Securitization is the process of pooling various types of debt -- mortgages, car loans, or credit card debt, for example -- and packaging that debt as bonds, pass-through securities, or collateralized mortgage obligations (CMOs), which are sold to investors.
The principal and interest on the debt underlying the security is paid to the investors on a regular basis, though the method varies based on the type of security. Debts backed by mortgages are known as mortgage-backed securities, while those backed by other types of loans are known as asset-backed securities.
ASSET SECURITISATION
Asset securitization is the structured process whereby interests in loans and other receivables are packaged, underwritten, and sold in the form of “assetbacked” securities. From the perspective of credit originators, this market enables them to transfer some of the risks of ownership to parties more willing or able to manage them. By doing so, originators can access the funding markets at debt ratings higher than their overall corporate ratings, which generally gives them access to broader funding sources at more favorable rates. By removing the assets and supporting debt from their balance sheets, they are able to save some of the costs of on-balance-sheet financing and manage potential asset-liability mismatches and credit concentrations.
DEBT SECURITISATION
It is nothing but the packaging of a pool of financial assets into marketable securities. It involves issue of securities against illiquid assets of financial institutions and such securities are really structured, whereby the originator transfer or sells some of the assets to a SPV which breaks these assets into tradable securities of smaller value then sold to the investing public. The general principle is that the maturities of these securities must coincide with the maturity of the securitized loan. Mostly three types of securities are issued to the public:- Pass through & Pay through certificate, Preferred stock certificates, Asset based commercial Papers. The operation of securities are divided into the following stages:-identification stage, transfer stage, issue stage, redemption stage, and credit rating stage, interest only certificates and principal certificate. The following assets are generally securitized by financial institution:-
Term loans to financially reputed companies Credit card receivable Hire purchase loans like vehicle loan Lease finance Mortgage loans
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