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Securitization is the process of transforming collateral or obligations into traded securities. An easy way to understand this is through example. The mortgage backed securities market is one of the largest and most liquid in the United States. Through the process of securiization, mortgages are transformed into bond-like securities. Assume a bank has made 100 mortgage loans ranging from $150,000 to $350,000 each to new homeowners this month. The homeowners have agreed to pay interest rates from 6.00% to 6.50% for 30 years on their various mortgages. Instead of holding 100 different mortgage loans of different sizes and coupons, and having risk to the credit of these homeowner on their balance sheet, the bank can use expected cash flows on the mortgages to securitize the mortgages into a mortgage-backed-security (a bond backed by the cash flows of the mortgages). In this case, assume the average loan size was $200,000, and the average interest rate was 6.25%. The 100 loans could be packaged together to create a $20,000,000 security paying 6.25%. Such a security would have a prospectus, which outlined the terms of the bond, and also would get a credit rating. The process of securitization transforms those smaller loans into a larger, more uniform, liquid security. This security could then be sold to an investor, such as a hedge fund, insurance company, mutual fund, or even another bank.
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Why would you expect securitization to take place only in highly developed capital markets?
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What are the key considerations when structuring a special purpose vehicle securitization?
When structuring a special purpose vehicle securitization, key considerations include determining the assets to be securitized, establishing the legal structure of the SPV, ensuring compliance with regulatory requirements, assessing credit risk, and designing the cash flow mechanisms.
What is secrutization?
Securitization is a type of marketable preparation. It makes sure the securities in marketing that are readily available show the interests in an ownership.
9 Why would you expect securitization to take place only in highly developed capital markets?
because your mom is gay
What is the relationship between securitizatioln and the role of financial intermediaries inthe economy. What happen to financial intermediaries as securitization progresses?
- Securitization changes the basic role of financial intermediaries. Traditionally, financial intermediaries have pooled funds from investors loaned to firms in their place. - Securitization has enabled firms to offer these functions in the form of a security, in which case, the focus shifts to the more essential function i.e. distributing a financial product. (For example, in the above case, the bank, being the earlier intermediary, was eliminated, and instead the services of an investment banker were sought to distribute a debenture issue.) - Securitization seeks to eliminate fund based financial intermediaries for fee based distributors. (In the above example, the bank was a fund based intermediary, a reservoir of funds, whereas the investment banker was a fee based intermediary, a catalyst, a pipeline of funds. Hence, with the increasing trend towards securitization, the role of fee based financial services has been brought into the focus.) - In case of a direct loan, the lending bank was performing several intermediation functions as noted above. It was distributor, in the sense that it raised its own finances from a large number of small investors. It was appraising and assessing the credit risks in extending the corporate loan, and having extended it, it was managing the same. - Securitization splits each of these intermediary functions apart, each to be performed by separate specialized agencies. The distribution function will be performed by the investment bank, appraisal function by a credit rating agency, and management function, possibly by a mutual fund which manages the portfolio of security investments by the investors. Hence, securitization replaces fund based services with several fee based services. This is mainly from http://www.citeman.com/5298-securitization-capital-markets-structured-financial-and-others/
Relationship between securitization and role of financial intermediaries?
Securitization involves pooling various financial assets, such as loans or mortgages, and converting them into tradable securities, which allows for risk dispersion and enhanced liquidity. Financial intermediaries, like banks and investment firms, play a crucial role in this process by facilitating the creation, structuring, and distribution of these securities. They assess the underlying assets, manage the associated risks, and provide investor access to diversified investment opportunities. Ultimately, securitization enables intermediaries to enhance capital efficiency and optimize the allocation of financial resources in the economy.
What has the author U S Sohoni written?
U. S. Sohoni has written: 'Securitization of assets' -- subject(s): Asset-backed financing
What do you mean by securitization in NBFC?
Securitization in Non-Banking Financial Companies (NBFCs) refers to the process of converting illiquid assets, such as loans or receivables, into marketable securities. This involves pooling various financial assets and creating securities backed by these assets, which can then be sold to investors. By doing so, NBFCs can improve liquidity, manage risk, and obtain capital for further lending activities. It also allows investors to gain exposure to a diversified portfolio of loans.
What kinds of assets are most amenable to the securitization process?
Assets that are most amenable to the securitization process typically include those that generate predictable cash flows, such as mortgages, auto loans, credit card receivables, and student loans. These assets are often pooled together to create securities that can be sold to investors, providing liquidity to the originators. Additionally, the assets should have a relatively homogeneous risk profile and be easily valued, making them suitable for structuring into tradable financial instruments.
What has the author T H Donaldson written?
T. H. Donaldson has written: 'Credit risk and exposure in securitization and transactions' -- subject(s): Bank loans, Credit, Credit control, Risk management
What has the author Karin Svedberg Helgesson written?
Karin Svedberg Helgesson has written: 'Securitization, accountability and risk management' -- subject(s): Money laundering, Banks and banking, Asset-backed financing, Liability (Law)
What is the role of a debt recovery tribunal in securitization?
These Tribunals are established under the Recovery of Debts Due to Banks and Financial institutions Act, 1993 to deal with the cases of recovery of debts above Rs. Ten lakh due to banks and financial intuitions.
