NEW YORK (Reuters) - European investors including UK hedge funds may drop U.S. subprime mortgage investments given a lack of transparency and mispricing of risk, two business professors said on Thursday.
Joseph Mason, a professor at Drexel University's LeBow School of Business, said investors in Europe besieged by news of surging mortgage delinquencies are "rethinking their decisions" to invest in subprime debt or shares of subprime lenders.
"A lot of UK hedge funds aren't sure what they are holding now," Mason said on a conference call hosted by the Hudson Institute, a Washington, D.C.-based political and economic research group.
Mason, joined by Oliver Arentz of Germany's University of Cologne, said the investors -- like many Wall Street banks -- aren't discussing the issue publicly because they don't want to call attention to themselves. They also don't want to mislead or be perceived as "industry shrills," he said.
European investors are concerned that debt securities they hold are more exposed to losses than the current ratings suggest, he said. Making matters worse is that Europeans lack understanding of details of the U.S. mortgage market key to the subprime sector, such as loan mitigation policies and "piggyback seconds," he said.
Piggyback seconds are second-lien loans taken out simultaneously with first-lien mortgages. Together, the loans often finance 100 percent of the home, increasing the risk to the investor.
Arentz said the unfolding story of subprime mortgages in the United States will create a chilling effect on mortgage-backed securities markets in Europe and on European Union efforts to boost cross-border competition. He didn't quantify the exposure of European investors but said some are looking for a way out.
"It's safe to say we will see fewer Europeans investing in MBS in the future," he said.
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