Introduction to Securitization

KEY POINTS OF THE CHAPTER

• While a good deal of emphasis has been placed on true sale or legal robustness of a securitization transaction, which examines whether securitized assets will remain unaffected by the bankruptcy of the originator, today there is concern in a securitization with operational risk.

• The has been increased attention to operational issues in securitization because of (1) a realization that the ultimate test of sustainability of a transaction on its own is not so much a true sale, but a true independence from the originator and (2) operational issues that affect the originator’s business are equally likely to affect the performance of the securitization transaction.

• Operational risk is the risk that a party (originator/servicer, third-party servicers, and trustees) involved in the various operations or processes that lead to the transformation of the securitized assets into investors’ cash flows may not do what they are supposed to do or that there might be a failure of systems, equipments, or processes that may lead to leakages, costs, delays, and the like.

• Because, in most securitizations, the originator is the servicer as well. If the originator goes into bankruptcy, it is crucial to examine whether it would be possible to shift the servicing to a replacement servicer.

• For residential and commercial mortgages, the three types of servicers are the primary servicer, master servicer, and specialized servicer.

• Generally, there is a standby servicer ...