A new report from Aite Group, LLC provides an overview of fixed-income securitisation in order to impart an understanding of how the process devolved into the current mortgage crisis. The report sheds light on collateralised debt obligations (CDOs) secured by asset-backed securities (ABS), and examines the history, the purpose and the process of securitisation and resecuritisation.
According to the report, securitisation – 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. Securitisation has been around for years, and has served well the interests of both borrowers and lenders. However, arbitrage ABS CDOs have morphed securitisation, a fundamental activity in today’s global financial markets, into hard-to-value assets. The report examines collateral credit issues, as well as security structure and the key market participants of this arcane fixed-income space. It also discusses how these various components ultimately led to today’s securitisation endgame.
“Securitisation 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 this report. “As capital has become more dear, credit rationing, particularly applied to mortgages, has become de rigueur at lending institutions. With less collateral to securitise into CDOs and no ready buyers in sight, ABS CDO issuance has virtually disappeared.”