The Big Squeeze on Securitization

As the dust continues to settle on interpreting the blended effect of  Todd-Frank, new FASB standards and Basel III, the news doesn’t look very good for securitization, particularly for the banks that have historically utilized securitization as a relatively less expensive tool for raising capital and fueling their consumer finance business lines, including residential mortgages, credit cards and auto loans.

The combined impact of the new capital adequacy rules under Basel III, skin-in-the-game standards under Todd-Frank (assuming a conservative application of the rule by the FDIC and others) and FASB’s fair value accounting standards will simply make securitization a much more expensive capital formation tool.  This bad brew doesn’t even include the costs associated with new investor disclosure standards for securitization.

While it’s hard to predict just how much more costly securitization will be, relative to other financing alternatives,  not a single expert we have spoken with expects these incremental costs to be minor.  The net result will be that many firms that utilized securitization to fund their mortgage banking or credit card operations, will likely now look to a combination of other funding alternatives AND reduce their activities in these business lines.  It just won’t make much sense to do otherwise.

For those who suggest that demand will always rule the day, we would respond that consumer demand for more product may very well create more lending, it just won’t come from the highly regulated sector of the economy (i.e. the banks), it will come from independent enterprises.  In our view, this is exactly the sector of the financial services markets that got us into trouble in the first place.  From the go-go mortgage brokers and bankers to the “no credit history necessary” credit card issuers, one can’t deny that the seeds for disaster in the 2007 crash were planted in the unrestrained growth of these specialty finance companies.  Many of these firms were and continue to be run very well, with robust credit standards and policies.  Unfortunately, too often that wasn’t always the case and it simply put too much pressure on the heavily regulated companies and the local and federal regulators charged with oversight.

While the dust has not settled completely and there is always time for common sense to come back into vogue, we foresee that the net result of this combination of remedies will squeeze traditional issuers of securitized debt, pushing them to the sidelines and opening the field to a group of market participants which will be much more difficult for the regulators to get their collective arms around.  Clearly,  this isn’t what the authors had in mind.

About markferraris
Managing Principal Orchard Street Partners LLC

One Response to The Big Squeeze on Securitization

  1. Monex says:

    FRS 5 sets out criteria that enable the originator to arrive at a conclusion as to whether the securitization transaction should be accounted for as ……… The most common accounting treatments in the UK have been either linked presentation provided the conditions set out in paragraphs 26 and 27 of FRS 5 are met – in particular that the element of recourse is not unlimited or separate presentation……..

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: