Securitization Market Maker: The U.S. Government

The securitization markets are dead.

- Robert Shiller, Economist, Yale University

Click here for larger graphic

Fascinating and important article on the front page of Wednesday’s New York Times Business section showing that the securitization markets are completely dependent on government programs.

There have been no commercial mortgage backed securitizations in the last two years - because there is no federal program supporting this type of securities.

Residential mortgage securitization, not backed by Fannie Mae (FNM), Freddie Mac (FRE) or Ginnie Mae, has collapsed from $744 billion in 2005 to $8 billion during the first half of 2009. Again, there is no federal program supporting these types of securities.

Asset backed securitization is showing some life, but that’s all due to the TALF: “The market is coming back, but a lot of it is because of TALF”, says Hyun Song Shin, a Princeton Economist who studies securitization.

The securitization market for Fannie, Freddie and Ginnie Mae MBS is booming. It is actually running far ahead of the pace set in 2005-2008. But that’s due to massive Federal Reserve purchases of these securities. Now that the Fed is tapering off this program through the end of the 1st quarter of 2010, what happens to this market without Fed support?

There is no private market for securitized mortgages and loans. The only market right now is the government. What happens if the government tries to exit these markets? Do they collapse?

Comments

[Wesley Mouch:]

"What happens if the government tries to exit these markets? Do they collapse?"

Yes, or at least the rate of return for owning the underlying instruments begins to align with the risks of ownership. What rate of return is required to hold a basket of mortgage backed securities that were issued by a loan officer who has no financial tie to how the loans perform? It is higher than 5%.

Oct 08 12:37 PM

[untrusting ...:]

Excellent article. Prime examples of why this rally is totally non-sustainable. The government and the Fed cannot keep proping up the entire market forever. And if they try, even government interest rates will rise substantially and probably re-ignite the dreaded "W" recovery senario.

Oct 21 01:21 AM