Will Private-Label Securitization Return?

Abstract

This paper examines the prospect of revitalizing asset-backed and non-agency mortgage-backed securitization markets rendered nearly dormant in the wake of the 2008 financial crisis. First, it briefly summarizes the background of the debacle and presents historical parallels for context. Then the analysis details new and proposed regulatory and industry reforms that will affect the supply of and demand for mortgage- and asset-backed securities. Incentives for future securitization will be tempered by amended accounting consolidation rules that result in more costly capital requirements for issuers, and by revised valuation criteria that impact the capital adequacy of investors. Collateral transparency will be paramount in the return of private-label securitization, and revival will depend on economic recovery and pending legislation and regulation. New securitization also will rest on the degree of moral hazard posed by continued underwriting concessions, current loan modification initiatives, and ongoing government subsidies. In any case, the recognition of securitization as an important financing tool, that contributed so much to economic prosperity before the abuses, constitutes a major impetus to its restoration.