You say distillation, I say desecuritization

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In the comments here and in his own blog, Sean DeCoursey has been pushing what he calls “distillation” as the solution to the near-total freeze-up of securitized lending:

Distillation is the opposite of securitization.  All the various components of the securitized debt are pieced back together into one single coherent original whole.  That means instead of an MBS made up of 9000 loans, you slice up and sew together 9000 MBS’ to get 9000 original loans.  By distilling the original loans out of the mess of loan securities, you create an object that can be easily and quickly valued and traded.  Individual debt obligations like a single mortgage are possible to value.  They could be traded.  People and institutions would know how much they had lost, and how much they still had.  The uncertainty that continues to confound the financial sector, and markets in general, would subside.  Without the continual threat of collapse and new reports of staggering losses, businesses could begin to recover.

Well now Jack Guttentag, “The Mortgage Professor,” seems to be pushing the same idea. Only he calls it “desecuritization”:

Desecuritization means reversing the securitization process. Securitization converts large numbers of individual loans into security issues. Descuritization converts the securities back into individual loans. The objective of both is the same: to enhance value. The first works during normal periods, the second can work during a crisis period such as the one we are in now. …

All that is needed to make desecuritization work is a way for investors to acquire control of 100 percent of a security issue. The investor who owns it all can dispose of the security and own the individual loans. To make this possible, we need a law that grants any investor who owns X percent of a security issue the right to buy the remaining 1 minus X at a price equal to Y percent of the average price the investor paid for the X percent already owned.

In theory this sounds really compelling. I’d be interested to hear if anybody out there thinks it’s at all practical.