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Asset Securitization: Theory and Practice by JOSEPH C. HU

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Chapter 4

Necessary Ingredients and Benefits of Asset Securitization

From the discussion of the previous three chapters, it is clear that the long and successful development of the U.S. asset securitization market was not accidental. Many professions with different backgrounds and expertise worked closely in the capital market to provide the needed financing for consumers and businesses. This cooperation was guided by market forces and made productive by the presence of nine elements that are conducive to asset securitization. This chapter will elaborate on these nine elements. It will also discuss in more detail the triple benefits of asset securitization to the originator, the investor, and the borrower.

The Nine Necessary Ingredients

From the experience of the development of the U.S. asset securitization market, it can be concluded that the success of the market is dependent on the presence of nine ingredients. They are:1

1. a sound loan origination process;

2. a complementary legal framework;

3. high integrity of cash-flow analysis;

4. clearly defined accounting rules;

5. prudent credit risk evaluation;

6. full-fledged investment banking services;

7. a mature government debt market;

8. an active secondary market;

9. a broad investor base.

These ingredients, though developed separately, contributed to each other's growth and are often complementary to one another. The development of one factor contributed to the growth of others. All these factors are in fact developed concurrently. ...

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