f you’ve read anything on our current economic crisis, you’ve no doubt heard about mortgage securitization: the process of pooling mortgages together so that they can be sold off to investors. Many believe this is the root cause of the crisis; by selling off mortgages to investors, lenders had little incentive to make good loans. They had no “skin in the game.” Not surprisingly then, a debate has emerged surrounding the value of securitization.
But like a lot of things, there are both positives and minuses to securitization. And one could actually argue — as Ed Glaeser does here – that securitization made the crisis less severe domestically (that is, within the U.S.):
“If we end up in that middle-of-the-road consensus, then securitization looks pretty good, because it did much to mitigate the costs of the crisis. Plenty of lenders would have gotten caught up in the exuberance of the boom even if they were holding onto the loans — as the savings and loans did 20 years ago. When the bubble burst, without securitization the banks would have been in far worse shape, because they would have been holding all the risk themselves. Securitization meant that the downturn in the American housing market was felt from Stockholm to Shanghai, which sounds bad except that it would have been a lot worse for us, and for our banking system, if the entire seismic shock had struck only banks in the United States.”
In all likelihood, securitization isn’t going to go away. It’s just going to change.
“I didn’t like the Fannie and Freddie model before the bust, and I don’t like it any more today. If these agencies are to continue, they need to be far more conservative, charging high fees and taking few risks, and they need to be purely public agencies. Securitization has a role to play, but that role doesn’t merit vast public support.”
Image: Flickr
