Wednesday, April 17, 2024

Securitization

Securitization is the process of creating securities by pooling various cash flow-generating financial assets.

These securities are then sold to investors.

The most basic form of securitization is an asset financing method.

Any asset that generates cash flows can be securitized.

The terms Asset-Backed Securities (ABS) and Mortgage-Backed Securities (MBS) reflect the underlying assets in the security.

Securitizations provide funding and liquidity for a wide range of consumer and business credit needs.

These include securitizations such as residential and commercial mortgages, auto loans, student loans, credit card financing, equipment loans and leases, commercial trade receivables, and asset-backed commercial paper issuances.

Securitization transactions can take many forms, but most share several common characteristics.

Securitizations typically rely on cash flows from one or more underlying financial assets (such as mortgages) that are the investor’s primary source of payment rather than the operating entity’s general credit or claim-paying ability.

Securitization allows the entity originating or holding the assets to effectively fund those assets because the cash flows generated by the securitized assets can be structured or “graded” in a manner that achieves target credit, maturity, or other desired characteristics Favored by investors.

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