CHAPTER 9 Securitization
WHAT YOU WILL LEARN IN THIS CHAPTER
- The meaning of securitization.
- How unbundling of the standard loan product occurs as a result of securitization.
- Challenges caused by asymmetric information and adverse selection.
- What is meant by regulatory arbitrage.
- The alphabet soup of securitized products: MBSs, ABSs, CDOs, CLOs, CBOs, and CMBSs.
- The key role played by Fannie Mae and Freddie Mac in the MBS market and thereby the mortgage market.
- How the process of building structured securities involves parsing the cash flows from the underlying loans into separate types of securities.
- How the financial crisis set back many types of securitization.
- How securitization acts to integrate credit markets more tightly.
- How securitization creates value added.
- How monetary policy has become more effective as securitization has developed.
BACKGROUND
When people buy a home or refinance, what happens to the new mortgage (home loan) that gets made? Does the lender hold on to the mortgage—having to fund it for as long as the loan exists—or does another party acquire and fund the mortgage? What about ordinary credit card and auto loans? What happens to them? Does securitization play a role here? If so, what is meant by securitization? Is securitization the wave of the future or was it a flash in the pan that the financial crisis demonstrated to be seriously flawed?
Securitization refers to the process by which ordinary, illiquid loans are placed in a pool of other assets ...
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