Advantages and disadvantages of securitization

Instead, shortly after issuing the loan, the lender will sell the mortgage to an investor on the secondary mortgage market. The investor will often pool a number of mortgages together and sell them to other investors as a financial security.

Advantages and disadvantages of securitization

Principal only certificates Pass through certificates: In the case of Pass through certificates, payments are received from assets such as housing loan from out of which payment for certificate of deposits are met as and when they are due.

In this case, multiple maturity structure certificates depending upon maturing pattern of various assets will be issued, so that as and when the assets mature the respective certificates will be paid.

The interest for these certificates will be paid as per the earnings from the assets securitised. Only the principal amount will be paid on the certificates from the realization of assets.

Advantages and disadvantages of securitization

Redemption stage in Securitization: Payments received from various assets are used for redeeming various credit instruments issued. This is done by the originator himself. In some cases, a separate servicing agent may be appointed who will undertake collection work for which adequate commission will be paid.

The job of the servicing agent will be to discharge the assets through the collection of principal and interest and settle the debt instruments. For example, the housing loan may be collected with principal and interest and fi. A pass through certificate which we have mentioned already may be a with recourse or without recourse certificate.

In the case of with recourse certificate, if payment is defaulted, the originator will be held liable by the SPV. Hence, SPV plays a major role in settling the claims of the investors.

Credit rating stage in Securitization: The pass through certificate issued by SPV has to be credit rated as they are debt instruments which are issued to the public. The financial institutions issuing these debt instruments will have to undergo credit rating which is statutorily mandated in certain countries.

The debt instruments are also traded in the secondary market especially for interest swap. The following are the various assets which can be used for Securitization by financial institutions. Housing loan granted to individuals or institutions Hypothecation of vehicle loan Leasing finance, especially financial lease Supply bills belonging to government departments Outstanding on credit cards Long-term loans granted to reputed parties.

Diagrammatic Representation of Stages involved in Securitization Process: The stages discussed above can be diagrammatically represented as follows: Merits of Securitization It enables the lending institutions to improve their liquidity by converting their long-term assets for Securitization.

The Advantages of Mortgage Securitization | Home Guides | SF Gate

With increasing turn over of the raised liquidity, the earnings of the originator goes up. Financial institutions can gain in Securitization by interest swap As the assets structure and volume are reduced, the capital adequacy ratio is increased and it reduces risk on the assets.

From the long-term assets, funds are raised and invested in various debt instruments which brings diversification of risks. The financial institution is able to get a better credit rating and this enables them to obtain funds at lower cost.

Mutual funds and other financial institutions such as insurance companies will be benefited due to different portfolio investments. Increasing demand in the money market can be met from out of the long term assets and this will make the capital market more dynamic.

Benefits of Securitization to banks: Commercial banks have an important responsibility of protecting the interests of depositors and at the same time provide them with attractive interest rates. This balancing act can be done only when commercial banks undertake Securitization.Mortgage securitization developed in the s, when lenders began creating pools of mortgages and selling them to government-backed agencies such as Ginnie Mae, Freddie Mac and Fannie Mae.

Spreading Risk. From the perspective of investors, one of the chief advantages of mortgage securitization is that it spreads the risk of a decline in loan value among a far larger number of parties.

Securitization is a process by which financial institutions create additional liquidity on backing of existing assets through sale of financial instruments. For most issuers of securitization, the main advantage is a lower cost of funds.

The main drawback is that the issuer’s collateral is secured. For investors, it’s tightly secured collateral that pays consistent cash flows, often on a monthly. Typi. Advantages and Disadvantages of Tourism Short Advantages and Disadvantages of Tourism - Short Essay New pedagogy St vincent & Grenadines Island is a small island with limited education facilities Primarily motivated students can easily start their own education.

Many people think of education as something that occurs in a school or classroom. For most issuers of securitization, the main advantage is a lower cost of funds. The main drawback is that the issuer’s collateral is secured.

For investors, it’s tightly secured collateral that pays consistent cash flows, often on a monthly. Typi.

The Advantages of Mortgage Securitization | Home Guides | SF Gate