The decline of a once-popular security
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Over the course of this credit crisis, we’ve all learned way more than we’d care to about how mortgages are sliced and diced and turned into bonds.
That process of packaging those loans is called securitization.
It’s not just mortgages. Car loans, credit card debt, even student loans are securitized and sold off. Usually sold pretty fast, too, so banks can turn around and issue more loans. Problem is, investors’ appetite for that kind of debt — or bonds — has practically disappeared.
Ashley Milne-Tyte reports that can only means bad things for the economy.
The investors who usually buy so-called asset-backed bonds do so because they get a decent interest rate in return. But they’ve stopped buying. Some are worried that people won’t make their payments in a declining economy. Others simply haven’t got the cash to invest. Hugh Johnson is CEO of Johnson Illington Advisors. He says banks and other financial companies that make car, student and credit card loans are now in a bind.
Hugh Johnson: If they can’t package those into securities and sort of offload them to investing institutions, then they have to bear the risk of owning those loans themselves. And if someone defaults on those loans, it will affect, obviously, the earnings of that bank.
When faced with defaults, banks usually sell off bad loans to third-party debt collectors at deep discounts. But Matt Fabian of Municipal Market Advisors says even that market is having problems.
Matt Fabian: The companies who buy these delinquent loans are having difficulty getting credit themselves. So they’re not coming up with the resources in which they can purchase delinquent loans from the credit card companies, from the auto loan companies.
Meaning those companies and banks are stuck with the bad loans. So Fabian says they are doing everything they can to reduce their risk when they make a loan. That means they’re lending a lot less. And that’s affecting everyone.
Fabian: Reduced credit means reduced consumer spending and that’s a deflationary input into the economy.
If people can’t borrow money to spend in other words, the economy’s just going to get worse.
In New York, I’m Ashley Milne-Tyte for Marketplace.
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