What is Securitization?
The subprime mortgage crisis that began in 2007 has given the decades-old concept of securitization a bad name. Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities. Securitization got its start in the 1970s, when home mortgages were pooled by U.S. government-backed agencies. Starting in the 1980s, other income-producing assets began to be securitized, and in recent years the market has grown dramatically. In some markets, such as those for securities backed by risky subprime mortgages in the United States, the unexpected deterioration in the quality of some of the underlying assets undermined investor confidence. Both the scale and persistence of the attendant credit crisis seem to suggest that securitization—together with poor credit origination, inadequate valuation methods, and insufficient r
Securitization is the process of pooling or bundling various types of debt instruments for the purpose of selling the instruments for cash. As part of the process, the combined value of the bundle of debt instruments is used to convert the pool into a bond issue that can in turn be purchased by investors. Generally, a trustee makes the initial purchase of the bundle, then sells the bond to one or more investors. The type of debt instruments involved in securitization do not have to be similar debts in order to be included in the bundle. A securitization deal may include such varied debts as mortgages, car loans, or credit card debt. Essentially, the main qualification for inclusion is that the debt instruments included in the bundle will continue to generate income from the payments received on the principle of the debt as well as any interest that is applied to the outstanding balance. A mortgage pool strategy of this type is relatively common. Banks, finance companies, and investor c
Securitization is a process that allows the cash flows of an asset to be isolated from the cash flows of that asset’s original owner. There are countless variations on this theme, and since our purpose here at derivative dribble is to foster clarity and simplicity, we will discuss only the main theme, and will avoid the Glen Gould variations.
