Securitization of Mortgages

Reflecting upon securitization of mortgages: It has seemed that one of the hallmarks of banking has been knowing one's customer, being able to work with him or her to encourage success or limit losses. Securitization, where mortgages are bundled and sold to third parties, eliminates this potentially enabling relationship.

So where is any value created in securitization? Perhaps there is a little in expanding the markets for debt, but it would seem this could be accomplished by sales of whole loans. And any enhanced market liquidity would seem more than offset by (a) the utter opaqueness of the securities (i.e., the inability to predict the likelihood of default by individual borrowers) and (b) the complexity involved in working with borrowers in the event of default.

The real "value" of securitization appears to be in throwing the bundled instruments into the realm of the credit rating agencies, substituting their second-hand, generalized, and dubious analyses and opinions for those of the original lenders.

Of course this doesn't create any real value whatsoever, but just an impression of value. Indeed enough credibility during the late financial boom to permit both originators and bundlers to extract substantial fees before the credit rating agencies were discredited and the emperor's nakedness was exposed.

It's hard to see a role for such instruments in a stable financial future.