Lack of Securitization Risks $2 Trillion in Credit, Groups Say

With market conditions expected to remain poor through 2010, the effectiveness of securitization markets will be put to a stiff test in coming years, according the Securities Industry and Financial Markets Association, which represents more than 650 securities firms, banks and asset managers.

“Banks may fail to meet $2 trillion of demand for credit origination over the next three years in the absence of well-functioning securitization markets,” read the joint statement, released Wednesday. Much that demand, of course, lies squarely in the residential and commercial mortgage markets.

Deteriorating loan underwriting standards, over-reliance on credit ratings, highly leveraged positions, misjudgment of liquidity risk and a lack of a sense of shared responsibility in the U.S. subprime market were some of the factors SIFMA attributed to the severity of the crisis and the speed of the securitization market deterioration. The correction of these factors and the recovery of securitization are key to reduced cost and availability of credit to the global market, SIFMA said. Read the group’s statement.

SIFMA urged a restored confidence in the securitization markets through through four immediate priorities for immediate action by the industry. Among them is improving disclosure of information on underlying assets for residential mortgage-backed securities, enhancing transparency with regard to underwriting and origination practices, restoring the credibility of credit rating agencies, and improving confidence in valuations, methodologies and assumptions.

The group contributed to a joint white paper published this week that outlines problems and potential solutions to restoring activity in secondary credit markets. Read the full paper, prepared by SIFMA, the American Securitization Forum, the Australian Securitisation Forum, and the European Securitisation Forum.

“The speed with which securitization returns and the form it takes are dependent on several factors, many of which are beyond the industry’s control,” said Rick Watson, managing director of the European Securitisation Forum. “Global macroeconomic factors are weighing on the market’s recovery. These recommendations, however, are focused on actions the industry can take immediately or that build on efforts which are already underway to foster market recovery.”

“Securitization is an essential source of funding for consumer and business credit throughout the world,” said George Miller, executive director of the American Securitization Forum. “It has served as an engine of economic growth for forty years. There will be a significant impact on the availability and cost of credit and, more broadly, the global economy if functionality is not restored in this important sector.”

Write to Diana Golobay at diana.golobay@housingwire.com.