Thursday, June 18, 2009

Securitization Helps Lower Cost of Consumer Credit, Study Says

Posted on Bloomberg by Jody Shenn:

The packaging of consumer debt into securities cuts the cost of consumer credit, according to a study by National Economic Research Associates Inc.

A 10 percent increase in securitization rates lowers the cost of subprime mortgages by between 0.24 percentage point and 0.38 percentage point relative to benchmark rates, and auto loans by between 0.22 percentage point and 0.64 percentage point, according to the study, which was released today.

“When discussing the role of securitization, it is critical to keep in mind its impact on the cost of credit,” Faten Sabry and Chudozie Okongwu, the study’s authors, wrote.

The report, commissioned by the New York-based American Securitization Forum trade group, also found that securitization encouraged banks to make more loans to hold and increased the ease of getting home loans in underserved areas. The Federal Reserve this year began offering unprecedented loans to buyers of asset-backed securities in a bid to revive lending to curb the longest U.S. recession since the Great Depression.

President Barack Obama’s plan to overhaul the U.S. financial system, released today, proposes new rules of securitized debt, after the market enabled looser home lending that resulted in record foreclosures and led to bond losses that hobbled banks.

The events of recent years, when volumes plunged as home- loan debt soured, supported many of the study’s findings about the possible benefits of securitization, Sabry and Okongwu wrote. A 10 percent rise in securitization rates cuts the cost of jumbo mortgages by between 0.04 percentage point and 0.12 percentage point, and credit cards by between 0.08 percentage point and 0.54 percentage point, based on data from 1999 to 2006, according to their study.

Fed Sees Success

The Fed sees its Term Asset-Backed Securities Lending Facility as successful so far, as it has boosted creation of bonds already eligible, and driven down yields relative to benchmarks on a range of securitized debt, which had accounted for about 60 percent of lending in recent years before issuance seized late last year, Hayley Boesky, director of market analysis at the Federal Reserve Bank of New York, said May 22.

Subprime mortgages are given to borrowers with poor or limited credit records or high debt burdens. Jumbo loans are larger than government-controlled Fannie Mae and Freddie Mac can buy or guarantee, currently $417,000 in most areas and as much as $729,750.

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