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A Primer on Securitization By Leon T. Kendall and Michael J. Fishman, eds., Cambridge, MA, MIT Press, 1996, 189 pp., Hardover $27.50.
This book is an interesting, useful and informative survey of one of the most important developments in contemporary financial markets, the securitization of hitherto essentially illiquid nonmarketable mortgages and loans. Indeed, according to Lewis S. Ranieri, the former Salomon Brothers expert on mortgage-backed securities who claims to have invented the term securitization, the term is less than twenty years old. Securitization essentially means assembling and bundling otherwise illiquid, essentially nonmarketable assets and converting them into marketable securities. Now, most new home mortgages as well as growing numbers of multifamily and commercial property mortgages are funded by securitization.
In addition, securitization of a large, growing and broadening range of loans for other purposes has taken place. Car loans and leases, credit card receivables, boat loans, mobile home loans, student loans, home equity loans, problem loans, Third World debt and even delinquent municipal tax liens are increasingly securitized. As business economists would expect, a large, thriving and possibly still growing subindustry is devoted to securitization and to the services necessary to produce, market, evaluate, manage and invest in these instruments.
Securitization changed traditional ways many financial institutions operate and have altered financial, business and investment practices, products, functions and markets. Securitization resulted in a significant increase in productivity resulting from price discovery that was largely unavailable in illiquid markets (with large elements of local monopoly), from decoupling and untying the typical terms of a complex loan agreement, from enhanced risk shifting and from facilitated risk management by borrowers. The result is substantial risk reduction, reduced volatility...