23 March 2016

Financial Times: Securitisation does not deserve toxic tag

It is argued that residential mortgage securitisation in Europe caused housing bubbles. But, residential mortgages and commercial real estate loans are used to back both securitisation bonds and covered bonds. It is overlooked that more than half of the residential mortgage loans are financed through European pfandbriefe. In countries such as Denmark, Sweden and Germany residential mortgage securitisation is rarely used, yet they did experience housing price bubbles and corrections, too.

It is overlooked that in most EU countries securitisation, similar to covered bonds, is executed under a national law; in fact, earlier securitisation laws occasionally established the basis for the current covered bond laws. It is also overlooked that the majority of EU securitisation bonds publicly placed with institutional investors have level of pool information disclosure exceeding that of any other secured or unsecured bond on EU markets.

There is clearly a disconnect between the view of “toxic” securitisation and the data about the “non-toxic” performance of publicly rated EU securitisation bonds. Given that the performance of a securitisation bond depends entirely on the performance of the loans it repackages, the claim about the “toxicity” of the bonds could be assigned to the loans, be they residential mortgages of working families or auto leases or SMEs. This is obviously untrue.

Such disconnect reflects oversimplification and bias in public discourse, and to assignment of a verdict “guilty by association” with other geographies or with sectors superficially similar to EU securitisation. After all, securitisation is a technology, which like any other technology can be used to produce good or not-so-good results in finance as much as in auto, pharmaceuticals and other industries.

Full article on Financial Times ( subscription required)

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