When the foreclosure crisis revealed that banks may have been sloppy with their processes and documentation, and big investors took note, one report indicated that the securitization market had begun to seize. You can imagine that if banks had been doing shoddy work putting together mortgage deals, then there could be a contagion to other asset classes as well. How much might the fiasco affect securitization?
At this time, it doesn't appear to affecting it much. If there was an initial hiccup, then it didn't persist. Two major asset-backed auto deals have been issued since last week, by Nissan and Volkswagen. Moreover, this week saw nearly $5 billion in new commercial mortgage-backed securities, according to Dow Jones Newswires. This implies that investors' fears may be isolated to residential mortgage securitization -- and they were already scared of that before.
The so called private-label mortgage-backed securities market, where the loans are not insured by the government, has failed to awaken since the financial crisis -- now more than two years later. Here are some of the big obstacle it faces:
- First, there was the hesitancy from investors who no longer trusted the rating agencies. As a result, they likely wanted to analyze the deals themselves, so they needed the data.
- Not only was the data a problem, these investors often had neither the manpower nor expertise to perform such analysis.
- Next, there's the new reality that home prices can, indeed, decline. This screws up the old models and requires entirely new analysis.
- Then, Congress came along and imposed some significant new regulatory requirements on the securitization industry. For example, now banks must retain a portion of the mortgages they intend to securitize.
- There's also the further uncertainty clouding the market as Washington tries to iron out its new housing finance policy over the next year.
- Now, the new mortgage mess has brought to light the fact that some banks and servicers were trying to limit their origination costs by skipping steps throughout the process and not hiring enough personnel to properly work through delinquencies and defaults.