Title LM17 Fixed-Income Securitization IFT Notes.pdf ✅

LM17 Fixed-Income Securitization 2025 Level I Notes © IFT. All rights reserved 3 Benefits to investors are as follows:  Securitization converts an illiquid asset into a liquid security.  It gives investors direct access to the payment streams of the underlying mortgage loans that would otherwise be unattainable.  There are higher risk-adjusted returns to investors: pooling loans results in diversification and lower risk for investors.  It gives investors an opportunity to buy a small part of the home buyers’ mortgage in the form of a security issued by the SPV.  It gives exposure to the market, real estate in this example, without directly investing in it. Benefits to the bank or loan originator are as follows:  It enables banks to increase loan origination, monitoring, and collections.  It reduces the role of the intermediaries (known as disintermediation) like the bank. However, note that an intermediary is still required to package and distribute securities.  Banks have the ability to lend more money if the demand for ABS and MBS is high relative to if the money was self-financed (from deposits, debt, equity, etc.).  There is greater efficiency and profitability for the banking sector: the mortgage- backed securities, at least in the US market, trade actively in the secondary market which improves the efficiency and liquidity of the financial market. Benefits to the borrowers of the loan are as follows:  It lowers the risk as the pooled loans offer a diversification benefit.  The lower risk decreases the cost of borrowing for homeowners. 3. The Securitization Process We look at the securitization process in detail in this section. An Example of a Securitization Kentara is a manufacturer of automobiles that range from $20,000 to $200,000. The majority of sales are made through loans granted by the company to its customers, and the automobiles serves as collateral for the loans. These loans, which represent an asset to Kentara, have maturities of five years, carry a fixed interest rate and are fully amortizing with monthly payments. Although the servicer of such loans need not be the originator of the loans, the assumption is that Kentara is the servicer. Steps in the securitization transaction:  Now assume that Kentara has $100 million of loans, shown on its balance sheet as an asset, and Kentara wants to raise another $100 million.  Kentara can do this by securitizing the loans and sells them to a special purpose entity (SPE), Automobile Trust (AT).