Source: The Financial Executive, March 2010, nr 48, www.feib.be
The securitization of assets was first introduced to the American mortgage markets in the 1970s. The market for securities backed by these mortgages (the so-called mortgage-backed securities or MBS) was given a special impulse by the public authorities who endorsed these emissions. After the initial success of this type of transaction, the emissions were supported by an increasingly more diverse series of assets, including assets (such as revenues from leases) and bank assets (such as future payments associated with business loans). At the beginning of this century, the securitization market had become one of the most prominent fixed income sectors in the world and was, in fact, one of the fastest-moving. At the end of 2006, however, a change could be witnessed in the capital market. Like Humpty-Dumpty, securitization has taken a big fall. For the first time, it became clear that the risky subprime mortgages in the United States that served as collateral for many of these mortgage-backed securities actually represented a lower value than was previously assumed and adopted (see also Crouhy, Jarrow and Turnbull, 2008). Home owners came into financial distress as a result of rocketing variable rates and were no longer able to pay the increased interest. Many investors who had invested in these MBS saw their portfolios downgraded by the credit rating agencies, and investors booked tremendous losses that no-one had anticipated.
Has securitization come to an end? In October 2009 the International Monetary Fund published a report on navigating the financial challenges lying ahead. In it, the IMF makes the case that restarting the securitization markets is critical to limiting the real sector fallout resulting from the credit crisis amid financial sector deleveraging pressures.
Mobilizing illiquid assets and transferring credit risk away from the banking system to a more diversified set of holders continues to be an important objective of securitization, and the structuring technology in which different tranches are sold to various investors is meant to help to more finely tailor the distribution of risks and returns to potential end investors.
Because the concept of securitization - by its very nature and complexity - is not always well understood, this article deals with the building blocks of securitization. Next, the motivation is discussed that lies behind the structure of a securitization transaction, and finally the risks and limitations associated with this phenomenon are considered.
Published on 7/03/2011
