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The Role of Securitization and the Secondary Market....Tanni

The Role of Securitization and the Secondary Market....Tanni

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Published by swatimalik23

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Categories:Business/Law, Finance
Published by: swatimalik23 on Jun 30, 2009
Copyright:Attribution Non-commercial

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10/20/2012

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THE ROLE OF SECURITIZATION AND THE SECONDARY MARKET
Securitizations transactions are an integral and growing segment of our economy. Thesecuritization industry is a large and significant market that provides an efficient fundingmechanism for originators of consumer and business receivables. The industry providesliquidity to nearly every sector of the economy – including the residential andcommercial mortgage industry, the automobile industry, the consumer credit industry,the leasing industry and the insurance industry – as well as to the commercial loan andcorporate bond market. Securitization, moreover, provides effective mechanisms for financial institutions and other entities to manage credit and other risks associated withtheir business activities.The securitization process starts with lenders who extend credit to new borrowers or existing borrowers who refinance credit products. With the vast majority of creditproducts, lenders undertake an underwriting process by which they review a borrower'screditworthiness and determine whether and, if so, precisely what formal credit offer toextend to the borrower. Underwriting is a standardized, if not automated, process.Before securitization became prevalent, banks funded extensions of credit through their customers' deposits, and credit availability was dictated, in part, by the volume of bankdeposits. Today, banks and other lenders have the option of retaining loans or sellingthem into what is called the secondary market where loans often underlie asset-backedsecurities. Many lenders issue their own asset-backed securities backed by the loansthey originate or purchase. Others do not lend directly, but purchase pools of loans froma wide-range of originators. These pools can be used to back an issue of bonds or retained as an investment. Regardless, the original lender obtains new capital it can useto make new loans. Purchasers of such securities include institutional investors, such aspension funds, investment funds, banks and insurance companies. These investorssupply the capital needed to make loans that, otherwise, might not be available. Theability of originators to sell loans in the secondary market, therefore, increases the creditavailable to lend and lowers borrowing costs.Investors who purchase loans, like originators, take steps to understand the quality of the loans they acquire. Loan purchasers, generally, conduct due diligence on the loan

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