Lisa Simpson
Feb 3,2010
In: Finance

The Securitization of Real Estate in the Financial World was not Without a Precedent

Currently the securitization market is in its last throes.

It is said that in the last twenty five years the greatest innovation was the securitization of real estate in the world of finance. It was a virgin path that allowed huge sums of dollars to be fed into the real estate market from such types of people who conventionally had never participated in it. Those granting the loans did not have to be concerned about repayments. But ultimately the entire framework tumbled and collapsed.

Currently the securitization market is in its last throes if not already dead for all practical purposes. But the market has to be revived so that citizens can once more be provided with mortgage loans. For this the method would require refashioning. Whatever that is and whenever it will be, the truth is that this is vital for the proper rolling of the economy. This is the prevailing view of the bankers and some economists.

Most of the thinking is not incorrect except the bit about the virgin path. The securitization of real estate in the financial world was not without a precedent. It is not something new. Very few many remember about a previous wave of private securitization that had changed the map of real estate, especially in New York. It also had an impact on the property market in Chicago and a couple of other cities in America. That wave too met with more or less the same fate as the recent one.

This harsh fact should bring up questions whether the securitization tool should once more be oiled and get back to business so as to run along sans government backing. Another way could be found if the banks and other long-term-investors like the insurance entities make and then keep most of these property loans that are essential for the good of society.

It was in the 1920s that the original wave of securitization took place when the country hopped into one of the most jumbo sized building booms. Many of the investors witnessed rapid increase of property prices and dived into action. The construction sectors as well as the middle men were only too happy to play along.

It has to be noted however that the securitization was not as complicated as the current ones that have been created recently but they were neither simple. Most of these were bonds that were backed by one commercial property whose construction required financing. But apart from this there were clutches of residential mortgages. Few of these bonds were inclusive of warrants for part ownership while others were convertible bonds.