The Promise And Pitfalls Of Securitization
Securitization entered the financial mainstream 40 years ago, when mortgage lenders discovered there were big profits to be made by selling their home mortgages to Wall Street. Investment banks bought the mortgages in droves, converting them into securities and selling them to retail and institutional investors, pension funds, foundations and others.
The problem was the securitization market had little oversight and regulation. Disclosures and transparency were essentially non-existent, meaning lenders could unload almost any type of mortgage, including risky subprime mortgages. Meanwhile, Wall Street began to securitize other types of speculative debt, such as collateral debt obligations, auction-rate securities, credit derivatives and total return swaps.
The boom days of securitization came to a screeching halt in the summer of 2007, with the collapse of the mortgage market. As reported in a July 6 story by NPR, many believe the housing meltdown and the recession that followed would never have happened if the securitization market had been better regulated.
The Obama administration is now considering a major overhaul of the securitization market. Among the proposals on table: Requiring securitizers to hold on to a piece of whatever financial product they’re trying to sell to investors. In doing so, investment banks and other securitizers would assume some of the risk of their products and therefore might take more precautions - and much needed oversight - of those investments.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
