What is individual securitization? Does it give more control to the individual or does it give the *appearance* of control, while actually placing the reins in other people’s (investors’?) hands?
related articles:
https://slate.com/technology/2018/11/mark-stasenko-overvalued-human-capital-market-derivatives.html
https://www.bloomberg.com/news/newsletters/2020-02-25/money-stuff-you-can-securitize-people-now
In: Economics
Lending is risky for lenders. One way you can reduce the risk is, instead of lending to one person and hoping they repay, you can bundle the right to the repayment of many different loans together and sell off bits of the income stream to anyone who wants it. If one person defaults, a bunch of lenders lose a little money instead of one lender losing a ton of money. This process is called securitization.
On a separate note: Traditionally, loans are secured by collateral. That is, you have an asset that, if you can’t pay off the loan, you can sell to pay your debt. However, and I would argue with the writers of these articles about how mainstream or even functional this is, many people are able to secure loans without assets based on their future income. Consider college loans. College students have basically no assets but are able to get loans against the value of their future income.
What the authors are talking about is that the next step for these types of unsecured (i.e. without collateral) loans would be to securitize them. This would reduce the risk and make them more widely palatable to lenders. Consider the example listed in the Bloomberg article where, instead of paying tuition, a school asks for a share of its graduates future earnings. They take a risk that some graduates won’t earn much. However, the risk is spread over many students who, on average, are likely to succeed. Offering a loan to one of these students for tuition would be risky. Investing in a school that earns income based on the future revenue of all of them is less so.
Again, though, in my non-expert opinion, this is unlikely to happen. We’ve seen how securitization masked, but did not eliminate, risk in a market with secured assets (housing). It would probably be much worse in a market with unsecured debt. Securitization, in general, incentivizes making incredibly risky loans as the securities are often sold after being created, meaning the person originally lending the money doesn’t care about the risk and the risk might be unclear to the person buying it.
I mean, to put it bluntly, imagine 2008 but both lenders and borrowers are even more screwed then before. At least the lendersgot houses (even if they were worth way less than a few years before) and borrowers could declare bankruptcy then.
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