Smith Breeden: Private securitization market moving forward, with one exception

[Update 1: Provides source of comments by Danial Dektar]

Securitized credit was a huge development in credit provision over the past 30 years — beginning with mortgage-backed securities, followed by commercial mortgage-backed securities and then back to housing-related securities.

In the aftermath of the housing crisis, many of these securitized markets are experiencing a revival, with the exception of one: residential securitized credit, chief investment manager Daniel Dektar of Smith Breeden Associates said in an interview by The Investment Fund for Foundations’ deputy CIO Thorndike at the foundation's recent Investment Forum.

"They haven't figured out the regulatory or securities structures to make new residential securitized issuance work,” Dektar said. “That's coming and I think it’ll be an important element in housing finance in the U.S. as the government-sponsored enterprises — Fannie Mae, Freddie Mac and Ginnie Mae — shrink in the future."

He added, "So, overall the market is mostly working right now except for residential."

During the timeframe of the progression of securitized credit investors were seen as the 'bankers' for many of these assets insofar as it’s where a lot of growth in credit came from rather directly from the big banking companies.

The growth in securitized credit was at the heart of the asset bubble, which grew and burst. These securities were leveraged by investors and also the cheap credit fueled price booms in real estate, Dektar noted.

Thus, the problem wasn’t an oversupply of inventory, but cheap money driving prices up.

“The heart of the crash in 2007-2008 was money market funds shrinking and then all the funding getting pulled for huge vehicles that held securitized assets, off balance sheet or outside of the traditional banking system. So securitized credit prices got hammered,” Dektar said.

He added, "Prices went down either because credit was bad, like in many of the housing-related securities, or often just because the funding went away."

However, the state of securitized credit is recovering and well-structured products are being issued again, especially in commercial mortgage-backed securitizations.

For instance, issuance CMBS of is making a comeback with $7 billion of CMBS issuance within the last month.

"It's good news for commercial real estate and helping to keep cap rates moving lower," Dektar said.

On a similar note, Dektar stated he was pleased with the efforts made by the Treasury and the Federal Reserve in regards to the monetary policy.

Although the Federal Reserve’s decision to leave rates unchanged and continue monthly purchases of agency MBS at a pace of $40 per month was a quick draw — in Dektar’s opinion — it halted debt problems from worsening.

"The problem with not fighting against the deleverage of the private sector and letting asset prices fall is that your real debt problems get worse. So we like it that the Fed has been keeping the debt problems from getting worse," he stated.

cmlynski@housingwire.com