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Guest Voices: Time to take a good look at how securitization helps the economy

By Fernando Peralta, For the Express-News
November 25, 2015


“Securitization” sounds like one of those buzzwords we hear from bankers and financial types to cue us that it’s time to tune out. In reality, greater understanding of the process and results of securitization would be helpful as our nation’s economy continues to shake off economic malaise.


Many associate the word “securitization” with the housing crisis of 2007, with talking heads blaming subprime mortgage-backed securities. They aren’t wrong, but there is much more to securitizing assets than the housing bubble.


Securitization is the process of packaging assets as a security and marketing different tiers to investors, thus the term “subprime” in reference to a poorly rated batch of securities. For example, a portfolio of loans could be combined and the whole thing could be bought and sold somewhat like shares in a company.


The practice is not new. The National Bureau of Economic Research cites examples dating in the 1800s. Basically, the process allows the issuer of securities to receive a cash infusion, and the investor has the ability to invest in low-risk assets, virtually assuring a higher rate of return compared to the market average.


Despite concerns regarding the packaging of securities, securitization helps support the economy by spreading risk and encouraging growth.


Take, for example, an auto financing company. The company expects to receive many monthly payments from individuals who have taken out financing for their vehicles. By selling its claim to the receivables, the financing company can mitigate risk because it no longer relies on the payments for its investment; the company gets paid in full and the buyer of the loans takes on the risk that some of the buyers won’t pay back their loans.


Reducing this risk factor enables the financing company to offer lower interest rates to future customers. And the rapid infusion of cash from the sale of the loans can support industry development and growth, theoretically driving down the price of goods over time. A win-win for everyone involved.


For another example, consider the Ygrene Energy Fund, a leading financier of clean energy initiatives, and their recent foray into securitization. Their sale of AA-rated notes for $150 million allows them to finance future green energy transactions at lower interest rates because they no longer are beholden to previously issued notes and the payments associated with them. Their risk profile is greatly improved. Investors are, therefore, more confident in their return on investment potential, and Ygrene is free to further innovate, which is crucial to long-term success.


Because securitization is so strongly associated with the economic meltdown of several years ago, it seems counterintuitive that it also could be a tool for economic recovery. But that’s exactly what many leading economists now say — that securitization is key to recovery in the United States and around the world.


In fact, securitization has become much more regulated and transparent, but the vitriol toward asset-backed securities has yet to subside. And many don’t recognize the positive changes and stability such regulation has produced.


The majority of the ill will toward securitization comes from a lack of knowledge. Considering that most people never will be directly involved with the sale of securitized loans, combating misinformation and lack of knowledge about how the process facilitates a robust economy is a huge challenge.


Case in point: The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known simply as Dodd-Frank. This law came about as a direct result of the Great Recession. It was a response to the widely held view that Big Banks and their risky dealings in subprime loans were the first domino to fall in a chain reaction that quickly ripped through the entire economy.


Clearly the megabanks were not blameless. But legislation created in a near-panic environment can be a perfect formula for unintended consequences.


And that’s precisely what happened. For one thing, Dodd-Frank prompted numerous lawsuits. Litigation has greatly limited the real-world impact of provisions designed to reduce risks. Big banks still are trading securitized assets and handing off the risks to investors, which Dodd-Frank sought to restrict.


Also as a result of the law, too many community banks are shutting their doors, and access to credit has become more difficult for many small businesses and individuals.


There’s no disagreement that securitization of loan portfolios should be regulated. The question is how, and how much. Securitization is not a bogeyman, as some suggest. When p



roperly used, it’s a means to grease the wheels of the economy and help it operate smoothly.


It’s time to take a hard look at laws and regulations aimed at securitization and to develop a more common-sense approach to managing it without eliminating its beneficial effects on the American economy.


Fernando Peralta is chief financial officer at San Antonio-based Propel Financial Services, which provides property tax lien financing to individuals and businesses.


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