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    • Fri Mar 28th 09:21 AM | Rating: 0 0
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      Securitization Shuffle - Source of This Meltdown
      Your comments begin with an indictment of the sub-prime industry, to which I agree to a degree, but quickly move to a condemnation of the entire residential securitization market, to which I vehemently disagree. Many of your comments are completely misleading. “Securitization” is a very broad definition; however, sales of interests in loans among banks and savings & loans (which can be interpreted as securitizations) took place long before Wall Street stepped up and put balance sheet dollars at risk to create a more liquid and standardized market in residential loans. Likewise, Fannie and its formerly Federal savings & loan-owned brother, Freddie Mac, imposed much-needed standardization in an industry that in most instances, saw lending standards and documentation vary from institution to institution. Hello….those efforts were good for the consumer.

      The early goals of securitization were quite simple – to move mortgage money to capital deficient areas from capital surplus areas. There was nothing nefarious about that. You paint “securitization” as a bad thing; however, absent the re-allocation of mortgage monies, many deserving individuals could not have purchased homes. I’m not arguing that some unscrupulous sub-prime lenders lowered underwriting standards for the sake of generating fees, and bankers on the Street realized there was an arbitrage in sub-prime assets, but to paint an entire industry and process with the same broad bush is irresponsible.

      As to the increase in spread between mortgages “then” and mortgages “now,” do you really believe that increased delta is a result of securitization activities? I would argue that but for those activities the spread on mortgage products would be well in excess of current market levels. Its was only around 1979 that portfolio lenders realized that funding 30 year assets with short-term liabilities might not be such a great idea. Liabilities became very mobile and Mr. & Mrs. Jones no longer forever kept their entire life savings of $36,000 in the corner S&L in a passbook earning 1.8%. What was the answer back then.. the roll-over rate loan or variable rate mortgage? And by the way, it wasn’t the Street who took the local bank and S&L out of the community lending business, rather Wall Street filled the void when these financial institutions abandoned their markets because of the asset/liability mismatch. It was in the late 1970’s we learned to spell “disintermediation.”

      As for the ½ point you assert only serves to unjustly enrich the “hard-sell artists and lordly titans of Wall Street,” I didn’t realize it was a constitutional obligation to put substantial balance sheet at risk and not be compensated. For a moment there, I thought perhaps something changed overnight and we were no longer in a capitalist society. I assume all of those activities you proudly show on your CV were purely charitable in nature.

      Some sub-prime lending and securitization activities were indeed nefarious and even stupid – but not all. A borrower without the benefit a screaming FICO score does not mean a individual who is not entitled to a loan. Overly and dangerous lending practices must be curtailed. Agreed. But to question the integrity and appropriateness of an entire industry over this mess is ludicrous.
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