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Securitization

• Securitization occurs when a financial security is created which is a claim to the cashflows of a collection (or pool) of individual real or financial assets (typically loans originated by banks or S&Ls). Hence, securitization turns a loan (an illiquid asset) into a liquid asset or a security.

• Is the process of homogenizing and packaging financial instruments into a new fungible one. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process. One common advantage of securitization is the enhancement of liquidity relative to the underlying collateral or financial instrument. Another benefit is the movement towards standardization of unit specifications.

• The process of creating a pass-through, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets. Also, refers to the replacement of non marketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets.

 
 Embedded terms in definition
 Assets
Asset
Capital market
Capital
Cash flow
Cash
Collateral
Composition
Distribution
Enhancement
Financial assets
Financial intermediaries
Instruments
Liquid asset
Liquidity
Mortgage
Pooling
Securities
Security
Underlying
Unit
 
 Referenced Terms
 Collateral: Assets than can be repossessed if a borrower defaults.Collateral is what the borrower pledges as security to the lender. In case of default, the lender can take possession of the collateral and sell it to cover the loan deficiency. The collateral can be viewed as the minimum payment in case of default on the loan.Is the underlying security, mortgage, or asset for the purposes of Securitization or borrowing and lending activities. It is pledged or held in trust.The items used by a borrower to back up a loan; any assets against which a lender has a legal claim if the borrower defaults on some provision of the loan.Securities, evidence of deposit or other property that a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.

 Homers: Is the acronym for a class of securities initially known as Home Owner Marketable Equity Receipt Securities. This innovative financial vehicle allows for the Securitization and hedging the equity-side of real estate. Previously, only hedges were doable for the debt-side of the equation. HOMERS™ can be used for commercial and municipal properties. These instruments are not limited to residential securitizations. These issues can serve as the underlying securities for various derivative products.

 Jumbo loan: Jumbo Loans are loans in excess of $240,00.Loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or Securitization by the federal agencies.

 Pass through: A mortgage-backed security on which payment of interest and principal on the underlying mortgages are passed through to the security holder by an agent.Is the term used to represent a generic class of securitized mortgage notes. Typically, these mortgage backed securities are issued by agencies of the United States, such as FNMA or FHLMC. The underlying collateral is serviced by banks or mortgage companies. The revenue generated by the servicing is considered fee income. The principal and interest payments go to the investors. Two attractive features of these instruments is that the Securitization process lowers the regulatory capital requirements for the originating then holding investor. Secondly, the securitization tends to improve the liquidity of the asset.

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