What is securitization or loan magic?
In very simple terms securitization is the conversion of loans to “stocks” that can be sold on the stock market as an investment. To explain securitization let’s start with the originator. If you’ve taken out a home mortgage you’ve probably paid an originator fee. The originator can be a bank or lender that makes loans to people or corporations and other business entities. The loans could be people like you and I who buy cars, trucks and houses. Loan payments are cash flow. Whoever owns the loan, the paper, owns the right to receive the loan payments or cash flow. Holding or owning loans requires lenders to maintain a certain amount of capital, money and assets, as a percentage of the value of loans. Meaning (as way of an example) if you lend $1 million you might have to have $100,000 in cash in your (reserve) accounts. This reserve maintains the integrity of the banking system to be able to cover bad loans. Banks or lenders might wish to convert loan payments to an immediate lump sum
