Introduction to Securitization

IDENTIFICATION OF THE ASSET POOL

After a corporation has decided it wants to create a securitization, the first step is to identify the assets that are to be securitized. Careful attention must be given to the following four factors in identifying the asset pool. First, the size of the pool is fixed. This is done while keeping in mind the corporation’s funding needs; in turn this is based on the intended application of the funding. For originators engaged in a regular business of originating loans and receivables, the proceeds generated from the securitization are then utilized in funding further originations. The size of funding must be a trade off between the cost of repeat securitization issuance, and the negative carry that invariably happens between the date of securitization and the reinvestment of the funding raised into creating further assets.

Second, the type of assets to be securitized (e.g., assets with high-spread or low-spread, prime assets or subprime assets) must be addressed and the resolution can only be made with reference to the objective of the originator/seller. As an example, the objective for the originator/seller may be to capture the excess spread and maximize the gain on sale.²⁴ Given that objective and the fact that subprime assets have the larger excess spread than prime assets, the corporation may decide to securitize subprime assets.

The third important structuring issue with respect to the collateral is whether the asset pool should be a static ...