This is from the Economist.com at http://www.economist.com/finance/displayStory.cfm?story_id=13061713&source=features_box_main : "The sums involved are depressingly large. In the worst case, losses on the $600 billion of securitised Alt-A debt outstanding—roughly the same as the stock of subprime securities—could reach $150 billion, reckons David Watts of CreditSights, a research firm. Analysts at Goldman Sachs put possible write-downs on the $1.3 trillion of total Alt-A debt—including both securitised and unsecuritised loans—at $600 billion, almost as much as expected subprime losses. Add in option ARMs, a particularly virulent type of adjustable-rate loan, many of which are essentially the same as Alt-A, and the potential hit climbs towards $1 trillion."
If securitized loans have a 25% ($150B/$600B) default rate and *ALL* alt-A debt has a 46% ($600B/$1300B) default rate, than this implies that securitized loans are more prudent/safer/less likely to default tha nunsecuritized loans. Moreover, the following deductions can be made:
1. Securitized loans are $600B, and unsecuritized loans are $700B, for a total of $1300B.
2. Unsecuritized loans have a 64.3% default rate. [(25%)($600B) + (x%) ($700B)]/$1300B = 46%, and solve for x. X=64.3%.
Here are my few questions:
1. Why are unsecuritized loans safer?
2. I thought that one of the big deals in this whole Financial Crisis was securitization. The media has made it look so evil and wily. Please clarify.