Securitization
Tue, Apr 15Securitization is the process of generating securities by aggregating various financial assets that produce cash flows. These securities are subsequently sold to investors. At its core, securitization serves as a financing method for assets. Any asset that generates cash flows can be securitized.
The terms asset-backed security (ABS) and mortgage-backed security (MBS) indicate the types of underlying assets associated with the security. Securitization offers funding and liquidity for a diverse array of consumer and business credit requirements. This includes the securitization of residential and commercial mortgages, auto loans, student loans, credit card debt, equipment loans and leases, business trade receivables, and the issuance of asset-backed commercial paper, among others.
Securitization transactions can take various forms, but they generally share several key characteristics. Typically, securitizations depend on the cash flows produced by one or more underlying financial assets (like mortgage loans), which act as the main source of payment to investors, rather than relying on the overall creditworthiness or claims-paying capacity of an operating entity.
Securitization enables the entity that originates or holds the assets to finance those assets more effectively, as the cash flows from the securitized assets can be structured, or “tranched,” to meet specific credit, maturity, or other characteristics that investors may seek.
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