In yet another example of synchronicity, Jim Hamilton provides a chart from Peter Hooper that illustrates why the housing market is in the doldrums: securitized credit has all but vanished. This topic came up in the previous post as a explanation of why the real estate market is coming to look like a war zone.
The collapse of private sector mortgage securitization hasn’t gotten the attention it deserves. To put it in crude terms, securitization became central to how we finance housing in America. Banks held only a small portion of the loans they originated; the rest were sold. As we have discussed elsewhere, securitization depends on credit enhancement. Paul Jackson reported early this year that the revival of securitization depended on having support of some form:
While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far — precisely because defaults can and do happen.
For secondary mortgage market participants, resolving this crisis isn’t just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.
In fact, regulators do not expect securitization to return to anything like its former level. They expect far more bank originated assets to stay within the banking system, on their balance sheets. That in turn will require them to carry vastly more equity than they do now. It will take financial institutions some time and doing simply to secure enough equity to make up for losses and increase their capital levels to the new more conservative standards that are being implemented.
The impairment of lending capacity suggests that housing prices could overshoot their “fair” value in relationship to incomes. Expect more efforts to socialize the housing market to prevent this outcome