Securitization Process

Securitization is that process in which the bank or financial institutions convert their illiquid assets into tradable securities or debt instruments which can be sold to investors which in turn generate liquidity for the bank or financial institution and the cash generated by securitizing the asset can be used for further expansion. Given below is the process by which the assets are securitized –

  1. The first step is to select the class of assets which the lender (bank) wants to securitize; generally home loans or loans which have longer maturity are securitized.
  2. Next step is to approach the issuer known as SPV (Special purpose vehicle) who makes payment to the lender for the assets which are securitized.
  3. After making the payment to the lender the issuer converts the assets taken from the lender into pool of securities which are called pass through certificates.
  4. These pass through certificates are then sold to investors who are willing to take the risk in anticipation of reward and also for diversification of their portfolio.
  5. Borrowers continue to pay their loan installment to the lender and the lender deposit this money received from borrowers to issuer (SPV).
  6. After receiving money from the lender the issuer distribute this money to the investors of pass through certificates in proportion of their investment.

As one can see from the above that securitization process is complicated and that is the reason why professionals are involved in the process and this process is done for standard assets and the pass through certificates are rated by various rating agencies so that investors are not cheated or misguided due to ignorance.

0 comments… add one

Leave a Comment