Speakers at the Information Management Network’s (IMN) ABS East conference discussed the role of securitization in boosting the country’s economy. The IMN gathering is being held in Miami Beach this week.
At one point providing 40% of the capital to the U.S. economy, securitization has indeed played a major role in offering liquidity to the consumer, according to the speakers at the panel called Understanding the Role of Securitization in Revitalizing the Economy.
As part of the discussion, speakers focused on the type of financings that need to occur to make a difference in the country’s economic recovery.
Panel moderator Samir Shah, senior vice president at MF Global, said that newly constructred assets are more crucial than those transactions that merely involve the transfer of wealth such as refinancings. “Newly constructed assets convert capital and labor into capital formation,” he said. This, would, in turn, generate economic growth.
However, refinancings are not exactly detrimental except if one looks at the cash-out component. “The bigger issue is when borrowers take equity out of their homes,” said Matt Jozoff, a managing director at JPMorgan Securities. This could be called the rachet up effect or it is when borrowers have taken out a significant amount of their home equity and have used up their cash-out limits.
Speakers at the conference said that a balance needs to be created between the government’s and the private sector’s roles.
The government’s presence in the mortgage market is essential in maintaining the fungibility of the TBA market and in providing financing without credit risk, they said. Meanwhile, a private market that could make a rational assessment of risk also needs to develop at this point.
Mark Hanson, vice president in mortgage funding at Freddie Mac, said the two GSEs had to come in “to bring in financing where it wasn’t happening on its own.” However, he said that, “policy has its limits.”
He added that for policymakers, market liquidity is something difficult to navigate with mark-to-market accounting offering a completely different market price each day for assets.
Seth Cohen, managing director at Carval Investors, said that liquidity has to come back because bankers have personal incentives to put money back to work “in order to get paid.”
Panelists also said that there’s a paradox happening here, while the government does not want the GSEs to be on the hook, it does not trust the private sector to set mortgage rates either. This struggle, they agreed, is going to take a long time to play out.