SECURITIZATION
TATHAGAT RAJ
21BMS0378
SECURITIZATION
CONCEPT & PROCESS
• Securitization is a financial process where certain types of assets, such as loans, mortgages, or
receivables, are pooled together and converted into securities, which are then sold to investors.
• Securitization pools or groups debt into portfolios.
• Issuers create marketable financial instruments by merging various financial assets into tranches.
• Mortgage-backed securities are backed by home loans issued to consumers. Asset-backed securities
are backed by auto loans, mobile home loans, credit card loans, and student loans.
SECURITIZATION
CONCEPT & PROCESS
• How Securitization Works
• Asset Pooling: Financial institutions or companies gather a large pool of similar assets.
• Formation of SPV: These assets are transferred to a legal entity called a Special Purpose
Vehicle (SPV) or Special Purpose Entity (SPE).
• Issuance of Securities: The SPV issues securities backed by the cash flows generated by the
underlying assets.
• Credit Enhancement: To make the securities attractive to investors, especially those of
lower quality, credit enhancement mechanisms may be employed.
• Sale to Investors: The securities are then sold to investors in the capital markets.
SECURITIZATION
CONCEPT & PROCESS
• Cash Flow Distribution: As the underlying assets generate cash flows (such as mortgage
payments or loan repayments), these cash flows are passed through the SPV and
distributed to the holders of the securities according to the terms of the deal.
• Servicing and Administration: The servicer, often the original lender or a third-party entity,
is responsible for collecting payments from the underlying borrowers and administering the
securitized assets.
SECURITIZATION
TYPES OF SECURITIES
• Asset-Backed Securities (ABS)
• Asset-backed securities are the primary categories of securitised assets.
• Asset-backed securities are securitised financial assets and debt instruments that are
backed by some collateral.
• These securities are generated by pooling together similar asset-backed loans
• then run through the process of securitisation to be sold on the stock market through
special purpose vehicles.
• Residential Mortgage-Backed Securities (MBS)
• Residential mortgage-backed securities are a type of asset-backed securities
• Derived from loan pools with residential properties such as houses & residential estates &
properties as collateral.
• In some instances, borrowers can even offer jewellery and other personal valuables as loan
collateral.
• Commercial Mortgage-Backed Securities (CMBS)
• Another significant type of asset-backed security
• derived from loans secured by commercial assets mortgage.
• Borrowers put some of their business or commercial property at stake to get a loan.
• Typical commercial mortgages are business assets such as machinery, buildings, plants,
factories, etc.
• Collateralised Debt Obligations (CDO)
• unique kinds of asset-backed securities.
• intricate financial products designed by restructuring and re-pooling
personal loans as securities to be sold.
• their value is derived from underlying financial assets.
• The value of these obligations is obtained from the underlying assets of the
debts, which become the collateral in case of any default.
SECURITIZATION
IN INDIA
• The need for securitization in India exists in three major areas –
• Mortgage Backed Securities (MBS)
• infrastructure Sector
• Asset Backed Securities (ABS)
• Securitization in India adopts a trust structure with the underlying assets being
transferred by way of a sale to a trustee.
