According to a story in the New York Times (Commercial Real Estate Breathes Life Into a Moribund Market), the securitization market is making a comeback. Led by commercial loan securitization, the story claims that "other sectors of this market, including car loans and collateralized loan obligations, are also showing signs of life." The key seems to be a better quality of loan underlying the securitization brought about by a number of factors, including new regulations:
Under the Dodd-Frank regulatory reform, banks are required to hold 5 percent of any securities they sell to investors. The move is intended to reduce risk by forcing banks to eat their own cooking.
Another rule, which will most likely take effect early next year, requires banks and other financial firms that issue asset-backed securities to review the quality of the underlying assets, including commercial real estate. The banks must then disclose their findings to investors. If the assessment shows that the assets did not meet the underwriting standards promised to investors, financial firms must explain the discrepancy in a filing.
Banks are also improving their lending standards on their own. The securities today are more diverse, including multiple loans from a number of developers across the country. The recent deals, for instance, includes a broad set of properties like the Christiana Mall in Newark, Del., the Kenwood Towne Centre in Cincinnati, the Pearlridge Center near Honolulu and 7 Hanover Square in New York.
"The banks can cherry-pick the loans they are making and typically only top-quality prime borrowers are getting financed," said Tony Plath, a finance professor at the University of North Carolina at Charlotte.
I wonder if these means that we will see a return of IP securitizations -- or whether the market will see these types of financial products backed by royalties from trademarks, copyrights and patents as simply too risky and uncertain for a market that needs high quality to survive?