12-12-2012, 01:58 PM
SECURITIZATION & SUB-PRIME CRISIS
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SECURITIZATION
A framework/process in which some illiquid assets of a corporation or a financial institution are transformed into a package of securities backed by these assets, through careful packaging
Packaging and selling of loans and other assets backed by securities
PROCESS OF SECURITIZATION
Selection of assets by the Originator
Packaging of designated pool of loans and advances (assets)
Assigning or selling of assets to SPV
Conversion of the assets into divisible securities
SPV sells them to investors
Investors receive income and return of capital from the assets over the life time of the securities
The risk on the securities owned by investors is minimized as the securities are collateralized by assets
The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and SPV
ADVANTAGES TO ISSUER
Remove assets from Balance Sheet and thus improve Capital Adequacy
Transfer risk
Liquidity
Reduce funding cost
SUB-PRIME CRISIS
It is set of event and conditions that led to the late-2000s financial crisis, characterized by rise in sub-prime crisis delinquencies and foreclosures , and the resulting decline of securities backed by said mortgages.