We used to see only virtues in having loans packaged and resold to third parties, but now there are critiques:
1. It is harder (impossible?) to renegotiate loan terms if something goes wrong (this is from Brad DeLong, and Paul Krugman today).
2. The loan holder no longer has market-stabilizing, special information about the value of the loan (see Avinash Persaud in yesterday’s FT). This decreases the likelihood of anyone "supporting the market" and holding or buying up the assets in hard times.
3. Selling the loan means it is harder to pinpoint where capital losses are falling, should the loans decline sharply in value.
4. The market for packaged loans is (maybe) more prone to herd behavior than the market for individual, idiosyncratic loans. The packaged loans are being judged in very gross terms as part of a relatively broad reputational class.
5. If real estate is relatively cyclical, securitization is easing or subsidizing a sector which makes the macroeconomy more vulnerable.
The WSJ Op-Ed page version of this argument (Ethan Penner, yesterday) blames Fannie Mae and Freddie Mac for having subsidized lending to the extent they did.
One month from now, we will know much more about the new argument against securitization. Dare I say one week from now? Who knows, we might even find out today.
As for yesterday, Brad DeLong offers information on normal mortages. My best guess is that we are seeing a return to sanity in the risk spread on lower-class assets. Financial blood will be shed, but as problems go we will deal with it. But until we all know who the losers are, investors will continue to exercise option value and equities will be volatile. Here is a very good FT forum on the issue. Might the real story end up being the lack of transparency in European banking and bank supervision? That wouldn’t surprise me one bit…