Corporate Finance

A Primer on securitization by Leon T. Kendall, Michael J. Fishman

By Leon T. Kendall, Michael J. Fishman

Collecting fourteen lectures through the pioneers of securitization and by way of present practitioners—from Freddie Mac, Paine Webber, JP Morgan, Chrysler, McKinsey & Co, and different significant players—A Primer on Securitization introduces readers to America's latest procedure of elevating capital: what it's, the way it operates, and what distinction securitization makes. The securitization technique bypasses monetary intermediaries that experience traditionally accumulated deposits and loaned them to these looking cash, and hyperlinks debtors on to cash and capital markets. even supposing little has been written approximately what's possibly probably the most vital suggestions to emerge in monetary markets because the Thirties, securitization has revolutionized the best way that the borrowing wishes of customers and companies are met. this present day, for instance, over two-thirds of all domestic loans are being securitized, in addition to titanic chances of car loans and bank card receivables, and the method maintains to extend into new fields together with man made securities. Authoritative and sensible, those lectures exhibit how securitization was once constructed to fill a niche in monetary markets. They talk about the character and reasons of the industry imperfections that made securitization a beneficial resource of money, and describe how securitization has associated neighborhood loan markets with foreign capital markets. Readers will achieve a wide point of view of the various parties—the borrower, the mortgage originator, the servicer, the score enterprise, the distinct function automobile, the credits enhancer, the underwriter, and the investor—as good as a close research of the way those events relate to each other. From the inception of the secondary personal loan industry throughout the cave in of the Granite money, readers will examine not just in regards to the luck but additionally in regards to the excesses and screw ups that sometimes accompany the improvement of any product within the actual or monetary region.

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Extra resources for A Primer on securitization

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A second definition of securitization is attributable to John Reed, chairman of Citicorp. " This definition speaks to the way banks, thrifts, and other portfolio lenders and investors operated during the pre-deregulation, cartel era of 19331980 with very high costs and highly structured ways of doing business. So long as laws, regulations, and the lack of low-cost technology precluded free entry into the loan origination business, banks and other deposit-type institutions were sheltered from price competition.

The restructuring of one home loan pool into three-year, five-year, and ten-year notes based on prepayment experience, as well as interest-only and principal-only tranches and even more exotic instruments increased the size and interest of the investor group and the efficiency of pricing. The synthetic securities or derivatives developed through this process have created both value and notoriety. The third stage of securitization is likely to involve the recycling of securitized issues, recombining outstanding issues into new securities.

Since most securitized assets are sold with double-A or triple-A ratings from a national credit-rating agency, the rating agencies are involved in the securitization process. S. government or the government-sponsored enterprises (GSEs), Fannie Mae or Freddie Mac, the market does not call for ratings. Ratings, however, are an important element for all securities not guaranteed by such agencies. One reason is because many regulated investors, such as life insurance companies and pension funds, are not allowed by regulation to purchase securities rated below investment grade.

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