The standard for assessing securitization must be that it benefits borrowers and investors.  The other participants in securitization should be compensated for adding value for borrowers and investors.  If securitization does not primarily benefit borrowers and investors rather than intermediaries and service providers, then it will ultimately fail.

At the loan origination stage of the securitization process, there was a continuous lowering of credit standards, misrepresentations, and outright fraud.  Too many mortgage loans, which only benefited the loan brokers, were securitized.  This flawed origination process was ignored by the security underwriters, regulators, and ultimate investors. 

In the middle of the process, we saw the creation of complex structures that shifted value from higher rated bonds to lower rated bonds.  Step downs, triggers, and credit enhancement targets may be good tools to make securitization structures more efficient, but when they allow credit enhancement to leak out of a structure in a manner that is not transparent to investors, they become counterproductive.  Further, the re-securitization of mortgage bonds into collateralized debt obligations (CDOs) can create instruments with risks that cannot be assessed using current analytical capabilities.

In the final stage of the securitization process, investors were too reliant on rating agencies assessments.  This created a herd mentality that served to reduce the intensity of critical assessment of investment risks.  Bonds often traded at spreads that seemed to be driven solely by rating.  Such trading would imply that the rating agencies always got their assessment right and that market participants had no additional insights into the pricing of assets.

Restoring the value of securitization to borrowers and investors will take significant changes in the securitization business.

First, originators should be held responsible for the quality of the origination process.  Investors in mortgage-backed securities rely on the originators of loans to create loans that meet underwriting guidelines and are free of fraud.  Borrowers rely on originators to provide them with truthful disclosures and fair prices.  Currently, investor requirements are supported by representations and warranties that