Does Investor-Performed Risk Evaluation Make Securitization Worthless?
Of course, under the current system, investors don’t have the ability to fully comprehend the risk of a MBS, because full data on the underlying mortgage pool is not provided. I’ve suggested that should change, and it would be one way to help the securitization market function more effectively. But Kling might respond like this, where he explains why securitization worked for government-backed mortgages: The benefits of securitization come from the fact that investors do not have to go to the trouble and expense of examining the underlying mortgages. Investors know the types of mortgages and the interest rates on the mortgages in the pool, which is the information that they need to manage interest-rate risk. However, investors assume that they are entirely insulated from credit risk, because of the guarantee provided by Freddie Mac or Fannie Mae. That may have been true in the 1980s, but I’d argue that technology has reduced that trouble and expense dramatically since then. Now it’s ve
