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Home > Blogs > Ian Fraser > It's securitization, but not as we have known it

It's securitization, but not as we have known it

Securitization | It's securitization, but not as we have known it Ian Fraser

When the global securitization market froze up as a result of sub-prime contagion in July 2007, many practitioners headed for the hills, assuming the game was over. But some diehards stuck it out, confident the structured finance market would one day return, albeit perhaps it in a different form. Their patience is now beginning to pay off.

Banks have arranged about $8.2 billion of commercial-mortgage bonds so far this year, according to Bloomberg data, compared with just $3.4 billion in the whole of 2009. Admittedly that falls a long way short of the $234 billion arranged in 2007, but it does hint of the recovery in a much maligned corner of the financial markets. In Canada too there are signs of recovery, according to a Globe & Mail article detailing how the market is evolving away from asset-backed commercial paper and towards longer-term asset-backed securities.

One person who did not give up on the market is Markus Krebsz, a London-based securitization expert who has worked for organizations including Fitch Ratings and Royal Bank of Scotland. Krebsz has taken advantage of the lean years to write a book covering just about every aspect of securitizaton.

Securitisation and Structured Finance Post Credit Crunch: A Best Practice Deal Lifecycle Guide, provides a comprehensive practical guide for market practitioners and incorporates lifecycle charts of structured products and detailed checklists. In the second half of the book, Krebsz explains how to use new-fangled analytical and risk-management tools from the likes of Principia and Bloomberg.

Even though securitization has been in the dog house since the global financial crisis - largely because it provided the raw material for the opaque and toxic instruments including collateralized debt obligations (CDOs), many of which were built on securitized and repackaged subprime home loans, that nearly brought down the global financial system - Krebsz is confident it still has any important role to play.

He believes that when securitization does properly return, sharp practice will have been all but eradicated. His hope, which borders on a plea, is that it will be characterized by "transparency, standardization and simplicity". Among other things, he predicts there will be much greater disclosure from bundlers and packagers of assets about the underlying quality of those assets. This will be driven by the shift away from the sellers’ market that existed during the credit bubble, to a buyers’ one. One would hope that if investors are in the driving seat, they're going to be much more discriminating about what they are actually buying.

However it seems unlikely that home loans will ever form such a big constituent part of the market as they did in 2005-07. Analysts at Morgan Stanley are warning that US government proposals obliging bond issuers or lenders to retain stakes in securitized loans contain a provision that could be a “deal killer” for home-loan bonds, shutting down the market for commercial-mortgage securities.

As Bloomberg reported, companies packaging property loans into securities would need to set aside cash they normally collect upfront in bond sales, retaining 5% of the credit risk themselves. The proposal was released for consultation on March 29 by US regulators including the Federal Deposit Insurance Corp and Federal Reserve.

For home-loan securities without government-backed guarantees, a market that has become “close to viable” again for the safest and largest loans, the provision “could potentially be a ‘deal killer,’” said New York-based JPMorgan analysts John Sim and Ed Reardon in a report.

The pivotal role of securitization in fuelling the financial crisis is recounted in lurid detail in Senate Permanent Subcommittee on Investigations report, “Wall Street and the Financial Crisis - Anatomy of a Financial Collapse”. The most relevant sections are those on Washington Mutual and Goldman Sachs/Deutsche Bank. The perils of the "Securitization food chain" were also detailed in a lecture at Massachusetts Institute of Technology given by Charles Ferguson, director of Inside Job.

Further reading on securitization:

Tags: asset backed securities , CDOs , FDIC , Federal Reserve , regulation , residential mortgage backed securities , securitization , structured finance , US
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