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Asset Securitization: Theory and Practice by JOSEPH C. HU

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Chapter 1

Asset Securitization: Concept and Market Development

The concept and market practice of asset securitization started in 1970, when mortgage bankers pooled their newly originated residential mortgages and issued residential mortgage-backed securities. By issuing residential mortgage-backed securities, mortgage bankers were able to raise funds more efficiently in the capital market to finance their originations of residential mortgages.1 It took only 20 years for the asset securitization market to become the largest sector in the U.S. capital market, with the outstanding balance exceeding one trillion dollars. In the early development of the asset securitization market, residential mortgages were the only type of underlying assets that were being securitized. Since the mid-1980s, a great variety of financial assets that had predictable and steady future receivable cash flows have been utilized as the underlying assets for securitization.

This chapter will first discuss the basic concept of asset securitization. It will then present the development history of the asset securitization market in the United States over the past 40 years.

Basic Concept of Asset Securitization

Asset securitization is an innovative way for lenders to raise funds in the capital market by selling the future receivable cash flows of their assets.2 The cash flows are sold in the form of securities that are backed by the cash flows of the very assets sold. The securities are therefore called asset-backed ...

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