There's No Stopping Asset Securitization

Article excerpt

Asset securitization, which has become a major factor in global capital markets, is here to stay.

Securitized markets will continue to evolve, with new assets and structures being created and modified, until these products mature, become more efficient, and see spreads narrow.

Then, as the cycle repeats, new, riskier, or unproven assets will be securitized - with wider spreads.

There's no limit to the range of assets that could potentially be securitized, nor is there any limit to potential sellers.

Reasons for Growth

Three forces that drove the business are still factors: the demand for capital, meeting investor needs, and advances in technology.

And new forces are coming into play, fueling the vibrant market for securitization. Among these are:

* The troubles of the thrift, banking, and insurance industries - coupled with regulatory changes.

* The real estate debacle.

* Reallocation and repricing of available funds for almost all borrowers.

* Credit and default assessment of assets and mortgages.

* The lack of yield in fixed-income markets.

Major Miscalculation

Thrifts, banks, and insurance companies mismatched their assets and liabilities in the past and made loans and investments with inappropriate credit adjustments. In other words, they assumed that asset valuations would never precipitously decline.

That was a fatal mistake. As regulators justly set up capital requirements and investment constraints for these institutions through mechanisms like the Basel accords, massive underlying problems surfaced.

Thrifts were forced out of business because of vast negative capitalization. Banks began selling any asset that could be made liquid and that required high capital standards. And insurance industry officials began to liquefy real estate, junk bonds, and risky assets in a more orderly way.

The Resolution Trust Corp. was the first and biggest entity to begin revamping one category of financial institutions - thrifts. But others will follow.

It is staggering to reflect on what the RTC has done. It has made sales of more than $200 billion by selling institutions with their assets intact, by selling whole loan packages, or by securitizing assets. Asset dispositions of all types have been made, but the single most important factor was that bulk had to be sold. With such a substantial supply of assets, issuers became very creative.

Momentous Change

The Federal Deposit Insurance Corp. and a number of insurance companies and "healthy banks" are also beginning to liquefy a large number of assets. This is a momentous change in the market, affecting all global financial institutions and investors.

As for the real estate debacle, it has also led to a number of changes in securitization.

Investment portfolios are being significantly reduced in value and sometimes sold. With few natural buyers, holders are turning to Wall Street for the same securitization techniques applied to single-family mortgages. Where traditional lenders have turned away, Wall Street is bridging the gap with capital.

And real estate investors, many of whom were burned in recent years, are often turning to mortgage and asset-backed products as investments.

Scarce Capital

As the real estate debacle was occurring, so was the driving force of reallocating and repricing scarce capital. Money or credit are still available to fund assets, but not on the same terms or for the same borrowers. Securitization techniques and access to capital are helping to fill the void.

The need to understand and access information on credit risk has taken on great importance. With new securitized markets evolving, the rating agencies and credit enhancers have assumed unsurpassed influence and importance. They dictate safety levels and comfort zones for clients. …