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securitization, also identified as structured finance is a financing technique that permits capital markets to support the pooling of sources direct income and sell them to investors. In nations where the legislation would encourage structured finance, virtually all income-making assets can be securitized.
In the United States, securing financing can be done for almost almost everything, like health-related and hospital records, oil exploration, settlement procedures of trial in projects across the enterprise, royalties to music, or even a baseball stadium. But often the most securitized assets, globally and in the United States are customer loans, particularly residence mortgages. The corporate structure of the U.S. mortgage securitization has created into a complicated network of relationships among the a variety of enterprise units that supply wide range of loans and investment services. In the United States, there are two simple property mortgage marketplace securities: a public (or at least quasi-public) and the other private. In basic, most residence mortgages marketplace operates by one particular of the two government sponsored enterprises (GSEs) created by Congress.
These Fannie Mae and Freddie Mac acquire mortgages businesses that meet strict underwriting recommendations with respect to private mortgage lenders. The status of Fannie Mae and Freddie Mac is a little vague, due to the fact Congress has not passed a law that explicitly guarantees the payment of bonds or securities issued by the GSEs. However economic markets typically think about these two businesses as TBTF and remedy of debt practically assured by the U.S. government, saying that Congress will not permit these businesses to collapse.
Fannie Mae and Freddie Mac to hold some mortgages in their own portfolios, securities, but many other people, they share investment instruments and sold to investors.
A huge amount of loans securitized by Fannie and Freddie give businesses economies of scale and the benefits of risk diversification that most private companies can not match. In addition. Due to the implicit federal guarantee of Fannie and Freddie, GSE can discover investors for their securities, increasing transaction expenses of credit rating agencies or credit enhancements.In addition, GSE hesitate to provide the highest loan-to-value (LTV) loans and are reluctant to purchase loans to borrowers with a history of questionable credit. Loans sold to these sources of public funds are typically 5 or 30 years mortgage, often fixed interest and no penalty for early repayment. Fannie Mae and Freddie Mac will not buy loans from private breeders mortgages, unless they use standardized contracts that include terms generally regarded as fair to both parties. The two GSEs have strict automated underwriting standards and generally accepted monetary models need standardized documents, and pay the exact same price tag for all the loans they obtain.
This is why, in basic, Fannie and Freddie acts as a stabilizing force in the prime mortgage industry, protects against and eliminate predatory lending situations or underwriting risk. Some commentators also argue that mortgage pools GSE “merge decrease and moderate some borrowers with the same loan pricing danger, which also supplies modest help for some borrowers to moderate danger. Mortgages packaged by Fannie Mae and Freddie Mac are in a great position rather by current difficulties in the mortgage market in the United States.
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Query by : what are the “method of securitization” invovle?
please describe in particulars
Ideal answer:
Answer by Arbitrage
Securitization refers to the processing generating some assets into a a lot more liquid, tradable security. There are frequently done with mortgages, exactly where the mortgage organization will sell off its loans right after they’re turned into bonds. They have the exact same fundamental money flow because it’s money coming in but mortgages aren’t liquid. By converting the cash flow into bonds, they have the potential to enhance the credit rating of the bonds. Usually, bonds issued by a company have a credit rating equal to the firm, but with these asset backed securities, they can also constantly issue at AAA.
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Question by kbrindhaa: what is meant by securitization?
relating to mortgages
Best answer:
Answer by yu-ling
It is the approach of making a economic instrument (mortgage-backed securities) by combining other economic assets (mortgage) and then marketing and advertising them to investors.
here is a lot more info about mortgage-backed securities –
http://private.fidelity.com/goods/fixedincome/pombs.shtml
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Query by Ashley C: Explain the Securitization Meals Chain?
Soon after watching the film, Inside Job, I learned that the Securitiziation meals chain led to the 2008 economic collapse. I never really understand it though. I know that a particular person wants a loan, banks had been giving out higher interest loans to individuals who could not afford them, but then i am confused. Who do the banks sell the loan to??
Best answer:
Answer by Atlas
I’m not an financial expert, so I hope this answer aids. The banks (lenders) sell the loan to an “Investment Bank”. The investment banks combine other debt (house loans, auto loans, credit card debt, and so on.) into complicated derivatives identified as Collateralized Debt Obligation or CDOs and sells that to investors.
The way it use to work, you (the purchaser) would spend back the loan to a lender over a period of a few decades. Now, the payments on the loan go straight to the investors of the world.
The high interest loans you speak of are known as “sub prime loans”. A lot of individuals were place into sub prime loans strictly since the interest price was higher, even although the borrower could not afford the loan. The worth of houses from 1996 to 2006 went up 194%. In that period of time, sub prime lending went from $ 30 billion to $ 600 billion.
In my opinion, “deregulation” was the widespread denominator in what led up to the 2008 financial collapse.
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Query by thamsenman!: Has securitization ruined America?
Has the packaging of mutual funds, bonds produced America much less safe?
Correct they have returned much better than bonds, money, and so on. but at what emotional expense? Wouldn’t it just have been greater to earn 4% making use of treasuries/CDs with no care in the world than ten% with every care in the world?
Greatest answer:
What do you think? Answer beneath!
Question by blackholesun: Does anyone know what securitization of criminal law is?
Best answer:
Answer by Mitch
Either consult a lawyer or try Black’s law dictionary. Should be available for you to use in a law library near you.
I am not telling you the answer, I am telling you where YOU can find answer yourself.
Feed a man a fish and you feed him for a day. Teach a man to fish and you feed him for the rest of his life.
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Question by hetbh123: securitization and subprime investment?
I don’t really understand this concept and how these two are related are are causing the financial crisis it is today. the ethical issue that is imposing on companies such as AIG….Can someone explain to me? thank you very much.
Best answer:
Answer by Ed Atun
In 2003 bank accounts were paying 1% interest. Many people had their life savings in the bank. Merrill Lynch was investing money in mortgages that paid 6%. Merrill said they would pay people 5% which was great compared to 1% at the bank. Merrill made 1% profit and people got 5% on their life savings. Everyone was happy. So Merrill started loaning to people with bad credit (subprime) at 8%. The people could now get 7% on their money. Much better than 1%. Merrill still made its 1% profit on every mortgage. This worked great. Merrill was not selling mortgages to the citizens of the USA. They were selling investments in a giant pool of mortgages. When a citizen received their 7% interest, they did not own a mortgage. They owned a “security” that was invested in mortgages.
But the people with bad credit did not pay their mortgages. People quickly realized that they might not get their 7% interest. They might not get anything at all. All of a sudden, the old 1% in the bank looked very safe. So everyone pulled out at once. The money disappeared. Merrill Lynch had no money to pay employees; no money to buy new mortgages; no money to do anything. So it all folded…
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Question by ivette s: What does securitizing an asset mean. Asset securitization? In plain english please. Thanks?
Best answer:
Answer by puremonopoly
Financial cash-flow producing assets that are pooled together and sold to investors in packages. These asset packets don’t hold high yielding returns.
Sub-prime lenders use this technique when issuing a loan. They’ll secure the loan from many lenders that contribute partial amounts of money so as to lower the total risk of each lender, thereby allowing each lender to partially secure loans for more than one party. Its a form of risk management that didn’t do so well in the mortgage industry recently because of bad investment techniques.
Its advised to risk no more than 15% of your total assets in Asset Securitization if you do choose to go down that investment route.
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Question by kehoejck: Securitization: Understanding?
”
Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors.
To free these blocked funds the assets are transferred by the originator (the person who holds the assets, ABC Bank in this case) to a special purpose vehicle (SPV).
The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile.
What this means is that only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities.
These securities issued by the SPV to the investors and are known as pass-through-certificates (PTCs).The cash flows (which will include principal repayment, interest and prepayments received ) received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted.”
I am trying to understand exaclty what the bank does to free up more cash. I would really appreciate help with this.
What I understand
Ok, banks give out loans to their customers and the properties are assets on balance sheet.How exactly by securitization does the company actually get in more funds> A very simple explanation would be appreciated.
What exactly are these investors getting?? Who do they make money from it?
Best answer:
Answer by frak1a12345
The investors gave money(puchased) for these PTCs. That money goes to the bank. The bank now has its money back and the investors have the PTCs.
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Question by Dang: Credit Securitization: how exactly does it work?
Say I have a portfolio of 100 credit card customers, what are the technical steps to securitize it? E.g. how do I do the following:
1) Data Mining
I assume the first step is some sort of database/spreadsheet (MS Excel?) with the debtors info, how does one quickly sort what slots in each tranche? Some sort of macro/algorithm?
2) Credit Rating
How does one benchmark what the risk of the tranches are? Do I simply go to Moodys and ask them to look at them and that’s it??
3) Issuance
Once we have a plan of which receivables we want in each tranche, what then? Do we go to a legal firm to issue the bonds?
Team Size Required:
How many people would I need in a small securitization team? What sort of experience would they require if we were just doing basic credit card pfolio?
Basically I am looking to set up my own niche securitization venture…I have no background in securitization though!
Thanks!
Best answer:
Answer by ADAM S
Read This : – ” Credit Card Securitization – An Overview ”
Here : – http://www.flixya.com/post/GOLDCash360/767657/
.+.
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Question by Scott45: Question about Loan Securitization?
Company ABC is looking to refinance a 75 million securitized loan on an office building in NY. Is this basically just saying the loan has been sectioned off in different tranches and was sold to investors via CMBS. Can someone give me alittle insight on the securitization process how and why it happens and who all does it.Also take the above example and say they can’t find the cash for the refi.. How would that effect the cmbs security they bought if one of the properties within goes in default
Best answer:
Answer by ronwizfr
Suppose you are a mortgage company. You have $ 1 million in capital, loaned out to 10 customers at 8% interest rate over 30 years. Obviously you are going to get your money back, either in payments or in foreclosed houses but it´s going to take a while. So in order to have the million back today you sell them to some other investors. Obviously you have to give up some of your future profits for cash now.
You could sell those 10 loans to 10 investors. Each investor would be taking a risk in buying those loans, because if any loan defaults, that one investor loses his money. Naturally, investors would not be willing to pay very much for those loans, knowing the risk involved. In order to get a better price, you combine the 10 loans into one special purpose entity, which you then split into 10 equal shares. Each investor still pays the same $ 100,000+x, but instead of owning one loan, they will own 10% of all 10 loans. If one loan fails, every investor loses only 10%.
And you can do even better, by buying credit derivatives insuring against the default or inflation and adding them to the entity.
The result is that you will be able to sell the loan assets for more money, and investors are insulated from the volatility of directly owning mortgages.
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Question by Johnny Question: SPE’s for securitization?
How do investors look at SPEs for the purpose of securitization of receivables? Should they be skeptical?
Best answer:
Answer by JoeyV
I’ll assume that you are in the US as I have no idea how this works in some other random country. I also assume that you mean the investor in the originating company, not an investor in a security based on the receivables.
In the US, the sale of receivables to the SPE must be a “true sale” pursuant to FASB 125. The rules on this are pretty strict and, unless there is reason to suspect the company is pretty dirty, I would generally regard it that way. This is significantly better than some off-balance sheet transfer that represents securitized lending and is some way of hiding debt.
I know this sort-of smells like Enron’s SPV’s or something, but I believe that most securitized receivables are just replacing traditional financing of receivables by a cheaper alternative and one that cleans up the balance sheet. Would you prefer that a company borrow short-term money by floating commercial paper, for instance, or securitizing their receivables? In the former instance, they have debt on the books that is probably higher on the capital pecking order than your investment and in the latter they have cash. Since the SPE is “bankruptcy-remote”, the securities issued by the SPE are likely to be more highly rated than the commercial paper so the cost to the company is probably less.
Skepticism is always good, but I think that you can be skeptically optimistic about this.
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