Securitization, the financial activity of packaging loans and bonds to create tradeable securities, will survive the current mortgage crisis, but the arbitrage ABS CDO business will not, according to a new report from the Aite Group, an independent research and advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry. The report sheds light on collateralized debt obligations (CDOs) secured by asset-backed securities (ABS), and examines the history, the purpose and the process of securitization and resecuritization.
While, securitization has been around for years, and has served well the interests of both borrowers and lenders, arbitrage ABS CDOs have morphed securitization, a fundamental activity in today's global financial markets, into hard-to-value assets, according to the Aite report. The report examines collateral credit issues, as well as security structure and the key market participants of this particular fixed-income space. It also discusses how these various components ultimately led to today's securitization endgame. "Securitization is not going away, as GNMA and GSE mortgages and other consumer debt are still being originated, but the arbitrage ABS CDO business model as we know it will cease to be for the foreseeable future," says John Jay, senior analyst with Aite Group and author of the report. "As capital has become more dear, credit rationing, particularly applied to mortgages, has become de rigueur at lending institutions. With less collateral to securitize into CDOs and no ready buyers in sight, ABS CDO issuance has virtually disappeared," he says.