures further depress house prices? A recent report by Deutsche Bank suggests that the continued decline of U.S. home prices will contribute to rapidly rising rates of negative equity and projects that over the next two years, an additional 11 million households will be underwater, bringing the total to as many as 25 million households. Which came first? The chicken or the egg? Or is the housing boom and bust of the last decade, as suggested by a recent report by the New York Fed, more the result of shifts in economic fundamentals - especially, swings in labor productivity - than of "bubbles" and credit market irregularities.

The most important question may perhaps be the most difficult to answer: When will we hit the bottom?

Perhaps because of the historically local nature of housing, our industry is uniquely myopic. In general, all organizations tend to take a narrow view of risk and believe that the greatest disruptions and surprises will come from within the boundaries of their industry or geography. As those in the mortgage and investment industry have learned the hard way, the most significant strategic challenges have emerged from a larger ecosystem of forces - behavioral, social, technological, economic, environmental, and political - that are creating constant change. Which brings us back to "Apocalypse Now," where we started this year's program. The forces of globalization accelerate and magnify that change in ways that have paralyzed the market and undermined the industry as well as the global economy. Events that have happened took the entire industry by surprise, and their impact continues to create dissonance and denial throughout the industry. We simply never asked the right questions, and we never thought to think the unthinkable. Organizations that do not have a system or practice of monitoring these exogenous forces of globalization are especially vulnerable to surprise. This is why we need to start thinking . . . the unthinkable.