In July 2007 we remarked that booming house prices were being fuelled by easy money courtesy of securitisation. “CDOs (Collateralised Debt Obligations) package portfolios of debt such as mortgages into high yielding bonds. Very attractive to Financial Institutions because the returns can be very high. The problem is that many CDOs are reliant on sub-prime lending which has a higher risk ofdefault.” The rest, as they say, is history although even we didn’t bank on the quality of the underwriting being so poor as to cause financial meltdown. For the past 7 years the market for Securitisations has been all but closed. “A good thing” you may say. So why has the Bank of England just released a Discussion Paper looking at ways of encouraging a return? The answer is that traditional sources of mortgage finance simply cannot meet demand. Without a properly functioning mortgage market the housing market will stagnate. However, would the return of Securitisation sow the seeds for the next Bust?
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