Mortgage securitization had been touted as wunderkind gamechanger bringing unparalleled liquidity to the real estate markets, allowing banks to lend more, enabling more people to get residential mortgages so they can own homes, and providing greater flexibility in transactions for commercial owners and dealmakers. Some observers say that only when securitization markets revive will commercial real estate markets have a chance to recover.

But arguably securitization markets created the current mess. Banks had more to lend, because they were able to clear their balance sheets by securitizing loan portfolios. Making good loans didn't drive profitability, making more loans did. The slice and dice structures mean nobody really knows who owns what or what pieces of which loans have gone bad. Risk transfer from institutional lenders to millions of ill-informed bond holders perpetuated moral hazard and eventually debacle.

Will it be enough to fix rating agencies, which proved totally incapable of assessing offerings? Of course the ratings firms were also totally compromised, profiting from fees from bond sponsors. Touted transparency in the securitization process was trumped by the volume of transactions and ultra complicated, Rube Goldberg structures.

You would think we would want a system where the original lender has skin the game and is always focused on underwriting quality. Would bankers have allowed loans with little equity down and crazy quilt structures, if they didn't have securitization outlets?

And will taxpayers want to keep backstopping private entities or quasi (now essentially public) entities like Fannie and Freddie.

Dealmakers want the securitization machine turned back on, but how can we afford to let that happen? And how can it be retooled to avoid another ugly breakdown and all its horrible consequences?

Our sad state affairs delays fixing the securitization engine, if it can be fixed at all.

Instant Insights /

What's the future of mortgage securitization?

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