Introduction to Securitization

ILLUSTRATION OF A SECURITIZATION

We use a hypothetical securitization to illustrate the key elements of a securitization and the parties to a transaction. Our hypothetical firm is the Ace Corporation, a manufacturer of specialized equipment for the construction of commercial buildings. Some of its sales are for cash, but the bulk are from installment sales contracts. For simplicity, we assume that the installment period is typically seven years. The collateral for each installment sales contract (sometimes loosely referred to herein as a loan) is the construction equipment purchased by the borrower. The loan specifies the interest rate the customer pays.

The decision to extend a loan to a customer is made by the credit department of Ace Corporation based on criteria established by the firm, referred to as its underwriting standards. In this securitization, Ace Corporation is referred to as the originator because it has originated the loans to its customers. Moreover, Ace Corporation may have a department that is responsible for collecting payments from customers, notifying customers who may be delinquent, and, when necessary, recovering and disposing of the collateral (i.e., the construction equipment in our illustration) if the customer fails to make loan repayments by a specified time. These activities are referred to as servicing the loan. While the servicer of the loans need not be the originator of the loans, in our illustration we are assuming that Ace Corporation is ...