Saturday, 1 November 2008

The end of mortgage securitization

Housing bubbles across the world were built on securitization. Banks bundled their high risk mortgages into bonds and sold them onto unwary investors. In return, banks received cash that allowed them to issue more mortgages. This recycling of loans created unprecedented levels of credit and fueled the extraordinary run up in house prices.

With the onset of the credit crunch, mortgage securitization has all but died. In October this year, residential mortgage backed securities issuance was just $10 billion; barely 5 percent of the March 2007 peak.

Without securitization, it will be impossible for housing prices to stabilize and recover. Without credit, there can be no housing bubble.


vodka drinker said...

It is the end of an era.

Anonymous said...

Why use the word "recover" ?
House prices will stabilise at the very least.

electro-kevin said...

Anon @ 10.15

Never mind the semantics. We need to get back to producing stuff for a living. That means competing directly with workers used to living 12 to a room.

The housing market, therefore, is also going to be faced with reduced demand because of a lowering of personal expectations.

Nick Drew said...

I think that if you were to look at project finance numbers you would see a significant falling-off following Enron and the UK power market collapse (2002) - but it all recovered again in the 5 years that followed

memories are short

Anonymous said...

Common misnomers:

Financial 'services'.

'Securitisation.' (!!!!!!!!!!!!!!!!!!!)

B. in C.

Mitch said...

I work for a small company making "real" things of which 75% go abroad, its pretty specialised engineering but we are really busy. I'm doing 60hrs a week and its not enough,odd eh?

mike said...

But the UK's billions of credit will now come from the government and so that graph is not so significant. The question is whether the government is able to get the loans they require and at a reasonable rate. It be bad news to find the government is not able to get the money they require because no one wants to lend or not able to lend. It would send the stock market again into free-fall.

London estate agent said...


"But the UK's billions of credit will now come from the government and so that graph is not so significant."

Fair point....

Anonymous said...

"But the UK's billions of credit will now come from the government and so that graph is not so significant."

No, the government won't make up the shortfall.

Note that they were issuing US $140 billion a month - that's nearly $1.7 trillion annually. Government 'gifts' to the banking industry have been a fraction of that amount. And what is funnier, the dumb b*st*rds plan to take a fair chunk of that cash and pay themselves bonuses.

You won't see money flooding the mortgage market, and as a result, prices will fall until they actually align themselves with tradition metrics.

Cheers, Haggis

Man in a Shed said...

But why is it a good thing for most people to owe money to the Arabs and Chinese to buy assets that without the supply of cheap credit they would have bought for much less money ? ( And have less interest to pay ? )

electro-kevin said...

Man in a shed -

Are you saying that Chinese goods could have been sold cheaper ?

A friend of a friend is a buyer for B&Q. You know those horrible hollow-core doors that you can barely plane because they are more space than wood ? They are bought and shipped for £1.50 and sold to us for about £25.

I think you're right. I think the Chinese have pulled a right flanker on us - decimated our production, industrialised themselves, advanced their techonologies, made no advancement in human rights (a downturn won't bother them if millions starve) ... and now we owe them big time.

Mark Wadsworth said...

@ MIAS, EK, the point is that the Chinese (and possibly the Arabs) sold us stuff cheaper than they could or should have. They ended up with mortgage backed securities, US Treasury bonds, shares in failing banks etc.

I do wonder who conned whom sometimes.

@ AC, that's a good chart, but would it not be better to do a longer term one, AFAIAA, this whole securitisation malarkey only goes back ten years or so?

Nick Drew said...

Mark, I have no doubt securitisation increased exponentially over the last few years before '07, but it dates from much earlier than that

(first one I was involved with was in 1993 - the securitised revenue-stream was rental on an energy-industry asset: did several more in the '90s in the same neck of the woods)

Josh said...

No credit, no bubble.

gattopardo said...

To electro-kevin (who asked "Are you saying that Chinese goods could have been sold cheaper?"): I think 'man in a shed' was referring to the domestic real estate market, rather than to imported consumer goods, when he mentioned "assets that without the supply of cheap credit [we] would have bought for much less money". Over the last decade the Chinese have exported both disinflation and surplus savings to the West, contributing to the Western abundance of credit at low interest rates. It is this deluge of cheap, easy credit that has led to surging house prices.

K said...

Thanks for your post. A mortgage can be stressful and confusing. Getting as much information as possible is always helpful.