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final capstone for fin503

final capstone for fin503 - Jeongseon Hwang Fin 503 Final...

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Jeongseon, Hwang Fin 503 Final exam The right usage of future securitization based on recent financial crisis 1. What is securitization? Using financial information, sophistication of computers, and uses of their modern technique are crucial elements to become wealth through financial activity. Most people believe that Securitization has been a key vehicle over the past few years to United State and even all over the world. Also, securitization which is essential tool in finance market place should play a key role in helping stabilize the current finance situation. By its need, understanding of securitization and right usage of it are necessary parts especially in recent complicated financial market. Securitization is very most efficient form of financing in the right financial environment. It is designed to maximize cash flow and reduce risk for debt originators. (Tara E. Gaschler, Understanding the Securitization Process and the Impact on Consumer Bankruptcy Cases) Through this financial activity, the assets are polled and securities representing interests in the pool are issued. In other word, securitization is the process of taking an illiquid asset or any other group of assets through financial activity. After that the pooled assets are transforming to security. The interest and principal will pay by investors or originators. These payments from the asset are passed through to the purchaser of the securities. Securitization has a long history which is originated in the 1920s when mortgage insurance companies sold guaranteed mortgage participation certificates for pools of mortgage loans. Investors actively traded these certificates until the real estate market crashed during the Great Depression. (James Woolley, 2008, A Brief history of securitization) Securitization of home mortgage, especially, has started in 1970’s with the US government-sponsored National
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Mortgage Association. From that time mortgage backed securities (MBS) has grown dramatically until before recent financial crisis. The typical example which is subprime mortgage boomed middle of 1990’s because of loosen regulatory, most people regardless of their credit score could have home mortgage plan comparing to traditional mortgage markets when had strict rule of that. These sorts of assets can be securitized auto loans, student loans, mortgage, lease payments, and trade receivable. In most cases, the originator of the asset anticipates a regular stream of payments. By pooling the assets together, the payment streams can be used to support interest and principal payments on debt. Mortgage backed securitize (MBS) is one of typical example of securitization and also is the type of asset backed security (ABS) which is non mortgage loans or assets with expected payment stream by collection of mortgages.
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