What does securitization of loans mean?
Unlike the more traditional relationship between a borrower and a lender, securitization involves the sale of the loan by the lender to a new owner–the issuer–who then sells securities to investors. The investors are buying ‘bonds’ that entitle them to a share of the cash paid by the borrowers on their mortgages.
What is credit securitization?
The term credit securitization refers to the transformation of illiquid, nonmarketed assets into liquid, marketable assets, i.e. securities.
How do banks securitize loans?
A securitized deal begins with an agreement between a lender and a borrower as to the amount borrowed, interest rate paid, collateral to secure the loan, and loan maturity. The borrower’s obligation is then sold or pledged to a trust along with a variety of other similar loans, creating the securitized product.
Which type of loans are securitized most often?
Bonds that are backed by mortgage payments are the most common type of securitized debt instruments. However, any type of asset that is backed up by a loan can also be securitized. For example, a person that takes out an auto loan that is backed by a vehicle is also referred to as a securitized debt.
Why do banks securitize mortgage loans?
Banks may securitize debt for several reasons including risk management, balance sheet issues, greater leverage of capital, and in order to profit from origination fees.
What are the benefits of securitization to banks?
Benefits of Securitization By reducing their debt load and risk, banks can use their capital more efficiently. The securitized instruments created by pooling the debt are known as collateralized debt obligations (CDOs). The securitization process creates additional liquidity for debt instruments.
Why do banks use securitisation?
Second, securitization allows banks to swiftly transfer part of their credit risk to the markets (including institutional investors such as hedge funds, insurance companies and pension funds) thereby reducing their regulatory requirements on capital.