Securitization: Taming the Wild West

Between 1989 and today, securitization markets, and therefore the capital markets, have replaced banks as the lead funding for home mortgages.  It is true that excessive social engineering to over-stimulate housing purchase drove speculation.  But in my view, poorly developed and opaque securitization markets drove excessive liquidity and irresponsible lending and borrowing.  Without the confluence of these issues we would not have had the withdrawal of liquidity to the mortgage finance market and an ongoing cycle of falling home prices.  This opacity is the actual root of the crisis, and it led to the ultimate breakdown of the private securitization market.

Today, as it was in the prelude to the crisis, securitization markets too often operate in a "Wild West" environment where the rules are more often opaque than clear, standards vary, and useful and timely disclosures of the performance of loan level collateral is hard to come by.  Asymmetry of information between buyer and seller is the standard.

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Joshua Rosner is a Partner at the independent research consultancy Graham Fisher & Co and advises regulators and institutional investors on housing and mortgage finance issues.  Previously he was the Managing Director of financial services research for Medley Global Advisors and was an Executive Vice President at CIBC World Markets.  Mr. Rosner was among the first analysts to identify operational and accounting problems at the Government Sponsored Enterprises and one of the earliest in identifying the peak in the housing market, the likelihood of contagion in credit markets, and the weaknesses in the credit rating agencies' CDO assumptions.

The views expressed in this paper are those of the author and do not necessarily reflect the positions of the Roosevelt Institute, its officers, or its directors.