Securitization: An Introduction
Securitization: An IntroductionPublished August 1, 2005 - Virginia, USA
Securitization involves the separation of the credit risk of one or more assets from the bankruptcy and credit risks of the owner of those assets (hereinafter, the “Originator”)1 and the issuance and sale of securities backed by the cash flow from those assets. The proceeds of the sale of the securities are then used for the purchase of the assets from the Originator.
Securitization began in the 1970s with Originators pooling home mortgages (“mortgage pools”) and selling those mortgage pools to certain governmentsponsored entities.2 The government-sponsored entities, in turn, guaranteed the cash flow from the mortgage pools and sold securities (called “mortgage-backed securities” or “MBS”) backed by the guaranteed cash flow from the mortgage pools.
As interest rates skyrocketed in the early 1980s, “private label” mortgage securitizations became increasingly popular. “Private label” mortgage securitizations involved issuances of mortgage-backed securities by entities other than Fannie Mae, Ginnie Mae and Freddie Mac. By the mid 1980s, securitization techniques had developed into the isolation of pools of otherwise illiquid, assets, the transfer of these pools to specially formed, limited-purpose entities (“SPEs”) and the issuance and sale by the SPEs of securities backed by those assets and types of assets involved in securitizations had expanded to include non-mortgage assets such as automobile loans, credit card receivables and various trade receivables. Similarly, the variety of securities issued and sold had grown and now ranged from certificates of participation to long- and medium-term notes to short-term commercial paper. This was the beginning of asset-backed securities or “ABS.”
Today, “asset securitization” typically refers to the securitization of non-mortgage assets, but may include the securitization of home equity loans. “Mortgage securitization” refers only to the securitization of mortgage loans on commercial or single-family residential properties.
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