Handbook of Finance: Investment Management and Financial Management

Chapter 73. Introduction to Securitization

ANAND K. BHATTACHARYA, PhD

Managing Director, Countrywide Securities Corporation

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

W. ALEXANDER ROEVER, CFA

Managing Director, U.S. Fixed Income Strategy, JP Morgan Securities, Inc.

Abstract: The securitization of assets is broadly defined as the process by which loans, consumer installment contracts, leases, receivables, and other relatively illiquid assets with common features are packaged into interest bearing securities with marketable investment characteristics. Using securitization, financial institutions can create assets suitable for resale from loans that might otherwise have been held to maturity. In this sense, asset securitization may be used strategically for a myriad of purposes, such as liquefying the balance sheet, improving leverage ratios, and creating alternative sources of capital, especially if the process leads to favorable gain on sale accounting treatment and lower costs of funding. Securitized assets have been created using a diversity of collateral, including home mortgages, commercial mortgages, manufactured housing loans, leases or installment contracts on personal property (such as computers, trucks, automobiles, credit card receivables, marine loans, recreational vehicles), small business administration loans, and health care receivables.

Keywords: securitization, asset-backed securities, underwriting standards, servicing, ...