With the passing of the fifth anniversary of the onset of the crisis, Fitch Ratings clarifies that the structured finance market is “not the culprit” of the economic downfall that hit in July 2007.
To separate fact from fiction in terms of these accusations, the latest Fitch Voice looked at the performance of securitization’s various sectors during and after the crisis.
Although Fitch said that securitization did not cause the crisis, the rating agency admitted that certain sectors, specifically U.S. mortgage and global CDO securitizations, performed much worse than most expectations and exacerbated the economic destruction further.
“The securitization market may not have caused the crisis,” analysts wrote,” But it did act as an accelerant and helped spread the damage wider than might otherwise have been possible.”
In fact, the rating agency pointed to many sectors that did perform strongly within and outside of the U.S., comprising of European RMBS, global ABS, U.S. CMBS and CLOs. Fitch believes that the resilience of these sectors is a “fact that is still under-reported, under-recognized, and under-appreciated.”
The rating agency noted that it may be because many spectators still don’t understand that market value losses, which ratings do not consider, considerably outweigh actual and anticipated credit losses on securitizations.
Similarly, post-crisis securitizations are considerably stronger, as market participants in all areas, including rating agencies, are learning from past lessons, Fitch said. This improvement can be observed in the quality of transactions issued since the peak of the crisis in 2009. For instance, credit enhancement is higher, structures have been simplified, interests are more closely aligned, and collateral quality is enhanced.
Fitch also described the changes it has made to foster recovery in terms of securitization. “Criteria is more transparent, our pre-sale reports are more robust, our research is more comprehensive, and our interaction with investors even greater,” analysts wrote.
Fitch warned, however, that excessive regulation could hinder recovery. Since the regulators around the world continues to blame the structured finance market for the crisis, they are limiting the aid that securitization can provide for the health and recovery of the global financial system.
To keep securitization as a valuable funding alternative, Fitch urged policymakers and regulators “to be united and coordinated on this front.”