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final fin503 - 1 Nature of Securitization Using financial...

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1. Nature of Securitization. Using financial information and sophistication of computers and their uses are crucial elements to become wealth through financial activity. More recently, people think that securitization is one of the very most efficient forms of financing activity in the right financial circumstances. By its need, understanding and usage of securitization are necessary part especially in recent complicated finance market Securitization is a financial transaction in which certain types of assets are pooled and securities representing interests in the pool are issued. In other word, securitization is the process of taking an illiquid asset through financial activity. The interest and principal payments from the assets are passed through to the purchasers of the securities. Read more: Subprime Mortgage Problems | eHow.com http://www.ehow.com/about_6508395_subprime-mortgage- problems.html#ixzz1P8izB92o http://www.heritage.org/research/reports/2008/04/subprime-mortgage-problems-a-quick- tour-through-the-rubble
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Securitized mortgages are known as mortgage-backed securities (MBS), while securitized assets—non-mortgage loans or assets with expected payment streams—are known as asset- backed securities (ABS).
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To initiate a securitization, a company must first create what is called a special purpose vehicle (SPV) in the parlance of securitization. The SPV is legally separate from the company, or the holder of the assets. Typically a company sells its assets to the SPV. The payment streams generated by the assets can then be repackaged to back an issue of bonds. Or, the SPV can transfer the assets to a trust, which becomes the nominal issuer. In both cases, the bonds are exchanged with an underwriter for cash. The underwriter then sells the securities to investors. Unlike other bonds, securities backed by mortgages usually pay both interest and a portion of the investor's principal on a monthly basis. Under securitization, sometimes referred to as the originate-anddistribute model of mortgage finance, the originating institution, traditionally a bank or a savings institution, will transfer mortgage titles to a special-purpose vehicle , a specialized institution that puts a large set of mortgages into a package and that refinances itself by issuing “mortgagebacked securities”, i.e. securities whose claims are defined with reference to the returns that are earned by the package of mortgages. The risks of mortgage finance are thus transferred from the originating institution to the special purpose vehicle and to the holders of the mortgage-backed securities . This paper is more focusing on mortgage backed security (MBS) that is a typical example of securitization, also the most important reason of subprime mortgage crisis in 2007.
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  • Spring '10
  • YI
  • Subprime mortgage crisis, Collateralized debt obligation, mortgage-backed securities, subprime mortgage, Securitization

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